Regional Income Growth and Club Convergence in Europe

Interest in new growth economics (see, for example, Romer 1986) has stimulated a considerable amount of interest in testing for patterns of convergent or divergent income growth at the international level. Initial findings suggested convergent growth (see Baumol 1986). More recent work has suggested that convergence has been quickest among a subset of largely OECD countries and that there may be a world-level convergence club from which many less developed are excluded (see Baumol and Wolf 1988, Mankiw, Romer and Weil 1992, Durlauf and Johnson 1995). The countries in Europe fall within the set of prosperous countries enjoying convergence growth. But there is no evidence of regions within the EU-25 forming separate convergence clubs. Is there a significant "development divide" between Western and Eastern regional economies in Europe in the sense that there exist distinct convergence clubs? The research program outlined in this proposal offers a new approach to this question from a spatial econometric perspective. The main focus of the proposed research is on testing the clubconvergence hypothesis which broadly speaking suggests that per capita incomes of regional economies that are identical in their structural characteristics converge to one another in the long-run provided their initial conditions are similar as well. The study aims at two central objectives. The first is to develop and apply an appropriate methodology for club- convergence testing that overcomes the deficiencies of current hypothesis testing practice, by allowing for possible interregional interactions and co-dependence in regional growth over time. The second is to generate novel empirical evidence on the hypothesis from a pan- European regional view including the EU-25 countries and the accession countries Bulgaria, Croatia and Romania. The proposed research combines a methodological and applied empirical perspective in an innovative manner: It shows the potential to open up a new line of club-convergence testing that overcomes misspecifications of the test equations caused by the neglection of the spatial dimensions of growth and the convergence process. The research, moreover, will shed new light on the issue of regional income growth in Europe in general and on the question of whether there is a development divide" between Western and Eastern European regional economies in particular.