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Varieties, Jobs and EU Enlargement

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  • Tito Boeri
  • Joaquim Oliveira Martins

Abstract

Two key factors that have so far allowed fast growing economies of central and eastern Europe to cope with their external constraint have been I) the presence of relatively low unit labour costs and ii)the initial undervaluation of the exchange rate. The accession to the EU will inevitably reduce both sources of competitiveness of eastern European exports: real wages are likely to catch-up western European levels and current EU members are pushing these countries to enforce labour market and social regulations that will increase labour costs; moreover, stability of the exchange rate will be a precondition for the negotiations over the accession to proceed. Small open economies can grow faster than their neighbours without running into a balance of payment crises if they succeed in increasing the number of differentiated goods produced domestically. The multiplication of the number of varieties in these countries after trade liberalisation is an unambiguous sign that consumers coming from the empty shelves of the pre-transition era have a strong taste for varieties, and hence that new varieties can create their own demand. But the increase in the number of varieties will involve a furthering of the worker reallocation process as production is still largely concentrated in homogenous good and scale-intensive industries and enterprise density is significantly lower than in western Europe. This paper will start by reviewing the changing profile and orientation of trade in transitional economies of central and eastern Europe. Next, developments in enterprise density and the performance of greenfield vs. state and privatised firms will be reviewed in an attempt to assess barriers to the entry and growth of small business. Finally, numerical simulations of a model will be developed which enables to assess the likely impact on employment, unemployment and gross worker flows of reductions in start-up costs.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 301.

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Length: pages
Date of creation: 01 May 2000
Date of revision:
Handle: RePEc:wdi:papers:2000-301

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Keywords: transition economies; product variety; trade specialisation;

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References

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  1. Robert Feenstra & Tzu-Han Yang & Gary G. Hamilton & Pierpaolo Battigalli, 2003. "Business Groups and Trade in East Asia: Part 2, Product Variety," Working Papers 9614, University of California, Davis, Department of Economics.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  3. Tito Boeri, 1994. ""Transitional" unemployment," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 2(1), pages 1-25, 03.
  4. Neven, Damien J, 1994. "Trade Liberalization with Eastern Nations. How Sensitive?," CEPR Discussion Papers 1000, C.E.P.R. Discussion Papers.
  5. Djankov, Simeon & Hoekman, Bernard, 1996. "Intra-Industry Trade, Foreign Direct Investment and the Reorientation of East European Exports," CEPR Discussion Papers 1377, C.E.P.R. Discussion Papers.
  6. Daniel Daianu, 1996. "Stabilization and exchange rate policy in Romania ," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 229-248, 05.
  7. Matsuyama Kiminori, 1995. "New Goods, Market Formations, and Pitfalls of System Design," Journal of the Japanese and International Economies, Elsevier, vol. 9(4), pages 376-402, December.
  8. A. Richter & M.E. Schaffer, 1996. "The Performance of De Novo Private Firms in Russian Manufacturing," CERT Discussion Papers 9610, Centre for Economic Reform and Transformation, Heriot Watt University.
  9. Krugman, Paul, 1989. "Differences in income elasticities and trends in real exchange rates," European Economic Review, Elsevier, vol. 33(5), pages 1031-1046, May.
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Citations

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Cited by:
  1. Funke, Michael & Ruhwedel, Ralf, 2003. "Export variety and economic growth in East European transition economies," BOFIT Discussion Papers 8/2003, Bank of Finland, Institute for Economies in Transition.
  2. Ralf Ruhwedel & Michael Funke, 2004. "Trade, Product Variety and Welfare: A Quantitative Assessment for the Transition Economies in Central and Eastern Europe," Quantitative Macroeconomics Working Papers 20401, Hamburg University, Department of Economics.
  3. Michael Bolle & José Caétano & Jaakko Kiander & Vladimir Lavrac & Renzo Orsi & Tiiu Paas & Katarzyna Zukrowska, 2002. "The Eastward Enlargement of the Eurozone - State of the Art Report," Eastward Enlargement of the Euro-zone Working Papers wp02, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Jan 2002.
  4. Rutkowski, Jan, 2004. "Firms, jobs, and employment in Moldova," Policy Research Working Paper Series 3253, The World Bank.
  5. Frensch, Richard, 2004. "Public governance as the source of quality and variety gains from transition," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 388-408, September.

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