Economic Issues of Southern

European Regions:

Functions and Territorial Structure

Ugo Fratesi

EDULOG International Conference

Economic development in Southern European

Regions: Policies and higher education

25th and 26th May 2017, Porto, Portugal

Ugo Fratesi

The need of regional upgrading

Regional upgrading concept in the global value chain

approach: (Gereffi, Humprey and Sturgeon, 2005)

• Technological upgrading

• Functional upgrading

Structural upgrading considered in the literature as

fundamental for the possibility of middle and high income

regions and countries to thrive in the global economy.

Fast globalization processes have significantly affected

European regions, affecting them with new challenges

(Capello et al. 2011).

2

Ugo Fratesi

Introduction: four underperforming

European countries

3

0

50

100

150

200

250

300

Luxe

mb

ou

rg

Au

stri

a

Ire

lan

d

Net

her

lan

ds

Swed

en

De

nm

ark

Ge

rma

ny

Be

lgiu

m

Fin

lan

d

Fran

ce

Un

ite

d K

ingd

om

Ital

y

Eu

rop

ean

Un

ion

Spa

in

Cyp

rus

Ma

lta

Slo

ven

ia

Cze

ch R

ep

ub

lic

Gre

ece

Slo

vaki

a

Po

rtu

gal

Est

on

ia

Lith

ua

nia

Po

lan

d

Hu

ng

ary

Latv

ia

Cro

atia

Ro

man

ia

Bu

lgar

ia

GDP per person in PPP as a % of EU 28 mean- year 2012

Ugo Fratesi

Introduction: four underperforming

European countries (2)

Real GDP (2010 prices)

4

Source of data: Eurostat

50

60

70

80

90

100

110

120

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Greece

Spain

Italy

Portugal

Rest of EU15

Ugo Fratesi

Introduction: four underperforming

European countries (2)

Real GDP (2010 prices)

5

Source of data: Eurostat

50

60

70

80

90

100

110

120

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Greece

Spain

Italy

Portugal

Rest of EU15

Ugo Fratesi

Total real GDP growth (%)

2008-2013

<-20

-20 - -9

-9 - -5

-5 - -2

-2 - 0

0 - 2

2 - 5

5 - 9

> 9

6Countries are in

relative decline but

regional differences

still exist

Source of data: Eurostat

Ugo Fratesi0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real labour productivity per hour worked (EU27=100)

EL Greece

ES Spain

IT Italy

PT Portugal

Weak economies in terms of

productivity

The weakness of Southern European countries and their

regions has been linked to their low levels of productivity

This is a long-standing issue, started well before the crisis

7

Source of data: Eurostat

Ugo Fratesi

Disentangling the effects of

productivity and employment growth

Relative decline

of GVA pp

Despite good

employment

performance

Due to very bad

productivity

performance

GVA per person as a % of EU27

1995 2001 2006

Old North 135.3 134.5 133.5

Old South non obj1 122.9 120.3 111.5

Old South obj1 66.4 67.3 67.5

EU27* 100.0 100.0 100.0

employment rate as a % of EU27

1995 2001 2006

Old North 101.9 104.3 102.8

Old South non obj1 100.3 104.9 107.3

Old South obj1 81.9 84.3 87.6

EU27* 100.0 100.0 100.0

GVA per employee as a % of EU27

1995 2001 2006

Old North 132.8 128.9 129.9

Old South non obj1 122.6 114.7 103.9

Old South obj1 81.1 79.8 77.1

EU27* 100.0 100.0 100.0

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Ugo Fratesi

At regional level, Southern European

Regions are characterized by specific patterns

9

1.98

1.985

1.99

1.995

2

2.005

2.01

2.015

2.02

1.985 1.99 1.995 2 2.005 2.01 2.015

Virtuous cycleRestructuring

Dropping out

Relative declineIndustrial conservatism

Economic take-off

Relative

employment

growth

Relative

productivity

growth

Ugo Fratesi

EL11

EL12

EL13

EL14

EL21

EL22

EL23

EL24

EL25

EL30

EL41

EL42

EL43ES11

ES12

ES13

ES21

ES22

ES23ES24

ES30

ES41

ES42

ES43

ES51

ES52

ES53

ES61

ES62

ITC1

ITC2

ITC3ITC4

ITF1ITF2

ITF3

ITF4

ITF5

ITF6

ITG1ITG2

ITH1ITH2

ITH3

ITH4

ITH5

ITI1

ITI2

ITI3

ITI4

PT11PT15

PT16PT17

PT18

1.98

1.985

1.99

1.995

2

2.005

2.01

2.015

2.02

1.985 1.99 1.995 2 2.005 2.01 2.015

New12

North EU15

South_EU

Virtuous cycleRestructuring

Dropping out

Relative declineIndustrial conservatism

Economic take-off

At regional level, Southern European

Regions are characterized by specific patterns

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Relative

productivity

growth

Relative

employment

growth

Ugo Fratesi

How to improve productivity

Three possible strategies for the improvement of regional

productivity (Affuso et al., 2011)

1. increasing productivity through innovation

2. reconverting the regional sectoral structure

3. reconverting to higher phases of the production

process

Each of them has its difficulties

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Ugo Fratesi

Southern European Regions need to

upgrade their economies

The role of regions in the increasingly fragmented global

value chain networks is an important determinant of their

development levels (Coe and Yeung 2015).

Southern peripheral European regions squeezed between

core European regions and competitors from emerging

countries.

For peripheral regions of Southern European Countries,

upgrading towards higher functions is no longer needed to

converge towards richest regions,

but to avoid decline

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Ugo Fratesi

Measuring functional upgrading

There is no single way to measure functional upgrading.

Here the approach uses the professions as coming from

European Labour Force Survey (ISCO classifications).

Professions (ISCO codes) linked with high-value functions:

• 11 Legislators and senior officials

• 12 Corporate managers

• 13 Managers of small enterprises

• 21 Physical, mathematical and engineering science

professionals

• 231 College, university and higher education teaching

professionals

• 241 Business professionals

• 245 Writers and creative or performing artists

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Ugo Fratesi

High-value added in Southern

European Regions are less diffused

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ISCO

denominations

Legislator

s and

senior

officials

Corporate

managers

Managers

of small

enterprise

s

Physical,

mathemati

cal and

engineerin

g science

profession

als

College,

university

and higher

education

teaching

profession

als

Business

profession

als

Writers

and

creative or

performin

g artists

ISCO codes 11 12 13 21 231 241 245

Old North 0.51 5.77 3.31 3.37 0.52 1.40 0.63

Old South non

obj1 0.69 2.50 3.58 1.65 0.39 0.66 0.61

Old South obj1 0.46 1.44 7.47 1.27 0.34 0.60 0.27

New 12 0.47 3.32 2.98 1.94 0.36 1.59 0.41

EU mean 0.51 4.42 3.86 2.66 0.45 1.25 0.54

sig *** *** *** *** *** *** ***

F 25.1625 188.5864 75.5542 39.1205 32.5722 64.3482 49.9712

Source of data: Eurostat

Ugo Fratesi

Functions affect regional growth

Panel regressions of regional growth in southern European

Regions, Nuts2 level, years 1996-2010 (3-years

averages), time and country dummies included

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Dependent variable: (1) (2) (3) (4) (5) (6)

Regional real GDP growth

Income per capita -345.5*** -344.8***

-365.2*** -606.3*** -593.8***

(99.22) (94.28)

(117.1) (119.6) (122.9)

High value functions

61.55*** 61.87** 47.65** 48.43**

(20.23) (23.35) (20.10) (19.81)

Human resources in science and technology (core definition)

0.248* 0.339** 0.332**

(0.148) (0.153) (0.165)

Education

0.108* 0.0971

(0.0609) (0.0620)

Constant 9.134*** 8.025*** 1.224*** 5.716*** 6.188** 7.295**

(1.911) (1.773) (0.413) (2.072) (2.733) (2.760)

Time and country dummies significant significant significant significant significant significant

Observations 290 290 290 277 199 199

R-squared 0.682 0.691 0.664 0.700 0.810 0.805

Number of groups 58 58 58 58 58 58

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Ugo Fratesi

The upgrading process and its

catalysts

Source: Fonseca and Fratesi (2017)

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Ugo Fratesi

What regional characteristics?

A definition of territorial capital

Source: Camagni (2009)

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Riv

alry

(lo

w)

(h

igh

) Private

goods

c i f

Private fixed capital stock

Pecuniary externalities

Toll goods

Relational private services operating on:

- External linkages for firms

- Transfer of R&D results

Human capital

Pecuniary externalities

Club goods,

impure

public goods

b h e

Proprietary networks

Collective goods:

-landscape

- cultural heritage

Cooperation networks

Governance on land and cultural resources

Relational capital

Public goods

a g d

Resources:

- Natural

- Cultural (punctual)

Social overhead capital:

infrastructure

Agglomeration and district economies

Agencies for R&D transcoding

Receptivity enhancing tools

Connectivity

Social capital:

- institutions

- behavioural modes, values

trust, reputation

Tangible goods (hard) Mixed goods (hard + soft) Intangible goods

(soft) Materiality

(high) (low)

Ugo Fratesi

Territorial capital in Southern

European Regions

18

-2

-1.5

-1

-0.5

0

0.5

Relational private services

Human capital

Relational capital (missing data)

Behavioural modes

Population density

Accessibility

Collective goods

Private capital

South EU15 Obj1

South EU15 not obj1

Rest of EU15

hard

soft

intangibletangible

hard

soft

intangibletangible

Ugo Fratesi

Conclusions

Macroeconomic issues are very relevant for Southern

European Regions, and sometimes a burden

(e.g. real effective exchange rates, public finances, etc.)

Yet, regional supply-side aspects are also very important,

and long standing.

Among them the inability to grow in productivity as the rest of

advanced countries

Well before the crisis, economic growth in southern

European regions was led by employment growth

(with scarce productivity increases)

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Ugo Fratesi

Conclusions (2)

A weak economic structure is more vulnerable to external

competition, and Southern European Regions are weak

because they are specialized in low-value added

functions and did not upgrade them

Among Southern European regions, those with relatively

higher functions have outperformed the others.

The economic structure of regions is a catalyst of upgrading

processes

But in terms of territorial capital, Southern European Regions

are less endowed in almost all assets

(and this is worth especially for the poorest ones)

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Ugo Fratesi

Implications for policies

Ongoing research is showing that territorial capital also acts

as catalyst of policy effectiveness:

• regional growth benefits more from policies when there

are complementary territorial capital assets in place;

• regional policies which invest in complementary

territorial capital assets are more effective than policies

concentrating on assets already present (where there are

decreasing returns)

--> The system of territorial capital has to be balanced

Can we relinquish structural policies in Southern European

Regions?

• No, even if they pay off only in the long run

• and attention has to be paid to complementary assets

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Ugo Fratesi

Thank you for your attention

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