Income convergence between Western Balkan countries and European Union

Abstract

The raise of the income level and the standard of living is one of the basic expectations of the European transition countries, which is why these countries have a strong interest in becoming full members of this intergovernmental and supranational union. European transition countries that have joined the European Union, have significantly increased their per capita income level. In the period from 1995 to 2016, New Member States increased per capita income from 20% to 36% of the EU15 average. In the same period Western Balkan transition countries increased per capita income from 4.3% to 12% of the EU15 average. A large number of previous studies tested and proved the existence of income convergence between the "old" and "new" European Union member states. However, there is still a small number of papers dealing with the income convergence hypothesis between the European Union member states and Western Balkan States. The paper tests the hypothesis whether the income level of Western Balkan States converges the income level of European Union member states. In order to test the hypothesis we will use two types of income convergence. The first is σ-convergence (sigma), which measures the dispersion of income between countries within the observed group. The second type is β- convergence (beta) which, using the regression equation, measures whether countries with a lower income level achieve faster growth than those with higher income levels. The observed period is from 1995 to 2016. The results of sigma convergence testing show that there is a trend of reducing per capita income dispersion between European Union member states and the Western Balkans States. However, this downward trend does not exist when we compare the Western Balkan States and EU15. Results also show the effects of Global economic crisis on income convergence. Namely, the coefficient of variation has increased in the period from 2008-2011, indicating divergence. The results of the regression analysis of beta convergence show the existence of income convergence for the entire observed period. Income convergence exists when we compared Western Balkan States and the European Union member states, when only European Union member states are considered, as well as when the Western Balkan States and EU15 are compared.