The dynamics of regional inequalities

This paper analyses empirically the dynamics of regional inequalities in GDP per capita. Our starting hypothesis is that the evolution of regional inequalities should follow an inverted u-shaped curve depending on the level of national economic development. This hypothesis relates directly to a number of theoretical findings put forward in the new growth literature, in particular, by Tamura (1996) and Lucas (2000) who study the growth transition dynamics of regional/national economies arguing that inequalities should first rise then decline depending on the total amount of knowledge available in the economy which is directly linked to the level of economic development. These arguments also correspond to earlier seminal papers by Kuznets (1955) and Williamson’s (1965) who argued that national growth dynamics may drive, at least initially, to a rise in regional inequalities. We test empirically these predictions by using regional data for a panel of European countries and by making use of semi-parametric estimation techniques. Our results provide strong support for an inverted U-shaped curve in the relationship between the national per capita income level and the extent of regional inequalities independently of the time period and regional administrative units considered. The nature of this non-monotonic relationship is not altered by the inclusion of other possible determinants of regional inequalities. JEL classification: R1, R5, D31