Determinants of Economic Growth:Empirical Analysis of the EU

Michele Kvistad

University of Wisconsin-Superior

Introduction

Objective: Identify the

macroeconomic determinants of economic growth in the European Union

EU background

Theories of Economic Growth

Solow (1956): Capital accumulation as a factor behind economic

growth Model predictions:

Convergence in income levels and growth rate

Romer (1986): Technological progress as the key driver of

economic growth Model predictions:

No convergence due to endogenous growth

Empirical Studies

Empirical determinants of economic growth: Capital Accumulation (Solow) Technology (Romer) Labor force and human capital (Jones) Institutions (North) Education (Barro) Geographical economics/agglomeration effects

(Krugman)

Empirical Study: Panel Data

Data Source: PWT

variable name variable description Variable Type

rgdppc_growth Real GDP Per Capita growth, chained 2005US$ PPP Dependentempl_growth Growth in number of employed Independenthc Human capital index, based on years of schooling

(Barro/Lee, 2010) and returns Independent

ctfp TFP level at current PPPs (USA=1) Independentlaglnrgdppc One-year lag of ln(Real GDP Per Capita) Independentk_growth Growth rate of capital stock Independentmemb_dur Duration of membership in the EU (in years) Independent

eu_member Dummy=1 if EU member, 0 otherwise Independent

Empirical Model and Hypothesis

Hypothesis: Members of the EU grow faster than non-members:

dgrowth/dEU membership dummy>0 dgrowth/dEU membership duration>0

1 , 1 2 3

4 5

ln

+it i t it it

it it it

growth a rgdppc kgrowth Emplgrowth

hc EU e

1 , 1 2 3

4 5 6

ln

+it i t it it

it it it it

growth a rgdppc kgrowth Emplgrowth

hc EU TFP e

Regression 1: EU membership duration

_cons 54.49386 5.829832 9.35 0.000 43.05848 65.92925 hc 1.79693 .9545947 1.88 0.060 -.0755356 3.669395 memb_dur .0918499 .0289556 3.17 0.002 .0350526 .1486473 empl_growth .8172969 .1533727 5.33 0.000 .5164519 1.118142 k_growth .2221395 .0721821 3.08 0.002 .0805523 .3637267 laglnrgdppc -6.127822 .7020486 -8.73 0.000 -7.504911 -4.750733 rgdppc_gro~h Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 304819.133 1522 200.275383 Root MSE = 13.661 Adj R-squared = 0.0681 Residual 283122.963 1517 186.633463 R-squared = 0.0712 Model 21696.1694 5 4339.23389 Prob > F = 0.0000 F( 5, 1517) = 23.25 Source SS df MS Number of obs = 1523

Regression 2: EU dummy

.

_cons 50.42557 5.501716 9.17 0.000 39.63379 61.21734 hc 1.677734 .9561508 1.75 0.080 -.1977834 3.553252 eu_member 1.721854 .7204395 2.39 0.017 .3086908 3.135017 empl_growth .8232859 .1535653 5.36 0.000 .5220632 1.124509 k_growth .2029207 .0725511 2.80 0.005 .0606095 .3452318 laglnrgdppc -5.654224 .6652603 -8.50 0.000 -6.959152 -4.349297 rgdppc_gro~h Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 304819.133 1522 200.275383 Root MSE = 13.681 Adj R-squared = 0.0655 Residual 283931.781 1517 187.166632 R-squared = 0.0685 Model 20887.3523 5 4177.47046 Prob > F = 0.0000 F( 5, 1517) = 22.32 Source SS df MS Number of obs = 1523

Regression 3: TFP & EU membership duration

_cons 96.66527 7.644528 12.65 0.000 81.66996 111.6606 hc 10.0285 1.402742 7.15 0.000 7.276922 12.78009 memb_dur .0651939 .0289139 2.25 0.024 .0084771 .1219106 empl_growth .7934396 .1572708 5.05 0.000 .4849414 1.101938 k_growth .1875066 .0753497 2.49 0.013 .0397026 .3353107 ctfp 25.19472 3.399609 7.41 0.000 18.52613 31.8633 laglnrgdppc -14.80562 1.274516 -11.62 0.000 -17.30567 -12.30556 rgdppc_gro~h Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 301059.369 1481 203.281141 Root MSE = 13.451 Adj R-squared = 0.1100 Residual 266859.459 1475 180.921667 R-squared = 0.1136 Model 34199.9104 6 5699.98507 Prob > F = 0.0000 F( 6, 1475) = 31.51 Source SS df MS Number of obs = 1482

Regression 4: TFP & EU dummy

_cons 93.84495 7.477654 12.55 0.000 79.17698 108.5129 hc 10.09647 1.406471 7.18 0.000 7.337579 12.85537 eu_member 1.027749 .7146769 1.44 0.151 -.3741427 2.42964 empl_growth .7925327 .1574432 5.03 0.000 .4836963 1.101369 k_growth .1729547 .0757035 2.28 0.022 .0244568 .3214526 ctfp 25.81542 3.384819 7.63 0.000 19.17585 32.455 laglnrgdppc -14.56038 1.267967 -11.48 0.000 -17.04759 -12.07317 rgdppc_gro~h Coef. Std. Err. t P>|t| [95% Conf. Interval]

Total 301059.369 1481 203.281141 Root MSE = 13.464 Adj R-squared = 0.1082 Residual 267404.34 1475 181.291078 R-squared = 0.1118 Model 33655.029 6 5609.17151 Prob > F = 0.0000 F( 6, 1475) = 30.94 Source SS df MS Number of obs = 1482

Conclusion

EU member-countries tend to grow faster than non-member countries

EU economic growth benefits accrue over time

Empirical evidence supports the research hypothesis