Leading sectors and leading regions: Economic restructuring and regional inequality in Hungary since 1990

Abstract

This article examines factors accounting for persisting regional inequality in Hungary during the regime change from socialism to a market economy in 1990. We examine the determinants of regional inequality through the lens of leading sector theory which has been used to explain why some ex-socialist countries have done better than others during the transformation. In other words, we ask whether some regions of Hungary are doing better than others for the same reasons that some ex-socialist countries have outperformed their counterparts. We use county level data from the Hungarian Central Statistical Office to examine whether the quantity and types of foreign direct investment counties have received since 1990 are associated with regional inequality in per capita GDP. We find that foreign capitalists concentrate human-capital-intensive investment in already well performing locations because they have similar supply structures to their home economies. We also contend that no measure of institutional modernization is likely to make lagging regions attractive candidates for human-capital-intensive investments in the near future. Hence, regardless of the national state's efforts to target development to lagging areas, or the effectiveness of local institutions, lagging regions are likely to remain underdeveloped. We recommend that future field-based research be conducted to examine the nexus between FDI, the nation state and localities. Unraveling interrelationships between these three political economy sites will expose the causal forces sustaining regional inequalities during post-socialism. © 2007 The Authors. Journal Compilation © 2007 Joint Editors and Blackwell Publishing Ltd.