Transcript Regional policy

Regional Policy
Lotte Ovaere, KULeuven
Louvain Institute for Ireland in Europe
Fall 2011
1
Course outline
• Facts on Europe’s economic geography
• Theory
– Comparative advantage
– New economic geography
• EU Regional Policy
2
Preliminary questions
• Why is it important to reduce income
disparities among EU member states?
• How can trade modify the location of
industries across Europe?
• What’s the role of the education level of the
citizens of a country in determining the
effects of trade on economic activity
concentration?
3
Europe at night
4
EU economic geography
Centrality of EU25
Regions
Periphery
Intermediate
Core
5
EU economic geography
Regions
Land share Population
share
GDP share
%
%
%
Relative
Unemploy
ment rate
(EU27=100)
Relative
Youth
unemploy
ment
(EU27=100)
Share of
population
with
income
above
EU27
average
Core
14.0
33.2
47.2
74.0
60.5
88.8
Intermedi
ate
21.1
25.5
31.7
101.0
95.3
70.3
Peripheral
64.9
41.3
21.1
120.8
134.2
18.1
Source: EU Commission 2001
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Geographic income inequality 2002
Lux.
DK
Ireland
NL
Austria
Belgium
German
Sweden
UK
Finland
Italy
France
Spain
Cyprus
Portugal
Slovenia
Greece
Czechia
Hungry
Slovakia
Poland
Estonia
Latvia
Lithuania
Romania
Bulgaria
• Luxembourg
is 110%
richer than
average
• Bulgaria
only 26% of
average
0
50
100
150
200
250
EU26=100
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Luxemburg
Denmark
Ireland
NL
Austria
Belgium
EU
Ark, Mon,
West V, Miss 8
Change in income standard deviation
1983-93 1990-94 1995-00
EU
Belgium
1983-93 1990-94 1995-00
-4.4
-2.7
-1.1
Italy
2.6
0.8
-1.4
Netherla
nds
9.5
0.6
Austria
Germany
1.2
0.7
-1.3
-15.9
0.2
2.0
0.6
-1.5
0.3
1.4
Greece
1.0
1.5
-0.8
Portugal
Spain
2.6
1.0
1.3
Finland
-0.8
5.5
France
0.9
1.9
0.1
Sweden
0.2
8.9
0.0
5.1
UK
-1.9
2.7
Ireland
5.2
0.6
Source: EU commission 1996 and 2003
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Geographic income inequality, within nations
Index, EU-25 = 100
•income distribution even
more unequal at regional
level.
•Within nation economic
activity is very unequally
distributed
•Income distribution has
become:
–More equal in EU15
–Less equal within
EU15 nations (by
region)
< 30
30 - 50
50 - 75
75 - 100
Canarias (E)
Guadeloupe Martinique
(F)
100 - 125
>= 125
(F)
RÈ
union
(F)
Guyane (F)
AÁ
ores (P)
Madeira
(P)
•Richest: Inner London
(67000euros GDP pc)
•Poorest: Lubelskie in
Poland (6700euros)
Kypros
SIG16
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Geographic income inequality
• French example
– Ile de France (Paris)
has almost 1/3 of all
economic activity
– Per capita incomes
(not shown) are 158%
of EU15 average
– Mediterranee has 10%
of GDP, 12% of
population
Outre-Mer
Mediterranee
Centre-Est
Sud-Ouest
GDP share
Pop share
Ouest
Est
• GDP/pop only 86% of
EU15 average
Nord - Pas-de-Calais
• Outre-Mer are former
French colonies (poor
islands in Caribbean,
etc.)
Bassin Parisien
Ile de France
0.00 0.05 0.10 0.15 0.20 0.25 0.30
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12
By looking only at the GDP, we may
conclude that EEI had modest impact on the
location of economic activity as a whole…
changes occurring within nations rather than
across nations.
BUT
EEI may have encouraged clustering of
manufacturing by sector rather than by region.
13
Krugman Index: Geographic Specialisation
• KI tells us what fraction of
manufacturing activity would
have to change to make the
country’s sector-shares line-up
with the sector-shares of all
other EU15 nations.
• Most EU nations have
became more
specialised
– EU economies seem to
be specialising more in
their comparative
advantages
Specialisation of European Industrial
Structure, 1970-73 & change 1970-97
Average
1970-73
France
UK
Germany
Austria
Italy
Belgium
Sweden
Spain
NL
Greece
Portugal
Denmark
Finland
Ireland
-0.2
Change, 197073 to 1994-97
0
0.2
0.4
0.6
0.814
Summary of facts
1. Europe’s economic activity is highly
concentrated geographically at the national level
and within nations
2. Geographic Distribution of economic activity
has become more concentrated within countries
(proxy: income per capita)
3. Only modest reallocation of industry across
nations
4. Specialization on a sector-by-sector basis
5. Sub-national level: industry more concentrated
spatially.
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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
• New Economic Geography suggests that
integration tends to concentrate economic activity
spatially
• General idea:
– Use c.a. approach to explain cross-nation facts
– Use NEG to explain within nation facts
16
We will focus on these two aspects - specialization at the
international level and agglomeration within the countries.
The first is the standard economic logic that connects
European integration and the location of economic activity.
The uneven distribution of activity is explained through
given “natural differences” among European nations or
what economists call comparative advantage.
The second focuses on how closer integration encourages the
geographic clustering of economic activity.
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Comparative Advantage and Specialisation
Relative labour endowments in Europe
Low-education labour
Portugal
Spain
Italy
Greece
Ireland
UK
Belgium
France
Netherlands
Finland
Austria
Sweden
Denmark
Germany
Medium-education labour
High-education labour
83% above
EU average
83%
58%
44%
25%
15%
13%
-4%
-9%
-16%
-30%
-35%
-42%
-50%
-52%
-80% -60% -40% -20%
0%
20%
40%
60%
80% 100%
18
Question
• Portugal and Germany:
What do you expect according to their relative
labour endowments? Think of ‘comparative
advantage and specialization’
• Think of 2 sectors, e.g. clothing and
pharmaceuticals
19
Hecksher-Ohlin Theorem
• Countries export the good that uses its
relatively abundant factor intensively
• Beneficial for both nations
• But different skill groups are affected
differently
• Integration makes it easier to trade
• Portugal shifts resources to production of
clothing
20
Trade liberalization allows nations to
specialize in sectors where they have a
comparative advantage.
This effect of liberalization can have
important effects on the location of
industry: it encourages specialization
nation–by–nation, even without firms
moving internationally.
21
Agglomeration & NEG
• When productive factors can cross borders
(international or inter-regional) integration may
have very different effects
• Scale economies and trade costs generate forces
that encourage geographic clustering of economic
activity.
22
Question
• Give examples of sectors on which there
exist scale economies.
• What about cheese production and car
engine production?
23
There are two types of clustering:
– "Overall clustering“ = some areas with lots of economic
activity, others empty “core-periphery”
– "Sectoral clustering" = each sector clusters in one
region, but most regions get a cluster
24
Agglomeration & Dispersion Forces
• Basic idea is that lowering trade costs affects both
– Agglomeration forces
• Tend to lead industry to cluster geographically
– Dispersion forces
• Tent to encourage industry to disperse geographically
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Agglomeration Forces
• Many agglomeration forces
–
–
–
–
Technological spillovers (e.g. silicon valley)
Labour market pooling (e.g. City of London)
Demand linkages (a.k.a backward linkages)
Supply (cost) linkages (a.k.a forward linkages)
• Demand & supply links are clearly affected
by economic integration (lower trade costs)
26
Circular Causality & Demand Linkages
Market size
1. Some firm moves to big region
To have access to a bigger market and reduce trade cost
4. Production
Shifting,
Due to trade costs firms prefer to locate close to big market.
More industry moves to big region
2. Expenditure Shifting,
Firm and its workers spend
incomes in big region
instead of in small region
3. Market Size Effects:
big market gets bigger, small market gets smaller
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Circular Causality & Supply Linkages
Cost of production
1. Some firm moves to big region
4. Production
Shifting
Some more firms move from small
market to big market, attracted by
lower costs
2. Production Shifting
Migrated firms’ output now
cheaper in big region & dearer
in small region (trade costs)
3. Cost Shifting,
Availability of wider range of locally available
intermediate goods makes big region cheaper place to
produce
28
Question.
• Given the benefits of agglomeration for the
firm, why don’t we observe all economic
activity to be located in a single place?
29
Dispersion Forces
• Many forces lead to a tendency of firms to avoid
agglomerations of economic activity
– Rents and land prices
– High cost of other non-traded services (e.g. unskilled
labour)
– Congestion costs and Local Competition with other firms
• The NEG focuses on “local competition” since it is
clearly related to trade costs
– As trade costs fall, distance provides less protection from
distant competitors
30
EQUILIBRIUM
How European integration affects
equilibrium location of industry?
the
Spatial density of economic activity in
equilibrium depends upon the balance of the
pro-concentration (agglomeration) forces
and anti-concentration (dispersion) forces.
31
Simple framework
• One agglomeration force: demand linkage
–
–
–
–
Big market
Trade costs
Increasing returns to scale
Ignore feedback effect (flat aggl. force curve)
• One dispersion force: local competition
32
Agglomeration vs. dispersion forces
Agglomeration
and dispersion
forces
Dispersion
force
B
A
E
Agglomeration
forces
% firms in
big region
33
Economic integration
• Reduces trade costs
• Big market effect does not change
• Impact on competition effect
– Trade barriers protect firms from competition
– Local competition becomes global
– Dispersion no longer succeeds in avoiding
competition
– Dispersion force drops
34
Effects of integration
Agglomeration
and dispersion
forces
Dispersion
force
Dispersion
force with
freer trade
E
E’
Agglomeration
forces
100%
% firms in
big region
35
Complicating factors
• Circular causality in agglomeration force
Upward sloping agglomeration force curve
• Shift in dispersion force curve: additional
dispersion forces at work
• …
36
Bringing two theories together
• Essential role for factor mobility
• With factors perfectly mobile within
countries (NEG) and perfectly immobile
between countries (CA), theory predictions
come close to reality
37
Question
• Is there a trade-off between national and
regional convergence?
38
EU Regional Policy
• EU always had poor regions (Mezzogiorno, etc.)
– much spending on poor EU regions, but very little by EU (pre 1986)
100%
Structural Funds
90%
Poor Vote-Share
CAP
80%
Enlargement
• 1973, Ireland (poor at the time joined); 1981, Greece joined but no
major reorientation of EU spending priorities.
• In 1986, Iberian enlargement shifted power in Council and spending
priorities changed
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
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40
EU Regional Policy
• For historical reasons, EU has 5 “Funds”,
– 4 Structural Funds: spent in any qualified region
* European Regional Development Fund: infrastructure,
job-creating investment, local development, small firms
* European Social Fund: unemployment
* Fisheries Guidance: modernizing fishing industry
* Agricultural Guidance and Guarantee Fund: rural
development and aid for farmers mainly in less
developed regions
– 1 Cohesion Fund: spent only in poor-4 (Spain, Portugal, Greece
and Ireland)
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EU Regional Policy
• Funds work together under overall strategy
• Many programs, initiatives, and objectives, BUT
over 90% is spent on three priority “objectives”
42
3 Objectives
• Objective 1 (about 70% of structural
spending):
– spending on basic infrastructure and
production subsidies in less developed regions
– generally defined: regions with incomes less
than 75% of the EU average
– about 60 “objective 1 regions”; they have
about 20% of the EU population.
43
Objective 1 regions 2000-2006
44
3 Objectives
• Objective 2 (about 10% of structural spending):
– projects in regions whose economies are specialized in
declining sectors
• coal mining, fishing, steel production, etc.
– spending should support economic and social
“conversion”
– about 18% of the Union's population lives in ‘Objective
2” regions.
45
3 Objectives
• Objective 3 (about 10% of the funding):
– measure to modernize national systems of
training and employment promotion.
– all EU regions excluding objective 1 regions.
46
Objectives, Structural Funds and Instruments 2007-2013
Objectives
Structural Funds and instruments
Convergence
ERDF
ESF
Regional Competitiveness
and Employment
ERDF
ESF
European territorial
Cooperation
ERDF
infrastructure,
innovation,
investments
etc.
vocational
training,
employment
aids etc.
all Member States and regions
environmental and
transport infrastructure,
renewable energy
MemberStates with a
GNI/head below 90%
Cohesion
Fund
Objective and Budget allocation
Objective
%Cohesion budget %of EU27 population
covered
Convergence
82
Standard Convergence regions
(34)
Phase-out convergence
regions(3)
Cohesion Fund nation(34)
Regional competitiveness
and employment
16
All non-convergence
regions(66)
Territorial cooperation
2
100
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Structural funds allocation
by type of region 2007-13
Total: €347.4 billion
Convergence: €199.3 bn.
Cohesion Fund: €69.6 bn.
Phasing out: €13.9 bn.
Phasing in: €11.4 bn.
Competitiveness: €4.5 bn.
Cooperation: €7.8 bn.
•in current prices
European Territorial Cooperation
2007-2013
Allocation: €7.75 bn. for cross-border,
transnational and interregional cooperation
Cross-border areas
Spending priorities and Guiding principles
• A good deal goes to physical infrastructure such as roads,
bridges, regional airports, etc.
• Lisbon Agenda emphasizes other spending: research and
innovation, infrastructure of European importance, industrial
competitiveness, renewable energies, energy efficiency, ecoinnovations and human resources.
• The Structural Funds are not spent on projects chosen at
the European level.
• Choice of project and their management are solely the
responsibility of the national and regional authorities.
• As a matter of principle – the so-called additionally principle,
Community funding should not be used to economize on
national funds (difficult to verify).
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Political allocation
Country
Bulgaria
Romania
Latvia
Poland
Lithuania
Slovak Republic
Estonia
Hungary
Portugal
Czech Republic
Malta
Slovenia
Cyprus
Greece
Spain
Italy
Germany
France
Finland
United Kingdom
Belgium
Sweden
Denmark
Austria
Netherlands
Ireland
Luxembourg
National
GDP per head, €, 2005
7,913
7,933
11,180
11,482
11,914
13,563
14,093
14,393
16,891
17,156
17,330
19,462
20,753
21,589
23,069
23,474
25,797
25,077
25,774
26,715
27,135
27,721
28,375
28,852
29,374
32,197
59,202
Indicative Financial Allocations: 2007-2013
Convergence Objective
Million €
€ per head in
Million €
recipient
regions
5,888
753
6,047
16,912
778
17,316
4,010
1,725
4,090
59,048
1,546
59,698
5,999
1,737
6,096
9,663
1,796
10,264
3,011
2,221
3,058
20,243
1,998
22,451
18,316
1,750
19,147
22,979
2,252
23,698
747
1,878
761
3,646
1,827
3,739
193
265
580
17,447
1,585
18,217
23,411
1,566
31,536
19,255
1,112
25,647
14,323
933
23,449
2,838
1,623
12,736
0
0
1,533
2,594
949
9,468
579
452
2,020
0
0
1,682
0
0
545
159
568
1,301
0
0
1,697
0
0
815
0
0
58
Total EU Regional Funds
€ per head in Share of GDP Share of total
recipient
%
regional funds %
country
768
3.15
2
795
3
5.6
1,749
3.52
1.3
1,562
3.43
19.4
1,757
3.42
2
1,904
3.3
3.3
2,247
3.31
1
2,210
3.22
7.3
1,847
1.82
6.2
2,323
3.25
7.7
1,922
2.35
0.2
1,874
1.7
1.2
812
0.56
0.2
1,658
1.34
5.9
778
0.49
10.2
449
0.25
8.3
284
0.14
7.6
208
0.1
4.1
295
0.13
0.5
160
0.07
3.1
195
0.09
0.7
188
0.08
0.5
101
0.04
0.2
161
0.07
0.4
105
0.05
0.6
207
0.06
0.3
130
0.02
0
52
Structural Funds: Eligible areas in EU25 for Objective 1 and 2
between 2000 and 2006
Objective 1
Phasing-out (till 31/12/2005)
Phasing-out (till 31/12/2006)
Special program
Objective 2
Objective 2 partly
Phasing-out (till 31/12/2005)
Phasing-out partly (till 31/12/2005)
53
Impact of 2004 and 2007 enlargement
• New members are much poorer than EU15
• Difficulties:
– Cost of structural spending could rise substantially
– 10 new poor nations make some poor regions in
EU15 look relatively rich
• Pushes them above 75% of EU25 average
• Political power in Council likely to shift
spending priorities
54
Impact of 2004 Enlargement
• Some regions that will be
pushed above 75% of
average will lose
Objective 1 status
• Some, like northern
Finland and Sweden are
unaffected
Regions below 75% in EU25
Regions “statistically” above 75%
Regions above 75% in EU15
Others
– Low pop density criteria
• All of 2004 entrants have
less than 75% of EU25
average
– Except Cyprus
55
New cohesion policy programs
• JASPERS: Joint assistance in supporting
projects in European regions.
• JEREMIE: Joint European resources for
micro to medium enterprises
• JESSICA: Joint European support for
sustainable investment in city areas
• Modernisation of public services
56
Question
• Educational level in all EU nations is rising. How
would this affect the spatial allocation of
production?
• Considering that low-skill intensive sectors
generate lower added-value, why is it important to
transfer funds to poorer countries, i.e. to intervene
in the natural forces of agglomeration and
dispersion forces?
• Assuming ethical arguments are not enough,
which rational and selfish arguments may justify
the reduction of inequality among EU members?
57