Convergence patterns in income and manufacturing productivity in EU: does the latter drive the former?

ABSTRACT

While exploring convergence in real income and in manufacturing productivity of the central and eastern European countries (CEE) and the southern EU counties with the developed EU ones, testing and clustering methodology and sigma convergence are used. We found that CEE countries strongly converge, both in real income and manufacturing productivity, with developed EU countries, while the southern EU countries do not. Moreover, the convergence pattern in real income follows that in manufacturing productivity in both peripheral EU groups suggesting that the underlying productivity clubs determine the formation of income clubs. The observed time pattern of sigma convergence also suggests that manufacturing productivity drives economic growth, as (non)convergence of the former preceded (‘caused’) that of the latter. Aforementioned findings are robust, since they are supported by the results obtained both by the Phillips and Sul (2007) approach and sigma convergence.

KEYWORDS:

• Convergence clubs
• sigma convergence
• GDP per capita
• manufacturing productivity
• European Union

Acknowledgments

We thank two anonymous referees and Slobodan Minić for helpful comments and suggestions. Remaining errors, if any, rest with authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data Availability Statements

The data that support the findings of this study are openly available in Eurostat database at https://ec.europa.eu/eurostat/data/database.

Notes

1. ‘Europe needs to reverse the declining role of industry in Europe for the 21^st century’, states European Commission in its report: A Stronger European Industry for Growth and Economic Recovery, 2012, p. 3.

2. It is estimated that labour mobility in the US is three times higher than in the former EU 15, i.e. prior to enlargement in 2004 and 2007 (cf. Gill & Raiser, 2012, p. 321).

3. Stiglitz (2016), for the US currency area, also adds the federal government financial support for states, i.e. fiscal union in fact, and banking union with a common deposit insurance scheme. See pp. 70 and 71.

4. For a thorough literature survey, see Cieślik and Wciślik (2020).

5. Employment in the US manufacturing in 2002 was 15.2 million, while in integrated value chains with services it is more than double at 37.4 million (Whitefoot et al., 2015).

6. That is $\underset{t\to \mathrm{\infty }}{\mathrm{l}\mathrm{i}\mathrm{m}}\left(log{y}_{it}-log{y}_{jt}\right)=0$.t

7. Phillips and Sul’s (2007) simulation results show that to secure size accuracy and raise test power in the case when α is close to zero, the choice of r should be 0.3 for a small or moderate sample, i.e. for a time dimension T ≤ 50, and 0.2 for large sample: T ≥ 100.

8. We skipped Croatia which joined the EU later, in 2013, since the available series for manufacturing productivity and GDP per capita run only from 2000.

9. The aggregate transition path for the CEE countries relative to developed EU countries is equal to an average of CEE9: $\frac{1}{9}\sum _{i=1}^{9}log{y}_{it}$ over the average of CEE9 and EU7: $\frac{1}{16}\sum _{i=1}^{16}log{y}_{it}$, (cf. Phillips & Sul, 2009). Similarly, one gets the corresponding aggregate transition path for the southern EU countries.

10. For in depth analysis why the southern EU countries do not converge in manufacturing productivity while the CEE countries converge, see Petrović and Gligorić Matić (2023).

11. Quality of institutions is measured by the average of six of the World Bank’s Worldwide Governance Indicators (see https://info.worldbank.org/governance/wgi/). Institutions weakened in all southern EU countries from the beginning of the 2000s onwards, and their quality in Italy and Greece dropped below the level in CEE from 2006 to 2008 onwards.

Additional information

Funding

The Authors acknowledge support from The Serbian Academy of Sciences and Arts, grant no. F-102. Mirjana Gligorić Matić also acknowledges support from the Ministry of Education, Science and Technological Development of the Republic of Serbia.