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BIG GROWTH DISADVANTAGES OF BEING IN THE SINGLE MARKET BUT OUTSIDE THE EUROPEAN UNION: New evidence from Norway

  • Published Date: April 2015

Norway would clearly benefit from membership of the European Union (EU), according to new research by Nauro Campos and colleagues to be presented at the Royal Economic Society’s 2015 annual conference.

Their study finds that if Norway had joined the EU in 1995, its productivity levels would have been on average 6% higher. Since Norway already enjoys the benefits of economic integration with the EU, this result suggests that there are significant additional benefits from the political integration that EU membership brings.

The view that the Norway-EU relationship is an alternative worth considering is now commonplace. This study presents econometric evidence to the contrary. By identifying substantial politically-driven integration payoffs, it challenges the notion that the benefits from integration are mostly economic and the costs mostly political. What’s more, it argues that a proper understanding of Norway-EU history shows that this relationship is idiosyncratic and thus unlikely to be replicated elsewhere.

The researchers note that European integration has always been explicitly a political process and an economic process. The choice of a customs union model instead of a free trade area, enshrined in the Treaty of Rome, underscores the agreed direction of travel as one towards deep integration.

Disentangling the economic and political costs and benefits is embroiled with difficulties and has not, to the best of these researchers’ knowledge, been attempted previously. They propose a suitable identification strategy: Norway fulfilled all EU entry requirements, completed accession negotiations, accepted founding membership in the European Economic Area (EEA, which gave it unrestricted access to the single market), but in a national referendum in 1994 decided to reject full-fledged EU membership.

Norway was then as ready to join the EU as the other candidates (Sweden, Finland and Austria). The discovery of oil (natural gas) reserves preceded the first (second) EU referendum in 1972 (in 1994), so Norway is the only country to have voted twice to reject EU membership. Understandably, the energy and fisheries sectors are central to understand these developments. Because it rejected full-fledged membership, Norway enjoys the economic benefits from EU membership but not its political benefits.

The sign of the estimate of the effect of EU membership on Norway shows whether this political economy effect worked more as a benefit than as cost. The size of the estimate demonstrates the economic importance of these politically-driven payoffs from integration.

The study uses the differences-in-differences and synthetic control methods with regional annual data from Austria, Finland and Sweden from 1985 to 2001 to assess the productivity (output per hour worked) of hypothetical Norwegian regions before and after the 1995 EU enlargement.

The main finding is that there are substantial politically-driven economic benefits from EU membership: if Norway had joined the EU in 1995, productivity levels between 1995 and 2001 would have been on average 6% higher.

Of the seven Norwegian NUTS2 regions, only one (Oslo) shows lower productivity with hypothetical full-fledged EU membership. This exception reinforces the authors’ interpretation of these effects as politically-driven benefits from integration. Even without full-fledged membership, integration boosts the productivity of the capital city region, thanks to its high level of human capital, growing financial sector and efficient public sector.

By contrast, the other regions remained shielded from competition through generous subsidies and protection of traditional Norwegian activities (such as fisheries), which full-fledged membership would not have permitted.

Another corroborating piece of evidence is the simple correlation between the estimated political economy benefits and sectoral shares of employment: regions with relatively large oil/gas and fisheries industries lose (in productivity terms) from non-membership, while regions with relatively large financial and public sectors benefit from it.

The authors conclude:

‘Norway would clearly benefit from EU membership. The political payoff would destroy rents and increase productivity by 6%.

‘The idea of replicating the Norway-EU relationship elsewhere is full of uncertainty because EEA membership is not automatic (not even for EFTA members) and it is unlikely to be offered again in similarly generous terms.’

ENDS


‘Norwegian Rhapsody? The Political Economy Benefits of Regional Integration’
Nauro Campos, Fabrizio Coricelli and Luigi Moretti

Contact:

Presenter:

Nauro Campos
Brunel University
Email: nauro.campos@brunel.ac.uk
Mobile: +44-7742-570981
Twitter @NauroCampos

Co-authors:

Fabrizio Coricelli (Paris School of Economics) fabrizio.coricelli@gmail.com
Luigi Moretti (University of Padova) lgmoret@gmail.com