Structural change and convergence

Supported by the funds of the Oesterreichische Nationalbank (Anniversary Fund, project number: 13372)

Funding: EUR 71.000,00

2009-2012 

The starting point and main motivation to conduct this research project was the interest of effects of European integration on the economies of European countries. Therefore, this research project deals with research questions at the crossroad between structural change and international economics. In other words, it deals with changes of the location patterns of industries as well as in the specialization patterns of countries due to economic integration. This topic is of particular interest with regard to the economic developments in Europe since economic integration via the Single Market and the adoption of a single currency has led to a gradual removal of trade and production barriers. The removal of these barriers is likely to have major effects on both the relocation of industries and the competitiveness of countries, causing changes in specialization patterns. Due to enhanced possibilities of international trade and the well-functioning of a common currency union, it seems to be highly relevant whether countries are economically drifting apart and whether markets are flexible enough to absorb growing specialization and concentration patterns.

The contribution of this research project is in a field of research that has evolved only recently. A sound economic analysis and understanding of the forces at hand are yet limited. Whereas the convergence of income levels has been widely studied in the literature (e.g. Easterlin 1960, Borts and Stein 1964, Williamson 1965 or Theil 1967), structural convergence has received far less attention, although studies indicate that income and productivity convergence do not necessarily imply structural convergence and even if so, the process of structural convergence is much slower than convergence of productivity levels due to agglomeration and path-dependent economic development (Fagerberg 2000 or Gugler and Pfaffermayr 2004).

Anderton et al. (1992) distinguish between three separate concepts of structural convergence. First, structural convergence can stand for the assimilation of economic institutions, legal practices and organizational frameworks in which firms operate. Second, structural convergence can be understood as the assimilation of costs and prices, inflation and exchange rates. Third, structural convergence can be understood as real convergence, i.e. the reduction of differences with regard to working conditions and living standards, but also with regard to employment shares, unemployment rates and labor productivity levels. In this research project, we focus on this third branch of structural heterogeneity only.

In particular, we address the following research questions:

What are the major driving forces of (de-)concentration and (de-)specialization patterns according to economic theory? Are these results in line with empirical findings? This is of special relevance, since a deep insight into the processes leading to concentration and specialization are needed in order to establish a successful economic policy for the European Union, especially for (structurally) lagging countries.

Which kind of statistical tools are available to study concentration and specialization developments? What are the characteristics of a good specialization measure? Having defined them, what kind of (dis-)advantages are connected with each of the single methods investigating concentration and specialization, respectively?

Has economic integration altered the location of industries in Western Europe? If so, which industries are affected the most and which characteristics do these industries share? Which countries are able to attract which industries?

With regard to the economic policy pursued by the European Union it is of special interest whether the ongoing integration is unleashing agglomeration forces which increase economic disparities between central and peripheral regions. Krugman (1991b) in this context voiced the hypothesis that economic integration in Europe would lead to a spatial distribution of European industry more similar to the regionally clustered geography that is typical of the United States.

Have economic structures of Western European countries become more similar over time? Has economic integration fostered specialization processes? What differences persist between Western European countries? In this respect it is of special interest to investigate what the differences of economic development between economic latecomers such as Finland and Ireland are compared to Greece and Portugal.

We restrict our analysis to the national level, even though heterogeneity at the regional and city level is of high relevance as well. It is for instance a common worry that peripheral regions lose competitiveness, leading to a loss of jobs in the wake of economic integration (Krugman, 1991 and Krugman and Venables, 1995), leading to slower economic growth and finally widening the gap to prospering regions in economic centers. Moreover, we do not address concentration processes of individual industries at the local level such as the textiles industry in the Prato region of Italy or the concentration of the automotive industry in Detroit.

In Chapter 2 we give a literature review that does not present new information, but aims to gather different strands of research, which so far have been investigated separately and give an overview of both theoretical and recent empirical research. First, we discuss both inter-sectoral and inter-industrial patterns of economic development. Since the processes driving these developments are quite different, it is necessary to make this distinction. Second, we give evidence on both factors driving (de-)concentration and (de-)specialization. Even though these two phenomena can go hand in hand, they are not the same thing. Thus, distinguishing between them is an important task. Third, we report empirical findings for Western European Countries in order to understand which are main driving forces and at the same time learn to what degree theoretical models hold true in reality.

So far, there is no good account available on which concentration and specialization indices to use for empirical studies and to what degree empirical results depend on either the index chosen to measure both concentration and specialization patterns or on the (aggregation of the) data bases . Since studies have reported contradicting results, we aim to evaluate whether these two factors drive empirical results. We thus do not only present a full account of the characteristics a proper measure of specialization ought to fulfill but also focus on the shortcomings of the indices being used in empirical research. In order to unravel the differences between the most common specialization indices, both absolute and relative indices are applied to European employment shares to ten to fourteen Western European Countries spanning up to 51 industries for the period 1970 to 2005.

Chapter 4 builds on the joint paper with Claudia Schmiedeberg “Structural Convergence of European Countries”, published in Structural Change and Economic Dynamics, 2010, vol. 21, 85-100. We extend the work by contrasting results obtained in the paper with sector- and country-weighted indices which by and large do not change the overall picture for the manufacturing and service sector as a whole. Turning to the development of individual industries, the results are too some extent contradicting whether concentration is measured in absolute or in branch size terms, however. In this respect, we show the influence of the size of an industry on empirical results. Thus, additionally to the data set and the choice of index we identify a third factor that influences empirical results on concentration and specialization processes. Moreover, we show that it is necessary to analyze the evolution of concentration patterns of each industry individually since on the one hand these patterns occur at different stages of time and on the other hand we can identify different forms of convergence (and divergence respectively): general convergence or one-country (one-club) developments. Finally, we show in a descriptive data analysis that industry characteristics such as inter-industry linkages and returns to scale have a positive effect on the degree of concentration whereas we do not find this link with intra-industry linkages.

In Chapter 5, we improve upon existing results since we use data for all Western European Countries, covering a long time period and a large sample of industries, which is important to obtain robust results. Moreover, we are interested in both the similarities and the differences among the countries under study. We therefore assign individual countries to clubs, i.e. groups of countries which share common features, and analyze the development of clubs and their individual countries over time. By doing so, we can distinguish between economic late-comers and front-runners and reproduce the structural change which occurred in each sub-sample. Then we show that even in a globalized world, where due to technological revolutions (e.g. the internet) the costs of transportation have been reduced, distance is still an important explaining both concentration and specialization patterns. In taking a long run perspective and investigating the developments of European countries and industries since the 1970s, we are able to shed light on the structural developments of Western Europe and give insights into the questions whether countries have become more heterogeneous over time and whether the process of European integration by removing barriers to trade have had a significant impact on competition, implying a change in the industries countries are specializing in and the degree of concentration of individual industries. A central question in the European Union – whether the economic core wins at the expense of the periphery is also examined in detailed since the free movement of both capital and labour is expected to increase the efficiency of production.

We presented the work at various conferences and meetings, including the FIW Workshop 2010, the NoEG Conference 2011 and the Göttinger Workshop "Internationale Wirtschaftsbeziehungen" 2011.