Structural funds, institutional quality and regional economic convergence in EU: A spatial econometric approach

The Structural Funds (SF), are the most important strategic tool of the European Union (EU) for the promotion of regional development. This chapter analyzes the effects of regionally targeted SF on labor productivity growth in 180 Nomenclature of Territorial Units for Statistics, level 2 (NUTS2) regions from 1989 to 2006. The main contributions of this chapter to the debate on the effectiveness of Cohesion Policy consist of two aspects: the spatial econometric technique adopted and the analysis of the effectiveness of SF conditional to regional institutional quality. Regarding the first contribution, the chapter shows that EU regions, after controlling for spatial dependence, not only have multiple steady states, but also heterogeneous convergence rates. Regarding the second contribution, it is demonstrated that, while regional institutional quality is not significant per se, it positively affects the effectiveness of Objective 1 SF. Under a policy perspective, regions, to achieve a higher effectiveness of SF on productivity growth, should invest primarily in strengthening their institutional capacity.