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Portugal-European Union convergence: Some evidence
EuropeanJournalof POLITICAL European Journal of Political Economy Vol. 12 (1996) 545-553
ELSEVIER
ECONOMY
Portugal-European Union convergence: Some evidence Pedro Pita Barros a,*, Nuno Garoupa
b
a Faculdade de Economia, Universidade Nova de Lisboa, Travessa Estevao Pinto, P-lOT0 Lisbon, Portugal b Queen Mary and Westfield College, University of London, London, UK
Accepted 1 July 1995
Abstract The convergence of national income to 'European' levels has been a topic in nearly all discussions about the Portuguese economy. In this paper we present an analysis of this convergence process from the early 1950s up until the present day, with particular reference to the potential change in the pattern of convergence after 1986. Two fundamental questions are addressed: (i) has Portuguese income shown a convergence pattern to European Union (EU) levels over time? (ii) Did this pattern change after 1986 when Portugal became a EU member? Our results suggest a positive answer to both questions. JEL classification: N1; 05 Keywords: European economic convergence; Portuguese economy; Spanish economy
1. Introduction The role of the European Union (EU) in the convergence of national income to 'European' levels has been one of the main topics of discussion regarding the Portuguese economy. Its importance is reflected in the EU decision to create transfer mechanisms, the so-called communitarian funds, from the richer countries to the poorer countries.
* Corresponding author. Tel: ( + 35) (11) 69 36 24; fax: ( + 35) (11) 388 60 73; e-mail: [email protected]. 0176-2680/96/$15.00 Copyright © 1996 Elsevier Science All rights reserved. PHS0176-2680(96)00015-8
546
P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
Some important empirical evidence has been presented concerning the convergence in nominal terms (the so-called nominal convergence). All empirical evidence pertaining to the convergence in real terms (the so-called real convergence) is, in fact, nothing more than a statistical comparison between the Portuguese national income growth and a mean of the EU countries' national income growth with reference to a single year (usually the current one). Such studies have been very crude in their analysis. They have not allowed consideration of trend behaviour and thus do not answer two important and crucial questions: (i) does the evolution of Portuguese income show a convergence pattern to EU average levels over time? (ii) did this pattern change after 1986, when Portugal became an EU member? This paper is a first attempt to answer these two questions. Using a simple model (Ben-David, 1993), we evaluate the convergence pattern of the Portuguese per capita national income to the unweighed mean of the EU countries since 1950. We do not, however, seek to identify the relative importance of the mechanisms used, nor the instruments available, to influence the process. The main conclusion of our paper is that a convergence pattern does exist. This is particularly evident in the period between 1961-1973 and from 1986 onwards. The period 1974 to 1985 is a stagnation period showing no evidence of a divergence pattern. 2 It is interesting to note that these conclusions do not depend 3 on the reference group. The paper is divided as follows: in Section 2 we explore the described analysis. In Section 3 we extend the analysis to the Spanish case. Finally, in Section 4 we point to the main conclusions.
2. Portugal-EU convergence An initial indication of the convergence pattern can be illustrated graphically. In Fig. 1 we compare the Portuguese per capita national income (in logarithms) with the mean of the EC6 countries since 1950 (also in logarithms). 4
1For an example, see Minist~riodas Finan~as(1992, pp. 41 42) or OECD (1992). 2 With a different methodology for addressing similar questions, Raymond (1993) gets the same results for the EU countrieson aggregate. 3 The three reference groups are EC6 (Germany, France, Belgium, Luxembourg, Italy and The Netherlands), EC9 (i.e. EC6 plus Denmark, the United Kingdomand the Irish Republic, which entered the EEC in 1973) and EC12 (these last nine countriesplus Greece, Portugal and Spain). 4 For the period 1950-85 we used data from Summers and Heston (1988): per capita GDP calculated at 1980 constant internationalprices. Internationalprices mean constant values in USD, adjusted for effects in relative prices in trade. For a complete description see the reference itself. For the period 1970-93 we used the PPP per capita GDP series publishedby the OECD,
P.P. Barros, N. Garoupa /European Journal of Political Economy 12 (1996) 545-553
547
1,3
...................................
T ....................................................
1,2
. . . .
1,1 1
:..
..................
............................
Log differences
",\;
0,9 .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(Real GDP 0,8 per capita)
f
.
.
.
.
.
.
.
.
.
.
0,7 0,6 0,5 0,4 1950
I
I
1955
1960
--"
I
I
I
1 9 6 5 1970 1 9 7 5
Hest on-Sursners
Q
I
I
I
1 9 8 0 1 9 8 5 1990
OECD
]
i Fig. 1. EC6
mean minus Portugal.
The pattern that emerges from these figures is clear: convergence until 1973 (the difference of the logarithms is decreasing), stagnation from 1974 until 1985 (the difference is constant or marginally increasing) and again, convergence following 1986. The years 1974 and 1986 are both inflexion points. We now proceed to a more precise characterisation of the convergence pattern. The fundamental equation of the model is (Ben-David, 1993): Yj,t+,-V+t+l*
= ~b[ Yj,t - Yt* ]
(l )
where Yj,t is the logarithm of country j per capita national income in the year t; Yt * is the (unweighed) mean of the logarithms of the reference group members per capita national income in the year t. We can rearrange the expression: AZj,,+, = - KZj,,
(2)
where K = 1 - 4, and the new variable Zj, t is described by zj,, =
Y,*
(3)
where A is the difference operator and ,¢ represents the convergence rate. Suppose country j has a per capita national income lower than the mean. Then Zj, t will be negative. If a convergence pattern exists, then Zj. t must be increasing in time (i.e. decreasing in absolute value). This implies that AZj, t+I> O. Thus a positive K means convergence and a negative K means divergence. 5
5 Under certain conditions, it can be shown that this model is a particular case of Barro and Sala-i-Martin (1992) model.
548
P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
Table 1 Portugal: Convergence to EC6 a Period
r
t-value
N
Half-life
1951-85 1951-60 1951-73 1961-73 1974-85 1986-93
0.008 0.005 0.014 0.023 - 0.008 0.022
1.68 0.66 2.54 * 2.93 * 0.80 3.76 *
35 10 23 13 12 8
86 49 30 31
a N is the number of observations. * For values meeting 5% significance. Source: 1951-1985 - Summers and Heston (1988); 1970-1993 - OECD (1970-1993).
T a b l e 1 p r e s e n t s the results o f t h e e s t i m a t i o n o f K a n d its s i g n i f i c a n c e test. 6 I f the p a r a m e t e r is statistically significant, T a b l e 1 also s h o w s the n u m b e r o f y e a r s n e e d e d to r e d u c e b y h a l f the d i s t a n c e b e t w e e n P o r t u g u e s e p e r c a p i t a n a t i o n a l 7 i n c o m e a n d the r e f e r e n c e g r o u p m e a n .
2.1. The period 1951-1973
T h e c o n v e r g e n c e c o e f f i c i e n t K is p o s i t i v e a n d statistically v a l i d in the p e r i o d 1 9 5 1 - 7 3 . T h i s i m p l i e s that t h e P o r t u g u e s e p e r c a p i t a n a t i o n a l i n c o m e c o n v e r g e d to the E E C m e a n d u r i n g that period. A l t h o u g h t h e p e r i o d 1 9 5 1 - 7 3 w a s d e f i n i t e l y a t i m e o f e c o n o m i c g r o w t h , it c a n b e f u r t h e r d i v i d e d into t w o s e p a r a t e s u b - p e r i o d s . T h e results in T a b l e 1 for the p e r i o d s 1 9 5 1 - 6 0 a n d 1 9 6 1 - 1 9 7 3 illustrate this fact. T h e 1950s, w h e r e n o c o n v e r g e n c e is detected, w e r e c h a r a c t e r i s e d b y an e c o n o m i c p o l i c y w h e r e the m a i n o b j e c t i v e was i m p o r t s u b s t i t u t i o n for d o m e s t i c p r o d u c t s ( d u r i n g this time, the e m p h a s i s w a s o n s u p p o r t i n g a n d c r e a t i n g i n c e n t i v e s w i t h its o v e r s e a s e m p i r e a n d less w i t h t h e E u r o p e a n m a r k e t ) T h e 1960s, o n the o t h e r h a n d , h a d a c l e a r c o n v e r g e n c e pattern. T h i s d e c a d e w a s c h a r a c t e r i s e d b y a c o m p l e t e l y d i f f e r e n t e c o n o m i c p o l i c y w h e r e the m a i n o b j e c t i v e w a s to e x p l o i t a n y c o m p a r a t i v e a d v a n t a g e s a v a i l a b l e t h r o u g h i n t e r n a t i o n a l t r a d e
6 Only estimates for the reference group EC6 are reported. Detailed results using different reference groups and different data sets yield the same results. They can be obtained upon request. Some results should be analysed with caution because some of the estimates are obtained using a small sample. Unfortunately, this is the cost to bear in the analysis of individual countries. The procedure is essentially a unit root test to determine convergence. The use of augmented Dickey-Fuller (ADF) tests is limited by the low number of observations, which makes it pointless to conduct such tests. Only the longer spans are really viable candidates for the ADF tests. Running the ADF with up to four lags produces non-significant results. We are thankful to the referee who called our attention to this point. 7 This half-time measure is defined in Ben-David (1993).
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549
(mainly due to non-skilled or semi-skilled labour). The Portuguese economy opened up to European competition and to the European markets: EFrA membership (1960) 8 and EEC cooperation agreement (1972). 9 In the period before 1973 the Portuguese economy had the typical characteristics of an NIC (new industrialised country) (Krugman and de Macedo, 1979): i.e. very fast economic growth based mainly on commercial expansion, exports of labour inputs (emigration) and imports of capital inputs (foreign direct investment). 10 2.2. The period 1974-1985 The parameter K is not significant for the period 1974-85, revealing the absence of convergence. This period was characterised by a politicised market economy with strong intervention from the Government, specifically in price determination (Borges, 1982). This regime was completely different from the regimes experienced by the EEC countries. In the early 1980s there were some attempts to modify the constitutional constraints which were imposing that regime. In spite of this, it was only with the second constitutional reform, in 1989, that these constraints were completely abolished. The Portuguese economy suffered two exogenous shocks in the period 1974-76. Firstly, as all of their European partners, the 1973 oil crisis led to corresponding increases in energy and raw material prices. Secondly, and specific to the Portuguese economy, the revolution on the 25th of April, 1974 created considerable instability and uncertainty within the domestic economy. The independence of Portuguese Africa and the demobilisation of the Army after a thirteen-year war led to an increase in the active population (about 10%) and to the loss of important markets. The relative successful absorption into the economy of Portuguese ex-colonies workers despite adverse conditions is quite surprising. The full consequences of this massive inflow are still noticeable today, with overloaded and low productivity public administration and state-owned enterprises. It is not possible, in this paper, to distinguish the effects of each shock but it seems that the Portuguese economy did not behave very differently from the other European economies during this period.
s Nevertheless, Portugal had a special membership due to the Appendix G. This appendix defined the conditions which ruled the Portuguese opting-out from abolishing all the obstacles to trade. It allowed some protection to Portuguese products. 9 This can be seen by comparing the source and destination of Portuguese imports and exports in this period. In 1958, 14.4% of the imports were from overseas and 59.3% were from the countries that later formed the EFFA and EEC. These numbers changed to 10.1% and 57.0% respectively in 1973. In 1958, the destinations of Portuguese exports were overseas (28.1%) and EFTA plus EEC (41.2%). These numbers changed to 14.8 and 62.5% in 1973 (source: OECD (1992)). l0 One restriction to this economic growth was the existence of a large and undeveloped traditional industrial sector, maintained by a straight jacket of government regulation (Lei do Condicionamento Industrial).
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P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
From 1976 until 1985 there were periods of recession (1976-79 and 1981-85) and periods of boom (1979-81 and 1985). The main policies during those years corresponded to short-run management of the business cycle (the so called stop-and-go policies) which explains why there was no convergence at all. J1
3. The period 1986-1993 It was not until 1985 that a new expansion policy began. This coincided with the Portuguese entry to the EC (January 1st, 1986). The convergence process resumed at approximately the same rate as in the period 1961-73. Again there were two effects: firstly, and common to all EC countries, was the 1986-89 world boom; secondly, and specific to the Portuguese economy, was the Portuguese entry to the EC. It is not possible to measure the outcome of each one of these effects on the convergence rate using our approach. Nevertheless, both of them were positive shocks and helped the recovery from the recession of the early 1980s. Both EC funds and external investment can be considered as main causes of the new convergence pattern. Gaspar and Pereira (1992) estimated that the annual product growth due to the EC funds is approximately 0.5%. The contribution to the convergence process by Portugal's entry to the EC seems to be both permanent and significant. However, we will only be able to proceed to a robust analysis after the end of the business cycle (probably, 1994). It is worth noting that the recession started later in Portugal than in the other EC countries, and the possibility of a counter-cycle evolution could lead to an overestimation of the convergence rate. Alternatively, Portugal may experience shorter business cycles. However, unfortunately the present data set does not allow us to distinguish these alternative explanations.
4. The Spanish case The comparison between the Portuguese and the Spanish experiences is relevant for several reasons: in several respects, the two countries have a similar historical background; both countries became EC members in the same year; and they are both located at the geographical periphery of the European Union, the Iberian Peninsula. Table 2 shows the results of the estimated convergence coefficient for Spain. The values of K are not statistically significant during the period 1951-85. This implies that the Spanish economy did not converge (nor diverge)
ii Although,as Balassa (1983) emphasises, real convergencehas been one of the long-rungoals of all Governments since the late 70s.
P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
551
Table 2 Spain: C o n v e r g e n c e to E C 6 a Period
K
t-value
N
Hal~li~
1951-85 1951-73 1974-85 1986-93
0.022 0.027 0.007 0.032
1.41 1.41 0.24 3.59 *
35 23 12 8
21
a N is the n u m b e r o f observations. * For values meeting 5 % significance. Source: 1 9 5 1 - 1 9 8 5 - S u m m e r s a n d Heston (1988); 1 9 7 0 - 1 9 9 3 - O E C D ( 1 9 7 0 - 1 9 9 3 ) .
before 1986. This conclusion is independent of the series used or of the reference group. The situation changes completely after 1986, when a convergence process exists. The results show that the Spanish convergence rate is higher than the Portuguese convergence rate for the same period. To interpret these results one must point out the main differences between the two economies. Firstly, Spain suffered a civil war (1936-39) which destroyed its production structure and consequences felt over the next two decades. Secondly, Spain did not receive any support from the Marshall programme (in contrast, Portugal did receive some economic support). Thirdly, the political isolation of the post-war years meant that Spain was out of the European economic zone. Its industrial development in the 1950s was based on a closed market strategy with small firms and low productivity. It was only in the 1960s that the Spanish economy opened up to international trade. Unlike Portugal, Spain was not a member of EFTA and it did not have an 'empire' overseas. Nevertheless, Spanish industrialisation in the 1960s and 1970s was more successful than that of Portugal. In Spain, the new industrial policy was based on the construction of large firms with high technological skills which was helped by the liberalisation of foreign direct investment and strong protection of trade (both imports and exports). The 1970 Spain-EEC agreement was the first step towards trade liberalisation. During the period 1974-76, the Spanish economy suffered greatly from the oil crisis. It exhibited a negative growth rate, mainly due to high production costs and small external investment (de Busturia, 1980). The recovery started in 1979 and has continued since then. Social stability was made possible at the end of 1977 with the Moncloa Pact, and political stability was achieved after the 1982 general elections. During the 1980s Spain was more successful than Portugal in substituting imports, in intra-industrial specialisation, in economic stability, in its reform of the incentives to agriculture and industrial growth and its recovery from regional
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P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
asymmetries (Neto da Silva, 1982; Balassa, 1983). This may explain why, after 1986, the convergence rate was higher in Spain than in Portugal.
5. Conclusions Our work intends to be a first step in analysing the real convergence pattern of the Portuguese economy to the EU. The main goal was to identify and discuss the presence of such a pattern, in terms of per capita national income, and to evaluate the importance of the 1986 entry to the EC in this context. The two fundamental questions posed were: (i) Did the evolution of Portuguese income over time reveal a convergence pattern to EU levels? (ii) Did this pattern change after 1986, when Portugal became an EC member? Our results suggest a positive answer to both questions. The empirical analysis indicates a convergence pattern since 1951. The rate of convergence was high from 1961 to 1973 and from 1986 onwards. The period 1974-85 was characterised by stagnation in the convergence process. When comparing 1951-85 to 1986-93, there are indications that the convergence rate is higher in the latter period. The similarity of effects after Portugal's entry to EFTA in 1960 and its entry to EC in 1986 leads us to conclude that there is a high correlation between trade liberalisation and a convergence pattern. 12 The trade 13 liberalisation seems to be the main driving force to real economic convergence. The comparison between the Portuguese and the Spanish experiences (autocratic Government in the 1950s and 1960s, political democracy in 1970s and EC membership in 1986) is extremely relevant and allows important conclusions to be drawn. The estimates support the conclusion that EC membership has had a positive impact on income in Portugal and Spain and that it has increased their real convergence rate.
Acknowledgements We benefited from the comments and suggestions of Ana B. Reis, Clara Raposo, Hugh Gravelle, Luis Cunha, Miguel Lebre, Paulo Pinho, Ricardo Ferreira, Rui Baleiras, seminar participants at QMW, UL and two anonymous referees. We are specially grateful to Daniel Trinder for his comments and suggestions in the revised version. The usual disclaimer applies.
12Similar evidence within EC6 is found by Ben-David(1993). 13This result is empirically tested by Levine and Renelt (1992). Other important forces are human capital growthand infrastructure investment. See Barro (1991) and Munnell (1992).
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553
References Balassa, B., 1983, Economic policies in Portugal, Economia 7, no. 1, 111-134. Ben-David, D., 1993, Equalizing exchange, Trade liberalisation and income convergence, Quarterly Journal of Economics 108, 653-679. Barro, Robert J., 1991, Economic growth in a cross-section of countries, Quarterly Journal of Economics 106, 407-443. Barro, Robert J. and Xavier Sala-i-Martin, 1992, Convergence, Journal of Political Economy 100, 223-251. Borges, A., 1982, Concorr~ncia e polfticas de pre~os, Economia 6, no. 2, 237-249. de Busturia, Daniel, 1980, Aspectos econ6micos de la adhesion de Espafia a la Comunidad Europea, Economia 4, no. 3, 495-518. Gaspar, V. and Alfredo M. Pereira, 1992, Analysis of the EC structural funds - with an application to Portugal, Working paper no. 191 (Faculdade de Economia, Universidade Nova de Lisboa) July. Krugman, P. and J. Braga de Macedo, 1979, The economic consequences of the April 25th revolution, Economia 3, no. 3, 455-483. Levine, R. and R. Renelt, 1992, A sensitivity analysis of cross country growth regressions, American Economic Review 82, 942-963. Ministrrio das Finan~as, 1992, Or~amento do Estado para 1993 (Minist&io das Finan~as, Lisbon). Munnell, A., 1992, Infrastructure investment and economic growth, Journal of Economic Perspectives 6, 189-198. Neto da Silva, A., 1982, Desigualdades regionais e integra~o econrmica: Portugal, Grrcia e Espanha, Economia 6, no. 2, 251-293. OECD, 1970-1993, Main economic indicators, several issues (OECD, Paris). OECD, 1992, Economic surveys: Portugal (OECD, Paris). Raymond, Jos6 Luis, 1993, Acortamiento de distancias, convergencia y competitividad en los paises de la Europa de los doce, Papeles de Economia Espafiola 56, 78-97. Summers, R. and A. Heston, 1988, A new set of international comparisons of real product and price levels estimates for 130 countries, 1950-1985, Review of Income and Wealth 34, 1-25.
ELSEVIER
ECONOMY
Portugal-European Union convergence: Some evidence Pedro Pita Barros a,*, Nuno Garoupa
b
a Faculdade de Economia, Universidade Nova de Lisboa, Travessa Estevao Pinto, P-lOT0 Lisbon, Portugal b Queen Mary and Westfield College, University of London, London, UK
Accepted 1 July 1995
Abstract The convergence of national income to 'European' levels has been a topic in nearly all discussions about the Portuguese economy. In this paper we present an analysis of this convergence process from the early 1950s up until the present day, with particular reference to the potential change in the pattern of convergence after 1986. Two fundamental questions are addressed: (i) has Portuguese income shown a convergence pattern to European Union (EU) levels over time? (ii) Did this pattern change after 1986 when Portugal became a EU member? Our results suggest a positive answer to both questions. JEL classification: N1; 05 Keywords: European economic convergence; Portuguese economy; Spanish economy
1. Introduction The role of the European Union (EU) in the convergence of national income to 'European' levels has been one of the main topics of discussion regarding the Portuguese economy. Its importance is reflected in the EU decision to create transfer mechanisms, the so-called communitarian funds, from the richer countries to the poorer countries.
* Corresponding author. Tel: ( + 35) (11) 69 36 24; fax: ( + 35) (11) 388 60 73; e-mail: [email protected]. 0176-2680/96/$15.00 Copyright © 1996 Elsevier Science All rights reserved. PHS0176-2680(96)00015-8
546
P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
Some important empirical evidence has been presented concerning the convergence in nominal terms (the so-called nominal convergence). All empirical evidence pertaining to the convergence in real terms (the so-called real convergence) is, in fact, nothing more than a statistical comparison between the Portuguese national income growth and a mean of the EU countries' national income growth with reference to a single year (usually the current one). Such studies have been very crude in their analysis. They have not allowed consideration of trend behaviour and thus do not answer two important and crucial questions: (i) does the evolution of Portuguese income show a convergence pattern to EU average levels over time? (ii) did this pattern change after 1986, when Portugal became an EU member? This paper is a first attempt to answer these two questions. Using a simple model (Ben-David, 1993), we evaluate the convergence pattern of the Portuguese per capita national income to the unweighed mean of the EU countries since 1950. We do not, however, seek to identify the relative importance of the mechanisms used, nor the instruments available, to influence the process. The main conclusion of our paper is that a convergence pattern does exist. This is particularly evident in the period between 1961-1973 and from 1986 onwards. The period 1974 to 1985 is a stagnation period showing no evidence of a divergence pattern. 2 It is interesting to note that these conclusions do not depend 3 on the reference group. The paper is divided as follows: in Section 2 we explore the described analysis. In Section 3 we extend the analysis to the Spanish case. Finally, in Section 4 we point to the main conclusions.
2. Portugal-EU convergence An initial indication of the convergence pattern can be illustrated graphically. In Fig. 1 we compare the Portuguese per capita national income (in logarithms) with the mean of the EC6 countries since 1950 (also in logarithms). 4
1For an example, see Minist~riodas Finan~as(1992, pp. 41 42) or OECD (1992). 2 With a different methodology for addressing similar questions, Raymond (1993) gets the same results for the EU countrieson aggregate. 3 The three reference groups are EC6 (Germany, France, Belgium, Luxembourg, Italy and The Netherlands), EC9 (i.e. EC6 plus Denmark, the United Kingdomand the Irish Republic, which entered the EEC in 1973) and EC12 (these last nine countriesplus Greece, Portugal and Spain). 4 For the period 1950-85 we used data from Summers and Heston (1988): per capita GDP calculated at 1980 constant internationalprices. Internationalprices mean constant values in USD, adjusted for effects in relative prices in trade. For a complete description see the reference itself. For the period 1970-93 we used the PPP per capita GDP series publishedby the OECD,
P.P. Barros, N. Garoupa /European Journal of Political Economy 12 (1996) 545-553
547
1,3
...................................
T ....................................................
1,2
. . . .
1,1 1
:..
..................
............................
Log differences
",\;
0,9 .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(Real GDP 0,8 per capita)
f
.
.
.
.
.
.
.
.
.
.
0,7 0,6 0,5 0,4 1950
I
I
1955
1960
--"
I
I
I
1 9 6 5 1970 1 9 7 5
Hest on-Sursners
Q
I
I
I
1 9 8 0 1 9 8 5 1990
OECD
]
i Fig. 1. EC6
mean minus Portugal.
The pattern that emerges from these figures is clear: convergence until 1973 (the difference of the logarithms is decreasing), stagnation from 1974 until 1985 (the difference is constant or marginally increasing) and again, convergence following 1986. The years 1974 and 1986 are both inflexion points. We now proceed to a more precise characterisation of the convergence pattern. The fundamental equation of the model is (Ben-David, 1993): Yj,t+,-V+t+l*
= ~b[ Yj,t - Yt* ]
(l )
where Yj,t is the logarithm of country j per capita national income in the year t; Yt * is the (unweighed) mean of the logarithms of the reference group members per capita national income in the year t. We can rearrange the expression: AZj,,+, = - KZj,,
(2)
where K = 1 - 4, and the new variable Zj, t is described by zj,, =
Y,*
(3)
where A is the difference operator and ,¢ represents the convergence rate. Suppose country j has a per capita national income lower than the mean. Then Zj, t will be negative. If a convergence pattern exists, then Zj. t must be increasing in time (i.e. decreasing in absolute value). This implies that AZj, t+I> O. Thus a positive K means convergence and a negative K means divergence. 5
5 Under certain conditions, it can be shown that this model is a particular case of Barro and Sala-i-Martin (1992) model.
548
P.P. Barros, N. Garoupa / European Journal of Political Economy 12 (1996) 545-553
Table 1 Portugal: Convergence to EC6 a Period
r
t-value
N
Half-life
1951-85 1951-60 1951-73 1961-73 1974-85 1986-93
0.008 0.005 0.014 0.023 - 0.008 0.022
1.68 0.66 2.54 * 2.93 * 0.80 3.76 *
35 10 23 13 12 8
86 49 30 31
a N is the number of observations. * For values meeting 5% significance. Source: 1951-1985 - Summers and Heston (1988); 1970-1993 - OECD (1970-1993).
T a b l e 1 p r e s e n t s the results o f t h e e s t i m a t i o n o f K a n d its s i g n i f i c a n c e test. 6 I f the p a r a m e t e r is statistically significant, T a b l e 1 also s h o w s the n u m b e r o f y e a r s n e e d e d to r e d u c e b y h a l f the d i s t a n c e b e t w e e n P o r t u g u e s e p e r c a p i t a n a t i o n a l 7 i n c o m e a n d the r e f e r e n c e g r o u p m e a n .
2.1. The period 1951-1973
T h e c o n v e r g e n c e c o e f f i c i e n t K is p o s i t i v e a n d statistically v a l i d in the p e r i o d 1 9 5 1 - 7 3 . T h i s i m p l i e s that t h e P o r t u g u e s e p e r c a p i t a n a t i o n a l i n c o m e c o n v e r g e d to the E E C m e a n d u r i n g that period. A l t h o u g h t h e p e r i o d 1 9 5 1 - 7 3 w a s d e f i n i t e l y a t i m e o f e c o n o m i c g r o w t h , it c a n b e f u r t h e r d i v i d e d into t w o s e p a r a t e s u b - p e r i o d s . T h e results in T a b l e 1 for the p e r i o d s 1 9 5 1 - 6 0 a n d 1 9 6 1 - 1 9 7 3 illustrate this fact. T h e 1950s, w h e r e n o c o n v e r g e n c e is detected, w e r e c h a r a c t e r i s e d b y an e c o n o m i c p o l i c y w h e r e the m a i n o b j e c t i v e was i m p o r t s u b s t i t u t i o n for d o m e s t i c p r o d u c t s ( d u r i n g this time, the e m p h a s i s w a s o n s u p p o r t i n g a n d c r e a t i n g i n c e n t i v e s w i t h its o v e r s e a s e m p i r e a n d less w i t h t h e E u r o p e a n m a r k e t ) T h e 1960s, o n the o t h e r h a n d , h a d a c l e a r c o n v e r g e n c e pattern. T h i s d e c a d e w a s c h a r a c t e r i s e d b y a c o m p l e t e l y d i f f e r e n t e c o n o m i c p o l i c y w h e r e the m a i n o b j e c t i v e w a s to e x p l o i t a n y c o m p a r a t i v e a d v a n t a g e s a v a i l a b l e t h r o u g h i n t e r n a t i o n a l t r a d e
6 Only estimates for the reference group EC6 are reported. Detailed results using different reference groups and different data sets yield the same results. They can be obtained upon request. Some results should be analysed with caution because some of the estimates are obtained using a small sample. Unfortunately, this is the cost to bear in the analysis of individual countries. The procedure is essentially a unit root test to determine convergence. The use of augmented Dickey-Fuller (ADF) tests is limited by the low number of observations, which makes it pointless to conduct such tests. Only the longer spans are really viable candidates for the ADF tests. Running the ADF with up to four lags produces non-significant results. We are thankful to the referee who called our attention to this point. 7 This half-time measure is defined in Ben-David (1993).
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(mainly due to non-skilled or semi-skilled labour). The Portuguese economy opened up to European competition and to the European markets: EFrA membership (1960) 8 and EEC cooperation agreement (1972). 9 In the period before 1973 the Portuguese economy had the typical characteristics of an NIC (new industrialised country) (Krugman and de Macedo, 1979): i.e. very fast economic growth based mainly on commercial expansion, exports of labour inputs (emigration) and imports of capital inputs (foreign direct investment). 10 2.2. The period 1974-1985 The parameter K is not significant for the period 1974-85, revealing the absence of convergence. This period was characterised by a politicised market economy with strong intervention from the Government, specifically in price determination (Borges, 1982). This regime was completely different from the regimes experienced by the EEC countries. In the early 1980s there were some attempts to modify the constitutional constraints which were imposing that regime. In spite of this, it was only with the second constitutional reform, in 1989, that these constraints were completely abolished. The Portuguese economy suffered two exogenous shocks in the period 1974-76. Firstly, as all of their European partners, the 1973 oil crisis led to corresponding increases in energy and raw material prices. Secondly, and specific to the Portuguese economy, the revolution on the 25th of April, 1974 created considerable instability and uncertainty within the domestic economy. The independence of Portuguese Africa and the demobilisation of the Army after a thirteen-year war led to an increase in the active population (about 10%) and to the loss of important markets. The relative successful absorption into the economy of Portuguese ex-colonies workers despite adverse conditions is quite surprising. The full consequences of this massive inflow are still noticeable today, with overloaded and low productivity public administration and state-owned enterprises. It is not possible, in this paper, to distinguish the effects of each shock but it seems that the Portuguese economy did not behave very differently from the other European economies during this period.
s Nevertheless, Portugal had a special membership due to the Appendix G. This appendix defined the conditions which ruled the Portuguese opting-out from abolishing all the obstacles to trade. It allowed some protection to Portuguese products. 9 This can be seen by comparing the source and destination of Portuguese imports and exports in this period. In 1958, 14.4% of the imports were from overseas and 59.3% were from the countries that later formed the EFFA and EEC. These numbers changed to 10.1% and 57.0% respectively in 1973. In 1958, the destinations of Portuguese exports were overseas (28.1%) and EFTA plus EEC (41.2%). These numbers changed to 14.8 and 62.5% in 1973 (source: OECD (1992)). l0 One restriction to this economic growth was the existence of a large and undeveloped traditional industrial sector, maintained by a straight jacket of government regulation (Lei do Condicionamento Industrial).
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From 1976 until 1985 there were periods of recession (1976-79 and 1981-85) and periods of boom (1979-81 and 1985). The main policies during those years corresponded to short-run management of the business cycle (the so called stop-and-go policies) which explains why there was no convergence at all. J1
3. The period 1986-1993 It was not until 1985 that a new expansion policy began. This coincided with the Portuguese entry to the EC (January 1st, 1986). The convergence process resumed at approximately the same rate as in the period 1961-73. Again there were two effects: firstly, and common to all EC countries, was the 1986-89 world boom; secondly, and specific to the Portuguese economy, was the Portuguese entry to the EC. It is not possible to measure the outcome of each one of these effects on the convergence rate using our approach. Nevertheless, both of them were positive shocks and helped the recovery from the recession of the early 1980s. Both EC funds and external investment can be considered as main causes of the new convergence pattern. Gaspar and Pereira (1992) estimated that the annual product growth due to the EC funds is approximately 0.5%. The contribution to the convergence process by Portugal's entry to the EC seems to be both permanent and significant. However, we will only be able to proceed to a robust analysis after the end of the business cycle (probably, 1994). It is worth noting that the recession started later in Portugal than in the other EC countries, and the possibility of a counter-cycle evolution could lead to an overestimation of the convergence rate. Alternatively, Portugal may experience shorter business cycles. However, unfortunately the present data set does not allow us to distinguish these alternative explanations.
4. The Spanish case The comparison between the Portuguese and the Spanish experiences is relevant for several reasons: in several respects, the two countries have a similar historical background; both countries became EC members in the same year; and they are both located at the geographical periphery of the European Union, the Iberian Peninsula. Table 2 shows the results of the estimated convergence coefficient for Spain. The values of K are not statistically significant during the period 1951-85. This implies that the Spanish economy did not converge (nor diverge)
ii Although,as Balassa (1983) emphasises, real convergencehas been one of the long-rungoals of all Governments since the late 70s.
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Table 2 Spain: C o n v e r g e n c e to E C 6 a Period
K
t-value
N
Hal~li~
1951-85 1951-73 1974-85 1986-93
0.022 0.027 0.007 0.032
1.41 1.41 0.24 3.59 *
35 23 12 8
21
a N is the n u m b e r o f observations. * For values meeting 5 % significance. Source: 1 9 5 1 - 1 9 8 5 - S u m m e r s a n d Heston (1988); 1 9 7 0 - 1 9 9 3 - O E C D ( 1 9 7 0 - 1 9 9 3 ) .
before 1986. This conclusion is independent of the series used or of the reference group. The situation changes completely after 1986, when a convergence process exists. The results show that the Spanish convergence rate is higher than the Portuguese convergence rate for the same period. To interpret these results one must point out the main differences between the two economies. Firstly, Spain suffered a civil war (1936-39) which destroyed its production structure and consequences felt over the next two decades. Secondly, Spain did not receive any support from the Marshall programme (in contrast, Portugal did receive some economic support). Thirdly, the political isolation of the post-war years meant that Spain was out of the European economic zone. Its industrial development in the 1950s was based on a closed market strategy with small firms and low productivity. It was only in the 1960s that the Spanish economy opened up to international trade. Unlike Portugal, Spain was not a member of EFTA and it did not have an 'empire' overseas. Nevertheless, Spanish industrialisation in the 1960s and 1970s was more successful than that of Portugal. In Spain, the new industrial policy was based on the construction of large firms with high technological skills which was helped by the liberalisation of foreign direct investment and strong protection of trade (both imports and exports). The 1970 Spain-EEC agreement was the first step towards trade liberalisation. During the period 1974-76, the Spanish economy suffered greatly from the oil crisis. It exhibited a negative growth rate, mainly due to high production costs and small external investment (de Busturia, 1980). The recovery started in 1979 and has continued since then. Social stability was made possible at the end of 1977 with the Moncloa Pact, and political stability was achieved after the 1982 general elections. During the 1980s Spain was more successful than Portugal in substituting imports, in intra-industrial specialisation, in economic stability, in its reform of the incentives to agriculture and industrial growth and its recovery from regional
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asymmetries (Neto da Silva, 1982; Balassa, 1983). This may explain why, after 1986, the convergence rate was higher in Spain than in Portugal.
5. Conclusions Our work intends to be a first step in analysing the real convergence pattern of the Portuguese economy to the EU. The main goal was to identify and discuss the presence of such a pattern, in terms of per capita national income, and to evaluate the importance of the 1986 entry to the EC in this context. The two fundamental questions posed were: (i) Did the evolution of Portuguese income over time reveal a convergence pattern to EU levels? (ii) Did this pattern change after 1986, when Portugal became an EC member? Our results suggest a positive answer to both questions. The empirical analysis indicates a convergence pattern since 1951. The rate of convergence was high from 1961 to 1973 and from 1986 onwards. The period 1974-85 was characterised by stagnation in the convergence process. When comparing 1951-85 to 1986-93, there are indications that the convergence rate is higher in the latter period. The similarity of effects after Portugal's entry to EFTA in 1960 and its entry to EC in 1986 leads us to conclude that there is a high correlation between trade liberalisation and a convergence pattern. 12 The trade 13 liberalisation seems to be the main driving force to real economic convergence. The comparison between the Portuguese and the Spanish experiences (autocratic Government in the 1950s and 1960s, political democracy in 1970s and EC membership in 1986) is extremely relevant and allows important conclusions to be drawn. The estimates support the conclusion that EC membership has had a positive impact on income in Portugal and Spain and that it has increased their real convergence rate.
Acknowledgements We benefited from the comments and suggestions of Ana B. Reis, Clara Raposo, Hugh Gravelle, Luis Cunha, Miguel Lebre, Paulo Pinho, Ricardo Ferreira, Rui Baleiras, seminar participants at QMW, UL and two anonymous referees. We are specially grateful to Daniel Trinder for his comments and suggestions in the revised version. The usual disclaimer applies.
12Similar evidence within EC6 is found by Ben-David(1993). 13This result is empirically tested by Levine and Renelt (1992). Other important forces are human capital growthand infrastructure investment. See Barro (1991) and Munnell (1992).
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