Institutional Determinants of IncomeLevel Convergence in the European. Union: Are Institutions Responsible for Divergence Tendencies of Some

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Błażej Piasecki
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2 Institutional Determinants of IncomeLevel Convergence in the European Union: Are Institutions Responsible for Divergence Tendencies of Some Countries? Dr Mariusz Próchniak Katedra Ekonomii II, Szkoła Główna Handlowa w Warszawie The research project has been financed by the National Science Centre in Poland (decision number DEC-2012/07/B/HS4/00367).

3 Contents Introduction Background and the method Results Concluding remarks References

4 Aim of the paper The paper explores the analysis of catching-up process among EU countries by examining the concept of club convergence. The main research hypothesis: the EU countries do not constitute one convergence club but they belong to different convergence clubs depending i.a. on the quality of institutional environment and the type of capitalism.

5 Introduction The concept of income-level convergence among the EU countries: e.g. Michałek, Siwiński, Socha, 2007; European Commission, 2009; Rapacki, 2009; Siwiński, 2009; Rapacki and Próchniak, 2010; Kulhánek, 2012; Staňisić, 2012; Grzelak and Kujaczyńska, Since the last global crisis and the crisis in the euro zone, a few studies emerged in which the authors suggested the appearance of divergence tendencies in Europe: Kurach, 2011; Głodowska, 2012; Herbst and Wójcik, 2012; Borsi and Metiu, 2013; Monfort, Cuestas, Ordóñez, 2013; Matkowski, Próchniak, Rapacki, 2013, 2014.

6 , Background and the method Steps: correlation analysis, regression analysis To verify the conditional β convergence hypothesis we use the Barro regression: ln y ( t ) ln y ( 0 ) = ζ 0 + ζ 1 ln y ( 0 ) + ζ 2 x1t + K + ζ n +1 xnt + ε it EU28 countries year subperiods

7 Background and the method Index of economic freedom (Fraser Institute); Democracy index (Freedom House); Dummy variables representing different models of capitalism: Anglosaxon capitalism; continental capitalism; Mediterranean capitalism; Scandinavian capitalism; emerging market capitalism.

8 Table 2 Models of conditional β convergence: large set of control variables Explanatory variable Initial GDP per capita Economic freedom Democracy Anglosaxon dummy Continental dummy Mediterranean dummy Scandinavian dummy Investment Government consumption Trade openness Population with tertiary education Current account balance Inflation Population number Population growth Population density Population aging Fertility rate Life expectancy 2 R within 2 R between 2 R overall The coefficient β Model 1 Model 2 Model 3 Model (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.357) (0.731) (0.509) (0.904) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.109) (0.273) (0.121) (0.577) (0.785) (0.061) (0.578) (0.000) (0.446) (0.575) (0.961) (0.244) (0.412) (0.000) (0.006) (0.000) (0.001) (0.011) (0.000) (0.001) (0.083) (0.351) (0.497) (0.000) % 11.0% 10.0% 13.3%

9 Results (1/2) All the models confirm the important role of institutions in determining economic growth and convergence of the EU countries. The models with dummy variables show that economic growth and the strength of convergence both are strongly related with the model of capitalism.

10 Results (2/2) The Anglosaxon countries grew on average more rapidly than similar countries with different models of capitalism. Scandinavian model of capitalism is also relatively beneficial for economic growth and convergence. South European countries have a lower potential for rapid GDP growth.

11 Concluding remarks The type of capitalism and the quality of institutions, measured by the scope of economic freedom and the level of democracy, are important determinants of the pace of economic growth and the speed of convergence. The assessment of the impact of institutions on economic growth requires further testing. This study shows that the regression equations aimed at verifying the convergence hypothesis in the whole EU should be supplemented by a more detailed analysis of various subgroups of countries. The EU countries, although relatively homogenous from the worldwide perspective, are not fully homogenous as represented among others by different types of capitalism.

12 Dziękuję za uwagę Dr Mariusz Próchniak Katedra Ekonomii II, Szkoła Główna Handlowa w Warszawie

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