Selected Issues Papers

Hungary is gradually converging to the average income level of the EU, but regional disparities remain persistently high and may worsen with the digital and green transitions. This paper employs income convergence and growth decomposition techniques to pin down the drivers of regional disparities in Hungary and analyze these trends through the lens of the ongoing digital and green transitions. The results indicate that divergence in productivity and labor force participation has played an outsized role in driving regional disparities, especially due to the concentration of economic activity in low-value-added and carbon-intensive sectors in lagging regions. Targeted reforms, particularly aimed at strengthening governance, increasing female labor force participation, and incentivizing migration, can promote economic dynamism and growth in lagging regions. Enhancing digital infrastructure and literacy has a statistically significant effect in reducing the urban-rural productivity gap, while investment in reskilling workers and incentivizing green R&D can promote an inclusive transition from brown to green jobs in regional economies.