Industrial transformations and regional inequalities in Europe

Abstract

An important channel through which less developed European countries have grown over the past twenty years is through the industrial transformation of their economies from low to higher value-added activities. The aim of the paper is to address the role of industrial transformation on regional imbalances, by analysing the different components of industrial productivity dynamics, namely the industrial composition, competition and reallocation effects. Based on both a shift-share analysis and a simulation analysis, the paper shows that the reallocation towards higher value-added sectors in Central and Eastern European (CEE) countries could in fact lead to higher regional inequalities. Our empirical results lead us to claim that short-term normative interventions should go in the direction of supporting “modern and technologically advanced traditional sectors” rather than necessarily pushing CEE countries towards a high value-added industry specialization.