Transcript Real convergence Reiner Martin

The impact of the EU's Structural and
Cohesion Funds on real convergence in the
EU
Dr. Reiner Martin
EU Countries Division
European Central Bank
Warsaw, 27 November 2003
20/07/2015
Introduction
"The evidence examined in [the 2nd Cohesion Report] shows
that over the previous programming periods (1989-93 and
1994-99) Community cohesion policies have had some notable
success. This is perhaps most visible in the case of the regions
where development is lagging behind, where there has been a
general process of catching up in economic and social terms."
(European Commission, 2001).
2
Introduction
“The best thing the EU could do for Greece is to cut off the
structural funds immediately (…); anybody who works hard
at a regular business is regarded as an idiot, since it’s much
easier to set up a project to draw in European subsidies.”
(The Economist 27 March 2003, quoting a ‘senior Greek official in
Brussels’).
3
Overview
• Introduction
• The EU’s Structural and Cohesion Funds
• Infrastructure and human capital as determinants for
real convergence
• Evaluations of the Structural and Cohesion Funds
• Conclusions
4
The EU’s Structural and Cohesion Funds
• Main aim is to improve long-term growth and
employment prospects (supply-side approach)
• No fiscal federalism
• No sector-specific policy like the Common
Agricultural Policy (CAP)
• Less firm-level oriented than most national
regional policies
5
The EU’s Structural and Cohesion Funds
European regional policy objectives during the
2000-06 period
• Relatively poor regions (Objective 1)
• Regions with specific economic problems
(Objective 2)
• Education, training and employment outside Objective 1
regions (Objective 3)
Cohesion Fund for relatively poor Member States
6
The EU’s Structural and Cohesion Funds
Population covered by European regional policy
objectives (in %)
Objective
Austria
Belgium
Denmark
Finland
Germany
Greece
Spain
Sweden
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
UK
EU 15
1 and 6
1994
4
13
./.
17
21
100
60
5
4
100
37
./.
2
100
6
27
2 and 5b
1994
37
19
16
38
19
./.
24
21
42
./.
19
43
22
./.
36
25
1
2000
3
./.
./.
21
17
99
58
5
3
25
33
./.
./.
65
8
22
2
2000
25
12
10
31
13
./.
22
14
31
./.
13
28
15
./.
24
18
Total
1994
41
32
16
55
40
100
84
26
46
100
56
43
24
100
42
52
Total
2000
28
12
10
52
30
99
80
19
34
25
46
28
15
65
32
40
Source: European Commission.
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The EU’s Structural and Cohesion Funds
EU resources for structural action
• From EUR 8 billion per year (1989) to 32 billion in
1999 (1999 prices)
• From 20% of EU budget (1987) to above 35% (1999)
• European Summit in Berlin (1999) resulted in slight
decline of available resources for 2000-06 compared
to 1994-99
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The EU’s Structural and Cohesion Funds
EU resources committed to structural action, 2000-06
Breakdown according to Member State and objective*
Germany
Greece
Spain
Ireland
Italy
Portugal
Other
EU 15
Obj. 1
Obj. 2
Obj. 3
Cohesion
Fund
Community
Initiatives
Total
19,958
20,961
38,096
3,088
22,122
19,029
12,700
135,954
3,510
./.
2,651
./.
2,522
./.
13,771
22,454
4,581
./.
2,140
./.
3,744
./.
13,585
24,050
./.
3,060
11,160
720
./.
3,300
./.
18,240
1,608
862
1,958
166
1,172
671
3,844
10,281
29,657
24,883
56,005
3,974
29,560
23,000
43,900
210,979
* Million EUR, 1999 prices
Source: European Commission.
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The EU’s Structural and Cohesion Funds
Functional distribution of EU Funds in Ireland, Greece,
Portugal and Spain, 1994-99 (in %)*
Type of expenditure
Greece
Spain
Ireland
Portugal
Structural Fund expenditures
Infrastructure
Human resources
Productive environment
45.9
24.6
27.8
40.4
28.4
30.5
19.7
43.9
36.2
29.7
29.4
35.7
Cohesion Fund expenditures
Transport infrastructure
Environment
51.2
48.8
49.7
50.3
50.0
50.0
48.1
51.9
*Cohesion Fund expenditures refer to the period 1993-99.
Source: European Commission
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The EU’s Structural and Cohesion Funds
Financial resources for Acceding Countries
• Until 2004 EUR 3 billion per year for all 12 AC and
Candidate Countries (1999 prices)
• Between May 2004 and end 2006 EUR 21.7 billion for
10 AC (1999 prices)
• 2/3 of this will be Structural Funds, 1/3 Cohesion Fund
• AC likely to be fully eligible for Objective 1 status (except
Prague, Bratislava and Cyprus)
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Determinants of real convergence
Convergence theory
• Free movement of goods and factors of production ensures
that all regions achieve their technologically determined
optimal level of capital intensity
• Economic integration will lead to ‘automatic’ convergence
• Conditional convergence theory: allows for regional/national
differences in production technologies
Divergence theory
• Stresses differences in technology, transport costs and external
effects
• Policy action is required to bring about convergence
Empirical evidence for last 20 years for the EU shows convergence
at the national level but less so at the regional level
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Determinants of real convergence
Infrastructure and real convergence
• Public infrastructure supports long-run growth by providing
complementary inputs for private production
• However, the net positive effect on production depends on
whether it crowds in more private investment than it
crowds out
Why public infrastructure?
• Public good case
• Increasing-returns-to-scale/natural monopoly case
13
Determinants of real convergence
Empirical evidence
• Major methodological problems (e.g. accounting for
quality differences, reverse causality)
• There is reasonable evidence of positive effects of public
investment on growth
• Benefits of public investment are greatest in countries
with a low level of infrastructure capital stock
• Identification of key infrastructure bottlenecks is crucial
in order to ensure an appropriate return on public infrastructure investments
14
Determinants of real convergence
Human capital and real convergence
• Endogenous growth theory gives considerable importance
to human capital as explanatory factor for growth
• Idea that human capital also increases the capacity to
innovate and to adapt new technologies
Why public investment?
• Social returns to individuals’ investments in education
might outweigh private returns
• Case for publicly subsidised education is reinforced if
credit markets are imperfect
15
Determinants of real convergence
Empirical evidence
• Methodological problems (proxies for human capital,
reverse causality)
• Some evidence that education is beneficial for growth but
weaker than theory would suggest
• Diminishing returns on education, primary education
being the one with the highest return
• On-the-job training and adult education could be also
beneficial but the available evidence is rather limited
16
Evaluations of the EU Funds
Types of evaluations
• Evaluations for specific projects or programmes
• Analyses based on aggregate public investment or EU
transfers as explanatory variable
• Macroeconomic models
Some common problems
• Lack of sufficiently long and detailed regional time series
for many variables
• Funds have operated for relatively short period
(particularly problematic for the identification of supplyside effects)
17
Evaluations of the EU Funds
Evaluations for specific projects or programmes
• Quality of the evaluations varies considerably
• Somewhat less interesting from a macroeconomic
perspective
• Indispensable for making the right choices in designing
concrete projects and programmes
• Venables and Gasiorek (1999) use models based on
economic geography to investigate inter-regional spillover effects of major CF funded infrastructure investments
• Location of such projects crucial for extra-regional effects
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Evaluations of the EU Funds
Econometric tests using cross-section or panel-data
analyses
• This strand of evaluations suffers in particular from data
constraints
• On balance rather pessimistic although there is some
heterogeneity in the results
• Recurrent issue is the impact of the quality of national
institutions in the recipient countries on the effectiveness
of the Funds
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Evaluations of the EU Funds
Macroeconomic models
• Results differ considerably, depending on the model
specifications and the ways in which the models take the
impact of the Funds into account
HERMIN
• HERMIN introduces the effect of the Funds in two ways:
1. Standard expenditure and income shocks
2. Policy externalities (Increased TFP, increased
attractiveness for FDI, enhanced ability of endogenous
industries to compete abroad)
• Simulation assumes funding to terminate after 2006
• Supply-side effects of 1-2% GDP growth per year for
Cohesion Countries and Eastern Germany
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Evaluations of the EU Funds
HERMIN simulation results on the impact of Objective 1 CSFs
2000-06 on the level of real GDP in the Cohesion Countries and
Eastern Germany
(in % deviation from baseline)
Source: Hallet (2002)
21
Evaluations of the EU Funds
QUEST II
• QUEST II model is forward-looking, with behavioural
equations based on the intertemporal optimisation of
households and firms
• Real interest and exchange rates are determined
endogenously, so that possible crowding-out effects can be
taken into account
• Impact of Funds is modelled as increase in the public
capital stock, which impacts on a neo-classical production
function
• For 2000-06 the results of QUEST II simulations for the
Cohesion Countries are low compared to HERMIN
• HERMIN and QUEST II estimates for supply-side effects
are more similar
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Evaluations of the EU Funds
QUEST II simulation results on the impact of Objective 1 CSFs
2000-06 on the level of real GDP in the Cohesion Countries
(in % deviation from baseline)
Source: Hallet (2002)
23
Conclusions
• Short-term redistribution and demand effects of the Funds
more easily identifiable and relatively undisputed
• Considerable uncertainty about the long-term supply-side
effects
• ‘Smallest common denominator’
• Well designed measures to upgrade infrastructure and to
increase human capital are likely to have a positive impact
on growth
• In particular in regions where infrastructure and human
capital are likely to represent growth bottlenecks
• On balance the results suggest that EU regional policy can
have a positive long-term impact on economic growth in
the recipient countries and regions
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Conclusions
Improvements to the current system of regional
support
• Further strengthen the focus on physical and human
capital building
• Improvements of Member States’ administrative capacity
could become a new priority for the Funds
• Further simplifications of the procedures
• Improved co-ordination between EU regional policy,
national regional policy and non-spatial European and
national policies
• Further spatial concentration of support
• Enlargement shifts main dimension of income differences
from regions to countries
• Allocation of funding may thus need to become more
strongly based on national socio-economic characteristics
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Conclusions
More far-reaching lessons
• Funds can only exert a positive impact on real
convergence if the supported countries are characterised
by a stable macro-economic environment and
institutional and microeconomic structures that are
conducive to growth
• Low level of inflation and sound budgetary policies
• Regulatory framework that facilitates the setting-up and
growth of endogenous companies as well as FDI, a
business-friendly tax system, sound financial markets
• Look more closely at the link between factor returns and
productivity in order to ensure for example that wagesetting systems take local productivity differences
sufficiently into account
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Thank you for your attention!
20/07/2015