Competitiveness in low income and low growth regions Błażej Gorgol, DG REGIO Coffee with an expert 29 June 2017

Initiative focuses on two groups of 'lagging' regions: Definition Initiative focuses on two groups of 'lagging' regions: 'Low growth regions’ (blue): did not converge over the last decade or more 'Low income regions' (red): GDP on the rise, but remain poor

Areas of analysis How to improve the economic performance of lagging regions? Experience from analytical and applied strands Macroeconomic framework What is the impact of macroeconomic imbalances on lagging regions? Do lagging regions tend to be more affected by macroeconomic imbalances? Structural reforms What is the impact of structural reforms (or lack thereof) on lagging regions? What are regional differences in implementing nation-wide reforms? Growth determinants What are the most important drivers for growth in lagging regions? Have lagging regions chosen a good investment mix ? What should cohesion policy invest in?

Economic growth

Economic growth -decomposed

Basic indicators

Macroeconomic framework

Macroeconomic environment: a case of Portugal Portugal was the only country with lagging regions, where investment were on the decline from 2000 External shocks: globalisation, and EU enlargements 2004 and 2007, but underlying productivity and competitiveness issues Euro – delayed policy transformation from nominal to real adjustment and growing macroeconomic imbalances Investment driven by non-tradable sector

Structural reforms provide More benefits for lagging regions because Lagging regions have higher unemployment rates lower employment rates lower shares of tertiary educated fewer firms per capita smaller firms lower start-up rates and start-ups have fewer employees

Example of labour market rigidities Structural reforms Example of labour market rigidities Multiple labour market rigidities in the low-growth group: central wage setting employment protection segmentation In general, lagging regions have: higher unemployment rates, lower employment rates lower shares of tertiary educated than non-lagging regions Italy and Spain: consistent underperformance of low growth regions

Business environemnt in lagging regions Structural reforms Business environemnt in lagging regions Lagging regions have: fewer firms per capita smaller firms lower start-up rates and start-ups have fewer employees in tradable sectors compared to non-lagging regions in their countries Unfavorable business structure may affect capacity of firms to adapt to economic changes and to innovate

Regional diffrences in ease of doing business Structural reforms Regional diffrences in ease of doing business Significant variation under the same regulatory and legal framework Different time, cost and number of procedures to start a business, register property, contract enforcement and construction permit Potential local efficiency gains Scope for peer-to-peer learning Differences in quality of institutions and administrative capacity important for business environment

Growth determinants Low-growth Low-income Growing population Metros do better No benefit from TEN-T Moderate innovators, but some decline Low to moderate quality of government EU and national policies consider lagging regions Shrinking population Metros do better Benefit from TEN-T Modest innovators, but some growth Low to moderate quality of government EU and national policies consider lagging regions in some Member States

Metro-regions do better Growth determinants Metro-regions do better Some significant cities exist in lagging regions (not all lagging regions are rural) Huge contribution of cities in low income regions to growth and jobs Smaller contribution in Portugal and Greece Portugal – issues of urbanisation structure dominated by Lisbon and Porto as well as insufficient over the years spatial planning in cities

Infrastructure and accessibility Growth determinants Infrastructure and accessibility Traditional factors of growth (eg infrastructure investment) still contribute significantly to economic development in low income regions In Spain and Portugal completion of TEN-T network does not really improve the accessibility Targeted infrastructure investment can still work in some low growth regions – but good management needed

Quality of governance matters Growth determinants Quality of governance matters Low to moderate quality of government in both groups Quality of government – a crucial factor of growth for the low growth regions Low income can still exploit reserves, but with diminishing returns on investment over-time, growth will fade without improvement in governance

Cohesion policy investment Diminishing infrastructure investment and rising productive and human capital in low growth regions Infrastructure still dominant in low income regions

Main findings Low-growth regions suffer most from a poor macroeconomic framework Lagging regions need more structural reforms in the labour market and business environment Lagging regions need to improve governance Low-growth regions need a better educated workforce and more export-oriented firms Low-income regions should avoid over-investing in infrastructure and under-investing in innovation Metro areas can strengthen growth in lagging regions