Does the European Union Positively Affect the Economies of Developing Nations When They Enter the Union?

Open Access
Author:
Dragalin, Michaela
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Stephen Ross Yeaple, Thesis Supervisor
  • James R. Tybout, Honors Advisor
Keywords:
  • European Union
  • Free-Trade Agreement
  • Moldova
Abstract:
The European Union is a coalition of countries in Europe that have entered into trade agreements with each other. Moldova, the poorest country in Europe, is actively trying to become a member of the EU. This paper seeks to answer the question of what would happen to the Moldovan economy, specifically to its GDP, exports, and openness levels if it were admitted in the EU by comparing the effects that EU membership had on nine different European countries. I first explain the requirements needed to enter the EU, and show how Moldova is already on the track to EU membership. I then prove that it is reasonable to assume that the effects that happened to the nine other countries in the EU would also happen to Moldova if it were admitted by giving a historical and economic comparison of Moldova and three of the other countries, Hungary, Czech Republic, and Slovenia. Next I give a summary of trade agreements, specifically Free-Trade Agreements and the positive effects they have on countries within the agreement when trade barriers are taken down. I also explain the risk of trade diversion, and show through data how Moldova has suffered from trade diversion because its neighboring countries have been admitted into the EU. Next I introduce the methodology of Change Point Regressions that will be used, and explain how I created a variable d representing EU membership. Throughout the course of this research, I ran 45 hypothesis tests, each split into three groups and three sub-groups. My research concluded that there is a statistically significant negative GDP growth the year immediately preceding admittance and in the year of admittance, as well as a statistically significant positive Openness growth the year before and the year of admittance. All tests surrounding export growth proved to not be statistically significant. Further tests showed that GDP continues to decline each year of being a member of the EU, but begins to decline at a slower rate in years six and seven. Openness growth for each year of EU membership was almost directly proportional to GDP growth, but this did not prove to be statistically significant, which led me to conclude that (exports + imports) do not stay constant through the years of EU membership. Furthermore, combining this to the previous tests, I concluded that there is a large influx of imports during the first year of EU admission, but this will steady eventually. This will eventually stop the decrease of GDP growth after a certain number of years of EU membership, and this, combined with improvements in production capabilities, will help a country’s economy in the long run. Interestingly, it was discovered that Moldova does not suffer from Trade Diversion due to a large influx of countries entering the EU in 2004. Unfortunately, this data is limited because the countries that are used were either admitted in 2004 or 2007, so there is not enough data to see the effects in the long run. Bringing these findings to Moldova shows that if it were admitted into the EU, it would see an initial decline of its GDP, though this is not necessarily a bad thing. This is probably a result of an increase in imports, since it will be exposed to strong economies with a large number of products. Further research might be able to prove that in the long run, GDP will begin to increase while trade stays constant. Because of this, I am confident that in the long run, EU admission has a positive effect on the economy of a developing country.