Transcript EU Regional Policy - The Economics Network

EU REGIONAL POLICY
REF: EUREGIONALPOL 2010 /FEB 23feb10
(1) Introduction


Aim - to overcome regional
disparities in the EU and support the
integration process
Structural funds (SFs) provide financial
assistance to do this
– invest in backward regions
– encourage future growth in these regions

Effective? Sufficient funds?
(2) Europe’s regions

Concern for Europe’s disadvantaged
regions has always been part of EU
priorities.
– In Treaty of Rome preamble.

Pre-1986, most spending on regions was
national
– Rural electrification, phones, roads, etc.

1973, Ireland (poor at the time joined);
1981, Greece joined but no major
reorientation of EU spending priorities.

Entry of Spain & Portugal created
voting-bloc in Council (with Ireland and
Greece) that induced a major shift in EU
spending priorities, away from CAP
towards poor-regions.
– QMV was 71% of vote, 31% to block
• See graph

“Structural spending” increasing % of
EU budget since 1980s.

QMV was 71% of vote
Important figure for ‘blocking’
100%
Structural Funds
90%
Poor Vote-Share
CAP
80%
70%
60%
50%
40%
30%
20%
10%
0%
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
Europe’s Economic Geography: Facts

Europe highly
centralised in terms
of economic activity.
– ‘CORE’
• 1/7th land, but 1/3rd
of pop. & ½ GDP.

Periphery has lower
standard of living
etc.
Centrality of EU25
Regions
Periphery
Intermediate
Core
(3) Why is an EU regional
policy required?


To overcome regional disparities in the
EU and support the integration process
Do your own research / see
presentations for recent data on
– Income inequality
– Unemployment inequality
– Core v periphery issue
• See European Commission Economic and
Cohesion Reports, Eurostat, UK House of
Lords European Committee (module web)
Geographic income inequality
Index, EU-25 = 100

Within nation
economic
activity is
very
unevenly
distributed
< 30
Canarias (E)
30 - 50
50 - 75
75 - 100
Guadeloupe Martinique
(F)
100 - 125
>= 125
(F)
RÈ
union
(F)
Guyane (F)
AÁ
ores (P)
Madeira
(P)
Kypros
SIG16
GDP per head by region (PPS), 1998
Index, EUR-26 = 100
Why an EU policy in addition to national
policy?

Controversial
– interventionist

Arguments for an EU policy
– Overcome market failure in EU,eg labour
immobility
– Counterbalance; EU policies may worsen
regional imbalances, eg CAP, EMU, SEM
– EU co-ordinate national policy
(4) Main types of funds

Structural funds (SFs)
– ERDF
– ESF
– EAGGF (guidance)
– FIFG
– Cohesion fund

Others incl.
– Pre accession aid
(5) Regional Policy Objectives &
Reforms


‘Minor’ reforms pre- single market
1989 Reforms
– Linked to SEM
– Principles incl:
• Made collaborative /EU co-ordinator
• Multi-annual programme
• additionality

Agenda 2000
– 2000-2006


Aim to increase efficiency
New streamlined objective regions
– 6 to 3 objectives
• See below
RP Objectives

1989-99
Objective1 regions
– structural adjustment

2000-06
concentration increased

–
–
–
–
Obj.2 regions
– industrial decline
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Obj 3 regions
Obj 4 regions
Obj 5 regions
Obj 6 regions
Objective 1

structural adjustment
< 75% EU GDP
70% SF here!
ERDF
Objective 2
– Regions in decline &
rural areas

Objective 3
– human resource
development
– ESF
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Simplification and decentralisation
Clearer division of responsibilities
Subsidiarity emphasised
But, budget fixed at 0.46% of EU GDP
2007-13

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New allocations following enlargement
Some EU15 regions now less funding
(now >75%) – phase out funding
3 objectives streamlined to 2 objectives

‘Convergence objective’
82% of expenditure
– structural adjustment
• If < 75% EU GDP
– Cohesion funds

‘Regional competitiveness &
employment’
16% of expenditure
– Regions in decline & rural areas
– human resource development

funds from…..
Issues incl.

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Dependency
Additionality
Subsidiarity
Enlargement
Absorption by CEECs
Each stage of integration - different
effects on regional disparities
(6) RP: Effective? Sufficient?

Some EU convergence across EU
– Convergence v divergence (see El Agraa)
– Some evidence indicates divergence
– At best, narrow convergence
– Convergence may be explained by Theory
of Comparative Advantage

Still ‘core-periphery’ disparities
Geographic Specialisation

Krugman index of
specialisation
shows most EU
nations becoming
more specialised.
– EU economies
seem to be
specialising more
in their
comparative
advantages.
Source: Midelfart-Knarvik and Overman (2002)
Krugman index comment

EU states: more specialised on a sector
basis
– explained by Theory of Comparative
Advantage
– Eg Portugal cloth, Germany
pharmaceuticals…..;
Comparative Advantage and
Specialisation
Low-education labour
Portugal
Spain
Italy
Greece
Ireland
UK
Belgium
France
Netherlands
Finland
Austria
Sweden
Denmark
Germany
Medium-education labour
High-education labour
83%
58%
44%
25%
15%
13%
-4%
-9%
-16%
-30%
-35%
-42%
-50%
-52%
-80% -60% -40% -20%
0%
20%
40%
60%
80%
100%
Source: Midelfart-Knarvik and Overman (2002)
comment

Federal systems (Canada & US) have
lower regional disparity than EU
– US - 1/2 that of EU
– Convergence slow (2% pa)

Underfunding despite increased finance
in 1990s
– SF 0.46% of EU GDP
– need ability to transfer funds between
regions

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Aims
– Realistic? Attainable?
– Elimination of disparities or equality of
opportunity?
Inefficiency due to problems with planning,
implementation and operation (EU 1999)

BUT, within EU states - greater
disparities
– clustering of economic activity
(agglomeration, see later for economic
geography theory)
(7) Theory


2 major approaches linking economic
integration to change in the geographic
location of economic activity.
Comparative advantage suggests
nations specialise in sectors in which
they have a comparative advantage.
– Some convergence between states

New Economic Geography &
endogenous growth suggest integration
tends to concentrate economic activity
spatially.
– Greater disparities within states
Agglomeration Theory

Economic geography can
– help explain empirical indications
– assess the effectiveness of structural
policies

Agglomeration forces exist when spatial
concentration of industry creates forces
that encourage further concentration
– positive externalities
– dynamic
– attract complementary factors
In the figure below
 Curve A; agglomeration index (the ratio of
the number of firms in the rich region to the total no.
of firms)
– Agglomeration rises, income disparities
widen
• As firms locate in core/rich areas
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Generally more profitable to produce in
rich area (larger market) to benefit from
economies of scale
If transaction costs between regions fall,
firms will increasingly locate in the
region & serve all regions

Curve R; regional income inequality
index (ratio of income in the rich region to the total
no. of firms)
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As agglomeration rises income
disparities narrow
– Aggm. Reduces innovation costs
• Raises innovation & NEW ENTRY
• Greater competition for firms in rich region,
lower profits & reduces disparity between
regions
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Curve S; agglomeration rises, so does
innovation & growth
– Agglomeration (spatial clustering) reduces
cost of innovation & raises growth rates
– Also, high innovation rate encourages
market entry/competition, reducing profits
of incumbent (concentrated in rich region),
& hence reduces regional income
disparities
See Martin (1999) for analysis
Agglomeration
Income inequalities
R
A
Industrial
agglomeration
S
Innovation rate & LR growth rate
Income inequalities
R
Equilibrium degree of agglomeration,
Innovation/LR growth rate
A
Industrial
agglomeration
S
Innovation rate & LR growth rate
Different impact of regional policy
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RP may fail
– EU RP often targets infrastructure to
support SEM
– Often unwanted & desired effects (tradeoff)
– Thus, need to chose policy carefully
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Eg 1. SFs reduce transactions costs
within poor regions (eg…………………)
Curve A shifts left A to A1
– For a given level of inequality , aggn falls
– Firms attracted to poor region
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Result: trade-off
– aggn
– inequlity!!!
– Growth/innovation!!!
Income inequalities
R
A
x
x
Industrial
agglomeration
x
S
Innovation rate & LR growth rate
Income inequalities
A1
A
R
x
x
Industrial
agglomeration
x
S
Innovation rate & LR growth rate
Income inequalities
A1
A
R
y
x
y
x
Industrial
agglomeration
y
x
S
Innovation rate & LR growth rate
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Eg 2. No trade-off is possible
– Raise innovation/growth
– Reduce aggm
– Reduce inequality

If SFs reduce costs of innovation

– Incl. R&D, education, telecommunications
(faster broadband)
– ‘less regional’!!
See Martin (1999) for analysis
(8) Conclusion

Despite some narrowing of disparities,
they still exist
– Disparities within countries widening
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RP linked to integration policies
Regional policy
– effective?
– sufficient?
Further reading
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Baldwin & Wyplosz, J Pelkmans, S Senior-Nello (all
on general reading list)
Martin (1999), ‘Are European regional policies
delivering?, EIB Papers, vol 4,2
Amiti M, “New trade theories and industrial location
in the EU, Oxford Review of Econ Poliy
Krugman & Venibles (1990), Integration and the
competitiveness of peripheral industry, in Bliss &
Braga de Macedo (eds), Unity with diverisity in the
European Economy, Cambridge Uini Press
Midelfart-Knarvik & Overman (2002), Delocation
&European integration. Is structural spending
justified?, Economic Policy