The process of economic convergence in Malta and in the European Union

Abstract

This paper looks at long-run trends in economic growth in European countries, focusing in particular on the real convergence process in Malta. Evidence of convergence at the EU level is mixed. Relatively poorer countries such as the New Member States (NMS) that joined after 2004 experienced a faster pace of growth compared to the EU15 countries, supporting the ‘beta’ measure of convergence. On the contrary, measures of income dispersion (sigma convergence) have increased after the financial crisis, especially among the EU15 countries. Changes in each country’s GDP per capita in PPS relative to the EU average are decomposed into the effects of labour productivity and labour utilization. Robust economic growth after the crisis pushed Malta’s GDP per capita in PPS to be the highest among the NMS that joined since 2004. Malta’s convergence since 2000 was driven by a higher utilization of labour, mainly due to the increase in the participation rate. A cross-country comparison is used to identify two important lessons for a country’s convergence process. These relate to the perils associated with rapid growth driven by the accumulation of imbalances and the need for flexibility in the adjustment process following an economic shock.