Tree-based approaches for understanding growth pat-terns in the European regions

Abstract

We run an empirical analysis to understand the main drivers of economic growth in the European Union (EU) regions in the past decade. The analysis maintains the traditional factors of growth used in the literature on regional growth - stage of development, population agglomeration, transport infrastructure, human capital, labor market and research and innovation - and incorporates the institutional quality and two variables which reflect the macroeconomic conditions in which the regions operate. Given the scarcity of reliable and comparable regional data at the EU level, the starting point of the analysis was devoted to build reliable and consistent panel data on potential factors of growth. Two non-parametric, decision-tree techniques, randomized Classification and Regression Tree and Multivariate Adaptive Regression Splines, are employed for their ability to address data complexities such as non-linearity and interaction effects, which are generally a challenge for more traditional statistical procedures such as linear regression. Results show that the dependence of growth rates on the factors included is clearly non-linear with important factor interactions. This means that growth is determined by the simultaneous presence of multiple stimulus factors rather than the presence of a single area of excellence. Results also confirm the critical importance of the macroeconomic framework together with human capital as major drivers of economic growth. This is overall in line with most of the economic literature, which has persistently underlined the major role of these factors on economic growth but with the novelty that the macroeconomic conditions are here incorporated. Human capital also has an important role, with low-skilled labor supply having a higher detrimental effect than the conducive one of high-skilled labor supply. Other important factors are the quality of governance for most developed economies and, in line with the neoclassical growth theory, the stage of development in particular for less developed economies. The evidence given by the model about the impact of other factors on economic growth such as those on the quality of infrastructure or the level of innovation is more limited and inconclusive. The analysis conclusions support the reinforcement of the EU economic governance and the conditionality mechanisms set in the new architecture of the EU regional funds 2014-2020 whose rationale is that the effectiveness of the expenditure is conditional to good institutional quality and sound economic policies.