What is regional development policy for and how does it work?

4th International Conference on Overcoming Regional Disparities “Implementing Regional Development Policies: What are the key factors for success?”Chişinǎu, 22 May 2014

William TompsonHead of the Urban Development ProgrammePublic Governance and Territorial Development Directorate OECD

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What is the problem?

Wide variation in growth performance before the crisis

Convergence vs Agglomeration

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What is the problem?

Tends to concentrate at all scales

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Source: Calculations based on the OECD Regional Database..

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What is the problem?

Concentration is increasing over time

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Source: Calculations based on the OECD Regional Database..

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What is the problem?

In most economies, a few big hubs account for a large share of aggregate growth. This implies:• Policy makers are right to be concerned about the

performance of the big regional hubs that are their main drivers of growth.

• Most growth still occurs outside the hubs. An exclusive focus on the hubs neglects the potential of policies that can help the great mass of regions.

• The notion of an “average region” is effectively meaningless, statistically and in policy terms.

What this means for policy

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What is the problem?

Overall, the crisis contributed to rising disparities across the OECD

Differential impact of the crisis

obs 2007-2010 2007-2008 2008-2009 2009-2010

urban (PU) 307 -0.67% -0.21% -3.91% 2.41%

intermediate 386 -0.86% 0.11% -3.75% 1.53%

PRC 301 -0.44% 0.84% -3.88% 2.09%

PRR 199 -1.22% -0.57% -4.30% 1.69%

GDP growth (2007-2010)

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What is the problem?

Labour mobility – constrained in many places – did not alter the picture much in the short term.

Differential impact of the crisis

2007-2010 2007-2008 2008-2009 2009-2010

urban (PU) 307 -1.10% -0.67% -4.38% 2.01%

intermediate 386 -1.18% -0.38% -4.18% 1.38%

PRC 301 -0.56% 0.66% -4.06% 2.06%

PRR 199 -1.27% -0.75% -4.38% 1.77%

GDP per capita growth (2007-2010)

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What is the problem?

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Gini idex of GDP per capita (TL2), 2011

Large inter-regional disparities

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What is the problem?

• Little evidence of convergence over time

No evidence of convergence over time

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0.14 Change in the inter-regional Gini coefficient, 1995-2011

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Why is this a problem?

Market forces and economy-wide policies do not guarantee first-best outcomes from the perspective of:1. Efficiency:

Spatially blind policies are not spatially neutral. Chronically under-performing regions are a drag on aggregate

growth.

2. Equity Citizens’ access to services and life chances should not depend

on where they are born. Not everyone can/will/should move!

3. Political reality: Failure to act can lead to costly remediation in the long run.

Agglomeration is beneficial, but other factors call for a differentiated approach…

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The solution: unlocking regions’potential

• Regions compete on absolute advantage. (Forget your Ricardo!)

• This a need to focus on immobile assets.

• Regional development strategy relatively immobile assets + policy co-ordination + multi-level governance.

• This is where much stakeholder engagement occurs: information revelation and balancing top-down leadership and bottom-up initiative.

Designing regional development strategies

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The solution

It’s not all about cohesion investments and shiny new infrastructure projects. Good regional development policy is nothing more nor less than good economic policy, without recourse to macroeconomic policy instruments. So think about:• Entrepreneurship, entry, regulation and competition.• Education, training and skills.• Innovation.• Active labour-market policies.

Don’t neglect the boring bits

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The pitfalls

• Too many goals dispersion of effort.

• Focus on current service delivery rather than development.

• Too much localism (often linked to the above!).

• Compensatory logic (often contributes to dispersion).

• Too little variety: often the result of following the (actual or perceived) priorities of the national government or donor.

• Too little risk.

• Failure to think seriously about spillovers.

Regional policy for national performance

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Why policy co-ordination?

Isolated sectoral actions have unintended outcomes.

Persistence of inequality

Infrastructure provision

Leaking by linking

Policyresponses

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Why policy co-ordination?

Isolated sectoral actions have unintended outcomes.

with labour mobility

Persistence of inequality

Policyresponses

Human capital formation

Brain drain

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Towards an integrated approach

Infrastructure provision

Human capital formation

Businessenvironment

Innovation

Regional growth and convergence

at the regional scale

Many countries are reforming in this direction, but implementation is still difficult.

Policyresponses

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Paradigm shift in regional policy

The “old new” OECD Paradigm: still a challengeTraditional

Regional Policies New Paradigm

ObjectivesBalancing economic performances by

temporary compensating for disparities

Tapping under-utilised regional potential for competitiveness

Strategies Sectoral approach Integrated development projects

Tools Subsidies and state aid Soft and hard infrastructures

Actors Central government Different levels of government

Unit of analysis Administrative regions Functional regions

Redistribution from leading to lagging regions

Building competitive regions by bringing together actors and targeting key local assets

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A word about structural funds

• Don’t focus on absorption capacity to the exclusion of all else.

• Money matters but sometimes less is more – harder choices can make for better decisions.

• Impact is greatest when investments take place in the context of a well-developed, cross-sectoral strategy.

• Provision of local amenities is nice – but it’s not a motor for development.

An instrument, not a substitute for policy

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A word about structural funds

Good practice doesn’t look like this…

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A word about structural funds

…Or this

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To sum up

• Provide infrastructure as part of an integrated regional approach.

• Invest in human capital.

• Emphasise innovation and R&D.

• Work at a scale and with a vision that makes sense for growth.

• Focus on integrated regional policies.

• Treat structural funds as a policy tool within an overall strategy – not as a policy in and of themselves.

OECD analysis points to a few broad lessons for policy:

Thank you for attention!

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