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Income convergence prospects in Europe: Assessing the role of human capital dynamics

Income convergence prospects in Europe: Assessing the role of human capital dynamics. Jesus Crespo Cuaresma Miroslava Luchava Havettov á Martin L á baj. BRATISLAVA ECONOMIC MEETING June 2012. Structure of the presentation. Motivation

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Income convergence prospects in Europe: Assessing the role of human capital dynamics

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  1. Income convergence prospects in Europe:Assessing the role of human capital dynamics Jesus Crespo Cuaresma Miroslava Luchava Havettová Martin Lábaj BRATISLAVA ECONOMIC MEETING June 2012

  2. Structure of the presentation • Motivation • Income convergence in Europe: The recent experience • An income projection model for Europe • The theoretical setting • Estimation results and the projection model • Income convergence prospects in Europe • Setting and assumptions • Projection results • Conclusions

  3. Average GDP per capita growth in EU-17 and EU-11 in % and the share of an average GDP per capita in CEEC countries on average GDP per capita in EU-17.

  4. 1.Correlation between the logarithm of real GDP per capita in 1995 and the average growth of GDP per capita (1995 - 2009), EU-28.

  5. 2. Correlation between the logarithm of real GDP per capita in 1995 and the average growth of GDP per capita (1995 - 2000), EU-28.

  6. 3. Correlation between the logarithm of real GDP per capita in 2000 and the average growth of GDP per capita (2000 - 2005), EU-28.

  7. 4. Correlation between the logarithm of real GDP per capita in 2005 and the average growth of GDP per capita (2005 - 2009), EU-28.

  8. An income projection model for Europe • The theoretical setting: • Standard aggregate production function with heterogeneous labour input: • Rewriting the equation in growth rates implies:

  9. In the spirit of the Nelson-Phelps paradigm (Nelson and Phelps, 1966; Benhabib and Spiegel, 1994; Lutz et al., 2008) we assume that the role of education also plays the role through its effect on innovation and technology adoption Total factor productivity depends on: a) the distance to the technology frontier b) the technology innovation potential of the economy c) the technology adoption potential

  10. Database • Panel data for 32 European countries for the period 1970 – 2010, with growth rates defined over 5-year non-overlapping intervals • The data on income per capita and total GDP – from the Penn World Table 7.0 • Physical capital stocks – estimated using PIM(investment rates from PWT 7.0) with 6 % depreciation rate • The data on population by age and educational attainment level – IIASA-VID dataset

  11. IIASA - International Institute for AppliedSystems Analysis – World population program • Education, Reconstruction and Projections • Reconstruction of Populations by Age, Sex and Level of Educational Attainment for 120 Countries for 1970-2000Using Demographic Back-Projection Methods • IIASA World Population ProgramandVienna Institute of Demography(VID)Anne Goujon(goujon@iiasa.ac.at), Samir K.C. (kc@iiasa.ac.at), Wolfgang Lutz (lutz@iiasa.ac.at), Warren Sanderson (wsanderson@notes.cc.sunysb.edu) • Correspondence and requests should be addressed to Anne GoujonorSamir K.C.

  12. Structure by age, sex, and level of education for South Africa for the year 2000

  13. Projected structure for South Africa for the year 2050

  14. Estimation results and the projection model Panel estimates

  15. An income projections • EU-11 (CEEC)and EU-17 (WEST) regions • over the period 2010-2070 • We design different simple scenarios for each one of the main drivers of economic growth in the model • Physical capital accumulation • Medium, Low and High scenario • Human capital accumulation • Constant Attainment scenario and Global Education Trend scenario • Global shocks in income growth • Constant scenario and Trend scenario • Since there are 12 possible scenarios for each region, this results in 144 possible income per capita scenarios for the 28 European countries in our sample

  16. Kernel density of ratio of average income per capita in EM-11 to average income per capita in EU-17 based on projections for all scenarios

  17. Share of simulations where the country attains at least 75% of average income percapita in EU-17, by projection year

  18. Concluding remarks • We have computed several income convergence scenarios in Europe with a concentration on human capital dynamics • Our results indicate that improvements in human capital contribute significantly to the income convergence potential of European emerging economies • Convergence over the longer-period, bi-modal structure and still great variation among the EU-11 countries

  19. Thank you for your attention

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