Academic journal article Global Economic Observer

Drivers of Long-Term Convergence. Focus on Romania

Academic journal article Global Economic Observer

Drivers of Long-Term Convergence. Focus on Romania

Article excerpt

Introduction

Economic growth has been one of the main concerns of development economics. Empirical analyses have tried to identify growth similarities and differences both in terms of speed and amplitude among various economies and groups of economies worldwide. The subject is also of particular interest for the EU policies that rely on and have the objective of speeding up economic convergence between Member States, usually measured by GDP per capita in PPS1. At the EU level, an additional policy interest in the convergence processes stems from the negative impact of the recent crisis on GDP growth across Member States. As Dobrinsky and Havlik (2014) highlight, economic convergence within the EU is far from being uniform both across New Member States2 and within the rest of the EU and such heterogeneity has been further deepened by the recent crisis.

Romania's current gap in GDP/capita is 46 pp if compared to either EU27 or EU28. The long-term projections on macroeconomic developments in Romania vary from pessimistic in the European Commission's study to very optimistic in the national studies:

- The Ageing Report: European Commission (2012)."The 2012 Ageing Report. Economic and Budgetary Projections for the 27 EU Member States (2010- 2060)". European Economy 2/2012

- Long term module of Dobrescu macromodel, in Corina Saman and Bianca Pauna eds. (2013) "Building Blocks in Modeling a Market Economy - Dobrescu Macromodel of Romania". Nova Publishing Inc., New York. "Chapter 6: Long-term forecast", Florin-Marius Pavelescu

- MECC (2013) "Ministry of Environment and Climate Change. Romania's 2013 Report for the Assessment of Projected Progress under Decision no. 280/2004/EC of the European Parliament and of the Council Concerning a Mechanism for Monitoring Community Greenhouse Gas Emissions and for Implementing the Kyoto Protocol". Paper commissioned to ISPE.

The goal of the paper is twofold: to reveal the potential contribution of the drivers of economic growth to the real convergence and to simulate the timeline for catching-up process, under various assumptions for GDP/capita growth rates.

The remainder of the paper is structured as follows: Section 2 presents the theoretical framework for assessing convergence, while Section 3 contains empirical investigations on Romania's long-term convergence. Based on the long-term projections on Romania, we have built three scenarios of real convergence to the EU, assessing the possible contribution of various drivers of growth. We have employed growth accounting method, the output growth rate being decomposed into production factors' contributions (capital and labour) and total factor productivity. Section 4 highlights the main findings drawn from the analysis.

1. Theoretical framework for assessing convergence

Real economic convergence between economies (at country or regional level) generally refers to the decreasing distance between the development levels of the economies under assessment or the closing of the existing gap between the welfare levels of such economies. Neoclassical (exogenous) growth theories predict that convergence processes occur between open economies. In other words, real per capita GDPs of the countries converge towards their individual steady state or their common steady state, irrespective of their initial start. However, more recent (endogenous) growth theoretical developments also allow room for economic divergence between countries, taking into account the variable impact of different drivers of economic growth such as: increasing returns on human capital, or foreign trade and foreign direct investments that can facilitate technological levelling between economies, provided that barriers between economic flows are gradually removed and economies become more and more integrated.

A comprehensive analysis of the evolution of different concepts of convergence in economic theory has been conducted in Nazrul Islam (2003), out of which we highlight in what follows a couple of ideas. …

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