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Whither the World: The Political Economy of the Future - Volume 1 | G. Kolodko | Palgrave Macmillan
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Whither the Multilateral Trading System?
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The labour of ICT4D: Whither the separation of carriage and content?
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Advanced Search. Article Navigation. Close mobile search navigation Article Navigation. Monopoly capital and entrepreneurship: whither small business? Thomas E Lambert. Economics Department, University of Louisville. Lambert Louisville. Oxford Academic. Google Scholar. This paper discusses the appropriate welfare function for analyzing the impact of European integration.
It is concluded that this function is too complex to be quantified with any precision. Concentrating on real income gains, the paper analyzes some simple methods to measure ex post the impact of European integration, in particular from the internai market programme. There seems to be some evidence of a structural increase in the level of Community GDP since , but ils size, permanence or precise link with the internai market are difficult to establish.
Whither the Gains from European Economic Integration ?
The almost completion of the internal market at the beginning of coincides with one of the most pessimistic short-term prospects for growth and unemployment in the Community since twenty years. The current events stand in dark contrast with the glorious years , in which a highly positive impact from internal market expectations is widely believed to have taken place.
Since then, German unification and plans for an economic and monetary union seem to have decisively influenced the Community's macroeconomic performance. Amidst the present turbulence, the attention for the internal market project, which may be considered as the crown on 35 years of economic integration, seems to have diminished. Still, it seems legitimate to ask what the role is of accelerated economic integration in this process.
Is it still possible to discern a positive impact from the internal market in the current downturn?
An answer to this question points to the need for evaluation of the costs and benefits of integration, both ex ante and ex post. The Cecchini and subsequent estimates of the benefits of the internal market seemed very promising. Have they, as is sometimes argued, already partially come true? More generally, what is the welfare function to judge the benefits from integration, and is there any practical way to deal with the problem of defining an anti-monde when evaluating the. Useful comments from Michel Fouquin are gratefully acknowledged. This paper tries to come up with some practical, but by no means perfect answers1.
The welfare function. It is well known, but sometimes forgotten, that the European Coal and Steel Community which lies at the heart of the present Community was founded with the ultimate purpose of avoiding future bloody conflicts between its members. Judged by this political objective alone, the Community can be called a success, also in view of its role in re-establishing democracy in Greece, Portugal and Spain.
We should not conclude from this fact that the economic performance of the Community is infinitely subsidiary to this political objective, and that this performance therefore would not matter. But it provides some substance to the idea that the Community may very well pursue objectives which go beyond, and may sometimes even seem contrary to, the kind of pure efficiency arguments with which economists tackle regional integration. In a recent paper, for instance, de Melo et al. Still, the United States government takes a great interest in the agreement because it would, by irrevocably confirming Mexican economic reforms, provide a guarantee for political stability on the southern side of the border which is of mutual interest.
It follows from these arguments that there is a whole spectrum of welfare functions depending of the objectives of integration. The traditional analysis of trade integration focuses on the impact of efficiency improvements on real income and is essentially static. Since the gains from integration have to take place via increased trade, early empirical analysis of the impact of European integration often contented itself with estimations of the impact on trade1.
Empirical results for the ex post impact on the level of real income of European integration are, even to date, fairly scarce2. Moving from pure trade integration towards complete factor mobility goods, services, capital, workers , the welfare function can stay unchanged because the theoretical impact still operates along the lines of a static efficiency increase.
Recently, the static efficiency-type of analysis has been extended in terms of empirical applications in two directions. First, empirical work has replaced the classical hypotheses of constant returns to scale and perfect competition with those of the existence of scale economies and imperfect competition. Nevertheless, this analysis remains essentially static, which explains the use of partial or general equilibrium models3. Secondly, interest has started to focus on growth. Baldwin  reminded us of the capital accumulation process that can be induced by efficiency increases, predicting in the case of the internal market that the static effects on output through medium-term capital accumulation could be more than doubled, leading to a temporary "growth bonus".
Using endogenous growth theory, he also analyzed the conditions under which static efficiency increases could lead to a permanent increase in the growth rate. The link between international trade and endogenous growth was extensively studied by Grossman and Helpman , and research is presently ongoing to integrate their approach with general equilibrium models with imperfect competition.
A final growth issue that has received much attention recently is that of convergence of growth rates as predicted by the neoclassical model in the case of international trade, with focus on the impact of trade on growth convergence4. The move from free factor mobility to a common market is characterised by the addition of common policies with specific objectives in mind.
In the context of the Community, one can think of the Common Agricultural Policy established by the Treaty of Rome or the so-called objective of economic and social cohesion that was introduced through the Single Act in The introduction of common policies in addition to the achievement of factor mobility implies that the welfare function has no longer real income as its sole element. The step from a common market to an economic union in which budgetary policy coordination takes place means that the welfare function has to be extended with macroeconomic policy objectives such as the stabilisation of output or low levels of unemployment.
Furthermore, tax competition or other forms of policy competition may lead to an undesirable outcome from the point of view of adequate provision of public goods, thus warranting policy coordination. Moving to a monetary union makes the welfare function even more complicated due to the inclusion of the short-run tradeoff between output and inflation and, in the case of the Community, the issue of monetary policy credibility1.
A final step to apolitical union is likely to make the welfare function completely intractable because of the introduction of non-economic, political objectives. Returning to the Community, whose integration case is a mixture of all stages on the ladder just described, a simple economist interested in the ex post measurement of the gains from integration cannot but conclude to stick to some undoubtedly imperfect but at least practical ways in order to make some quantified statements.
First-shot indicators. Despite the foregoing, the main vehicle of integration in the Community is economic and concerns the free movement of goods, services and capital2. A very simple way of looking at the impact of any kind of economic integration is therefore to shoot at everything that moves, i. This first-shot approach has as most obvious shortcomings, first, that it disregards the overall impact on, say, real income of the integration step and in particular negative side effects on other variables trade creation versus trade diversion, consumer surplus versus producer surplus and, second, that the anti-monde in a world where everything grows may not be particularly well chosen.
On the other hand, if nothing moves, the likelihood of zero or negative impact becomes very high, so it may be considered as a necessary, but not sufficient condition for a positive impact of integration. Examples of the first-shot approach are not difficult to give in the case of free movement of goods, services or capital, because they should directly affect observable economic variables. The graph focuses exclusively on the trade between the old and new countries that are integrating.
From the graph, a few conclusions seem to stand out. First, there is the remarkable increase in intra-EC6 trade in the s which reaches its maximum in , but then actually declines to stabilise only ten years later with a slight rise from onwards.
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