29 July 2000 • The Impact of EU Accession of Selected CEECs on Bilateral Economic Relations with the EU. A Dynamic Gravity Approach • Peter Egger

EU accession by CEECs is expected to give rise to growth effects on bilateral exports and FDI stocks. According to the projection for selected EU and CEE countries, additional FDI growth rates up to 2010 (+11/2 percentage points) are about triple those for exports (+1/2 percentage point). As the model allowed no accounting for feedback effects and since no additional growth effects in the GDPs of the EU member states from the CEECs' accession were added to the model, the additional growth effects shown here appear to be rather the lower limit for what can actually be expected.

The projection looked at the dynamics of integration for selected EU and CEE countries. The latter (Hungary, the Czech Republic and Poland) were assumed to join the EU in 2005, in order to project the additional effects of their accession on average annual bilateral growth rates for exports and (stocks of) FDI between the EU and the three CEECs. The theoretical model was a traditional gravity model. The empirical approach employed was a dynamic panel data approach. In contrast to the static specification, the dynamic specification offered the advantage of being able to distinguish between long-term equilibrium states of the growth paths and short-term adjustment processes. Even though geographical, regional economic and socio-cultural variables were not explicitly modelled because of the lack in variation in the time dimension, it was pointed out that these act implicitly in the model through growth dynamics and the levels of previous periods. In this manner, projections could be obtained which match important insights of the past years: additional (bilateral) export growth from the CEECs' accession to the EU was projected to be lower in the medium term than FDI growth. Mainly because of differences in the projected dynamics of the GDP between countries, future growth effects of EU accession by the CEECs were calculated to be bilaterally divergent for exports and FDI.

In conclusion, it may be said that, based on the model projection, exports and FDI will grow for the EU countries and the CEECs on their accession to the EU in both target markets. The additional growth effect is about 0.5 percentage point for exports, and about 1.5 percentage points for stocks of foreign direct investment at the bilateral level.

As the partial analysis model allowed no accounting for feedback effects and since no additional growth effects in the GDPs of the EU member states from the CEECs' accession were added to the model, the additional growth effects shown here appear to be rather the lower limit for what can actually be expected.