Asymmetric regional dynamics: from bust to recovery Fernando Alexandre∗ H´elderCostay Miguel Portelaz Miguel Rodriguesx November 26, 2018 Abstract Regional convergence stands out in the severe adjustment of the Portuguese economy that followed the international financial crisis. This result contrasts with increasing regional inequality in other European countries. We show that regions' GDP growth rates of the Portuguese economy were driven by debt and exports. Our estimates suggest that differences in regional debt-to-GDP and exports-to- GDP ratios resulted in asymmetric regional economic dynamics. Highly indebted regions had a more severe recession and a slower recovery. Regions more open to trade had a milder recession and a stronger recovery. Finally, our results suggest that fiscal decentralization may improve regions' resilience. Keywords: regional development, economic convergence, debt, exports, local government, fiscal decentralization, resilience, international financial crisis, Eurozone crisis. JEL Classification: E32, E44, F34, H63, H71, H72, R11, R51 1 Introduction This paper aims at contributing to a better understanding of the spatial impact of the international financial crisis and of the Eurozone crisis. In the 2008-2016 recession and ∗Corresponding author;
[email protected]. NIPE/Universidade do Minho. Acknowledgments: This paper was sponsored by Associa¸c~aoComercial do Porto. We are grateful to participants at NIPE/CICP UMinho seminar and to Lu´ıs Valente de Oliveira, Francisco Veiga (Universidade do Minho), Jos´eTavares (Nova School of Business & Economics), Linda Veiga (Universidade do Minho) and Pedro Ba¸c~ao(Universidade de Coimbra) for insightful comments and suggestions. yNIPE/Universidade do Minho zNIPE/Universidade do Minho and IZA Bonn xCICP/Universidade do Minho 1 recovery cycle of the Portuguese economy, aggregate divergence in real GDP per capita relative to the EU{28 coincided with strong regional convergence.