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Re
gio
nia
l Po
licy
BrusselsOct 12, 2005
Can regional policy help lagging regions
to catch up?
Open Days
October 12, 2005
Albert van der Horst
CPB, The Hague
Re
gio
nia
l Po
licy
BrusselsOct 12, 2005
Outline
Has regional policy been effective?
Why has it been (in)effective?
How should regional policy be designed?
Re
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nia
l Po
licy
BrusselsOct 12, 2005
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)
Re
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l Po
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BrusselsOct 12, 2005
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
Re
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BrusselsOct 12, 2005
Example 1: Eastern Germany
Re
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BrusselsOct 12, 2005
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
Re
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BrusselsOct 12, 2005
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
Re
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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
Re
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BrusselsOct 12, 2005
Linkages between regions
Linkages between firms
+
Trade costs
+
Mobility of production factors
=
Linkages between regions
Re
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BrusselsOct 12, 2005
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?
Re
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BrusselsOct 12, 2005
Evidence 1: traveling time
Regions within 1 car-hour affect each other positively!
Re
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BrusselsOct 12, 2005
Evidence 2: inequality between NUTS3-regions
Re
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BrusselsOct 12, 2005
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.
Re
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BrusselsOct 12, 2005
It's not the blue banana ..
Re
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BrusselsOct 12, 2005
.. but local interactions that matter
Re
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BrusselsOct 12, 2005
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
Re
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l Po
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BrusselsOct 12, 2005
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!
Re
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nia
l Po
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BrusselsOct 12, 2005
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
Re
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BrusselsOct 12, 2005
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