Employment effects of private investment initiatives in rural areas of southern Europe: A regional SAM approach

AbstractThe paper examines issues related to the employment effects of financial investmentincentives provided to SMEs in a lagging rural area in Southern Europe. A regional SAM is built to portray the structural characteristics of the local economy, followed by the estimation of regional economic impacts, distinguished into investment- and capacity-adjustment effects. Results indicate a moderate impact on regional employment, but capacity-adjustment effects seem substantial. Policy effectiveness is moderate when only jobs created on site are considered. However, if economy-wide jobs created are considered, gross cost per job is significantly lower, this consisting a more comprehensive measure for policy makers.Key words: Regional development policy; Social accounting matrices; Private investment-incentives; Job-creationIntroductionRural regions in the EU are currently undergoing significant economic and social changes, mostly induced by agricultural policy reform, international trade liberalization and the enhancement of the role of rural development policies. These changes are not expected to affect all EU rural areas in an equal manner. Rural areas in the 'centre' are characterized by higher population densities, greater proximity to major markets, low dependence on farming and a diversified economic base, and are expected to face a smoother adjustment process, as their economies and societies do not concentrate heavily on farming. On the other hand, rural areas of the 'periphery', characterised by severe remoteness, depopulation, infrastructural inadequacies and high dependence on agriculture, are expected to face a significant structural adjustment process (Psaltopoulos et al., 2006). Agricultural adjustment in these peripheral areas is expected to have a significant influence, as job opportunities in farming decline and increased dependence on welfare transfers creates more pressure in terms of the maintaining of a fragile social fabric. As already suggested in several fora, the answer to these problems lies in economic diversification and the promotion of an integrated development process, which can be facilitated through (amongst other programs) the creation and maintenance of viable Small and Medium Enterprises (SMEs), especially in the secondary and tertiary sectors.Regional development policy in Greece (a country dominated by remote rural areas, most of which still depend heavily on agriculture) aims at promoting regional employment, re-distributing and diversifying the regional economic base and enhancing competitiveness through the adoption of innovation and technology in all stages of production. Selective regional assistance to investment projects in the secondary and tertiary sectors has attempted to advance economic growth through supporting and sustaining the growth of regional non-farm sectors. Along these lines, the first coherent framework of regional investment-incentives to private enterprises was introduced by Development Law 1262/82, later amended and reoriented by Development Laws 1892/90 and 2234/90. These frameworks, funded by both the European Regional Development Fund (ERDF) and national funds, have provided SMEs with capital subsidies, interest rate subsidies on investment bank loans, tax waivers on profits and increased depreciation rates.Employment growth however, is undoubtedly the paramount aim of formal regional policies in Europe and internationally. Thus, it is not surprising that, the overwhelming majority of research efforts have focused on the employment effects of regional assistance instruments (Foley, 1992; Hart et al., 1993; Harris, 1991; Moore and Rhodes, 1973; Storey, 1990; Wren, 1987; 1989; 1994; 1996; 1998; Wren and Waterson, 1991). Within this framework, highly developed research has attempted to identify the job creation effects of regional assistance instruments. These effects are distinguished into "gross job-creation", defined as the number of work-places specifically created by a certain policy intervention without taking into account economy-wide effects of this policy on the regional economy, and "net job-creation" which takes into account displacement, i. …