Paper Submitted by the Hungarian Central Statistical Office1
1. This paper has been prepared as a contribution to the substantive discussion on the subject "Possibilities to describe statistically the effects of ongoing integration processes in the ECE region" at the forty-third plenary session of the Conference of European Statisticians. As the basic paper is being prepared by Eurostat, the present report pays relatively little attention to the specific issues of EU integration; its basic concern is rather the total of the European region.
2. Although legal aspects are not discussed in the paper, and the concept of integration used in it goes beyond the limits of formal integration schemes, it should be born in mind, that the legal harmonization within the framework of integration schemes (EU, GATT etc.) may influence the selection and comparability of the fields to be measured (trade, capital flow etc.).
3. Integration can be investigated in three aspects:
The state of integration in a reference period,
The integration process(es),
The effects of the integration.
4. In many cases the same statistical instruments (methods, indicators etc.) are used in all of these aspects. E.g. one may describe the integration process by comparing the states in two different periods, or investigate the state of integration with the help of a set of indicators basically tailored for the effect (e.g. similarity measures).
5. In present day Europe integration procedures go hand in hand with disintegration. Two types of disintegration can be distinguished:
Disintegration as a consequence of the split of long existing countries into independent political units (the FSU, Yugoslavia)
Countries joining a formal integration scheme (community) presumably loosen contact with former partners, staying outside the integration.
6. The position of the transition countries is very particular in terms of integration. The CMEA (COMECON) constituted a very strong integration framework, even its concepts, underlying philosophy etc. differed from those of western type integration schemes. (The theoretical background rooted in the idea of central planning e.g. "Integration constitutes multilateral international cooperation in the framework of which decisions on macroeconomical development programs are made on the basis of agreement between the countries concerned.") Unfortunately however, only very few attempts were made for the statistical monitoring of this integration; e.g. after each phase of the "comparison of the most important value aggregates of the member states" (a predecessor of ICP) a project was launched under the title "Gradual approaching and evening up of the economic level of the member states".
7. Ongoing procedures in applying Eurostat standards in transition countries - within the framework of "Data for Eurostat" program - are expected to provide sufficient degree of uniformity in concepts, definitions, methods and data sets, that promote the appropriate statistical description of integration.
8. Quantification of the effects of integration processes is limited by the fact that these effects are never explicit. They are embedded into general trend and are mixed with effects other than integration. The only way to show the effect of an action or group of actions - lifting trade barriers, decreasing tariffs, introducing monetary union - is the comparison of figures of post-integration period(s) with pre-integration time. However, conclusions from this comparison should be very cautious in order to avoid " post hoc ergo propter hoc"-type statements.
9. Measuring the effect of integration on economic development and welfare has been one of the focal points of economic theory in the last two-three decades. It has been assumed that international trade enables countries to exploit comparative advantages. An enormous literature has sprung up with models of international trade, with assumptions of given or developing techniques, constant or increasing returns in production, indifference curves etc. (See the "classical trade theory", the theory of "increasing returns and unequal efficiency" and other schools.)
10. E.g. one of these theories assumes that the reduction of a tariff brings a gain because it both causes producers to switch resources from high-cost to low-cost industries, and causes consumers to switch from lower-utility to higher-utility goods. On the other hand, the theory based on increasing return to scale assumes that markets become more perfect as the number of participants increases. One of the main impacts hoped from integration is the enlargement of the market, i.e. the growing number of economic units able to compete effectively. Under certain conditions this may result in double gain: narrowed gap between marginal cost and price, and a reduction in costs.
11. Economic literature distinguishes various types and stages of integration processes, beginning with the freeing of barriers (trade integration), the liberalization of factor movements (factor integration), the harmonization of national economic policies (policy integration), the development of a common monetary system (monetary integration) up to a single market (total integration). E.g. the affiliation schemes between a number of transition countries and the EU favor some types of integration (trade), contrary to limitations in other fields (labour and capital flows). The strategy of statistics may depend on the type and degree of integration.
12. Statistical description of the integration processes necessitates the establishment of a framework (or system) of adequate statistics (analogous to the framework developed in the field of social statistics and demography - FSDS). Such a system may consist of two principal blocks:
A. Instruments for quantification of processes and/or their effects in general terms.
B. Various fields of statistics relevant from the point of view of integration.
13. From among the instruments that may help a manifold presentation of the state, process and effect of integration, the following are considered here:
Large macroeconomic statistical systems
The System of National Accounts
The International (or European) Comparison Program
Models with mixed sets of variables
Cluster analysis
A model quantifying the rapidity of the processes.
14. With its manifold set of macroeconomic accounts, tables, balance sheets etc. the accounting system is indispensable for monitoring the integration processes and their impact on the national economies. Due to internationally agreed concepts, definitions, classifications and accounting rules, it enables the compilation of tables with the relevant data of the countries concerned.Some example regarding the most typical sectors of National Accounts with respect to integration:
15. The System of National Accounts presents the main aggregates of the national economy (GDP, final consumption etc.). They enable the investigation of the effects of integration processes on the general economic level and economic growth. It is subject of further investigations how to single out the effects of these factors.
16. The external transaction account constitutes perhaps the most relevant part of the National Accounts in the present context. This is the point where the full range of transactions - trade, income transfers, capital transfers, payments - that take place between the total national economy and the rest of the world are articulated.
17. Within the framework of the external transaction account special attention should be paid to the external accumulation accounts. One of them, the capital account covers capital transfers receivable and payable, acquisition of assets between non-residents and residents. Financial account records all transactions in financial assets between national economy and the rest of the world. Almost all data of these accounts are relevant in terms of assessment of integration.
18. The International (or European) Comparison Program (ICP, ECP) with its manifold comparable data offers a rich set of instruments for monitoring integration.
19. The most general result of the ICP exercises, the relative level of per capita GDP in real terms can be considered as an overall picture of the integration effect. Assuming that the integration process is aimed to close the gap between the income level of countries, comparison of the relative GDP of the countries concerned along with the subsequent phases of the ICP reflects the overall tendencies of the integration procedure.
20. This kind of analysis is however limited because of two reasons: (a) the caution mentioned above (paragraph 8) regarding the general limitations of measuring integration process in terms of comparison of various periods; (b) a specific shortcoming of the ICP regarding the lack of consistency between the results of various phases of ICP and between these results and national growth rates, respectively.
21. ICP permits - in addition to the comparison of economic level in terms of per capita GDP - the comparative study of the economic structure. Against this background two basic aspects of investigations are possible:
(a) Comparison of the economic structure of the countries in a given period with the assumption that the more similar the structure of any two countries, the closer the integration between them;
(b) Comparison of economic structure in subsequent phases of the ICP; this implies that growing integration of any two countries is expressed by decreasing differences in their structure.
22. Along this line, integration processes influence the price structure of the countries concerned, as these structures come closer with the development of integration. In such a way similarity of the price structures might be a measure of the degree of integration. The variance (V) of relative prices of any pair of countries (i and j) can be conceived as quantification of dissimilarity of price structures:
V [p(ik)/p(jk)]; k=1,...,n
where p(ik) and p(jk) are the domestic price of commodity k in country i and j respectively, and n is the number of commodities. The smaller is V the more similar is the price structure of countries i and j. Decreasing V over time, can be interpreted as growing integration.
23. More sophisticated methods for the quantification of structural similarities were developed in the framework of ICP in terms of similarity indices. Similarity indices were formulated for both price and quantity structures. These measures of similarity between the vectors of quantity or price relatives referring to any pair of countries are their weighted raw-correlation coefficients (i.e. the ratio of the weighted cross moment to the square root of the product of the two weighted second moment.) They are equal to the cosine of the angle between the n dimensional quantities or price vectors of the two countries concerned. Consequently the similarity indices have a maximum of 1, which means perfect similarity (and perfect integration) between the quantity or price structure of two countries. This is achieved if the quantity or price relatives are identical for each item. The greater the differences, the smaller the similarity index.
24. Structural analysis can be extended with the help of cluster analysis. In the present context cluster analysis is a tool for comparing the economic structures of various countries. The procedure classifies the countries according to their economic (and social) characteristics which are described by a set of variables such as production or consumption of selected goods and services, the stock of various producers' and consumers' goods etc. These variables may originate - totally or partly - from ICP, but the scope of variables can be extended beyond the field of the Comparison Program.
25. Let us consider m countries and h variables, which characterize the different aspects of the countries' economies. The data are arranged in a matrix of size m*h. With the help of the vectors of any two countries (i and j) in this matrix, a distance measure d(ij) can be constructed (e.g. in terms of Euclidean distance) In international comparison, the distance measure can be considered as the quantitative measure of dissimilarity between the economic structures of two countries.
26. The set of distance measures constitutes the distance matrix with the size m*m. This is the basis for further operation, first of all the building of clusters, i.e. group of countries with similar economic structures. Countries belonging to the same cluster can be considered as closer integrated with each other than with countries outside the cluster. (More about the method and its economic implications in ""Cluster Analysis in International Comparisons" by György Szilágyi; Journal of Official Statistics Vol. 7. No. 4, pp. 425-435)
27. Various models can be applied to quantify the intensity of the integration process. Some of them are of general character others are specific to a particular aspect of the economy. A very general formula, the model to quantify the speed of the processes can be the following:
INT**ij = 1 - (x**it - x**jt)/(x**io-x**jo)
where
i and j are the countries the integration of which is being measured;
x is a variable which is deemed relevant from the point of view of integration (e.g. average wages, interest rate )
o - the basic period, i.e. the beginning of the process being measured
t - the reference period, i.e. the end of the process being measured.
28. Selection of statistics to be incorporated in the framework can be made in two subsequent steps:
(i) Identification of a number of broad areas which are deemed as most important in the context;
(ii) Selection of a set of variables from each of them.
29. The following fields can be identified as key areas of statisitics for the investigation:
trade,
labour,
capital transfer,
prices,
finances,
enterprise statistics,
welfare.
A few examples for each of them are put forward below.
30. Statistics of international trade - in the classification of traded goods and partner countries - provides the most direct information on economic integration. It has primary role in the assessment of trade integration, but the analysis of all other types of integration needs trade data as well.
31. Both labour and capital is the basic concern of factor integration. E.g. migration of labour force - in breakdown of industries and qualifications - can be considered as a substantial measure of the intensity of the integration process, whereas the number and/or share of foreign manpower is one of the indirect indicators of the integration effect.
32. International capital flow constitutes a considerable sector of integration processes in present day Europe. E.g. the number of joint ventures is one of the basic indicators of the level, the value of foreign direct investment that of the intensity of the process.
33. Price statistics offers manifold instruments for monitoring the state and effects of integration. Various measures of economic similarity are discussed in paragraphs 22-23.
34. International financial statistics has been discussed under the heading of National Accounts; paragraphs 16-17. The amount of funds - in the breakdown of short-, medium- and long-term - raised on the international financial markets and financial flows should be mentioned here as particularly relevant.
35. Investigation of the integration is carried out generally at macro level. Consideration of enterprise statistics is necessary in order to extend the analysis over the micro-world. The number of economic units owned by foreigners viz. national ownership abroad in addition to data on multinational enterprises might be of help in such an extension.
36. The final objective of all economic actions is the improvement of welfare. Therefore, the investigation of the welfare effect of integration constitutes a substantive field of the statistical activity in this area. Level of the total consumption, income distribution and a number of social indicators are candidates for inclusion into the statistical framework.
37. The most convenient framework for the arrangement and analysis of the majority of the components suggested in this part of the paper, is the cross-classification in a country*country-type matrix form. E.g. in the case of trade this corresponds to the trade flow model, with exporting countries (eventually subregions) in the rows, importing countries (subregions) in the columns.
38. Presentation in matrix form enables several types of analysis. In the case of trade flow the structure of international trade can be analyzed in terms of "trade intensity" or "gravitation" models. Intensity indicators, derived from the matrix show the extent by which flow between two particular countries (or subregions) deviates from what might be expected on the basis of the shares of the respective countries (subregions) in world trade.
39. As demonstrated in the previous paragraphs, there are several possibilities to describe statistically the effects of the integration processes. Such a description will, presumably, result in a multidimensional and multicolor map of the ECE region. Statistical investigations of the topic should go beyond official declarations, formal contracts, integration rules etc.
Integration processes within or towards the EU constitute an important but not the sole aspect of the issue (see e.g. the reintegration among some FSU countries.)
40. The statistical description needs a complex methodology, the general framework of which, along with a number of examples as regard the components of such a framework, have been put forward above. Further input is necessary in terms of concepts, definitions, classifications and a full set of statistics within the framework.
1 Prepared by Professor György Szilágyi