TESTING FOR CONVERGENCE OF THE EU REGIONAL ECONOMIES

Abstract

I. INTRODUCTION Variations in the economic performance of different regions of the European Union have become a matter of increasing concern for policymakers in recent years.(1) This paper is, however, less concerned with the details of the European Union's regional policy than with attempting to assess the degree to which economic convergence has occurred across its regions. The question of economic convergence has been, rather surprisingly, a neglected and under-researched topic in economics, although there has been something of an upsurge of interest following Baumol's work on the convergence of OECD economies (Baumol [1986]). The more rigorous analyses of convergence have tended to focus on monetary phenomena and look at the national rather than regional level (e.g., the work of Haldane and Hall [1991] and Hall et al. [1992] on nominal exchange rate and inflation convergence in the European Union). Barro and Sala-i-Martin's [1991] study of U.S. and European regions is an exception to this. While their paper offers interesting insights into convergence, it is forced to rely for its empirical analysis on a number of disparate data sets and to use a number of alternative proxies for variables such as industrial composition in different time frames as explanatory variables. In contrast, we employ a consistent data base to both re-examine and update the findings of Barro and Sala-i-Martin and to extend the analysis to embrace a wider set of variables that are often thought to have an influence on the convergence process. In particular, the calculations offered by Barro and Sala-i-Martin relate to a period before the creation of stronger monetary ties between some union members that have changed the long-standing nature of national regional policy instruments. In particular, the quasi-fixing of exchange rates reduces the ability of countries to stimulate their national economies and depressed regions by currency depreciations. II. APPROACHES TO STUDYING ECONOMIC CONVERGENCE General methods for examining convergence include using such indicators as changes in the coefficient of variation of the dispersion of regional performance over time (sometimes called sigma convergence).(2) Table I provides coefficients of variation for regional household GDP (at level one regional aggregation) within the European Union for the period 1977 to 1990 and the ratios of top to bottom deciles.(3) The changing coefficients provide general guidelines, for example, relating to the implications for regional income disparities as successive enlargements have brought more peripheral regions into the Union (Commission of the European Communities [1988]), but offer little beyond this. The major difficulty with these types of measures is that they can be subject to outliers. Hence convergence or nonconvergence may be excessively influenced by an outlying region. Further, it is not possible, or at least very difficult, to consider any causes of change through time. The data set used in this study is cross-section data across the level one regions of the European Union for 1975, 1981 and 1988. This data set differs from that employed in the earlier work by Barro and Sala-i-Martin [1991] in three main ways. First, it is a consistent set with all measures of output per head coming from Eurostat and based upon gross domestic product (GDP) per head at market prices in purchasing power parities standard. Second, it is based on official European Union level one administrative regions rather than the mixed system of regions employed by Barro and Sala-i-Martin. This means that for the whole sample period we have three cross sections of annual data on fifty-one regions across nine countries consisting of the UK (eleven regions), West Germany (eleven regions), France (eight regions), the Netherlands (four regions), Belgium (four regions) and Denmark, Luxembourg and Ireland, each of which is a single region. In contrast, Barro and Sala-i-Martin used data on seventy-three European Community regions, but across only seven countries. …