Do Poor Regions Catch Up?

Whether poorer regions within countries grow faster and close the gap with richer ones, evidence from Europe and India, and why convergence has slowed.

Economic theory suggests poorer regions should grow faster than richer ones, as capital and technology flow to where they are scarce and workers move to where wages are higher. This process is called regional convergence.

Historical convergence

In the United States, poorer states converged toward richer ones for much of the twentieth century. Research by Robert Barro and Xavier Sala-i-Martin found regional incomes in the U.S., Europe and Japan converged at roughly 2 percent a year over long periods.

Convergence slowed

Since around 1980, convergence among U.S. regions has slowed sharply. Economists Peter Ganong and Daniel Shoag linked this partly to rising housing costs in rich cities, which prevent low-skilled workers from moving to high-wage areas.

Europe’s cohesion policy

The European Union spends a large share of its budget on cohesion policy, funds to help poorer regions catch up. Central and eastern European regions have converged strongly since joining the EU. But some regions, especially in southern Europe, have stagnated or fallen further behind.

India’s divergence

Unlike many countries, Indian states have tended to diverge rather than converge in recent decades: richer states have often grown as fast as or faster than poorer ones, widening gaps. Economists attribute this partly to differences in governance, infrastructure, education and the ability to attract investment. Some poorer states, such as Bihar in some periods, have grown quickly, but gaps in income per person remain large.

Why convergence may fail

Agglomeration benefits keep drawing activity to already rich regions.
Poor regions may lack infrastructure, skills and institutions.
Barriers to migration, such as housing costs or language.

Housing blocks the escalator

In the past, a worker from a poor region could move to a rich city and earn much more, sending money home and helping regions converge. When housing in rich cities becomes very expensive, the extra wage is eaten up by rent. Fewer people move, and the regional gap stops closing.

Thinking regional gaps always shrink over time

Convergence is not automatic. In recent decades, many countries, including India, have seen regional gaps persist or widen.

Key takeaways

Regional convergence means poorer regions grow faster and close the gap.
U.S. and European regions converged for decades, but convergence slowed after 1980.
Housing costs in rich cities have limited migration and convergence.
Indian states have tended to diverge, with richer states often growing faster.