Covergence or Divergence? An efficiency approach to European Regional Growth 1980-2002

The study investigates the changing growth pattern of 69 European regions measured at NUTS-level 2 between 1980 and 2002 by addressing the hypothesis of capital accumulation versus technological change as sources of convergence or divergence. The paper adds to the existing regional growth and convergence literature in three respects. First, regional estimates of capital stocks are constructed from regional investment series using the Perpetual Inventory Method (PIM). Second, and in contrast to earlier regional growth studies that use standard regression analysis or cluster analysis, the study utilizes Data Envelopment Analysis (DEA) combined with a recently proposed decomposition of productivity growth (Kumar & Russell: 2002) into three factors: capital accumulation; technical change and relative efficiency improvements (“catch-up”). The advantage of DEA is that it is non-parametric and requires no a priori specification of the functional form of the productivity frontier. In addition, it allows for a dynamic analysis that can reveal historical lead-lag patterns and identify shifts in the constructed worldwide production frontier. Third, the analysis is extended to address the dynamics of the regional productivity distribution in order to investigate questions of convergence, divergence or the emergence of European “regional clubs” in accordance with the ideas expressed in Quah (1996). From a tentative analysis two results emerge: (i) Capital accumulation and technological change seem to have played equally important roles in increasing labour productivity during the investigated time period. However, relative efficiency improvements seem to have been virtually absent. This suggests that the ranking of regions has remained stable over the time period and that few regions have managed to improve their relative positions. In opposition with standard neoclassical growth models, it also appears that capital accumulation has had a slightly diverging effect on the labour productivity distribution, rather than causing convergence. (ii) Technology is clearly not Hicks neutral, meaning that technological change and technology adaption seem to occur mainly in highly capitalized regions. This finding further highlights the importance of understanding the process of technology diffusion for patterns of growth