Convergence of GDP per capita in EU25 : Does it happen and how can it be explained?

Abstract: The EU25 Member States’ GDP per capita levels converged in 1994-2005. Convergence occurred at an average speed of approximately 1.5 percent per year. In the first part of this paper unconditional convergence is analyzed by looking at both β- and σ-convergence and the performances of the catch-up economies are compared, discussed and related to the convergence definition. In a second stage, the catch-up performances are analyzed in relation to theory of economic integration. Substantial increases in labor productivity explain a great deal of the catch-up for poorer economies such as the Baltic states, while increases in employment have been relatively more important for the less poorer economies such as Spain, Portugal and Slovenia. Labor productivity is further elaborated and it is found that both FDIs and internal savings have been consistently higher for the catch-up economies than the non-catching-up economies. FDIs are also assumed to have indirect effects such as promoting incorporation of technology.