European Regional Convergence Revisited: A Weighted Least Squares Approach

Abstract

A plethora of past studies have concluded that unconditional beta-convergence is present in a broad sample of regions, implying that poor regions grow faster than rich ones. All these econometric studies tend to overlook the relative importance or size of each region in the national setting, treating all regional observations as equal. However, this assumption might lead to unrealistic or misleading results. Convergence analysis could be more meaningful if it included a weighting mechanism taking into account the size of regions. The aim of this paper is to investigate whether the inclusion of a weighting mechanism in beta-convergence analysis, giving more weight to larger regions and less to smaller ones, can result in sharply different implications for the regional convergence-divergence process. For this reason, both unweighted ordinary least squares (OLS) and weighted least squares estimators are used in the analysis of regional (intra-national) convergence within 10 European Union (EU) countries over the period 1990-2000. The comparison between the two methods reveals that when regions are appropriately weighted for their size, intra-national divergence, rather than convergence found with the OLS approach, seems to be the dominant experience in the EU.