Trade, structural transformation and income convergence: The case of EU.

The creation of European Union (EU) was driven by the motivation to create a European Common Market that encourages free trade. As a result of Maastricht treaty of 1993, EU saw the biggest enlargement to date, from initial six founding members to now 28‐member countries comprising the union. The lower income countries have joined the EU with the hope to bridge the income gap between them and the higher income countries of the union. It has been observed in many studies that intra‐EU income convergence has happened. This article further confirms this finding. For income convergence to be sustainable, the lower income countries must also experience convergence in economic structures. Therefore, in this paper we try to assess how intra‐EU convergence in incomes is linked to intra‐EU convergence in economic structures. We observed income convergence in the EU has been mainly due to convergence in income shares of the industrial and services sector. The main contribution of this article is to examine the role of trade in income convergence via its impact on structural transformation of the EU. Using the augmented Chenery‐Syrquin model in a panel data framework, we have found that trade openness determines the sectoral shares of industry and services in income across the countries. We have also demonstrated that both the higher and lower income countries within the EU have gained in the share of industrial sector due to trade, although the gain is lesser for the lower income countries as compared to the gain in share of industries of the high‐income countries in the EU. However, structural convergence has not been fully achieved because the lower income countries of the EU are yet to gain from trade in terms of enhancing their income shares of services. [ABSTRACT FROM AUTHOR]