Catching-up, Regional Disparities and EU Cohesion Policy: The Case of Hungary

Central and Eastern European countries (CEECs) such as Hungary are not only relatively backward with respect to the ‘old’ EU Member States (EU-15), but they are also witnessing a worrying rise of regional inequalities within their boundaries. With the example of Hungary, we try to identify the factors behind catching-up with the EU-15 in some regions (‘winner regions’) and falling-behind in others (‘loser regions’). By its very definition, EU cohesion policy has to consider both problems (national catching-up vs. the containment of regional disparities) very carefully in the enlarged EU. This is a complex issue, as regional policies often seem to face an equity-efficiency trade-off, as will bw shortly shown. On the basis of this analysis, we discuss how EU cohesion policy could contribute to attain higher national growth and, at the same time, contribute to the decrease in regional disparities. We use a theoretical approach that combines an endogenous growth framework with a new economic geography. The model we use shows that – in contrast to the traditionally used transport infrastructure policies – a policy that reduces the cost of innovation or increases the diffusion of innovation is able to reduce regional income inequality and agglomeration, and increase the national growth rate. The regional policies involved could be primary subsidies for research and technological development, investment in human capital or ICT infrastructure. In the final two sections of the paper, we discuss whether these regional policy prescriptions would fall on fertile soil in the light of Hungary's economic reality, and which could be promising EU cohesion policy schemes that would incorporate an innovation-oriented regional policy approach.