EU accession and income growth: An empirical approach

The dynamic effects from EU membership are crucial for the new member states to catch up with the average income level in the old member states. To gauge the dynamic effects we follow a two-step procedure in which a gravity equation for bilateral trade shows the trade effect of EU membership and a growth regression yields the income effect of trade. Shared EU membership is found to increase trade between two of its member states with about 27%. EU membership may contribute to trade by inducing countries to improve the quality of their institutions. Trade increases by another 23% if institutions improve, yielding a total trade increase of 50%. Improved openness increases income by 38% according to our estimates. Adding a small direct effect of improved institutions on income, the total income effect of EU membership is 40% for the 12 new members and Turkey. This implies that EU membership, or its effect on trade and institutions, could lead to large economic gains for the new member states, but does not bring them economically on par with the old member states.