Are European regional policies delivering?

Abstract

European policy makers may have asked too much from regional policies: to decrease inequalities\nbetween regions, to increase efficiency at the national and European levels and to decrease\ninequalities between countries. This paper argues that these policies face a trade-off between equity\nand efficiency at the spatial level. If the existence of positive localised spillovers and of returns to\nscale explain the phenomenon of self-sustaining agglomeration, then agglomeration must have\nsome positive efficiency effects. We also argue that because infrastructure financed by regional\npolicies have an impact on transaction costs and therefore on the location decision of firms, the\nlong-term effect of certain regional policies may be unexpected and unwelcome. Policies that\nfinance infrastructure to reduce transaction costs on goods between regions lead to more\nagglomeration but higher growth at the national level. We show that policies that reduce\nagglomeration (transfers, financing of transport infrastructure inside the poor regions) may then also\nreduce efficiency and growth. On the contrary, a policy that reduces the cost of innovation or\nincreases the diffusion of innovation reduces regional income inequality, agglomeration and\nincreases growth.

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