An Intertemporal Analysis of Development Policies in the EU

In this paper, we focus on the effects of EU structural transfer programs on the evolution of the EU less developed economies. We develop a two-sector endogenous growth model of private and public physical capital and human capital accumulation in which the public sector and the current account balances play a crucial role. This model is applied to Portugal. Simulation results suggest that structural programs will bring Portuguese GDP per capita to 63.7% of the EU average (up from around 54% in the last two decades), thereby greatly contributing to the process of real convergence of the Portuguese economy to EU standards. Additional transfers, primarily targeted at infrastructure development, are necessary, however, if a greater degree of real convergence is to be achieved. Furthermore, the impact of transfers on public deficits, the current account, and real exchange rates might adversely affect the long run requirements of nominal convergence and might exacerbate the need for budgetary restraint in Portugal. Accordingly, a relaxation of domestic matching fund requirements might be desirable.