Real convergence and the determinants of growth in EU candidate and potential candidate countries - a panel data approach

The EU candidate and potential candidate countries have made considerable progress in economic transition and integration into the world economy within less than two decades. Nevertheless, gaps in terms of income per capita relative to the euro area remain large. This suggests that the challenges of real convergence will remain relevant for the region even in the medium and long term. This paper therefore focuses on real convergence and its determinants in the candidate and potential candidate countries. The analysis reveals that total factor productivity growth has been the main driver of convergence, followed by capital deepening, whereas labour has contributed only marginally to economic growth. There is evidence of conditional convergence in the transition countries of central, eastern and south-eastern Europe. More specifi cally, controlling for the quality of institutions, the extent of market reforms and macroeconomic policies, there is a significant and negative link between the initial level of GDP and subsequent growth. Labour productivity has improved in most countries, while employment and participation rates have been falling. Structural changes have resulted in, at least temporarily, increasing labour market mismatches. Investment rates have been rising rapidly in recent years, and foreign direct investment has been found to have a positive impact on total investment. Investment in human capital is still at a relatively low level compared with the euro area average. Thus, in order to sustain the positive developments observed in the past, further improvements are needed in terms of labour productivity and utilisation, as well as in terms of physical and human capital accumulation. JEL Classification: F15, F43, O16, O43, O47, O52.Real convergence, conditional convergence, determinants of growth, total factor productivity, labour markets, capital accumulation, EU candidate and potential candidate countries.

Offshore Production, Labor Migration and the Macroeconomy

Thesis advisor: Fabio GhironiIn Chapter 1, I analyze the cross-country transmission of business cycles when firms relocate production abroad, at locations with lower labor costs. In the model, I distinguish between fluctuations in the number of offshoring firms (the extensive margin) and the value added per offshoring firm (the intensive margin) as separate transmission mechanisms. Firms are heterogeneous in labor productivity. They face a sunk entry cost at home and an additional fixed cost to produce offshore. The model replicates the extensive and intensive margin dynamics that I document for Mexico's maquiladora sector. Offshoring enhances the co-movement of output between the countries involved. Offshoring also reduces price dispersion across countries, because it dampens the real exchange rate appreciation that follows improvements in domestic productivity. In Chapter 2, I estimate the conditional correlations and impulse responses of three indicators of offshoring to Mexico (total value added, value added per plant, and the number of plants) for U.S. permanent technology shocks. Using data from U.S. manufacturing and Mexico's maquiladora sector, I identify U.S. permanent technology shocks in a structural VAR model with long-run restrictions. Following a positive shock, offshore production in Mexico exhibits an immediate increase along its intensive margin, but returns to its initial level over time. The extensive margin does not adjust on impact, but increases gradually towards a permanently higher level. The model of offshoring in Chapter 1 matches qualitatively the business cycle dynamics of offshoring to Mexico. In Chapter 3 (co-authored with Federico Mandelman), we analyze the dynamics of labor migration and the insurance role of remittances in a two-country, real business cycle framework. Emigration increases with the expected stream of future wage gains, and is dampened by the sunk cost reflecting border enforcement. During booms in the destination economy, the scarcity of established immigrants enhances the volatility of the immigrant wage and remittances. The welfare gain from the inflow of unskilled labor increases with the complementarity between skilled and unskilled labor, and with the share of the skilled among native labor. The model matches the cyclical dynamics of the unskilled immigration into the U.S. and remittances sent back to Mexico.Thesis (PhD) — Boston College, 2009.Submitted to: Boston College. Graduate School of Arts and Sciences.Discipline: Economics

Offshore production and business cycle dynamics with heterogeneous firms

Cross-country variation in production costs encourages the relocation of production facilities to other countries, a process known as offshoring through vertical foreign direct investment. I examine the effect of offshoring on the international transmission of business cycles. Unlike the existing macroeconomic literature, I distinguish between fluctuations in the number of offshoring firms (the extensive margin) and in the value added per offshoring firm (the intensive margin) as separate transmission mechanisms. The firms' decision to produce offshore depends on the firm-specific level of labor productivity, on fluctuations in the relative cost of effective labor, and on the fixed and trade costs of offshoring. The model replicates the procyclical pattern of offshoring and the dynamics along its two margins, which I document using data from U.S. manufacturing and Mexico's maquiladora sectors. Offshoring enhances the synchronization of business cycles, and dampens the real exchange rate appreciation generated by aggregate productivity differentials across countries.Business cycles