Comparative analysis of static and dynamic effects of economic integration in the case of the European Union and NAFTA

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Comparative analysis of static and dynamic effects of economic integration in the case of the EU and NAFTA

O. Pshyk-Kovalska, PhD in Economics,

Associate professor of management and international entrepreneurship Department

D. Mirzoieva, a student,

National university «Lviv Politechnic»

Abstract

The subjects of this article are static and dynamic effects of economic integration. The article aims to explore the influence of these effects on the functioning of the member countries of integration. Case studies of static and dynamic effects are the EU and NAFTA. To research the static effects was analyzed the dynamics of key macroeconomic indicators - GDP and inflation rate before and after the unification of member countries of NAFTA (USA, Canada and Mexico) and particular EU countries with different levels of economic development (France, Germany, Italy and Greece). Also were analyzed the static effects of entry to the EU of countries, which joined later - Poland and Slovakia. Were analyzed dynamic effects of economic integration. The research confirmed the influence of static and dynamic effects, and were adduced the consequences of Ukraine's accession to the EU.

Key words: economic integration, static and dynamic effects, the EU, NAFTA, trade creation, trade diversion.

Анотація

Порівняльний аналіз статичних та динамічних ефектів економічної інтеграції на прикладі ЄС та НАФТА

О.О. Пшик-Ковальська, к. е. н., доцент, доцент кафедри менеджменту та міжнародного підприємництва

Д.Р. Мірзоєва, студент, Національний університет «Львівська політехніка»

Предметом даної статті є статичні та динамічні ефекти, які виникають внаслідок економічної інтеграції. Метою статті є дослідити вплив наведених ефектів на функціонування країн-членів інтеграційних об'єднань. Прикладом для вивчення статичних та динамічних ефектів є інтеграційні об'єднання ЄС та НАФТА. Для вивчення статичних ефектів було проаналізовано динаміку основних макроекономічних показників - ВВП та рівня інфляції до та після об'єднання країн-членів НАФТА (США, Канади та Мексики) та деяких країн ЄС з різними рівнями розвитку економіки (Франції, Німеччини, Італії та Греції). Також були перевірені ефекти інтеграції у країнах ЄС, які вступили пізніше - Польща та Словаччина. Були проаналізовані динамічні ефекти економічної інтеграції. У результаті дослідження було підтверджено наявність дії статичних та динамічних ефектів, а також наведені можливі наслідки вступу України до ЄС.

Ключові слова: економічна інтеграція, статичні та динамічні ефекти, ЄС, НАФТА, створення торгівлі, відхилення торгівлі.

economic integration european union

Formulation of the problem. The issue of economic integration remains relevant under globalization processes. But the integration could cause both positive and negative consequences, what would be revealed in long-term period. The relevance of analysis of different effects of economic integration enables to understand better a mechanism of functioning of such integrations and to predict possible consequences of new countries' entering. For analysis of consequences of economic integration is advisable to use Jacob Viner's theory of customs unions [1,2], what enables to find out an existence of static and dynamic effects by comparing of welfare levels before and after integration. The objects of comparison are NAFTA and the European Union - the associations which have different characteristics and features of functioning.

The analysis of recent research and publications. Problems of economic integration, static and dynamic effects are studied by many researchers J. Viner [2], T.V, Derkach [3], in particular - the consequences of Ukraine's entry to the EU are investigated by M.S. Shchelkunova [4], O.N. Verstyak [5], I.V.Prihodko [6]. In these publications the general characteristics of static and dynamic effects, the effects of economic integration for Ukraine are adduced. Jacob Viner is the founder of the theory of static and dynamic effects of economic integration. O. Verstyak believes that the dynamic effects of Ukraine's accession to the EU can have a negative impact due to the small Ukraine's experience in such activities. T. Derkach and A. Shchelkunova justify the need of analysis of key macroeconomic indicators for deciding on the expediency of integration. I. Prikhodko analyzes modern concepts of economic integration and emphasize on the lack of a unified approach by the need to thorough analysis of both economic and political spheres. However, there is no comprehensive analysis of these effects with examples of existing integrations and no comparative analysis of static and dynamic effects in various integration associations.

The aim of the article. The issue is to determine static and dynamic effects in case of the EU and NAFTA, their influence on the economic system of member states with purpose to predict possible consequences for entry of Ukraine to the EU.

The presentation of main material and results of the research. Trade creation and trade diversion effects are basic effects of economic integration. Decreasing of administrative costs and improvement of trade conditions with third countries are also referred to static effects. Market expansion, enhancement of possibilities to use economy of scale, strengthening of competition, what stimulates development of technologies and production, enhancement of access to technologies and resource, increasing of investments inflows, development of infrastructure, reducing of the entrepreneurship's risks are dynamic effects of economic integration [1,2,3].

In purpose to distinguish differences between NAFTA and the EU, let's form appropriate criteria for comparing (tab.1).

Tab. 1. Comparative characteristic of NAFTA and the EU (formed on the basis of [1])

On the basis of conducted comparative analysis let's distinguish main differences between NAFTA and the EU (pic.1).

Pic. 1. Main differences between NAFTA and the EU (formed on the basis of [1])

For analysis of main static effects of economic integration of NAFTA and the EU is advisable to adduce dynamic of basic macroeconomic index - GDP, before and after integration. Its increasing would be consequence of trade creation effect.

Let's analyze dynamic of GDP of NAFTA-members (pic. 2,3).

Pic. 2. The dynamics of GDP of USA during 1990-2015 (formed on the basis of [4])

Pic. 3. The dynamics of GDP of Canada and Mexico during 1990-2015 (formed on the basis of [4])

Represented analysis revealed that integration of USA to NAFTA had slightly effect, because tempos of GDP increasing stayed stable. GDP of Canada increased afteragreement, so can be considered existing trade creation effect. Situation in Mexico is different, because before agreement there is increasing of GDP, after - rapid decreasing. With all other conditions being equal it can argued about trade diversion effect.

It should be noted that in 1990 the share of Mexican exports in the US is 70.2%, and imports - 67.15%, in 1995 - the share of exports 83.4%, imports - 74.49% [5]. In addition, in 1990, trade between Mexico and Canada was almost absent, but in 1995 exports to Canada reached 2.5% and imports 1.9% [5]. As for Canada, in 1990 and in 1995 the share of exports to Mexico remains low.

Another important indicator of the economy is the inflation rate (pic.4)

Pic. 4. The dynamics of inflation rate in USA, Canada and Mexico during 1990-2015 (formed on the basis of [4])

As Canada and the United States during the integration were countries with developed economies inflation decreased after integration: the US from 5.4% (1990) to 2.8% (1995); in Canada from 4.8% (1990) to 2.2% (1995) [5]. In Mexico, for the period 1990 -1994 there is a gradual decline in inflation from 26.7% to 7% [5]. However, in 1995, inflation reached 35% [5], stagflation can be seen through the integration of Mexico's weak economy to developed countries.

Similarly will analyze dynamics of the GDP of the leading countries of the European Union (pic.5), namely Germany, France, Italy and Greece. The features of the selected countries are that they also entered the EU in 1992 immediately and have different levels of economic development.

Pic. 5. The dynamics of inflation rate in Italy, France, Germany and Greece during 1990-2015 (formed on the basis of [4])

In 1993 a decrease in GDP in all the countries is surveyed. This is due to the effect of trade diversion and formation of close relations between the countries. Introduction of the euro as a common currency, in particular. It should be noted that changes in the economy of a country common to all other countries regardless of their level of economic development. For analysis is chose three highly developed economies - Germany, France, Italy; and underdeveloped - Greece. The difference in the level of economic development has a decisive influence on the functioning of the EU.

Analysis of exports and imports of the EU is inexpedient because the constant trade among the member countries lasts from 1958, respectively, the largest share in the structure of exports and imports is occupied by EU member states.

It is advisable to bring the dynamics of inflation countries surveyed (pic.6).

Pic.6. The dynamics of inflation rate in Germany, France, Italy and Greece during 1992-2015 (formed on the basis of [4])

In 1993, inflation decreased in all countries. In subsequent years, inflation in Italy and Greece was fluctuated and stayed at the highest level than in other countries. The rapid decline in inflation in Greece is caused because of economic support from the EU. It should be noted that deflation in Italy and Greece could lead to economic depression - a decrease in GDP. In addition, reduction in credits to the population and increase of unemployment via lowering of wages according to the price level are possible.

Let's analyze the dynamics of GDP of countries that joined the EU much later, such as Poland and Slovenia in 2004 (pic.7).

Pic. 7. The dynamics of GDP of Poland and Slovenia during 1990-2015 (formed on the basis of [4])

Joining the EU of Poland in 2004 contributed to the rapid growth of GDP. Entry of Slovenia to the EU affected the small growth of GDP in 2004-2008. Here is the dynamics of inflation Poland and Slovenia during the 1992-2015 (pic.8).

Pic. 8. The dynamics of inflation rate in Poland during 1992-2015 (formed on the basis of [4])

In the year of joining was an increase in inflation into 4.5 times, from 0,8 to 3,6% [4]. However, in subsequent years are seeing decline in inflation.

It should be noted that the entry of new countries in 2004 had no impact on the economies of other EU member states.

Let's analyze the dynamic effects due to the formation of NAFTA. The manifestation of dynamic effects will be observed after ten years after the formation of integration, that is, since 2004. In the long run GDPs continue to rise, inflation in Mexico has dropped significantly and is about on one level with other countries in NAFTA.

The United States were able to use economies of scale to the Mexican and Canadian market. In fact, access to technology has only the United States as they develop them. In addition, the United States have access to the resources of Mexico. Thus, the largest flows of investments are directed to and from the US in particular, a large amount is sent to Mexico to improve the life of Mexicans. Development of infrastructure and introduction of entrepreneurship risk reduction activity are inherent to all member countries of NAFTA. The effect of market expansion significantly affected Canada as it has access to the markets of Mexico. In addition, Canada has access to the resources of Mexico, where are directed Canadian investments. Mexico got prospects for new markets and investments. However, most of the benefits are received by the United Sates what is negative dynamic effect.

Similarly analyzing the dynamic effects of the formation of the EU. Countries with a high level of economic development were able to use economies of scale. Strengthening of competition affected, because access to technology has the majority of leading the EU countries. The development of less developed countries is supported and financed. The effect of market expansion almost had no impact on the EU member states because before integration countries have traded with each other. However, new members of the EU have access to whole EU market, what stimulates an increase in exports and investment inflows.

It should be noted that NAFTA member countries have greater economic stability and are developing with different tempos because integration is only economic: no common currency and legislation. The EU provides the integration in all spheres. However, there is a significant advantage - the EU member states can get help to stabilize theirs economy, NAFTA did not provide such activities. The expansion of the EU is continuing, what is accompanied by entry of developing countries and weak economies.

Conclusions

Economic integration has a significant impact on the economy, what affects the dynamics of key macroeconomic indicators and leads to changes in the functioning of the economy in the long run. Analysis of static and dynamic effects helps identify priority areas of economic regulation of the member state, to predict future functioning of the integration, as well as changes caused by entry of new member states, which is important for Ukraine within the framework of European integration.Particularly because of the economic crisis, the unstable economy and the the war, the effect of trade diversion can exceed the creating trade effect, extend the crisis in the short term period. However, dynamic effects may be positive in conditions of overcoming the crisis and stabilizing the economy.

References

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