1. 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

2. Regionial Policy Brussels Oct 12, 2005 Outline Has regional policy been effective? Why has it been (in)effective? How should regional policy be designed?

3. Regionial Policy Brussels Oct 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)

4. Regionial Policy Brussels Oct 12, 2005 Do Cohesion Funds add to growth? Cohesion funds of 1% of GDP add X% to GDP-growth StudyX 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 studies0.00

5. Regionial Policy Brussels Oct 12, 2005 Example 1: Eastern Germany

6. Regionial Policy Brussels Oct 12, 2005 Example 2: Ireland Structural funds per capita growth 1990-2000 EU-152662.4 Italy4971.7 Spain10873.0 Greece19732.3 Portugal19273.2 Ireland8337.2

7. Regionial Policy Brussels Oct 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

8. Regionial Policy Brussels Oct 12, 2005 To cluster or not.. Centripetal forcesCentrifugal forces High demand from firmsCompetition from other firms.. and from consumers Availability of workersFishing in the same pool of workers as other firms do Access to good infrastructureCongestion Cohesion funds to lagging regions

9. Regionial Policy Brussels Oct 12, 2005 Linkages between regions Linkages between firms + Trade costs + Mobility of production factors = Linkages between regions

10. Regionial Policy Brussels Oct 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?

11. Regionial Policy Brussels Oct 12, 2005 Evidence 1: traveling time Regions within 1 car-hour affect each other positively!

12. Regionial Policy Brussels Oct 12, 2005 Evidence 2: inequality between NUTS3-regions

13. Regionial Policy Brussels Oct 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.

14. Regionial Policy Brussels Oct 12, 2005 It's not the blue banana..

15. Regionial Policy Brussels Oct 12, 2005.. but local interactions that matter

16. Regionial Policy Brussels Oct 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

17. Regionial Policy Brussels Oct 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!

18. Regionial Policy Brussels Oct 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

19. Regionial Policy Brussels Oct 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