A regional perspective on inequality and growth in Portugal using panel cointegration analysis

This paper examines the relationship between inequality and economic growth for thirty Portuguese NUTS3 regions within a multivariate panel framework over the period 1995–2007, using panel cointegration techniques to test for the existence of a relationship between inequality and real GDP per capita. The results point to the existence of a relationship between the variables, where the effect of inequality, measured as the Gini index of the earnings distribution, on per capita output is negative. This negative influence seems to be determined by the behaviour of the bottom of the earnings distribution, most likely by dampening investment in human capital, with the results pointing to the coexistence of a positive impact of inequality at the top of the distribution, supporting the incentives argument for the inequality-growth nexus. Additionally, the results confirm the predicted positive relationship between human capital and output, lending support to both the exogenous and endogenous growth models predictions on the importance of human capital for production both as an input in the production of final goods and in the production of technology. Another interesting result concerns structural funds: we found a negative relation of this variable with regional output. We believe that EU structural funds were a source of Dutch disease for Portugal, which resulted mainly in a lack of external competitiveness of the Portuguese economy due to the excessive specialization in non-tradable goods made possible by the European funds.