Bruno D. Castanheira works with the European Commission in securing the Union’s financial interests, having previously worked to improve implementation of Regional Policy. His research to stabilise European Economic Integration explored new approaches to Regional Policy and the role of financial instruments in Cohesion founded on behaviourist, industrial and financial economics. You can find him on twitter at @BrunoDuarte_, or connect with him on LinkedIn or his own blog.
Recent academic research presents mixed results when assessing Cohesion Policy.
Some researchers conclude the absence of productivity convergence between Member-States acceding after 2004 and other Member-States is due to institutional divergence (Niţoi & Pochea, 2016) while others find TFP growth in advanced regions is instead driven by human capital. (Männasoo, Hein, & Ruubel, 2018) Others still find that accessing the Single Market and Cohesion Policy funds led to some income convergence (Leonardi, 2006).
Research also finds that high value-added activities are concentrated in high-income EU regions. Industrial specialization seems to attract high value-added firms to Northern Europe while Southern Europe concentrates on labour-intensive industries, even while within-country regional dispersion is observed. Considering this economic geography, Cohesion Policy’s support to R&D (Cutrini, 2010) and place-based approach (Avdikos & Chardas, 2016) may exacerbate the regional divide – thus practitioners increasingly advocate for a Cohesion Policy combining place-based interventions and EU-wide “collaboration and engagement”. (Bachtler, Oliveira Martins, Wostner, & Zuber, 2017).
Nektarios Santorinios, in the centre, and Corina Creţu, on the left, during their visit of the new EU-funded desalination plant.
Single Market and Cohesion
As regional competitiveness is determined by the quality and quantity of human and physical capital, of technology and labour force made available to firms (Krugman & Elizondo, Trade policy and the Third World metropolis, 1996), uneven intra-EU labour mobility rates (0.023% of the Union’s population) (DG EMPL, 2018) and cross-border capital flows (12.66 % of GDP, including 0.026% of GDP in direct investment) (DG FISMA, 2018) imply deepening the Single Market may lead to regional divergence.
Different capital and labour mobility rates exacerbate the “rapid expansion of prices in tradable sectors” (or input-factor price convergence) observed in new entrants’ economies (IMF, 2014) (DG ECFIN, 2008). The resulting real exchange rate appreciation may lead to a middle-income trap if Member-States fail to evolve from factor-price to factor-supply strategies (Staehr, 2015). To escape the trap, firms in middle-income countries must upgrade their input to value chains from preproduction and postproduction services to high value-added services and technological frontier products. (WTO, 2017)
Using data for 2016, I find that in a sample of 11 Cohesion and 10 more developed Member-States, the ratio of employment in tradable manufacturing to services and the output volume to third countries grew faster than average (2016) on only two and five Cohesion Member-States respectively, more so as it seems led by high domestic demand for tradable services (Zeugner, 2013) (NWO, 2016). Conversely, the nine wealthiest EU Member-States are ranked likewise when domestic value-added of exports is observed (OECD, 2015), indicating a link between export value-added and economic growth (Banga, 2014) that is further enhanced by cross-border regional value chains (Fontagné & Santoni, 2018).
The Single Market may yet foster regional income convergence if it facilitates resource reallocation necessary to intraindustry exchanges (within the same industry) across regions that promotes income convergence (Kawecka-Wyrzykowska, 2009) (IMF European Dept., 2013) and business cycle synchronisation (Duval, Elmeskov, & Vogel, 2007) and contributes to stable monetary policy transmission (Bickram Rana, Cheng, & Chia, 2012).
Parties to the SEA thought as much and created Cohesion Policy. (Single European Act, 1987)
Marianne Thyssen, in the centre, and Raf De Backer, Personal Assistant to Marianne Thyssen, on the left.
Value chains and wealth
In yet unpublished work, I extend JRC’s Regional Benchmark (JRC, 2014) to include firm location theory (Davis & Weinstein, 1996) and new economic geography (Brülhart, 1998), and create a “Single Market for Cohesion” benchmark that outputs region-pairs’ economic distance. The modified benchmark is more effective in identifying between-country region-pairs within European Macro-Regions.
Region-pairs’ RIS3 priorities are then assessed considering Relative Technological Advantage and Technological Relatedness (Boschma, 2017) to identify cross-border industry links that foment both intraindustry integration and technological profile upgrade.
Concurrently, I compare drivers of intraindustry integration in the region-pair (including Economies of Scale, labour intensity of production, GERD, GFCF, and GVA in manufacturing) and plot each region in a Lerner Diagram (Leamer, 1995) to assess the pair’s position within diversification cones.
I then advance a two-prong intervention: a European inter-regional value chain link (EVC) and a regional development intervention.
The EVC creates a region-pair ecosystem comprising a cross-border value-chain in a Core sector (funded through project finance) and a learning-by-doing/knowledge-spillover initiative in a related, technologically upgraded Research sector (funded through grants). Investing Core sector firms reap benefits from relative comparative advantage while Host Research sector firms gain human and physical capital. An IP-barrier based on joint-ownership and bounded exclusive commercialisation incentivises Investing Research firms. Positive externalities accrue from product and qualification standardisation. A similar link (Clubes de Fornecedores , 2017) was established in Portugal where I presented this concept to the Ministry of Economy in 2015.
Each Investing and Host region also implements a regional development intervention to prevent nefarious integration outcomes caused by inadequate/exhausted input-factor supply or rapid input-factor price equalisation such as congestion and middle-income trap (Aiyar, Duval, Puy, Wu, & Zhang, 2013), and to embed agglomeration benefits, human and physical capital gains.
Challenges to European economic integration
Cross-regional industrial links are fertile ground for either income convergence or rapid depletion of competitive advantage. Regions should maximise gains of knowledge and physical capital transfer by implementing region-specific interventions that embed physical and human capital gains.
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Aiyar, S., Duval, R. A., Puy, D., Wu, Y., & Zhang, L. (2013). Growth Slowdowns and the Middle-Income Trap. Washington D.C.: International Monetary Fund.
Avdikos, V., & Chardas, A. (2016). European Union Cohesion Policy Post 2014: More (Place-Based and Conditional) Growth – Less Redistribution and Cohesion. Territory, Politics, Governance, 4(1), 97-117.
Bachtler, J., Oliveira Martins, J., Wostner, P., & Zuber, P. (2017). Towards Cohesion Policy 4.0: Structural Transformation and Inclusive Growth. Falmer Brighton, UK: Regional Studies Association.
Banga, R. (2014, June). Linking into Global Value Chains is not sufficient: do you Export Domestic Value Added contents? Journal of Economic Integration, 29(2), 267-297.
Bickram Rana, P., Cheng, T., & Chia, W.-M. (2012, December). Trade intensity and business cycle synchronisation: East Asia versus Europe. Journal of Asian Economics, 23(6), 701-706.
Boschma, R. (2017). Relatedness as driver of regional diversification: a research agenda. Regional Studies, 51(3), 351-364.
Brülhart, M. (1998, October). Economic Geography, Industry Location and Trade: The Evidence. The World Economy, 21.
Clubes de Fornecedores . (2017). Retrieved from IAPMEI: https://www.iapmei.pt/PRODUTOS-E-SERVICOS/Incentivos-Financiamento/Portugal-2020/Clube-de-Fornecedores.aspx
Cutrini, E. (2010). Specialization and Concentration from a Twofold Geographical Perspective: Evidence from Europe. Regional Studies, 44(3), 315-336.
Davis, D., & Weinstein, D. (1996, August). the National Bureau of Economic Research. Retrieved from Does Economic Geography Matter for International Specialization?: https://www.nber.org/papers/w5706
DG ECFIN. (2008). What drives inflation in the New EU Member States? Proceedings of the workshop held on 22 October 200. Directorate-General for Economic and Financial Affair. Luxembourg: EU Publications.
DG EMPL. (2018). 2017 annual report on intra-EU labour mobility. Luxembourg: EU Publications.
DG FISMA. (2018). SWD(2018)103 – Commission Staff Working Document on the Movement of Capital and the Freedom of Payments. Luxembourg: Publications Office.
Duval, R., Elmeskov, J., & Vogel, L. (2007). Structural Policies and Economic Resilience to Shocks. OECD. Paris: OECD iLibrary.
Fontagné, L., & Santoni, G. (2018, April). GVCs and the Endogenous Geography of RTAs. Retrieved from CEPII: https://www.cepii.fr/CEPII/en/publications/wp/abstract.asp?NoDoc=11314
IMF. (2014). Central and Eastern Europe: New Member States (NMS) Policy Forum. Washignton, D.C.: International Monetary Fund.
IMF European Dept. (2013). German-Central European Supply Chain-Cluster Report : Staff Report, First Background Note, Second Background Note, Third Background Note. Washington D.C.: IMF.
JRC. (2014). Benchmarking Regional Structure. Retrieved from Smart Specialisation Platform: https://s3platform.jrc.ec.europa.eu/regional-benchmarking
Kawecka-Wyrzykowska, E. (2009). Evolving pattern of intra-industry trade specialization of the new Member-States *NMS) of the EU: the case of automotive industry. Luxembourg: DG ECFIN.
Krugman, P. (1999, October). Was It All In Ohlin? Retrieved from https://web.mit.edu/krugman/www/ohlin.html
Krugman, P., & Elizondo, R. L. (1996). Trade policy and the Third World metropolis. Journal of Development Economics, 49, 137-150.
Leamer, E. (1995). The Heckscher-Ohlin Model in Theory and Practice. Retrieved from EconPapers: https://econpapers.repec.org/paper/fthprinfi/77.htm
Leonardi, R. (2006). Cohesion in the European Union. Regional Studies, 40(2), 155-166.
Männasoo, K., Hein, H., & Ruubel, R. (2018). The contributions of human capital, R&D spending and convergence to total factor productivity growth. Regional Studies.
Niţoi, M., & Pochea, M. M. (2016). Productivity clustering and growth in Central and Eastern Europe. Baltic Journal of Economics, 16(2), 132-151.
NWO. (2016). World Input-Output Database. Retrieved from https://www.wiod.org/database/seas16
OECD. (2015). International trade – Domestic value added in gross exports. Retrieved from OECD Data: https://www.oecd.org/sti/ind/tiva/CN_2015_UnitedStates.pdf
Single European Act. (1987). OJ L 169, p.1.
Staehr, K. (2015). Economic Growth and Convergence in the Baltic States: Caught in a Middle Income Trap? Joining the euro and then? How to ensure economic success after entering the common currency (p. 25). Vilnius: DG ECFIN.
WTO. (2017). Measuring and analyzing the Impact of GVCs on economic development. Washington D.C.: International Bank for Reconstruction and Development/The World Bank.
Zeugner, S. (2013). Tradable vs. Non-tradable: An empirical approach to the classification of sectors. Retrieved from https://www.zeugner.eu/studies/research/TradedShares_zeugner.pdf