Convergence in TFP among Italian Regions - Panel Unit Roots with Heterogeneity and Cross Sectional Dependence

1 Introduction

The income differential between the Northern and Southern regions is a well
known and long standing issue in Italy. This gap still persists in spite of
recent evidence of growth in some of the eastern regions of the peninsula,
such as Abruzzo. Within Europe, Italy remains one of the countries with the
widest regional growth differentials. This is clearly a matter of great con-
cern for both national and local authorities. The main policy agenda of the
past (“Intervento Straordinario per il Mezzogiorno”) was oriented towards
increasing the amount of industrial investment through financial assistance
and/or direct investment in public firms. There is now a large consensus
among researchers and policymakers, that this policy has not been effective
at achieving long run convergence because it has not successfully targeted
the structural differences (technological and financial, but also social and
institutional) among the regions.

In the neoclassical framework, these structural differences affect Total
Factor Productivity (TFP) and consequently have also an effect on long-run
growth. Indeed, in the long-run steady state, it is possible to show that cap-
ital intensity (i.e. the ratio between capital and labour) grows at the same
rate of labour productivity that in turn depends on TFP growth. Indeed,
many recent papers¹ have asserted that the international cross-country vari-
ation in labour productivity depends more on TFP than on capital intensity.
For Italian regions, a similar result was highlighted by Aiello and Scoppa
(2000), Destefanis (2001), and Ascari and Di Cosmo (2004). Therefore, it
seems particularly important to analyse the process of convergence among
Italian regions with respect to their Total Factor Productivity over a long
period of time.

In this analysis, we depart from the traditional approach to testing for
beta and sigma convergence in a strictly cross-sectional regression, and rely
¹See among the others, Klenow and Rodriguez-Clare (1997), Hall and Jones (1999),
Parente and Prescott (2000), and Easterly and Levine (2001)

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