Relatedness, Economic Complexity, and Convergence Across European Regions

Abstract

The aim of this paper is to analyze how the heterogeneous structure of the European regions has affected their patterns of convergence or divergence. We analyse data collected by Eurostat, from a balanced panel of 191 regions and 55 economic branches over the period 2003-2015. In this way, we are able to describe and capture technological proximity across the regions and analyse how it has evolved over space and time. Limiting the analysis to the manufacturing activities, we are also able to measure the degree of economic complexity of the regional production systems and assess how this affects their patterns of growth.

Our findings suggest that there are pushing (enhancing convergence) and pulling (exacerbating economic gaps) forces to economic convergence. Spatial effects tend to push towards convergence, with the Eastern regions that started from relatively low levels of GDP per capita and experienced higher growth rates. Nevertheless, the different level of economic complexity tends to widen the gaps between territories: for example, the German regions, whose economic structures are more complex, have kept on widening the gap between themselves and the other European regions. The two different forces are also interconnected as the Eastern regions combine a relatively low level of GDP per capita with a significant level of economic complexity. During the period considered, the improvement in living standards has corresponded to the upgrade of their manufacturing production structures.

Keywords: regional disparities, growth, convergence, structural change, relatedness, economic complexity, spatial effects

JEL Classification: O10, O25, P25, R10, L16