Impact of Cohesion Funds on Convergence Club's Economic Growth

Abstract

This paper empirically estimates the impact of the European Structural and Investment Funds (ESIF) on economic growth across European regions. The narrative of this paper is based on the convergence club hypothesis. In this context, we implement the data-driven Phillips and Sul test to classify European regions into endogenously identified convergence clubs that tend to converge to different steady-state equilibria. We find three substantially different convergence clubs in terms of both per capita output and spatial location: capital cities and metropolitan areas (along the so-called “Blue Banana”), core countries, and the periphery. We observe a persistent core-periphery pattern in terms of output per capita among European regions with different rates of convergence. The convergence club comprising capital cities and metropolitan areas converges almost four times faster than the rest of the EU. Subsequently, we estimate club-specific growth regressions to investigate the impact of ESIF expenditures on short-run economic growth. Our main identification strategy relies on two instrumental variables, namely the spatial lag of EFSI expenditures-to-GDP and the air distance to Brussels, to address a strong endogeneity problem in strongly biased relationship between ESIF expenditures-to-GDP and short-run economic growth. Our results indicate a positive impact of ESIF expenditures-to-GDP on short-run economic growth in the second (core) and third (periphery) convergence clubs, with the impact being twice as large in the latter compared to the former. These results remain robust when adjusting the growth regressions to use ESIF expenditures-to-population instead of ESIF expenditures-to-GDP, although the pronounced difference in effect magnitude among convergence clubs diminishes.