Does the EU need a regional policy?

Michael Dunford
University of Sussex
Does the EU need a regional policy?

• The case for regional policies

– the rationale of the ERDF
– theories of convergence and divergence
– empirical regional trajectories
• 2 Growth, welfare and cohesion: establishing
priorities
The case for regional policies (1) negotiating
net budget contributions

• creation of ERDF in 1975 to reduce UK's net budget

contribution
• regional policy as stake in intergovernmental
bargaining over net budget contributions
The case for regional policies: (2) monetary
integration

• monetary integration rules out exchange rate

adjustment, and
• leaves three adjustment mechanisms to deal with
asymmetric shocks
– migration
– downward wage flexibility
– solidarity/fiscal transfers
Monetary integration: (2A) how much mobility?

• geographical mobility is limited, and

• more equal development may be preferable to more
(mass) migration
– diseconomies and social/infrastructural costs of
over-concentration and depopulation
– loss of social capital
– mobilisation of under-employed
Monetary integration: (2B) why not downward
wage flexibility?

• commodification of labour (nature, and money)

generated the need for social protection (Polanyi,
1944)
• negative Keynesian-type impact on local residential
economy
Monetary integration: (2C) fiscal federalism

• 1977 MacDougall Report argued for fiscal federalism

to offset asymmetric shocks after loss of monetary
independence: EC to spend 2-2.5% of EC GDP in a
pre-federal stage; 5-7% in a federal small-public-
sector stage
• the 1989 Delors Report on EMU called for closer
coordination of fiscal policies to provide 'shock-
absorbers' and prevent political backlash against
EMU.
Monetary integration: (2D) national fiscal
policies
national fiscal stabilisation and insurance mean that regions of
equal wealth in the EU are net contributors in poor countries
(Brandenburg) yet net beneficiaries in rich countries (Lisbon)
The case for regional policies: (3) growth-
inflation trade-offs, market/co-ordination failure

• inter-regional transfers alter geography of aggregate

demand to mobilise under-used resources and permit
non-inflationary growth (Kaldor, 1970)
• market/co-ordination failure
The case for regional policies: (4) equity, growth
and welfare

1. suppose a community of 100 people have an income of €1

each. Total income = €100
2. suppose there is a possible economic change after which
1. 60 people double their incomes to €2 per head
2. 40 people see their income halved to €0.5 per head
3. Total income = €140
3. should the change take place?
4. it does not satisfy the Pareto criterion
5. a potential Pareto improvement
6. voting and irreversibility
The case for regional policies: (4A) equity,
cohesion and the Treaties

• in 1986 Single European Act sees the emergence of

economic and social cohesion as an objective.
• in 1988 reform of Structural Funds and doubling of
their size in 1987-93
• cohesion is equated with regional disparities in GDP
per head and unemployment rates, only affecting
inequalities between individuals or households
insofar as they coincide with spatial disparities
The case for regional policies: spatial and social
inequality

• average small-area incomes and consumption play a

not insignificant role (up to 25%) in explaining total
interpersonal income inequality (Kanbur and
Venables, 2005)
• tackling spatial inequality could therefore make an
important (cost-effective) contribution to combating
social inequality
• territorial justice does not necessarily imply social
justice
The case for regional policies: (5) adaptation
and restructuring of economic conditions and
governance structures and … economic growth

• geographical disparities are rarely a temporary but

result instead from persistent structural differences in
competitiveness and deep-seated institutional and
social constraints
• EU inter-regional transfers aim to accelerate the long-
term restructuring of less-developed areas
Italian
regional
trajectories
The case for regional policies: (6) legitimacy
and citizenship

• ERDF and Structural Fund projects are tangible and

visible for EU citizens. If filtered through Member
States the European dimension would be less visible.
In this sense these programmes play an important
role in the political construction of Europe.
• if spatial inequalities are aligned with religious, ethnic
or other divisions they may be dangerous
Theories of regional development:
convergence/catching-up versus divergence

• mainstream neo-classical theories anticipate

– unconditional long-run convergence, or
– conditional or club convergence
• competing theories identify the coexistence of
convergence (centrifugal) and divergence
(centripetal) tendencies
Modelling trends in development: economic
theories of catch-up

• neoclassical growth models: convergence stems from

closing technology gaps
• neoclassical regional growth models: mobility of
people and jobs
• neoclassical trade theories: factor price equalisation
Modelling trends in development: cumulative
causation, endogenous growth and divergence

• Myrdal's theory of cumulative causation, backwash

and spread effects
• Kaldor's theory of increasing returns and cumulative
causation
• economic geography and endogenous growth
models
Theories of regional growth: neoclassical and
cumulative causation
Agglomeration
and the new
economic
geography
Economic integration and core-periphery
systems
Concentrating
manufacturing
activities
Endogenous growth and twin peaks (Quah)
Empirical national and regional trajectories

• in the EU national convergence yet often

• regional divergence within Member States,
• offset by regional policies
• identifying need for appropriate counterfactual
UK regional
inequality
Growth, welfare and cohesion: establishing
priorities

• growth matters, and Europe's growth record is

dismal, especially in comparison with its Golden Age
(1950-73) record, and is poor relative to the USA
• the aim of EU policies should be to increase welfare
rather than growth per se. Growth is a means to an
end
Growth, welfare and cohesion: partitioning GDP
per head and GDP per head growth

• suppose one partitions GDP per head and GDP per head
growth into elements that depend on
– hourly productivity,
– annual hours worked, and
– the employment rate
Growth, welfare and cohesion: Europe's growth
is not substantially worse than that of the United
States

• in 1989-2002 EU11 productivity growth (1.89%)

exceeded US productivity growth (1.51% per year)
• the employment rate rose marginally in the EU11,
while in the US it declined slightly
• annual hours worked per person employed rose in
the US (0.2% per year), while they fell in the EU11 (-
0.38% per year)
Growth, welfare and cohesion: comparing
France and the United States

• French hourly productivity stood at 60% of the US

figure in 1960, 82% in 1973 and 111% in 2002.
• the average number of hours of work of French
people declined from 103%, to 98% and to 78% of
the US figure
Growth, welfare and cohesion: Europe versus
the US

• in terms of level the EU11 lies nearly 30 per cent

beneath the US, but
• 'a significant fraction of GDP in the US does not
improve welfare‘ (Gordon, 2002)
• the gap is also substantially due to the facts that
– a smaller percentage of the population works (94
per cent of the US level)
– Europeans spend fewer hours at work than their
US counterparts (82% of the US figure)
• the remaining productivity divide is substantially due
to retail and wholesale services
Growth, welfare and cohesion: Europe versus
the US

• differences employment rates and in working hours

reflect a combination of
• the preferences of Europeans for leisure rather than
work (welfare implications and sustainability) and
• insufficient employment growth, noting that
• differences in employment rates have SIGNIFICANT
regional and national dimensions
EU regional
disparities:
productivity
and
employment
rate variations
Growth, welfare and cohesion: comparing
Europe and the US

• Europe’s slow growth is not due to way the EU

spends its resources but to slow domestic demand
growth, while
• US growth is in part a result of
– Increased indebtedness of US households, and
– a massive net inflow of financial resources
Growth, welfare and cohesion: US growth and
the explosion of inequality

• of the total increase in US income in 1973-2000

– nearly 60% went to the top decile, though most of
the gains were made at the top of this group, so
that
– 28.8% of the total increase went to the top centile
Top percentile income share: US, UK and
France

Source: elaborated from Piketty and Saez, Atkinson and Salverda

Whither the European social model?

• ‘Europe has already experienced three historic

challenges …. Our challenge today is to see whether
Europe is capable of offering the world an alternative
to the American model’.[1]

• [1] Delors, J., Ce que la France doit faire, l’Europe ne

le fera pas [What France must do, Europe will not
do], Journal La Croix, 17/12/04
National
convergence
in the EU15
Italian regional inequality
Italy: Productivity convergence and employment
rate divergence
Italy: north
versus south
Russian regional inequalities
1980 1985 1990 1995 2000 2001
Moscow 149.2 134.7 160.1 406.8 534.7 485.1
Tyumen 148.0 155.4 155.9 244.7 282.3 308.5
Sakha 172.0 170.6 164.7 215.8 204.9 193.8
Komi 137.9 131.9 128.1 150.2 160.5 189.3
Murmansk 158.2 147.8 138.7 166.9 191.9 184.8
Kamchatka 198.1 192.0 186.5 214.0 175.0 172.9
Magadan 233.9 213.4 211.6 216.7 171.5 165.3
St Petersburg 116.0 108.4 115.1 151.5 149.0 153.9
Sakhalin 165.8 157.5 152.2 151.5 147.5 149.4
Krasnoyarsk 113.3 115.3 108.1 134.0 148.7 148.9
Penza 89.1 93.9 89.1 67.9 65.4 63.8
Adygeya 54.3 64.0 60.9
Vladimir 94.4 93.9 88.2 70.8 64.9 59.1
Chuvash 71.4 76.7 76.6 68.1 58.5 58.7
Chita 90.7 87.0 85.8 94.9 58.6 58.3
Karachaevo-Cherkessia 52.3 58.8 58.0
Dagestan 55.2 55.9 59.9 43.5 49.0 53.0
Marii El 77.8 80.8 79.3 58.4 49.7 46.6
Ivanovo 92.9 90.5 88.2 69.0 52.5 45.2
Ingushetia 58.0 56.6 77.9 26.2 28.1 44.7
Comparative development: a decomposition of
per capita GDP growth in the EU, and the US,
1951-2001
Year Real GDP Midyear Civilian
growth (in population employment
PPS) growth growth
1950-73
EU11 4.58 7.51 0.71
C4 6.23 7.26 0.39
UK 2.89 4.79 0.49
USA 3.86 14.37 1.49
1973-89
EU11 2.35 5.73 0.92
C4 2.66 7.31 0.27
UK 2.07 1.25 0.46
USA 2.99 9.66 1.88
1989-92
EU11 1.91 3.54 0.40
C4 2.88 2.95 1.62
UK 2.06 3.35 0.49
USA 2.76 11.62 1.04
Comparative development: a decomposition of
per capita GDP growth in the EU, and the US,
1951-2002
GDP per GDP per Annual hours Employment
head growth hour growth worked per rate growth
person
employed
growth
1950-73
EU11 3.83 4.51 -0.64 -0.04
C4 5.50 6.11 -0.28 -0.33
USA 2.42 2.98 -0.61 0.05
1973-89
EU11 1.78 2.26 -0.83 0.35
C4 1.93 2.96 -0.57 -0.46
USA 2.02 1.28 -0.18 0.92
1989-02
EU11 1.55 1.89 -0.38 0.04
C4 2.58 1.43 -0.17 1.33
USA 1.60 1.51 0.20 -0.12
Comparative development in the EU, Japan and
the USA in 2002 (share of the US figure)

GDP per head GDP per Employment rate Annual hours worked per
hour person employed

EU11 0.71 0.92 0.94 0.82

C4 0.55 0.65 0.89 0.96

UK 0.72 0.81 1.01 0.88

Japan 0.73 0.72 1.07 0.95

US: average income of tax units

Source: Piketty and Saez

Top decile income share: US. UK and France

Source: elaborated from Piketty and Saez, Atkinson and Salverda

Top 0.1 percentile income share: US, UK and
France

Source: elaborated from Piketty and Saez, Atkinson and Salverda

Gini coefficients