Do Differentials in Regional Economic Performance Diminish?

Over the whole period from 1971 to 1988, productivity differentials (measured by gross value added per dependent employee) between the Federal States and between administrative districts have not become smaller, though narrowing among States in the 1970s and among districts in the 1980s. Economically weak areas catch up whenever labor-intensive technologies move towards abundant supply of low-cost labor or when new stocks of raw materials are exploited. However, capital formation is accompanied by higher regional concentration, if incremental profits do not diminish with the rising level of development. Central areas endowed with an efficient transportation and communication infrastructure exhibit productivity advantages; agglomerations with intensive human capital formation mainly grow via permanent innovation. The empirical analysis concentrates on "dynamic economic areas" of similar supply structure and framework conditions for development, derived from a classification of Austria's administrative districts. The lowest aggregation level distinguishes between 9 categories of regions, three of which may be regarded as capital extensive (extensive industrial regions, tourist rural regions, industrial rural regions). Two of the capital intensive regional categories (intensive industrial regions, intensive tourist regions) are predominantly physical-capital-intensive, while the city of Vienna, the other large cities and their suburbs as well as the medium-size towns are characterized by a high concentration of human capital. Among these economic regions, converging and diverging forces were facing each other during the 1980s. Productivity differentials narrowed within Austria's capital extensive rural areas or within areas which are predominantly human-capital-extensive. Districts which in the 1960s and 1970s benefited from policy-induced business location or from the spreading of tourism, did not obtain a lasting advantage. Physical-capital-intensive regions with a particular industry dominating, situated along western and southern railway axes, were hit by structural difficulties during the 1980s, making for diminishing productivity differentials vis-à-vis rural areas. Productivity levels among human-capital-intensive regions, on the other hand, did not converge. In particular, the principal urban agglomerations of the largest Federal states, together with their surrounding areas, widened the gap to the other regions during the 1980s. For these agglomerations (Vienna, Linz, Graz, Salzburg, Innsbruck, Klagenfurt and surroundings) the annual average increase in nominal productivity was 9.6 percent in the 1980s, compared to 9.0 percent for the other regions. With the importance of human-capital-induced technological competitiveness rising, Austria's regional structure is likely to concentrate even more in favor of those high-performing central areas.