52682 Reshaping Economic Geography: Implications for New EU Member States 1 Indermit Gill, Chorching Goh and Mark Roberts slowly. During the same period, GDP per capita in fourteen Western European economies grew at three times the pace Key Messages of Eastern Europe (Figure 1). The drivers of West European · Make economic borders `thinner'. Economic growth were market economies, regional cooperation, and divisions to the mobility of people and products global economic integration. The European Economic remain considerable between new EU member Community, started by six Western European nations in states. Reforms to reduce these divisions should 1957, continued to increase its membership with the remain high on the agenda even during the ultimate aim of full economic and monetary integration. 2 financial crisis. In the EU15 , as governments Figure 1: Economic Divergence in a Politically Divided deliberate economic stimulus programs, they Europe (19491989) should resist the temptation of nationalism that 20,000 Denmark would make their borders `thicker'. 18,000 United Kingdom Sweden · Welcome rising economic density. The lesson Netherlands GDP per capita (1990 international dollars) 16,000 Belgium of history is that greater international 14,000 France Finland convergence is accompanied by a concentration 12,000 Germany Austria of production in leading areas and cities. 10,000 Italy Ireland Governments should not resist domestic 8,000 Spain concentration of economic activity ­ the very Portugal Greece 6,000 nature of growth and competitiveness. Bulgaria Czechoslovakia 4,000 Hungary · Deepen institutional convergence. While Poland 2,000 Romania infrastructure and placebased investments are Yugoslavia 0 often seen as critical, the mainstay of a strategy Ye ar (19491989) for economic integration is common institutions Source: Data from Maddison (2008), "Statistics on World that facilitate mobility of goods, services, capital, Population, GDP and Per Capita GDP, 12006 AD." ideas, and labor. New member states should continue their efforts to harmonize trade, After the collapse of the former Soviet Union in 1991, the 3 financial and employment regulations. EU10 countries, along with Malta and Cyprus, joined the expanded European Union, an economic zone based on the The ongoing crisis should spur deeper European principles of democracy, markets and the free mobility of integration, rather than a return to the nationalism of the goods, capital and labor. The 27country European Union 4 past. The World Development Report 2009, Reshaping has a combined population of almost 500 million people 5 Economic Geography, spotlights several issues for new EU and accounts for over 30 percent of the world's GDP. But member states. the legacy of division has meant that the EU10 countries lag considerably behind most of the other member states. While Some Economic History the EU10 have brought 123 million people into the From 1950 to 1990, Eastern Europe was impermeable to the European Union, they have reduced its average level of flow of goods, services and ideas from the West, and grew GDP per capita by an estimated 15.6 percent. 3 EU10 countries: Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, 1 Hungary, Poland, Romania, Slovakia, and Slovenia. Special thanks to Siobhan Murray for her superb cartographic assistance. For 4 questions, please contact Chorching Goh at cgoh@worldbank.org. Eurostat figures for 2008. 2 5 EU15 countries: Belgium, France, Germany, Italy, Luxembourg, Netherlands, International Monetary Fund, World Economic Outlook Database, October Greece, Portugal, Spain, Austria, Finland, Sweden, Denmark, Ireland, and UK. 2008: Nominal GDP list of Countries. Economic Division: Thick Borders Impede Good access to foreign markets should help facilitate the Specialization building of domestic density, which promotes real market potential through the growth of the domestic economies. In In the West, market forces operating within democratic turn, greater real market access should lead to frameworks enabled people and firms to gravitate towards improvements in foreign market potential because domestic areas of maximum opportunity. This facilitated the buildup growth enlarges the markets that neighboring countries can of economic density in a core area which now stretches 6 access. across Western Europefrom London to Paris, through Figure 4: The Economic Topography of Central Europe and Brussels and Frankfurt, and down to Milan. The density the Baltics: Mountains in the West, Hills in the East built in this core area propelled the Western economies forward. Eastern European economies were denied access to this core economic areaby division, not distance--and remained relatively poor. Eastern European economies are still, relatively speaking, divided from the economic density of Western Europe. Figure 2 shows the thickness of economic borders, which has contributed to a discrepancy between the market potential in the West and in Central Europe. Figure 2: Economic Borders in the EU: the Thinner the Better Source: Estimations by staff in the World Bank's Development Research Group's GIS Lab. Economic Density Facilitates Agglomeration Density refers to the intensity of economic activity per unit of land area and can be measured by, for example, the level of GDP generated per square kilometer of land. Figure 4 shows Eastern Europe's economic topographyit looks spiky rather than flat, reflecting the fact that market forces generate more concentrated economic activity in some areas relative to others. While the spikes in Germany, Austria and Source: Based on data from WDR 2009, Reshaping Economic Geography. Italy resemble peaks in a mountain range that spreads The width of borders is proportional to a summary measure of each westward into other established EU member states, the country's restrictions to the flow of goods, capital, people, and ideas with all other countries. spikes in Eastern Europe are more like small foothills, reflecting the great difference in density between the EU10 Figure 3. Market Access in the EU10 Real market potential relative to the US, 2005 and the rest of Europe. In particular, economic density across the EU's sub national areas shows a strong association with GDP per capita. Econometric evidence demonstrates that density 7 facilitates higher productivity and wellbeing (Figure5). Economically dense settlements of activity and people have production advantages, including `thick' markets which help to enhance consumption variety, and have a vibrant base of suppliers for industries, a pool of labor, and knowledge spillover within and between local industries. The EU has a strong commitment to tackling disparities in productivity and wellbeing across its member states and regions. A key objective of its new `Cohesion Policy' Source: Based on estimates in Mayer (2008), "Market Potential and (20072013), for which the EU has allocated total funding Development", background paper prepared for WDR 2009, Reshaping of 348 billion, is the `convergence objective' that will take Economic Geography. 6 Real market access--which measures the size of nearby Mayer (2008), "Market Potential and Development", background paper for WDR 2009, Reshaping Economic Geography. markets, including the home economies--in the EU10 7 Ciccone, Antonio (2002), "Agglomeration Effects in Europe", European (Figure 3) falls short of that in Europe's leading economies. Economic Review, vol. 46, pp 213217. up almost 82 percent of the spending. Some 71 percent of improved governance. The policies and governance spending under the convergence objective is earmarked for standards in countries close to large world markets have to 8 the NUTS2 regions which have GDP per capita levels of converge with those in the nearby high income regions. less than 75 percent of the EU average the majority of Multinational firms are more likely to locate in countries these regions are in the EU10 states. The aim of this that have institutional and physical connections to larger spending is to "reduce structural disparities between EU markets. The large markets also have strong incentives to regions, foster balanced development throughout the EU foster sound policy and governance frameworks in small 9 and promote real equal opportunities for all." This is often markets to ensure stability in their neighborhoods. equated with spatial equality and the desire to `smooth out' the economic landscape. The World Development Report The prospect of joining the EU has accelerated the pace of (2009) suggests that such an approach may be misguided, at reform in Central Europe, just as the prospect of better least at the stage of development of much of the EU10. access to the US market triggered policy reforms in Mexico Economic growth, by its nature, is spatially unbalanced. long before NAFTA took effect. The Stabilization and Association Agreements between the EU and the Balkans Figure 5: Higher Economic Density, Higher Standards of Living specify the preaccession legal and regulatory reforms. The Balkans have also signed an intraregional free trade 40000 agreement, the CEFTA (Central European Free Trade 35000 Agreement), which enhances the trade and transport GDP per capita (EUR, PPS) 30000 facilitation initiatives of 2000. The region has established a 25000 common power market and an open sky agreement that 20000 could boost tourism. The Balkan region is so close to the 15000 EU that its firms can easily integrate into panEuropean 10000 production networks. Governments can link their supply y = 4867.4x + 11196 5000 2 R = 0.6917 capacities to the EU's through mutual recognition 0 agreements, conformity assessments, and traderelated 2 1 0 1 2 3 4 5 coordination initiatives. ln(Dens ity m illions of GDP pe r s q k m , EUR, PPS) Source: Eurostat. This is based on data for 2005 for 48 NUTS2 regions in Despite their membership of the EU, the EU10 states need the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and to continue to reduce the thickness of their borders. They Slovenia. have made considerable progress (to fulfill the Copenhagen The economies which have grown fastest in the EU over the criteria to join the EU for example), but continued domestic period 20012005 are also those which have experienced institutional reform is still needed. Hungary, Bulgaria, the largest increases in spatial inequality (see Box 1). The Romania, Slovenia, the Czech Republic, and Poland still lag experience of Western European and other advanced behind leading EU economies in the Ease of Doing 10 countries suggests that increased spatial concentration will Business rankings. Bulgaria lost 220 million of EU initially lead to rising spatial disparities in productivity (and funding by the European Commission over a failure to 11 also in living standards), but will diminish gradually as tackle corruption and organized crime. economic density rises. Strengthening common institutions within each new EU For many EU10 nations that are building density and member state is important. Universal provision of basic and growing, rising spatial inequality may have to be social services, as well as improved land markets, will temporarily tolerated. Even though faster national growth increase labor mobility and land use convertibility. Such may mean larger disparities between subnational areas, it mobility is a primary mechanism for building density and may bring forward the day when the living standards of creating spatial convergence of living standards within even the poorest regions will have converged to EU average countries. The most striking example of the impact of levels. migration on convergence is German unification (Box 2). Promoting Prosperity in the EU10: Institutions that However, migration from Eastern to Western EU nations Unify all Places may be a weak force in promoting international convergence. Many of the 350,000 Polish workers who The 2009 World Development Report suggests that the migrated to the UK in 2004/05 have returned home due to most important integration instruments for economies close 12 the crisis. A more important policy priority may be to major world markets are strengthened institutions and facilitating worker migration to `dense' areas within the 8 The Nomenclature of Territorial Units for Statistics (NUTS) is a geocode 10 For the full list of rankings see www.doingbusiness.org/economyrankings standard for referencing the administrative divisions of countries for statistical 11 th Article entitled "EU Strips Millions from Bulgaria", published on 25 purposes it comprises three levels and is instrumental in the EU's Structural Fund November 2008 on the BBC website delivery mechanisms. news.bbc.co.uk/1/hi/world/europe/7748300.stm 9 12 st Activities of the European Union: Summary of Regional Policy Legislation The Guardian, "345,000, migrants since EU expansion, figures show", Wed 1 website (http://europa.eu/scadplus/leg/en/s24000.htm). March, 2006 EU10 nations and improving the flow of workers, goods Box 2: German Integration: Convergence and and services between poor and prosperous places. However, Concentration with Mobile Labor Europeans are usually less willing to move compared to With the fall of the Berlin Wall in 1989, direct Americans, for example, partly due to the artificially migration from East to West Germany became possible. `thicker' European borders. Domestic and EUwide policies By 2007, more than 1.7 million of 17 million East could help facilitate the mobility. Germans (population at the time of the fall of the Berlin wall) had migrated to the West (Figure B2.1). Box 1: Economic Concentration Accompanied Faster Convergence in Western Europe Figure B2.1: Migration from East Figure B2.2: Wages in the To West Germany After the Fall of East and West Converged Between 1977 and 2000, Ireland's per capita GDP grew the Berlin Wall (net migration, During This Period (black from the EU average of 72 percent to 116 percent. How 19912005, in thousands) line=1992, red line=2005) did this happen? 180 After joining the EU in 1973 and until 2003, Ireland 160 received about 17 billion in EU Structural and 140 120 Cohesion funds. In the first two rounds of funding, all of 100 Ireland was classified as an Objective One area. From 80 19932003, about 2 billion was spent on investments in 60 40 leading areas and in connecting leading and lagging 20 areas. In 2004, Irelandbased U.S. firms exported goods 0 94 98 99 03 91 92 93 95 96 97 00 01 02 04 05 and services worth US$55 billion, mostly to Europe. 19 19 19 19 20 20 19 19 19 19 19 20 20 20 20 The rapid rise in incomes was accompanied by rising Migration produced one desired outcome: incomes spatial concentration of economic activity. Compared became more equal between the two areas and average with other cohesion countries (Greece, Portugal, and incomes rose (Figure B2.2). The geographical distance Spain), Ireland's economic concentration was much of East German counties from the West remained the higher (Figure B1) and its per capita income grew much same but their economic distance was considerably faster. Today, almost all EU10 regions qualify for EU shortened. funding they may want to follow the Irish example of using this financing for international convergence. Convergence in incomes also had a more surprising Figure B1: As Ireland's Income Rapidly Grew, Economic outcome: East German women moved to the Concentration Increased economically dynamic areas while the men, mostly, stayed behind. A likely explanation for this is that Evolution of regional incomes women are, on average, more educated, which makes it 17 easier for them to study or find jobs in the more 16.5 prosperous parts of Germany. 16 15.5 Source: Based on Box 8.2 in WDR 2009, Reshaping Economic ln (variance) 15 Geography, (World Bank, 2008). 14.5 14 13.5 About the Authors 13 Indermit Gill, Chief Economist of the ECA Region 12.5 Chorching Goh, Senior Economist, PREM Unit, ECA 12 Region and Mark Roberts, Consultant. 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 7 78 79 80 81 82 83 84 85 86 87 88 89 90 92 93 95 96 98 99 01 91 94 97 00 7 19 19 19 19 19 19 19 19 20 years Greece Portugal Ireland Spain Source: Based on Box 8.4 in WDR 2009, Reshaping Economic Geography, (World Bank, 2008) "ECA Knowledge Brief" is a regular series of notes highlighting recent analyses, good practices and lessons learned from the development work program of the World Bank's Europe and Central Asia Region http://www.worldbank.org/eca