Regional income convergence in Central Europe: Evidence from a pair-wise approach

Abstract

Regional disparities are usually monitored in terms of economic performance. But as pointed out by many scholars, research has to look beyond GDP, investments, unemployment, and focus also on regional inequality in measures of well-being, for example, the disposable income of households. Therefore, this article examines the income disparities among the regions of Central European countries. We apply the probabilistic definition of convergence that is tested by the time series cointegration analysis. However, in our analysis, convergence criteria are tightened to increase robustness. In particular, we propose to require meeting of both criteria, i.e., stationary and absence of unit root, instead of one for the acceptance of the cointegration condition of regional convergence. Empirical analysis shows that despite the application of stricter conditions, the hypothesis of income convergence between Central European regions in 2003-2022 cannot be rejected. In particular, we found inner-country convergence in most countries. However, the involvement of individual regions in cross-country convergence varies widely. The results suggest that convergence intensity in the easternmost and westernmost regions is weak. However, we identified a "belt of convergence" along the border of the former Iron Curtain. These findings support the hypothesis of club convergence suggested by some scholars in the region of Central and Eastern Europe. On the other hand, our results significantly challenge previous research that claimed Central European transition economies are converging, especially towards German regions. Instead, our results indicate that convergence towards German regions is weak, while convergence towards Austrian regions is much more pronounced. Finally, uncovering how regions are converging at different rates and towards different steady-states can help to optimize the allocation of EU funding.