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Economic Models: from theory to application n.3
The diversity of European Union member states gives rise to many challenges. The EU needs to ensure integration as well as cohesion between member states in order to optimise and ease the realisation of its goals, whether economic or social. In its early days, the European Union counted only 6 countries, and had a narrowed scope of action, which limited its need for homogeneity. However, as it enlarged and countries with diverse backgrounds and institutional settings gained admission, disparities arose which threatened the vision of a united, strong and homogeneous block. While such diversity can be a driving force for some aspects of the EU, it may also represent barriers to its functioning, such as for the European Monetary Union.
However, the initial diversity among its members need not be preventative to the EU reaching its aim. Perhaps the union itself is a vector to greater uniformity within its members.
The Solow growth model is a crucial economic model that assesses economic growth depending on productivity, capital, labour and the demographics of a country. Among the important predictions of this model, its analysis of growth rates depending on initial capital may be used in the context of the European Union to study convergence and integration among the member states. In particular, the discrepancy between GDP levels of recently admitted countries and more established members gives us a framework to observe the potential effects of European integration on growth rate.
The Solow Growth
The Solow Economic Growth model studies economic growth and output in an economy based on several factors such as saving, population and technological advancement. This model makes valuable predictions, as it predicts that countries eventually reach their steady state, that is a level where there is no growth in output per worker, with said level determined by the factors mentioned above. More importantly, what this model predicts is that countries with lower output will end up experiencing faster economic growth in order to catch up with the more advanced economies to eventually reach this steady state as well.
In the case of the EU, this is captured by two types of convergence rate; the β-convergence and the σ-convergence. The first type of convergence corresponds to the difference in GDP levels between countries; over time and after admission to the Union, members should eventually converge to similar levels of GDP per capita. The second type of convergence deals with the catch-up process that allows for similar levels of GDP per capita, that is that countries with lower levels of income have to grow faster than high-income countries. Therefore, β-convergence is necessary in order to reach σ-convergence; indeed, if countries with different levels of output were to grow at the same pace, countries with lower levels of GDP would never be able to catch-up with more advanced economies, therefore sustaining – if not worsening – the gap existing between these countries. Hence, faster growth rates among low-income countries is an essential part of the cohesion process.