EU REGIONAL POLICY REF: EUREGIONALPOL 2010 /FEB 23feb10 (1) Introduction Aim - to overcome regional disparities in the EU and support the integration process Structural.
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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 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 Simplification and decentralisation Clearer division of responsibilities Subsidiarity emphasised But, budget fixed at 0.46% of EU GDP 2007-13 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. 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 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 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) 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 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 RP may fail – EU RP often targets infrastructure to support SEM – Often unwanted & desired effects (tradeoff) – Thus, need to chose policy carefully 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 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 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 RP linked to integration policies Regional policy – effective? – sufficient? Further reading 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