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GTAP Resource #982

"Eastern Enlargement of the EU: Factor mobility and Transfers - Which Matters Most?"
by Vaittinen, Risto

The European Union is expected to take new members from the former socialist countries around year 2005. In this study of EU's enlargement both factor mobility and trade policy impacts are evaluated. EU's enlargement will have a significant economic impact on the new Member States. Our simulations indicate that GDP in new entrants will be 10 % above its baseline within 10 years. However, national income won't grow as fast. Considerable share of the increased output is generated by foreign investments whose rewards are paid abroad. Labor mobility moderates the growth effect. On the other hand, consumption per capita in new Member States will increase, since migration to present Member States decreases output less than proportionally. The economic consequences of enlargement for the EU’s current Member States will be modest. This is due to the difference in size between the current and new Member States. The GDP of the applicant countries is around 10% and population is around quarter of that in incumbent members.

We assume that the new Member States will gain immediate access to the EU’s Common Agricultural Policy. Structural Fund Transfers are phased in gradually as they are indicated in Financial Perspectives of the EU. Increased capital mobility is modeled as a reduction in the required rate of return for investment in the acceeding region. Migration between the old and new EU -countries is assumed to reflect income disparities. The sensitivity of migration to income disparities is assumed to follow the results from study of Boeri and Brücker (2000).

This study uses a dynamic multi-region CGE -model that is an extension to the GTAP model (Hertel and Tsigas, 1997). Three inter-temporal links has been added to dynamize the model: (1) accumulation of fixed capital, (2) accumulation of financial claims and (3) lagged adjustment mechanisms. In defining the accumulation of physical capital the model, closely follows the Australian single-area MONASH model (Dixon and Rimmer, 2000). In modeling financial claims the approach of
McDougall and Ianchovichina (2001) was adopted where the central motivation is to make macro accounting reflect the income distribution effects of the cross-ownership of wealth caused by capital movements. The model contains two types of lagged adjustments. In investments and labor markets actual prices may differ from the equilibrium ones. Expectations adjust towards equilibrium by means of error-correction mechanisms. Investments and employment may deviate from the levels that are consistent with stable prices.

Boeri T. - H. Brücker (2000): The Impact of Eastern Enlargement on Employment and Labour Markets in the EU Member States, European Integration Consortium 2000, Berlin.
Dixon, P. B. - M. Rimmer (2000): ’MONASH: A Disaggregated, Dynamic Model of the Australian Economy, manuscript.
Hertel, T. - M. Tsigas (1997): ‘Structure of GTAP’ in Hertel T. (ed.) Global Trade Analysis: Modeling and Applications, Cambridge University Press.
McDougall, R. A - E. Ianchovichina (2001): Theoretical Structure of Dynamic GTAP, GTAP Technical Paper No. 17, Center for Global Trade Analysis, Purdue University.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2002 Conference Paper
Status: Published
By/In: Presented at the 5th Annual Conference on Global Economic Analysis, Taipei, Taiwan
Date: 2002
Created: Vaittinen, R. (4/25/2002)
Updated: Bacou, M. (7/16/2002)
Visits: 3,220
- Technological change
- Labor market issues
- Europe (Eastern)

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