Regional inequality and economic growth: interactions of the relationship with the level of economic development and speed of growth

The interaction of inequality and growth and the direction of causality in this relationship have been an extensively discussed topic with several questions but without clear answers both in the theoretical and empirical literature. The current paper contributes mainly into the new economic geography (NEG) literature by focusing on the member states of the European Union. The purpose of the paper is to shed light on the effect of the economic development level and speed of growth on the relationship between economic growth and regional inequality. The research hypothesis of a significant interrelation between regional inequality and economic growth is discussed based on the models of NEG. The empirical part of the paper relies on the regional data of the 27 European Union member states at the classification level NUTS 3 over the period 1996‚Äí2006. The results of the empirical analysis allow us to conclude that regional inequality has a pro-cyclical character: regional inequality is as a rule higher in countries and time periods when economic growth is faster. However, this relationship varied between the countries of the EU-27 during the period under observation, depending on the development level. While in the Western European countries regional inequality and economic growth are negatively related, in the Eastern European countries regional inequality increases in the periods of fast economic growth. Relying on the NEG models, such differences can be explained by a different weight of internal and foreign markets in trade relations of countries and regions. Possibly the result also refers to disparities in congestion costs in Western and Eastern European core regions. We conclude that growth enhancing policy measures should be implemented at a different regional scale, depending on the level of economic development and growth of the countries. Growth supporting policies in poor countries should first of all concentrate on achieving sustainable national growth, not on reducing regional disparities.