Offshoring, Relocation and the Speed of Convergence in the Enlarged European Union

29 Pages Posted: 2 Dec 2008

See all articles by Kari Alho

Kari Alho

ETLA, Research Institute of the Finnish Economy

Ville Kaitila

ETLA, Research Institute of the Finnish Economy

Mika Widgren

University of Turku - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 2008

Abstract

Economic convergence of the new member states (NMS) of the EU towards the old EU countries (EU-15), not only in terms of real income, but also in nominal terms, is of paramount importance for the whole of the EU. We build a dynamic CGE model, starting from the Balassa-Samuelson two-sector framework, but modify and enlarge it with forward-looking investment, consumption, and labour mobility behaviour to address several other issues like welfare and sustainability in terms of foreign indebtedness. At the same time we evaluate the impact of convergence on the EU-15 countries also, by endogenising offshoring and the related FDI flows from them to the NMS. Thereby we identify various effects of relocation and globalisation on the EU-15 enlarging the standard set of effects of globalisation and demonstrate the key role of their dynamic nature in the process of convergence. We find that in a general equilibrium setting fears of large adverse effects of a relocation of EU-15 manufacturing to the NMS are not well founded. In contrast, offshoring appears to be a win-win case for both the EU-15 and the NMS in terms of real income. The convergence of the NMS is fairly rapid, but will involve a persistent rapid inflation rate.

Keywords: Convergence, EU-15, new member states, relocation

JEL Classification: F15, F21, F43

Suggested Citation

Alho, Kari and Kaitila, Ville and Widgren, Mika T., Offshoring, Relocation and the Speed of Convergence in the Enlarged European Union (October 2008). Available at SSRN: https://ssrn.com/abstract=1308071

Kari Alho (Contact Author)

ETLA, Research Institute of the Finnish Economy ( email )

Lonnrotink. 4 B
FIN-00120 Helsinki, 00120
United States

Ville Kaitila

ETLA, Research Institute of the Finnish Economy ( email )

Lonnrotink. 4 B
FIN-00120 Helsinki
Finland

Mika T. Widgren

University of Turku - Department of Economics ( email )

FIN-20500 Turku
Finland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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