Regional Disparities in the Enlarged European Union

Geography, innovation and structural change

Valentina Meliciani

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780367869465
• eBook ISBN: 9781317806639
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The last twenty years have seen an increase in European integration and the emergence of the technological revolution. Although tighter integration coupled with technological innovation should facilitate cross-regional convergence, some European regions have managed to jump ahead while others have been left behind. This book examines the regional characteristics that favour growth and analyses the relevance of innovation, socio-economic and structural factors in shaping regional economic disparities.

In this book, particular attention is devoted to the EU enlargement towards the East, to its consequences on Europe's traditional North-South divide, and to the increasing regional disparities in new member states after the transition. It demonstrates the growing importance of innovation and human capital in explaining the increase in income and employment disparities in old EU members, particularly after the 2008 financial crisis. It also shows that for newcomers, regional disparities are essentially linked to socio-economic factors as capital regions approach Western standards, while others - mainly old industrial regions and peripheral ones - lag behind.

This book integrates theoretical discussion with empirical evidence and will appeal to regional scientists interested in regional inequalities, and to policy makers concerned with devising effective strategies to tackle regional disparities in Europe.

1
Introduction

Starting from the 1990s a series of events at global and European level have transformed the landscape in which firms, regions and countries operate, opening up new questions, stimulating new theoretical approaches and informing new policies.

First, the 1990s and 2000s have seen a sharp intensification in the process of European integration. This included the liberalization of capital movements, the creation of the European Monetary Union and the progressive enlargement of the European Union (EU) to eastern, formerly planned economies. These events created new opportunities for laggard regions but also raised new problems, especially for Southern European regions. Trade and capital liberalization, coupled with new technologies, allows multinational enterprises to relocate their activities in order to minimize production costs. This process may favour, on the one hand, regions with lower wages and less-regulated labour markets, and, on the other, regions with a strong innovation capability and efficient institutional systems, leaving behind intermediate regions. It can also lead to a race among laggard regions to become more attractive by lowering wages and dismantling regulations (and rights) perceived as detrimental by foreign investors.

Monetary unification and the adoption of a single currency is generally expected to lead to a fall in the importance of national factors in explaining regional disparities in income and employment. Adopting a common currency should make regions more independent from the countries they belong to since movements in exchange rates affecting simultaneously the international competitiveness of all regions of a country are no longer possible. Moreover, for each region, there is now only one common central monetary policy rather than different policies for regions belonging to different countries. However, countries still keep their power in most domains that are crucial for long-run growth and employment. These include the management of fiscal policies, the regulation of labour markets, operating the juridical system, the school system, the health system, etc. All these factors might be more important than monetary policy for driving convergence or divergence processes. Differences across countries in these factors, together with lower labour mobility, may lead to a much more dispersed location of economic activity in Europe than in the USA, despite further economic integration.

Finally, in 2008 the financial crisis, originated in the USA, strongly affected European countries and regions, leading to a simultaneous crisis of sovereign debt. This macro-economic shock cannot be disregarded when studying the evolution of regional disparities since not all regions were hit in the same way. In particular, regions located in Southern European countries suffered more because of the higher public debt (this is particularly the case for Greece and Italy) that led them to adopt restrictive fiscal policies in a period of recession. On the contrary, public debt in former socialist countries is much lower, allowing them more flexibility in fiscal policy. This applies also to countries recently joining the Eurozone. Finally, the integration of former socialist economies in the EU has led to a shift of EU structural funds previously mostly devoted to Southern European regions towards the East. Moreover, the lower costs of production have encouraged foreign direct investment (FDI) in eastern regions, changing regional specialization patterns in Europe. All these elements might lead to a different performance of newcomers with respect to old members and suggest the importance of controlling for country-effects when studying the evolution of regional disparities.

Another important event conditioning the evolution of regional disparities in the 1990s and 2000s is the technological revolution based on information and communication technologies (ICTs), which strongly reduces transportation costs and drastically changes the ways in which goods and services are produced and delivered across countries. In particular, it allows fragmentation of the production process domestically (outsourcing) and internationally (offshore outsourcing). In a recent and very popular book, Friedman (2005) argues that the new technologies have changed firms’ and individuals’ opportunities, favouring an a-spatial distribution of economic activity, thus creating a ‘flat world’. From this perspective, thanks to advances in connectivity, in global supply chain software and in outsourcing, insourcing, offshoring and supply chaining, every territory, no matter how remote, has the potential to become a global player (see the discussion of Friedman by Rodríguez-Pose and Crescenzi, 2008). However, the concept of a flat world has been challenged by many authors (Rodríguez-Pose and Crescenzi, 2008; Prager and Thisse, 2012). Rodríguez-Pose and Crescenzi (2008) note that, even with the sharp reduction in transport and communication costs, there are several forces that favour the agglomeration of economic activity, thus contributing to create ‘mountains in a flat world’. These include innovation, knowledge spillovers, backward and forward linkages, diversification benefits, social capital, etc. Moreover, while technological improvements in communication infrastructures have allowed ‘codified information’ to be transmitted over increasingly large distances, this is not the case for ‘tacit’ knowledge, which remains geographically bounded (Prager and Thisse, 2012; Ciarli et al., 2012) – contributing to the increasing concentration of innovation (Audretsch and Feldman, 2004; Cantwell and Iammarino, 2003). Similarly, the existence of backward and forward linkages favours the co-location of producers and users whenever they have to exchange tacit knowledge (Meliciani and Savona, 2014).

Therefore, although advances in technology and deregulation may allow for economic activity to take place virtually everywhere, favouring the emergence of new actors in the global world, at the regional level globalization appears to favour some regions, leaving others well behind.

This raises the question of which endogenous characteristics of territories favour the concentration of innovation and economic activity. One of the aims of this book is to answer this question, with particular attention to regional socio-economic characteristics, specialization patterns, geographical location and levels of knowledge and human capital.

Starting from the evidence that there are only weak signs of regional convergence in per capita GDP, labour productivity and employment rates in Europe, we will argue that the new growth and new geography models are insufficient to explain the complexity and diversity of regional growth dynamics. In particular, reading the process of convergence/divergence along the lines of the neoclassical (old and ‘new’) growth theory and/or of the new economic geography paradigms misses important features of growth and transformation processes that are relevant for regional disparities. These include the sectoral composition of the economy and processes of structural change, the way in which local territories are able to introduce and assimilate new technologies and socio-economic factors.

The main purpose of this book is to investigate, beyond the more traditional role of geographical factors, the relevance of knowledge, socio-economic and structural factors in the evolution of income and employment disparities in the enlarged Europe at the regional level over the last 20 years.

We argue that disparities are often tied to regions’ particular structural or socio-economic characteristics and to their ability to produce and assimilate knowledge. Let us consider, first, the role of regional specialization: the underlying assumption is that growth is often accompanied by a process of structural change where some sectors offer better opportunities than others. For example, in the last 20 years knowledge intensive services have grown more than other services and more than the rest of the economy (Rubalcaba and Kox, 2007), while manufacturing (in particular medium-low-tech manufacturing or heavy industry) has faced important restructuring problems and has lagged behind. Since specialization patterns tend to be sticky, they might provide favourable (unfavourable) conditions for income and employment growth.

Second, also socio-economic factors may be important. Following the approach developed by Rodríguez-Pose (1998a; 1998b; 1999) that divides the EU-12 regions into four groups (capitals and urban areas; old industrialized and restructuring regions; intermediate regions; peripheral ones) it appears that groups of regions with similar initial structural features generally show a similar capacity to respond to the challenges posed by socio-economic restructuring and hence experience similar trends in per capita GDP, once national factors are wiped out. The process of globalization is fostering the concentration of capital and decision-making powers in a limited number of core urban spaces (Harvey, 1985; Cheshire and Hay, 1989; Frenken and Hoekman, 2006) where the concentration of skilled labour, of headquarter functions of multinational firms (Duranton and Puga, 2000) and of a dynamic service sector can lead to self-enforcing mechanisms of economic growth. On the contrary, old industrialized regions have rigid social and economic conditions that may negatively affect their performance (Rodríguez-Pose, 1999). Finally, many peripheral regions due to their distance from the core of Europe may not be able to benefit from technological advances and the agglomeration of industrial and service activities.

Structural features and socio-economic ones can be interlinked. In particular, knowledge intensive business services tend to locate in urban areas, while peripheral areas often specialize in agriculture and old industrialized areas in manufacturing. We will ask whether changes in technology and, in particular, the rise and diffusion of ICTs, contribute to a process of convergence in specialization patterns and in income and employment levels at the regional scale or, rather, if agglomeration economies and local regional advantages still play a large role, leading to an increasingly uneven distribution of knowledge intensive activities and to growing income/employment divergence across territories sharing different structural and socio-economic characteristics.

Structural and socio-economic characteristics can also affect the mechanisms through which knowledge is transmitted across various agents (firms, research centres, universities, etc.), both within a country and across countries with important implications on regional convergence. The literature on knowledge diffusion shows that spillovers are very localized and occur only within short distances (Bottazzi and Peri, 2003; Peri, 2004; Crescenzi, 2005; Crescenzi and Rodríguez-Pose, 2011). Moreover, even when knowledge is identically available for all, regions may still show very different levels of ability in absorbing new technologies and transforming them into (endogenous) growth. Among the different local factors that affect a region’s absorption capacity, the literature emphasizes the role of human capital. The population’s level of education also matters for the creation of innovative networks among institutions aiming at creating, adopting and/or modifying new technologies (i.e., learning organizations; Lundvall, 1992). Following this approach, Crescenzi (2005) introduces human capital combined with innovation as an explanatory variable of regional growth in the EU. Crescenzi and Rodríguez-Pose (2011) find that this variable interacts with local innovative activities in a statistically significant way, allowing each element to be more (or less) effectively translated into economic growth.

These factors may be differently linked to geography, producing different effects on growth and convergence. For instance, if, on the one hand, knowledge flows easily across contiguous areas this creates geographic clusters of innovating (or of technologically backward) regions (Rodríguez-Pose and Crescenzi, 2008). If, on the other hand, ICTs allow knowledge to spread to distant places, new investments may locate in peripheral areas creating a more homogeneous economic space (Friedman, 2005). Specialization patterns may lead to the same results, either creating localized clusters or spreading across far-away regions. Socio-economic factors generally interrupt geographic homogeneity: urban areas surrounded by less developed neighbours often follow growth patterns that are more similar to those of other distant urban areas than to those of their neighbours. Also national borders could act in the same way, determining different outcomes in areas that are contiguous but belong to different nations.

In a seminal paper, Boschma (2005) underlines that, apart from geographic closeness, contiguity – or proximity in a general sense – may be important too. In this framework proximity becomes largely, even if not uniquely, a-spatial. This poses the question of what type of proximity is relevant for convergence. In other words, which one(s) among the various types of closeness is decisive for determining convergence patterns in the EU?

This book analyses the relative role of four types of ‘proximity’ – country-effects, similarities in socio-economic features, in specialization patterns and in innovation and human capital – in determining convergence in per capita GDP, labour productivity and employment rates in the enlarged EU; it aims to assess whether convergence occurs across: 1) regions of the same nation; 2) regions sharing similar socio-economic characters; 3) regions specialized in the same sector; or 4) regions with similar levels of innovation and human capital.

Particular attention in the book is devoted to the EU enlargement towards the east. This process raises new questions concerning the ties between integration and convergence, given the very special features of the countries involved in the last two enlargements. First, the overwhelming bulk of new members is composed of former centrally planned economies. These countries share a record of some 40 years of centralized communist regimes under which regional disparities were kept artificially low; at the same time, at the onset of integration income disparities with older members were far bigger than in previous accessions; also, the eastern location of most new members adds a new geographical dimension to Europe’s traditional north–south divide. In addition, sometimes a different location entails a different historical background and also different regional culture and traditions. For example, until World War I Poland was divided among centralized Prussia and Russia and the relatively decentralized Hapsburg Empire, which granted some degree of local self-government. The Banat region in Romania was under the highly centralized Hungarian crown up to 1918 and so on (see Yoder, 2003). The end of the strongly centralized socialist regimes opened the way to regional development paths that may differ also in relation to history, local traditions and culture.

Finally, the book theoretically discusses and empirically analyses the implications of the financial crisis for the evolution of regional income and employment disparities in European countries/regions, distinguishing between countries inside and outside the European Monetary Union.

The book is organized as follows. Chapter 2 reviews the main theoretical and empirical analyses on regional income convergence. It starts from the neoclassical growth model and then moves to discuss the new growth and new economic geography models. The chapter also reviews the main methodologies used to assess the evolution of income disparities/income convergence. Starting from regression analyses (and β-convergence), it focuses on approaches explicitly taking into account the role of spatial factors and on non-parametric methodologies. The last part of the chapter presents and discusses a series of stylized facts on the evolution of regional income disparities in Europe.

Overall, the chapter argues that the simultaneous reduction in some disparities and the emergence of new ones cannot be fully understood within the framework of the old and new growth theories. Other approaches emphasizing the role of structural change, regional systems of innovation and socio-economic factors offer new categories that might prove more powerful for accounting for such differentiated patterns of growth and convergence.

These categories are introduced in Chapter 3. After discussing the role of each factor, the chapter classifies European regions – first, according to their specialization, then with respect to their knowledge profiles and, finally, on the basis of their socio-economic characteristics.

The position of European regions in each classification and their transitions over time are investigated with the purpose of assessing, in the following chapters, the explanatory power of the groups for regional convergence/divergence in levels of per capita GDP, labour productivity and employment rates.

Chapter 4 analyses regional disparities in per capita GDP, also focusing on the Eurozone after the 2008 crisis, while Chapter 5 looks at disparities in labour productivity and employment rates.

In both chapters we use different methodologies to investigate the role of the different explanatory factors on regional disparities including the analysis of variance, conditioned distributions and spatial regression models.

The analyses reveal that the general trend of falling variability in per capita income across EU-27 regions actually conceals different and diverse phenomena: on the one hand, income disparities among old EU members grow, e...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of appendices
• Acknowledgements
• 1 Introduction
• 2 Regional income disparities: theories and facts
• 3 Classifying European regions on the basis of specialization, knowledge and socio-economic groups
• 4 The evolution of income disparities in the enlarged EU and the role of specialization, knowledge and socio-economic groups
• 5 The evolution of regional disparities in labour productivity and employment rates in the EU: the role of specialization, knowledge and socio-economic groups
• 6 A closer look at the evolution of regional disparities in Central and Eastern Europe after the transition
• 7 Conclusions
• Index