Transition Without Accession. Effects of Differential Integration on Trade and Welfare in a European Perspective

Abstract

In the past decade, we observed an acceleration of Western European integration, while the transition countries of Central Eastern Europe have not become members of the EU. In this paper, we conduct numerical simulations on the consequences of such a kind of differential integration within the European economic area with a spatial model of endogenous growth. Three main aspects are analysed: first, we look at the impact of inclusion in, or exclusion from, the EU on the localisation of "advanced" industries. Second, we consider the consequences for trade and capital flows (foreign direct investment) of the re-localisation of enterprises due to differential integration. Third, we analyse the welfare effects for insiders and outsiders from a dynamic viewpoint (that is, accounting for different growth regimes and transition). We find that, while outsiders always lose in welfare terms relative to insiders if transition is not accounted for, when transition is explicitely introduced it is possible for an outsider to perform better than the insiders. Hence, the model suggests that successful transition might provide a remedy against delayed accession to an integrated area.

Keywords: Transition economies, trade and monetary integration, economic geography, Central Eastern Europe

JEL Classification: F15, F21, F31, P2, R13