Regionial Policy Brussels Oct 12, 2005 Can regional policy help lagging regions to catch up? Open Days October 12, 2005 Albert van der Horst CPB, The Hague.

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Can regional policy help lagging regions

to catch up?

Open Days

October 12, 2005

Albert van der Horst

CPB, The Hague

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Outline

Has regional policy been effective?

Why has it been (in)effective?

How should regional policy be designed?

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How effective is regional policy

Economic models► applied to European regions► show that cohesion funds boost economic growth► regional policy is potentially effective

Econometric evidence► lagging regions do grow faster► because they import capital and technology► BUT: cohesion funds do not add to this growth► regional policy has been ineffective in practice (on

average)

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Do Cohesion Funds add to growth?

Cohesion funds of 1% of GDP add X% to GDP-growth

Study X

Fagerberg and Verspagen (1996) - 0.32

Cappelon et al. (2001) 0.14

Garcia-Solores and Maria-Dolores (2001) 0.12

Garcia-Mila and McGuire (2002) 0.07

Ederveen et al. (2002) - 0.16

Mean of all studies 0.00

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Example 1: Eastern Germany

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Example 2: Ireland

Structural funds per capita

growth 1990-2000

EU-15 266 2.4

Italy 497 1.7

Spain 1087 3.0

Greece 1973 2.3

Portugal 1927 3.2

Ireland 833 7.2

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Economic explanation (1)

Firms’ location decision is based on the balance of costs and benefits

Costs and benefits depend on the presence of other firms

Firms want to be where other firms are;

Firms want to go where other firms go to

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To cluster or not ..

Centripetal forces Centrifugal forces

High demand from firms Competition from other firms

.. and from consumers

Availability of workers Fishing in the same pool of workers as other firms do

Access to good infrastructure Congestion

Cohesion funds to lagging regions

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Linkages between regions

Linkages between firms

+

Trade costs

+

Mobility of production factors

=

Linkages between regions

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Economic explanation (2)

Thesis:

The advantages for firms to locate in core regions are large (in general)

Implication:

Cohesion funds are unable to overcome the disadvantage to locate in lagging regions (in general)

Key empirical question:

How far does the attractiveness of core regions reach?

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Evidence 1: traveling time

Regions within 1 car-hour affect each other positively!

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Evidence 2: inequality between NUTS3-regions

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Evidence 3: wages are higher in and near core regions

Thesis: firms want to be where workers are ..

.. and vice versa

Evidence: wages are higher in the neighborhood of production centers

Scope of this positive wage effect: 100 km.

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It's not the blue banana ..

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.. but local interactions that matter

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Regional Policy

Regions interact, they should never be treated as single entities

In particular, the interaction between proximate regions (1 car-hour or 100 km) is strong

The scope of regional policy in reducing regional disparities by enticing business activity to the periphery is limited.► policy should take the core-periphery structure at

NUTS 2&3 level as given

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Infrastructure - a warning

Infrastructure improves the interaction between regions

Firms in core:► better access to (consumer) market in peripheral

region

Firms in periphery► better access to market (for intermediate inputs) in

the core

Who benefits more: … ?

Infrastructure might make location in the core even more attractive!

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Regional policy

If the aim is to improve economic growth:► select projects, not regions, which promise to pay-off

(presumption: selection of potentially successful projects is easier than selection of regions )

If the aim is to support low-income regions:► income support► education

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Recall

Observation:

Regional policy is often shown to be ineffective

Explanation:

the advantage for firms and workers to locate in core regions are huge

Implication:

cohesion and competitiveness are often conflicting goals of regional policy - a single policy cannot fulfil both aims!

► competitiveness: support firms where they are► cohesion: support poor households where they are

Limitation: this holds for proximate regions