Leading By Example
Dr. Christian Weller is a senior economist at the Center for American Progress, where he specializes in Social Security and retirement income, macroeconomics, the Federal Reserve, and international finance. Prior to joining American Progress, he was on the research staff at the Economic Policy Institute, where he remains a research associate.
This weekend, an epochal event is likely to make few, if any, headlines. The European Union will expand by 10 new countries, mostly from the former Soviet bloc. The largest one-time expansion of the EU puts front and center a viable international trade system that distributes the benefits of growth fairly equally. As the United States engages in new trade negotiations"such as the Caribbean Free Trade Agreement (CAFTA) and the Free Trade Agreement of the Americas (FTAA)"the EU expansion offers important lessons.
The EU model of economic integration fosters economic growth on a durable basis by redistributing resources where they can be most productive. The lessons for new trade agreements in America are that dedicating resources to build institutions in emerging economies"including enforceable worker rights"is money well spent. All trading partner countries are likely to grow faster than without economic integration. With American trade negotiations now under way, parties to the negotiations should view institution building and the redistribution of resources to the countries that most need them to be in the interest of all partner countries.
Focus On Structural Policies
Although there are many factors determining growth, there are a few basic considerations. In a world of increasing capital mobility and exchange rate flexibility, the governments' ability to design macro policies to fine tune their economies is increasingly limited. This puts the focus on policies that change the institutional structure of an economy so that resources are reallocated where they have the greatest effect. For instance, structural policies like more progressive taxation, income redistribution, better worker rights and an improved rule of law"among other things"result in the more effective allocation of resources, thus supporting economic growth.
EU expansion is a good example of how structural changes can work. On May 1, the EU will grow from 15 members to 25. In the process of EU enlargement, resources will shift from rich countries"such as France and Germany"to the new member countries. For the next three years, the European Commission estimates that approximately $51 billion will be transferred to the new countries, for"among other expenditures"rural development, infrastructure projects and border security. Funds are channeled to the countries where they are needed most and where investments can make the greatest difference
Carrot Approach To Workers' Rights
EU accession not only brings with it the benefits of Brussels' money, but also the responsibilities to comply with EU rules and regulations. The European Commission has engaged in negotiations with new member countries to ensure they offer protections for workers similar to those in the rest of the EU. These protections include anti-discrimination rules and provisions to strengthen the collective bargaining process, and specific language to create employment opportunities for low-skilled, low-wage workers. By institutionalizing protections that will aid low-wage workers, the entire European economy will benefit because low-wage workers will have more money to buy the products that are being produced in their own economies, without going into debt. The net result will be economic stability within each of these countries and greater economic stability and growth within the EU, which the EU desperately needs.
In addition to helping low-wage workers and stabilizing economies, EU accession means that resources will be redistributed toward more efficient uses. Incomes are typically lower and infrastructure needs are higher in the lower-income accession countries than in the rest of the EU. Thus, the infusion of funds will have a greater effect on spending and productivity for the accession countries than for the rest of the continent. This should result in faster growth and more employment in the entire EU.
Creating Jobs And Purchasing Power
Similarly, policies are being put in place within the accession countries to redistribute funds toward lower income households, thereby bolstering demand even further. To put it another way, infrastructure investments should help to increase supply, and income redistribution should give a bump to demand. Because production and consumption"and consumption and income move in tandem"economies are more stable since households, governments and the economy have to depend less on debt. The result, if all goes well, will be more durable growth and employment creation in the entire EU thanks to trade linkages between the member countries.
Every time the EU expanded, its economy has grown substantially. After Spain and Portugal joined the EU in 1986, growth accelerated markedly. Similarly, after a number of countries joined the EU in 1995, growth rose and remained robust through 2000. Moreover, the IMF estimates that growth in the EU will accelerate in 2004 and 2005 when accession is in full swing. Growth accelerations after 1992 are even more remarkable since the EU has suffered from tight monetary and fiscal policy as unwelcome side effect of the introduction of the euro, which have kept employment low.
For decades, the EU has been steadfast in pursuing its own model of economic integration. It has encountered large problems, often bureaucratic in nature, along the way. However, its approach to international economic integration, which has relied heavily on redistributing resources where they can be most effective, has helped the EU avoid large social disparities and economic instabilities. Because of that record, it can serve as a viable model for economic integration in a world that has experienced growing inequities and instabilities in recent years. Trade negotiators in the Americas may want to take note of this path-breaking EU expansion, even if the media do not.
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Published: Apr 29 2004
