Policy convergence
We define ‘policy convergence’ to cover various symmetries in approaches to macroeconomic and microeconomic policies. For example, in the case of the EU, in addition to specifying convergence criteria, the Maastricht Treaty de facto imposed a set of common macroeconomic goals and approaches to policy formation, which, on the road to integration, may be perceived as the logical follow-up to the many common microeconomic policies required by the Single Market Program. We might specify three types of symmetry under the rubric of ‘policy convergence’:
1. Symmetry of macroeconomic goals and policies to reach them (e.g., common inflation targets, unemployment-rate ‘warnings’, exchange-rate stability, government expenditure restrictions, current account/financing issues).
2. Symmetry of macroeconomic goals and policies (e.g., government involvement in the private sector, trade-policy orientation, export diversification policies, foreign investment policies, regulation of the financial sector, competitions policies, intellectual property protection).
3. Symmetry of multilateral co-operation policies (positions in bilateral, sub-regional, and multilateral forums).
Real convergence
We define real convergence quite simply to be the actual integration that takes place between two or more countries. There are a plethora of indicators that may be used to gauge the degree of ‘real’ convergence, all of which are imprecise and explain different aspects of real convergence. Myriad methodologies exist to capture various manifestations of integration, but while the idea is clear and unambiguous, the applications are difficult and subject to dispute (which is often the case in economics). We offer here two approaches to ‘real’ convergence that differ in the types of questions they address:
1. Symmetry of economic structure
a) Have economic structures become more similar (as proxied by similarities in sectoral production shares, export structure, ‘revealed’ comparative advantage, etc.)?
b) Do external shocks affect the countries’ economies in a similar way (e.g., extent to which changes in, say, product prices, productivity, etc., affect relative macroeconomic performance)?
2. Economic convergence through interdependence
a) To what degree has integration occurred with respect to trade and investment (e.g., changes in bilateral trade shares, investment flows, labour flows)?
b) Are real business cycles correlated, that is, are external shocks ‘symmetric’?