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Speed of Convergence and Relocation: New EU Member Countries Catching up with the Old

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  • Alho, Kari E.O.
  • Kaitila, Ville
  • Widgrén, Mika

Abstract

Economic convergence of the EU’s new member countries (NMCs) towards the incumbent EU countries (EU-15) is of paramount importance for both partners, not only in terms of real income but also in nominal terms. In this study we build a dynamic, computable general equilibrium model, starting from the Balassa-Samuelson two-sector framework, then modify and enlarge it (with, among other things, endogenous capital formation, consumption behaviour and labour mobility) to address several other issues such as uncertainty, welfare and sustainability in terms of foreign indebtedness. At the same time we make flows of foreign direct investment (FDI) endogenous in order to evaluate the impact convergence has on the EU-15 and the interaction between the two regions through FDI. We find that in a general equilibrium setting, fears of adverse effects resulting from a relocation of EU-15 manufacturing to the NMCs are not well founded.
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Suggested Citation

  • Alho, Kari E.O. & Kaitila, Ville & Widgrén, Mika, 2005. "Speed of Convergence and Relocation: New EU Member Countries Catching up with the Old," Discussion Papers 963, The Research Institute of the Finnish Economy.
  • Handle: RePEc:rif:dpaper:963
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    Cited by:

    1. Alho, Kari & Kaitila, Ville & Widgrén, Mika, 2008. "Offshoring, Relocation and the Speed of Convergence in the Enlarged European Union," CEPR Discussion Papers 7000, C.E.P.R. Discussion Papers.
    2. Aziz Atamanov & Alexander Chubrik & Irina Denisova & Vladimir Dubrovskiy & Marina Kartseva & Irina Lukashova & Irina Makenbaeva & Magdalena Rokicka & Irina Sinitsina & Michael Tokmazishvili, 2008. "The Development Gap Between the CIS and EU," CASE Network Reports 0081, CASE-Center for Social and Economic Research.

    More about this item

    Keywords

    convergence; new member countries; EU-15;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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