# Economic and social cohesion in the European Union: the impact of Member States’ own policies

Bernard Henri Nicot, Fiona Wishlade, Laurent Davezies, Douglas Yuill, Sandra Taylor, Rémy Prud'Homme

► To cite this version:

Bernard Henri Nicot, Fiona Wishlade, Laurent Davezies, Douglas Yuill, Sandra Taylor, et al. Eco-
nomic and social cohesion in the European Union: the impact of Member States’ own policies. EPRC
(F. Wishlade, D. Yull, S. Taylor) et L’OEIL (L. Davezies, B.H. Nicot, R. Prud’homme), ” Economic
and social cohesion in the European Union: the impact of Member State’s own policies ”, Regional De-
velopment Studies n°29, Office for Official Publications of the European Communities, Luxembourg,
1998, 253p., 29, Office for Official Publications of the European Communities, 253 pp, 1998, Regional
development studies, 9282740390. hal-01138700

HAL Id: hal-01138700

https://hal.science/hal-01138700

Submitted on 3 Apr 2015

HAL is a multi-disciplinary open access
archive for the deposit and dissemination of sci-
entific research documents, whether they are pub-
lished or not. The documents may come from
teaching and research institutions in France or
abroad, or from public or private research centers.

L'archive ouverte pluridisciplinaire HAL, est
destinée au dépôt et à la diffusion de documents
scientifiques de niveau recherche, publiés ou non,
émanant des établissements d'enseignement et de
recherche français ou étrangers, des laboratoires
publics ou privés.

Public Domain
<figure><img src="image_1.png" /></figure>

European Union

Regional policy and cohesion

Regional development studies

# Economic and social cohesion
in the European Union:
the impact of Member States'
own policies

<figure><img src="image_2.png" /></figure>

<figure><img src="image_3.png" /></figure>

<figure><img src="image_4.png" /></figure>

European Commission
<figure><img src="image_5.png" /></figure>
# Economic and social cohesion in the European Union: the impact of Member States' own policies
01 — Demographic evolution through time in European regions (demeter 2015)

02 — Socioeconomic situation and development of the regions in the neighbouring countries of the Community in Central and Eastern Europe

03 — Les politiques régionales dans l'opinion publique

04 — Urbanization and the functions of cities in the European Community

05 — The economic and social impact of reductions in defence spending and military forces on the regions of the Community

06 — New location factors for mobile investment in Europe — Final report

07 — Trade and foreign investment in the Community's regions: the impact of economic reform in Central and Eastern Europe

08 — Estudio prospectivo de las regiones atlánticas — Europa 2000
Study of prospects in the Atlantic regions — Europe 2000
Étude prospective des régions atlantiques — Europe 2000
Estudo prospectivo das regiões atlânticas — Europa 2000

09 — Financial engineering techniques in regions covered by Objectives 1,2 and 5b of the Community regional policies

10 — Interregional and cross-border cooperation in Europe

11 — Estudio prospectivo de las regiones del Mediterráneo Oeste
Évolution prospective des régions de la Méditerranée-Ouest
Evoluzione delle prospettive delle regioni del Mediterraneo occidentale

12 — Valeur ajoutée et ingénierie du développement local

13 — The Nordic countries — what impact on planning and development in the Union?

14 — Development prospects of the central Mediterranean regions (Mezzogiorno-Greece)

15 — The spatial consequences of the integration of the new German Länder into the Community

16 — The impact of the development of the countries of Central and Eastern Europe on the Community territory

17 — Étude prospective des régions de l'arc alpin et périalpin
Studio delle prospettive delle regioni dell'arco alpino e perialpino

18 — The prospective development of the northern seaboard

19 — L'impact sur le développement régional et l'aménagement de l'espace communautaire des pays du sud et de l'est méditerranéen (PSEM)

20 — Evolución prospectiva de las regiones interiores (y de los espacios rurales de baja densidad de población en la Comunidad)
Évolution prospective des régions intérieures (et des espaces ruraux de faible densité de population de la Communauté)

21 — The regional impact of the Channel Tunnel throughout the Community

22 — Prospects for the development of the central and capital cities and regions

23 — La notoriété des politiques régionales en Europe

24 — Cohesion and the development challenge facing the lagging regions

25 — In den Regionen für die Regionen Europas — Über die Aneignung eines neuen gewerkschaftlichen Arbeitsfeldes
At regional level on behalf of Europe's regions — Developing a new field of trade union activity
Agir dans les régions pour l'Europe des régions — Un nouveau champ d'activités syndicales

26 — The impact of structural policies on economic and social cohesion in the Union 1989-99
Die Auswirkungen der Strukturpolitik auf die wirtschaftliche und soziale Kohäsion in der Union 1989–1999
L'impact des politiques structurelles sur la cohésion économique et sociale de l'Union — 1989-1999

27 — Community involvement in urban regeneration: added value and changing values

28 — The EU compendium of spatial planning systems and policies

These documents can be obtained in the language of the relevant country from the addresses given at the end of the brochure. For further information on other language versions, please contact:
European Commission — DG XVI/F/2 — Rue de la Loi 200, B-1049 Brussels — Fax (32-2) 296 60 03

A great deal of additional information on the European Union is available on the Internet. It can be accessed through the Europa server (http://europa.eu.int) and the Inforegio Website (http://inforegio.cec.eu.int).

Cataloguing data can be found at the end of this publication

Luxembourg: Office for Official Publications of the European Communities, 1998

ISBN 92-827-4039-0

© European Communities, 1998

Reproduction is authorized provided the source is acknowledged

Printed in Italy
Table of contents

<table><tr><td>ACKNOWLEDGEMENTS</td><td>v</td></tr><tr><td>ABSTRACT</td><td>vii</td></tr><tr><td>1. Introduction</td><td>1</td></tr><tr><td>1.1 Research Questions</td><td>1</td></tr><tr><td>1.2 Country Coverage</td><td>1</td></tr><tr><td>1.3 Relative Policy Weightings</td><td>2</td></tr><tr><td>1.4 Concluding Points</td><td>4</td></tr><tr><td>2. Member States' Regional Policies</td><td>7</td></tr><tr><td>2.1 The Objectives of Member States' Regional Policies</td><td>7</td></tr><tr><td>2.1.1 The "Cohesion" Countries</td><td>8</td></tr><tr><td>2.1.2 Germany and Italy</td><td>10</td></tr><tr><td>2.1.3 The "Northern European" Member States</td><td>11</td></tr><tr><td>2.1.4 The Nordic Member States</td><td>14</td></tr><tr><td>2.2 The Impact of Regional Policy</td><td>15</td></tr><tr><td>2.2.1 The Regional Distribution of Expenditure</td><td>15</td></tr><tr><td>2.2.1.1 Regional Incentive Expenditure Trends</td><td>16</td></tr><tr><td>2.2.1.2 The Scale of Regional Incentive Expenditure</td><td>17</td></tr><tr><td>2.2.1.3 The Intensity of Regional Policy Expenditure</td><td>19</td></tr><tr><td>2.2.2 The Effect of Regional Policy</td><td>22</td></tr><tr><td>2.3 Concluding Points</td><td>24</td></tr><tr><td>3. Other Spatial Policies Operated by the Member States</td><td>27</td></tr><tr><td>3.1 The Objectives of Member States' Other Spatial Policies</td><td>27</td></tr><tr><td>3.1.1 Urban Policy</td><td>28</td></tr><tr><td>3.1.2 Rural Policy</td><td>30</td></tr><tr><td>3.1.3 Policies for "Crisis" Areas</td><td>32</td></tr><tr><td>3.1.4 Policies for Special Status Regions</td><td>34</td></tr><tr><td>3.2 The Impact of Member States' Other Spatial Policies</td><td>36</td></tr><tr><td>3.2.1 The Regional Distribution of Expenditure</td><td>36</td></tr><tr><td>3.2.2 The Effect of Other Spatial Policies</td><td>38</td></tr><tr><td>3.3 Concluding Points</td><td>41</td></tr></table>
<table><tr><td>4. Horizontal Policies with Important Regional Impacts</td><td>43</td></tr><tr><td>4.1 Policies to Promote Competitiveness</td><td>43</td></tr><tr><td>4.1.1 RTD and Innovation Policies in Context</td><td>44</td></tr><tr><td>4.1.2 The Objectives of R&D and Innovation Policies</td><td>45</td></tr><tr><td>4.1.2.1 The Cohesion Countries</td><td>45</td></tr><tr><td>4.1.2.2 Germany and Italy</td><td>47</td></tr><tr><td>4.1.2.3 The "Northern European" Member States</td><td>49</td></tr><tr><td>4.1.3 The Regional Impact of Competitiveness Policies</td><td>52</td></tr><tr><td>4.1.3.1 The Regional Distribution of Expenditure</td><td>53</td></tr><tr><td>4.1.3.2 The Regional Effects of Competitiveness Policies</td><td>63</td></tr><tr><td>4.2 Employment Policies</td><td>65</td></tr><tr><td>4.2.1 Job Creation or Job Diversion?</td><td>67</td></tr><tr><td>4.2.2 Employment Policy and Cohesion</td><td>69</td></tr><tr><td>4.2.3 Summary of Employment Policies in Member States</td><td>69</td></tr><tr><td>4.2.3.1 Education and Training</td><td>69</td></tr><tr><td>4.2.3.2 The Employment Intensity of Production</td><td>70</td></tr><tr><td>4.2.3.3 Developing Initiatives at the Local Level</td><td>72</td></tr><tr><td>4.2.3.4 Reducing Non-Wage Labour Costs</td><td>74</td></tr><tr><td>4.2.3.5 Improving Effectiveness of Labour Market Policy</td><td>75</td></tr><tr><td>4.2.3.6 Helping Those Hard-Hit by Unemployment</td><td>76</td></tr><tr><td>4.3 Concluding Points</td><td>77</td></tr><tr><td>5. Interregional Transfers from Central Government Budgets</td><td>81</td></tr><tr><td>5.1 Introduction</td><td>81</td></tr><tr><td>5.2 A Simple Model of Budget-Induced Interregional Transfers</td><td>83</td></tr><tr><td>5.3 Methodology</td><td>84</td></tr><tr><td>5.3.1 Conceptual and Statistical Difficulties</td><td>84</td></tr><tr><td>5.3.2 Budget Breakdown</td><td>85</td></tr><tr><td>5.3.3 Regional Allocation Procedure</td><td>86</td></tr><tr><td>5.3.4 Summing Procedure</td><td>87</td></tr><tr><td>5.3.5 Flow Approach and Benefit Approach</td><td>88</td></tr><tr><td>5.3.6 Treatment of Debt-Related Items</td><td>88</td></tr><tr><td>5.4 Main Findings</td><td>89</td></tr><tr><td>5.4.1 The Concentration of the Results</td><td>89</td></tr><tr><td>5.4.2 Budget-Induced Interregional Transfers are Large</td><td>91</td></tr><tr><td>5.4.3 Budget-Induced Interregional Transfers are Related to GDP</td><td>97</td></tr><tr><td>5.4.4 Equal Regions are not Treated Equally</td><td>97</td></tr><tr><td>5.4.5 Additional Confirmation in the Cases of France and the UK</td><td>100</td></tr><tr><td>5.5 Concluding Points - Implications of the Findings</td><td>101</td></tr><tr><td>5.5.1 A New Ranking of the Regional Economic Situations in Europe</td><td>102</td></tr><tr><td>5.5.2 An Alternative Regional Development Strategy in the Poorest Regions</td><td>102</td></tr><tr><td>5.5.3 The Impact of Non-Regional Policy Changes on Interregional Cohesion</td><td>103</td></tr><tr><td>6. Conclusions</td><td>109</td></tr><tr><td>6.1 Main Findings</td><td>109</td></tr><tr><td>6.2 Outstanding Issues</td><td>110</td></tr><tr><td>6.3 Policy Implications</td><td>111</td></tr><tr><td>BIBLIOGRAPHY</td><td>113</td></tr><tr><td>ANNEX I</td><td>119</td></tr><tr><td>ANNEX II</td><td>179</td></tr></table>
Acknowledgements

The research on which this report is based is divided into two broad areas: research on proactive policies pursued by government which have either a regional focus or regional implications; and research on the largely automatic interregional transfers which result from general public expenditures and central government allocations to subnational authorities.

The former area of research was directed by the European Policies Research Centre (EPRC) at the University of Strathclyde and relied heavily on the country expertise of colleagues within EPRC: John Bachtler, Ross Brown, Ruth Downes, Moira Lowe, Geraldine McBride, John Macquarrie, Rona Michie and Patricia Noble. We are extremely grateful to them for their input into the project. We would also like to acknowledge the important contributions of Helene Vignolles (University of Paris XII, France) and of Terry Ward (Alphametrics, Cambridge). Terry Ward wrote the overview of employment policies (Section 4.2).

The latter area of research was directed by the Laboratoire d'Observation de l'Economie et des Institutions Locales (L'OEIL) of the University of Paris XII. The research was based on detailed information provided by research teams in seven Member States:

France: Laurent Davezies, B.H. Nicot, Rémy Prud'homme, L'OEIL, University of Paris XII.

Germany: Rüdiger Budde, Heinz Schrumpf, RWI, Essen.

Italy: Riccardo Cappellin, Gianfranco Viesti, Gugliemo Wolleb, CSE - Centro per gli Studi Economici, Milan.

Portugal: Valadares Tavares, CEPI, Universidade Catolica Portuguesa, Lisbon.

Spain: Juan Cuadrado Roura, University of Alcalá.

Sweden: Peter Hugoson, University of Jonkoping.

U.K.: Sandra Taylor, Fiona Wishlade, Douglas Yuill, EPRC, University of Strathclyde.

We would like to express our sincere gratitude to these researchers for their painstaking identification of information sources and budgetary breakdowns and for their enthusiastic collaboration in what was a major task of data generation.

Although the research for the project can be viewed as two distinct entities, the outcome has been very much a joint collaboration between EPRC and L'OEIL. Certainly, as authors of the report, we are delighted to accept a common responsibility for the report's findings.
Finally we would like to thank Dr Ronnie Hall and Daniel Mouqué of the European Commission (DG XVI) for their
helpful comments on earlier drafts and for their general support and encouragement throughout the project. That
having been said, responsibility for the report remains our own.

EPRC

Fiona Wishlade

Douglas Yuill

Sandra Taylor

L'OEIL

Laurent Davezies

B H Nicot

Rémy Prud'homme

October 1996
## 1. Introduction

This report presents the findings of research which has been undertaken on behalf of the European Commission into the impact of Member States' policies on economic and social cohesion in the European Union (EU).

The report obviously considers policies which have an explicit spatial dimension - including not only "classic" regional policy measures, but also policies that address specific issues such as rural problems, urban deprivation or unemployment blackspots. However, in expenditure terms, such spatially-oriented policies tend to be dwarfed by two other aspects of government activity which are likely to have regional implications: on the one hand, sectoral and horizontal policies that are pursued "proactively" (eg. R&D, employment, defence); and, on the other, the (mainly) automatic, interregional transfers resulting from general public expenditures and central government allocations to subnational authorities.

In considering these four areas of government activity (regional policy; other spatial policies; horizontal policies; and overall government expenditures), the key research questions are:

i. to what extent can policies which have the redress of regional disparities as their objective (ie. regional and other spatial policies) be shown to contribute to this end?

ii. to what extent can it be shown that horizontal or sectoral policies contribute to or undermine spatial policy spending and its objectives?

iii. at a global level, what is the spatial distribution of public spending and what is its role in reducing economic and social disparities?

These research questions concern, first, the proactive policies pursued by government, whether or not with spatial objectives in mind, and, second, the largely automatic interregional transfers that are the outcome of the differing spatial distribution of government taxation and spending. The next three chapters focus on the proactive policies of government. They consider, in turn, the regional impact of Member States' regional policies (Chapter 2), other spatial policies (Chapter 3) and selected horizontal policies (Chapter 4). Chapter 5 then reviews those budget-induced interregional transfers which result from government expenditure and taxation policies. A final chapter, Chapter 6, draws together the main findings of the report.

## 2. Member States' Regional Policies

The aim of this chapter is to provide an assessment of the impact of Member States' regional policies on economic and social cohesion. This is done by reviewing the objectives of regional policy in the different Member States and
the available evidence on the effects of policy, as shown by the regional distribution of national regional policy expenditure and by reviewing recent evaluation studies.

With respect to the objectives of Member States' regional policies (see Section 2.1), the chapter distinguishes between four broad groups of countries:

* the four Cohesion countries (Greece, Ireland, Portugal and Spain), where issues of economic development are the main preoccupation, but where underemployment and peripherality, and, especially in Spain, unemployment are also concerns.

* Germany and Italy, which are characterised by the dual nature of their economies. These countries display by far the widest internal disparities and expend by far the most on regional policy; both countries extend the focus of policy beyond the most underdeveloped regions and also operate regional policies in the disadvantaged parts of the more prosperous regions.

* the central and northern EU countries (Austria, Belgium, Denmark, France, Luxembourg, the Netherlands and the United Kingdom), where employment issues, especially related to industrial restructuring, tend to dominate. However, the nature of the regional problem in these countries is also characterised by its variety, complexity and susceptibility to change; recent years have seen the emergence of acute urban and rural problems, as well as issues associated with the restructuring of industries such as defence. Moreover, peripherality and rural depopulation are often also concerns. In addition, in some countries, there are special situations to address, notably Northern Ireland within the United Kingdom, and Corsica in France.

* the Nordic Member States (Finland and Sweden), where peripherality, climate and geography are the principal issues addressed by regional policy.

As far as regional policy objectives are concerned, the four Cohesion countries (and especially Greece, Ireland and Portugal) are characterised by the problem of implementing a regional development policy in the context of national economies which are themselves underdeveloped from an EU perspective. This creates tensions between efficiency-related issues and equity-based concerns, between short-term and longer-term considerations and between national prosperity and regional disparity - tensions which have resulted in significant shifts in priorities and changes in the relationship between national industrial development and regional policies over time. Moreover, these tensions reflect the wider picture at the EU level of the potential conflict between competitiveness and cohesion.

A feature of Germany and Italy is their extreme internal regional disparities; this has resulted in considerable policy emphasis on their most underdeveloped regions. In Germany (and in Italy until recently) separate policies are operated for such regions (the Mezzogiorno in Italy and the new Länder in Germany) in a range of policy areas, although regional policy is also among the instruments used.

In the "northern European" Member States, regional problems tend to comprise a range of concerns, though high levels of unemployment are generally at their core; in these countries regional policy tends to have a relatively low political profile. There are, however, marked differences between countries with respect to both the objectives and substance of policy; at one end of the spectrum is France with the broad concept of aménagement du territoire, while at the other comes the United Kingdom with a far narrower policy focus on regional industrial policy.

In the Nordic Member States the regional problems to be faced are different in both scale and type (sparsely-populated areas, harsh climates, distance from population centres etc); regional policy in these countries tends to be allocated a higher priority and to include a fairly broad range of policy measures.

With regard to the instruments of regional policy, the chapter highlights the considerable variety in policy approaches. In some countries, national regional policy is essentially comprised of financial incentives to firms investing in the problem regions: this is true of Belgium, Luxembourg and the United Kingdom, for example. In others, a range of non-spatial government policy measures are associated with the objectives of regional policy. In France and Finland, for example, regional development legislation makes this link explicit.
There are also considerable differences in the *institutional arrangements* for regional policy between countries. Among the federal or quasi federal states, the role of the subnational level is key. For example, in Belgium, policy is the responsibility of the regional governments; however, in Germany and Spain responsibility is divided between the national and regional governments according to competences defined in the constitution and partnership is a core component of policy delivery. In Austria, the organisation and competence for regional policy is not allocated constitutionally either to the federal government or to the Länder. In practice, there is an informal allocation both of legislative competence and of the administration of public activities affecting regional development between different bodies at federal, Land and local level. The remaining countries are organised along unitary lines, but there is frequently administrative devolution in the operation of regional policy. This is so, for instance, in France, where the préfets play an influential role in regional economic development policy and, more prosaically, in Great Britain where government regional offices are largely responsible for administering regional incentive policy.

As far as *regional policy expenditure* is concerned (see Section 2.2.1), the chapter focuses on regional grant ex-
penditure, in order to obtain comparable and regionally-disaggregated information. A number of points arise from
the discussion of the distribution of expenditure at both national and regional levels.

First, in respect of *expenditure trends*, regional capital grant expenditure (and, indeed, regional policy spending more generally) has been in decline in most countries over the 1989-93 period, with particularly significant falls in Italy and Spain; these trends reinforce longer-term developments, especially in the northern Member States where the decline in some countries since 1980 has been more than two-thirds. On the other hand, east Germany stands as an obvious exception to these general trends, with major regional development spending from 1990 onwards. Strikingly, some two-thirds of overall regional grant expenditure relates to east Germany and Italy, just under one-fifth to the Cohesion countries and some 15 percent to the remaining six EU12 countries.

Regarding the *scale* of regional grant spending, this is, in general, significantly higher in the four Cohesion countries than elsewhere in the Member States (except Luxembourg); though spending declined markedly in Spain and increased steeply in east Germany from 1990. However the position at the regional level is more varied. While the broad picture is for regions in the four Cohesion countries, in east Germany and in the Italian *Mezzogiorno* to appear towards the top end of the scale ranking - together with Northern Ireland - certain Spanish and Italian regions are found towards the lower reaches of the ranking. In similar vein, average *per capita* spending in a range of northern European regions (Wallonia, Saarland, Limburg, Wales) is broadly in line with the country averages of Spain and Italy.

When considering the *intensity* of policy, the key point to note is that this involves relating regional incentive spending to the population of those regions actually in receipt of support (the assisted areas). As a result, those countries and regions with only limited assisted area coverage move markedly up the rankings. Thus, the intensity of regional incentive spending in east Germany, Italy (prior to the demise of *Mezzogiorno* policy) and Luxembourg is significantly higher than in the four Cohesion countries, while the intensity of expenditure in Portugal and Spain is not dissimilar to that recorded in many northern Member States. A similarly varied pattern is found at the regional level, with the intensity of regional incentive spending in a number of northern regions exceeding, by some way, that found in many regions in the Cohesion countries.

Turning finally to the review of *evaluation studies* (see Section 2.2.2), in general these provide only limited information on the effectiveness of policy. Econometric exercises tend to be constrained by data availability, by the difficulty of establishing the counterfactual and by problems of determining causality, while survey-based research tends to have a quite specific focus - on a particular incentive or a particular region or a particular development process - which creates difficulties when attempts are made to generalise the results. At the EU level, these difficulties are compounded by the lack of EU-wide comparative data and the plurality of evaluation approaches used. Without good comparative information, the systematic and comprehensive appraisal of the relative effectiveness of national regional policies will remain elusive.

3. Other Spatial Policies Operated by the Member States

In this chapter, the focus is on those spatially-discriminating policies (other than regional policy) which operate in se-
lected Member States (France, Germany, Italy, Portugal, Spain and the United Kingdom). The review is concerned
with national government policies. However, it is important to note that, in some areas of spatial policy, subnational levels of government also play an important role; this is particularly true of urban policy. In Germany and Spain, for example, urban policy operates at the subnational level and is not the responsibility of the national government. Moreover, in other areas of spatial policy, EU policies are often important; in some countries, for instance, rural policy is essentially subsumed within EU policies operated under Objective 5b or within the LEADER Community Initiative - again this is true of Spain. Similarly, EU policies are also significant in the context of industrial crisis regions designated under KONVER, RENAVAL, RESIDER and so on.

The spatial policies of Member States identified in this study address a variety of objectives. For the purposes of this report these have been grouped into urban, rural, crisis area and special status area policies. The distinction between regional and other spatial policies is not always a clear one - this is especially so of countries like France which take a broader view of regional development policies within the context of aménagement du territoire and where there have been increasing moves to integrate spatial policies within a single framework. Nevertheless, there is a difference in emphasis between regional and other spatial policies; the essence of this lies primarily in the extent to which other spatial policies concern issues of social and political cohesion, rather than essentially economic development objectives. This is not to say that there is not always a mix of rationales and motivating factors underlying policy; however, the four categories of policy identified concern areas where the political dimension of policy tends to be central - certainly more so than is generally the case with regional policy.

As far as urban policy is concerned, the discussion in Section 3.1.1 concentrates mainly on the position in France and, especially, the United Kingdom where urban policy has been given a relatively high priority. Indeed, in the UK, the political imperatives arising from growing unrest in areas of extreme poverty and deprivation have seen urban policy expenditure rise to some four times that of the main British regional incentive (Regional Selective Assistance). In similar vein, national urban policy spending in France is broadly on a par with the sum expended on the range of aménagement du territoire policies (including measures for rural and "crisis" regions as well as regional policy support). These two country examples underline the significant social and environmental aspects of national urban policy; while economic development instruments are among the measures used, they are generally employed for social and political ends.

Elsewhere in the Member States, urban policy tends to be somewhat different in nature - a response to physical planning and environmental pressures rather than social unrest. Moreover, it is often the responsibility of sub-national levels of government rather than being a national policy initiative. On the other hand, the federal government in Germany can grant supplementary aid for urban measures where the investments serve to improve the conditions for growth in the economy as a whole or to equalise economic strength between the regions.

Regarding rural policy, the emphasis in Section 3.1.2 is very much on France where the speed of agricultural change in the post-war period and the stress placed on the rural way of life has resulted in the policy being accorded a high national political profile. Elsewhere, rural issues tend to be less politically-sensitive from a national perspective and, indeed, much of the policy impetus now comes from EU-level policies (in particular, Objective 5b and the LEADER Community Initiative). In general, the objectives of rural policy at the national level tend to reflect social priorities - in particular, the desirability of maintaining population settlements by sustaining standards of living and by assuring the provision of public services. While economic development instruments can play a role in achieving such objectives, the overall focus of policy is more on social than economic cohesion.

Policies for "crisis" areas have been a feature in many Member States since the 1980s, particularly in response to increasing problems of structural adjustment arising from job losses in the steel, shipbuilding and (most recently) defence industries (see Section 3.1.3). There is usually a clear economic development objective underlying such policies, reflecting the need to encourage alternative economic activities. However, the intensity of decline (and its spatial focus) is usually such that the policy response also incorporates significant social and political aspects. In the case study countries, examples of "crisis" area policies are provided for Germany, France, the United Kingdom and Italy, all of which have experienced major plant closures in narrowly-defined localities. Over time, such areas tend to be incorporated within designated problem regions.

Finally, policies for "special status" regions are considered in Section 3.1.4. In such regions - which include the new Länder in Germany, Corsica in France, Northern Ireland in the United Kingdom and (historically) the Mezzogiorno in Italy - the primary motivation of policy is to contribute to national political cohesion by reducing economic and social disparities. A feature of policies for special status regions is the sheer scale of the transfers involved, underlin-
ing the importance attached to national solidarity and political cohesion. The most striking illustration of this is the scale of transfers to the new Länder set alongside the volume of EU spending on the Structural Funds: the gross transfers to the new Länder for 1996 alone amount to 101 billion ECU; this compares with Structural Fund spending for the EU as whole of 64 billion over five years (1989-93).

As far as the *spatial distribution* of expenditure is concerned (see Section 3.2.1), comparative regional-level information has proven difficult to obtain. Even so, the evidence is that most spatially-discriminating policies tend to favour those areas in receipt of regional policy support. This is certainly true of policies for special status regions and it is also generally the case for most "crisis" areas. For rural and urban policy areas there may be less coincidence of policy boundaries with designated regional problem areas. That having been said, both policies are very clearly focused on economic and social cohesion in its wider sense; they aim to tackle the specific problems of urban and rural areas and, in so doing, to reduce sources of national discord.

Considering, finally, the *evaluation studies* reviewed in Section 3.2.2, the available evidence tends to suggest that current policy instruments are of limited impact. In particular, as regards urban policy, the evidence is that properly-led urban regeneration initiatives generate a large proportion of low quality temporary employment, ill-suited to the unemployed people within disadvantaged communities. This is a disappointing finding given the significant social component to urban policy objectives. A further, more positive finding, at least for regional policy, is the fact that the cost per job figures attached to many other spatial policies are generally higher than those found for standard regional incentives.

## 4. Horizontal Policies with Important Regional Impacts

The purpose of this chapter is to consider policies which have no *intended* spatial effects but which, nevertheless, have significant regional impacts. Unlike the next chapter which deals with the regional dimension of general government transfers, the focus of this chapter is on the *proactive* policies of government. Two particular policies are reviewed: policies to promote competitiveness (in effect, R&D-oriented policies) and employment policies.

As far as RTD and innovation policies are concerned, the chapter begins by providing appropriate *background context* (see Section 4.1.1). The point is made that R&D spending in the four Cohesion countries is significantly less than that found elsewhere in the EU Member States - whether measured in relation to GDP or to national population. That having been said, Ireland and Portugal were the only OECD countries in which both public and private expenditure on R&D increased between the periods 1985-9 and 1990-2, an indication perhaps of the stimulating effect of EU policies. With regard to the *regional* dimension of R&D policy, the emphasis within the Cohesion countries is clearly on issues of *national* competitiveness, scarcely surprising given the tensions noted in Chapter 2 between national prosperity and regional disparity.

In considering the objectives of R&D and innovation policies (see Section 4.1.2) the grouping of Germany and Italy together reflects the common regional features of their economies rather than any similarities in the R&D arena. Indeed, the two countries currently take quite different approaches to RTD in their problem regions. While in Germany a major effort is in train to try to establish an efficient research environment in the new Länder, in Italy there are now no separate measures for supporting RTD in the problem regions, following the demise of special intervention in the Mezzogiorno.

With respect to the "northern European" Member States, the focus is on the two case study countries: France and the United Kingdom. In terms of the emphasis placed on R&D expenditure (as a percentage of GDP or on a *per capita* basis), both countries are very much towards the top end of the EU Member State range, just behind Germany and Sweden (see Chart 4.1). As far as the *regional* dimension is concerned the focus, once more, is on *national* competitiveness. That having been said, examples are to hand in both countries of initiatives which aim to encourage greater participation in innovation in all regions. Moreover, in Northern Ireland, a distinct strategy and enhanced funding are available to stimulate RTD in the province.

Summing up the overall contextual position, it is clear that policies to promote RTD and innovation are generally operated with national policy objectives in mind. While there are some attempts to stimulate innovation in the prob-
lem regions, this is primarily in the form of encouraging technology transfer and the uptake of innovation rather than innovation *per se*. This broad picture is hardly surprising: research and development policymakers are understand- ably unlikely to be willing to jeopardise R&D policy objectives for the sake of promoting less viable projects in the problem regions.

Turning to consider the *regional distribution* of expenditures on R&D, the analysis in Section 4.1.3.1 is restricted to four countries for which relevant data is available: France, Italy, Spain and the United Kingdom. The focus is, first, on the regional-level distribution of *overall* R&D expenditure, distinguishing between the private sector, government and the higher education sector; and, secondly, on the regional-level distribution of so-called business enterprise sector expenditure on R&D (BERD) and the extent to which this is financed by *government*.

With regard to the former aspect - the regional distribution of overall R&D expenditure - a number of common themes apply across the four case study countries. Of perhaps most significance, R&D expenditure tends to be heavily concentrated in more prosperous regions. Thus, Paris (the Île de France region) accounts for 43 percent of all R&D expenditure in France, Piemonte and Lombardia for almost half private and State R&D expenditure in Italy, Madrid for 42 percent of total R&D expenditure in Spain and the South East for some 54 percent of all R&D ex- penditure in the United Kingdom.

The reverse side of this coin is that R&D expenditure in the poorest regions is generally very low. By way of example, in France the Limousin region accounts for less than 0.2 percent of the national R&D spend and, on a *per capita* basis has expenditure levels 20 times lower than in Paris. In similar vein, the eight regions of the *Mezzogiorno* in Italy account for only 8 percent of private and State R&D funding compared with 36 percent of the national popu- lation. The Spanish Objective 1 regions collectively account for 24 percent of the total R&D spend while contain- ing almost 60 percent of the national population. Lastly, in the UK, Northern Ireland represents just 0.7 percent of overall national R&D expenditure but holds 2.8 percent of the national population.

A final interesting point regarding the regional distribution of overall R&D expenditure concerns the distribution of pri- vate and public sector spending by region. While there is considerable variation between regions, there are a sig- nificant number of instances where relatively prosperous regions benefit particularly from public sector funding. An obvious example is Lazio which, on its own, receives over half of the State funding for Italian R&D. In Spain, too, over three-fifths of State R&D funding is channelled into Madrid.

Moving on to consider the regional distribution of government-funded BERD (business enterprise sector R&D) three general points can be made. The first is that there is a high degree of complementarity between government R&D funding and regional aid at the regional level. Prosperous regions are generally ineligible for regional support but ben- efit disproportionately from R&D funding; in contrast, poorer regions perform badly in terms of government R&D aid for business but generally do well with respect to regional assistance. Second, notwithstanding the general com- plementarity shown in Chart 4.5 to Chart 4.8, it is important to note the very different scales of R&D and regional spend by country. In general terms, R&D spending is far more significant than regional support in the prosperous Member States while regional aid is more important than government-funded BERD in many poorer Member States. Third, combining these two general points, it is the richest regions in the richest countries and the poorest regions in the poorest countries which benefit most from Member State R&D and regional aid in combination.

*Evaluation studies* on the regional effects of horizontal policies in general, and competitiveness policies in particular, are fairly limited, hampered by the lack of appropriate regional data and by the difficulties of disentangling the im- pact of what are often wide-ranging policies from other government policies (see Section 4.1.3.2). As a result, the focus of most studies is less on the regional effects of competitiveness policies and more on assessing the effec- tiveness of such policies in different geographical contexts. While it is difficult to generalise, a broad conclusion seems to be that competitiveness policies work less well in less-favoured regions.

Turning, finally, to consider *employment policies* (see Section 4.2), there is, in practice a serious lack of empirical evidence on the effects of most of the measures included in the employment programmes being followed by Mem- ber States. However, while the effect of present policies on employment growth is uncertain, particularly in terms of its scale, their impact on cohesion is less questionable. A common characteristic of most of the measures in operation or being planned is to reduce disparities in employment opportunities whether between individuals, social groups or regions. While most measures do not have a specific regional dimension, the very fact that many of them are aimed at the unemployed - and within this group at the most disadvantaged of those without work - is likely to
mean that they benefit regions with the most serious problems of unemployment and inadequate rates of job creation more than others, so tending to narrow regional disparities.

## 5. Interregional Transfers from Central Government Budgets

Public expenditure in the different Member States of the EU represents a significant proportion of the income of the countries concerned; on average, around a quarter of GNP in industrialised countries - more if social security is included. Government funds are generated from obligatory contributions across the regions of the countries concerned and are redistributed in expenditures across the regions. This process involves involuntary but significant interregional transfers. The question is whether this redistribution is in or out of line with the objectives of regional policy. In spite of its importance as a mechanism to promote cohesion, this issue has been understudied. This chapter presents the results of a research effort to assess these interregional transfer mechanisms in seven EU countries: France, Germany, Italy, Portugal, Spain, Sweden and the United Kingdom.

A starting point for the discussion of this issue is a simple model of budget-induced transfers (see Section 5.2). This shows that national budgets are likely to transfer large amounts of money from richer to poorer regions. According to the model, these transfers are expected to be larger in those countries where the size of the budget (relative to GDP) is larger, where the tax system is progressive, where the expenditure system is "equalising", and where interregional income disparities are greater.

Measuring interregional transfers induced by a national budget for a given country and a given year is a difficult exercise. The difficulties to be overcome are both conceptual and statistical (see Section 5.3). At a conceptual level, it is often unclear how a particular tax or a particular expenditure should be regionally allocated. Moreover, even if and when it is known how, in principle, to allocate a particular type of revenue or expenditure, there may well be statistical difficulties in practice. The methodology adopted in the present study involves three steps:

* first, detailed national budgets are established. These have to be (i) consolidated (ii) balanced (iii) recent (iv) executed and (v) broken down into as many items of revenue and expenditure as possible.

* second, to allow the regional allocation of these budgetary items, allocation criteria or "keys" are sought for each item. Regional allocation keys are chosen on the basis of their economic sense: the research methodology is guided by economic reasoning and by the theory of incidence in the selection of criteria

* third, for each region, the amounts estimated for each item of revenue and of expenditure are summed with a view to indicating how much each region has contributed (in revenues) to the budget and how much it has gained (in expenditures) from the budget.

While of itself simple, the methodology is complicated by two factors. One is that there is often more than one allocation key which may be considered appropriate to any given budgetary item. The procedure adopted in the study is to allocate these alternative regional keys on the basis of 101 randomly selected combinations and to study the distribution of the summed totals. If the distribution of numbers is sufficiently concentrated - that is, if the coefficient of dispersion is reasonably low - the conclusion is that the estimates converge and the median or average value of the distribution is retained. If, on the contrary, the distributions are extremely dispersed, then it is impossible to say much about the contributions to the budget and the gains from the budget for a given region.

A second complication arises from the distinction which can be drawn on the expenditure side between a "flow approach" - focusing on where expenditure flows in the first instance - and a "benefit approach", concentrating on where the ultimate beneficiaries of any given expenditure flow are located. Different allocation keys apply depending on whether a flow or benefit approach is being utilised. As a consequence, for any given region, two estimates of budgetary "gain" are produced: one based on the flow concept, the other on the benefit concept. In similar vein, two estimates of budget-induced transfers are produced for each region - "transfers (flow)" (ie. allocated expenditures on the flow concept minus budget contributions) and "transfers (benefits)" (ie. allocated expenditures on the benefit concept minus budget contributions). Neither estimate is "better" than the other: they are of equal interest, viewing the complex phenomenon of budget-induced interregional transfers from different angles.
The main findings from the application of the above methodology are presented in Section 5.4. They are:

* that there is indeed a concentration of results in practice, making it appropriate to utilise the mean results

* that budget-induced interregional transfers are large: irrespective of whether the "flow" or the "benefit" concept is used, it appears that the richer regions of the countries studied transfer significant sums to the poorer or problem regions through public funds

* that the transfers induced by government budgets are clearly related to the GDP per capita of regions: the richer is a region, relative to the national situation, the more its net contribution to the budget; in similar vein, the poorer is a region, the more it receives in transfers from the budget

* that equal regions from an EU perspective are not treated equally: national cohesion machines are unequal at the European level.

Out of these results, it is possible to suggest three broad implications for European regional policies (see Section 5.5). First, taking into account budget-induced transfers produces a new (different) representation of the relative economic situations of the regions of Europe - this point must be borne in mind when designating problem region maps at the EU level. Second, when considering pro-active spatial policies, it is important not to lose sight of the role of budget-induced transfers within countries, particularly in the less-developed Member States. The measurement of budget-induced transfers shows that some of the richest regions of these countries, though relatively poor at the European level, transfer large amounts of money to the rest of their countries. Third, regional policy must take into account the fact that changes in institutional or fiscal policies could have direct implications for the level of the flows of budget-induced transfers. For example, fiscal decentralisation, which is in progress in many countries, has a direct implication for the volume of public funds managed at the national level and, related, for the intensity of the interregional redistribution of income. In another field, the EU convergence criteria which aim to reduce the public deficit (ie. public expenditures) have a direct impact on the scale of interregional transfers. Any harmonisation of national tax systems in European countries could also produce changes in the structure of government revenues, and thus change the spatial progressivity of the fiscal system. As a result, those in charge of regional policies must develop a better understanding of budgetary cohesion mechanisms and become more involved in many, indeed most, non-regional policy changes.

# 6. Conclusions

This report has focused on two principal categories of government spending that impact on economic and social cohesion in the EU Member States: the automatic transfers induced by government taxation and expenditures; and the spending policies pursued proactively by governments, whether or not with cohesion in mind.

A key point to bear in mind in considering the overall results of the work (see Section 6.1) concerns the scale of the transfers and spending concerned; budget induced interregional transfers are massive compared with spending on proactive government policies. This is best illustrated by example: the value of the transfer flows to Lorraine is about 40 times the spend on regional incentive policy in the region. Moreover, this is a modest example; Lorraine is not even one of the principal beneficiaries of transfers in France (transfer flows to Midi-Pyrénées and Limousin amounted to 5 and 6 percent of regional GDP, respectively compared to just 2 percent for Lorraine), but Lorraine does receive more regional aid as a proportion of regional GDP than any other French region. The same calculation for Limousin shows that transfers are worth 600 times more than regional incentive spending in the region.

The same holds true for expenditure on horizontal policies. In Chapter 4, it was noted that the contribution of EU governments to private sector spending on R&D was of the same broad order of magnitude as their spending on regional incentive policy. In all the countries discussed, this spending is very heavily skewed in favour of the more prosperous regions, even in relation to regional GDP. Taking France as an example again, government funding of private sector R&D in Île de France amounts to around one-fifth of the value of the transfer flows out of the region. Again, this is a very conservative example. Of the countries considered in Chapter 4, government funding of private sector R&D accounts for a higher proportion of regional GDP (0.57 percent) in the Paris region than anywhere else;
the comparable proportions for Madrid and Piemonte are 0.26 percent and 0.13 percent of their regional GDP fig-
ures respectively. Moreover, the value of the transfer flows away from these regions are significantly higher than those
away from Paris; 10 percent of regional GDP in the case of Piemonte and 9 percent in the case of Madrid. This
means that the value of the transfer flows away from Madrid is some 70 times the value of government R&D poli-
cy in the region.

In the wider context of cohesion at the European level, these figures are clearly of considerable significance. Not
only does Île de France receive substantially more in government funded R&D as a proportion of regional GDP than
does Madrid, but the transfer flows away from Madrid are substantially larger than those away from Paris. All this
must be set in the context of the fact that the GDP of Madrid is 97 percent of the EU average while that of Île de
France is 166 percent of the EU average.

Not only do the expenditures considered in this report differ substantially in scale, they also differ in nature. Auto-
matic transfers are the inevitable outcome of differences between the amount of taxation collected in a given re-
gion, which is closely related to the prosperity of that region, and the value of government expenditures in a region,
which is more closely related to the population of that region. The pattern of much of this expenditure reflects the
needs arising from the demands made on welfare and public services provision, including health, education and un-
employment benefits. In consequence, in regional terms, transfers flow, in a neutral way, to those regions where the
need arises. In so doing, they remove much of the impact on regional incomes of external economic shocks. Also
key, transfer mechanisms are long-term, providing a kind of mutual insurance policy between the regions of a na-
tion. In France, for example, the status of regions as contributors or beneficiaries from the central government has
changed over time as the competitive advantage of regions has changed; in the 1960s, the Nord Pas de Calais re-
gion was a contributor to the budget - it is now a beneficiary. It is unclear how common this change of status is;
however, it is clear that if regions that are beneficiaries are to have any chance of becoming contributors, then gov-
ernment funding must continue to provide for the basic needs of the region, irrespective of how much it currently
contributes to the central budget.

Proactive policies contrast sharply with automatic transfers. By their nature, they are explicit and directed at spe-
cific developmental objectives; they tend to be implemented on short to medium-term timescales. Far from being
neutral and automatic, they frequently involve considerable policymaker discretion and require expert input into pol-
icy design, delivery and implementation. Nevertheless, the impact of proactive policies is unclear. The difficulties in-
volved in policy evaluation mean that an understanding of the real effects of the range of government policies (on
cohesion or more generally) "remains elusive".

Notwithstanding the differences in the nature and the volume of the expenditures studied, and the difficulties in-
volved in policy evaluation, it can be said that, overall, national expenditures tend to flow from the more prosperous
towards the less prosperous regions within a country. Not surprisingly, regional policy spending tends to flow in the
direction of the worst-off regions within countries although, as has been shown, the patterns of spend are some-
what uneven. Regional policy spending is buttressed by automatic transfers; the results from this part of the study
are unambiguous - the direction of the flows supports economic and social cohesion within the national context.
Member States' other spatial policies also support cohesion, although it is notable that, as far as these policies are
concerned, the overriding objectives are political and social, rather than economic. The pattern for horizontal poli-
cies is less clear cut. Member States' employment policies tend, by their nature, to support social, and perhaps
economic, cohesion. However, the pattern of expenditures on policies aimed at improving the competitiveness of
national economies by promoting RTD is virtually a mirror image of patterns of regional disparity; the wealthier a re-
gion is, the more government tends to spend on promoting R&D within that region. Conversely, the poorer a region
is, the smaller the spend on R&D as a proportion of regional GDP.

This study has examined the situation of regions primarily within their national contexts. However, it is important to stress that, taking an EU perspective, there is no direct relationship between the prosperity of a region and its status as a contributor to the national budget or a beneficiary from it; similarly, it does not follow that regions of equivalent prosperity in a European context will be equal beneficiaries of Member States' regional or horizontal policies. The Midi-Pyrénées and Cataluña regions, which have the same level of prosperity in relation to the EU average illustrate this point. Midi-Pyrénées is designated for French regional policy purposes and receives a net flow transfer from the government budget equal to 5 percent of regional GDP; in contrast, Cataluña is not designated for national regional policy purposes and makes a net flow contribution to the government budget of 5 percent of its GDP. More than this, not only does Cataluña receive nothing from the national regional policy budget, but it also receives
less than Midi-Pyrénées in R&D policy spend; the R&D spend in Midi-Pyrénées is worth 0.44 percent of regional GDP; in Cataluña it is worth just 0.06 percent.

Looking to the future (see Section 6.2), the report identifies three sets of issues requiring further work:

* the need to move from a static analysis to take more account of the impact of history on cohesion mechanisms

* the desirability of taking "non-spending" policies more into account, given the obvious differential impact of regulatory and other policies upon different regions

* and the need for the analysis (especially relating to budget-induced transfers) to take more cognisance of the long-term impacts of public expenditures.

Finally, in Section 6.3, the report draws together four general, but important, policy implications. The first is that it is not only regional policy decisions which impact on spatial cohesion: decisions taken in all policy areas have regional and cohesion consequences. Second, the sum of Member States commitments to national cohesion does not add up to EU cohesion; indeed national cohesion policies frequently run counter to European cohesion policies. Third, the role presently played by regional GDP per capita in the design of EU regional policies should perhaps be reconsidered, not least because GDP per capita is an indicator of the wealth of a region *before* national redistributive policies. Lastly, the analysis suggests that more policymaker attention should be given to the longer-term impacts of assistance policies.
# Economic and Social Cohesion in the European Union:
The Impact of Member States' Own Policies

## 1. Introduction

### 1.1 Research Questions

This report presents the findings of research which has been undertaken on behalf of the European Commission into the impact of Member States' policies on economic and social cohesion in the European Union (EU).

Regional disparities within EU countries are often significant; indeed, the internal inequalities expressed in terms of income per head and unemployment or other measures of disadvantage are of sufficient concern for all EU countries to have introduced regional policies that aim to redress such imbalances. In addition to "classic" regional policy measures, many countries are also concerned with other types of spatial problem and operate policies that address specific issues such as rural problems, urban deprivation or unemployment blackspots.

Government policy responses to regional and other spatial problems are often high profile. However, in expenditure terms they tend to be dwarfed by two other aspects of government activity which are likely to have regional implications: on the one hand, sectoral and horizontal policies that are pursued "proactively" (eg. R&D, employment, defence); and, on the other, the (mainly) automatic, interregional transfers resulting from general public expenditures and central government allocations to subnational authorities.

In considering these four areas of government activity (regional policy; other spatial policies; horizontal policies; and overall government expenditures), the key research questions are:

i. to what extent can policies which have the effect of regional disparities as their objective (ie. regional and other spatial policies) be shown to contribute to this end?

ii. to what extent can it be shown that horizontal or sectoral policies contribute to or undermine spatial policy spending and its objectives?

iii. at a global level, what is the spatial distribution of public spending and what is its role in reducing economic and social disparities?

These research questions concern, first, the proactive policies pursued by government, whether or not with spatial objectives in mind, and, second, the largely automatic interregional transfers that are the outcome of the differing spatial distribution of government taxation and spending. The next three chapters focus on the proactive policies of government. They consider, in turn, the regional impact of Member States' regional policies (Chapter 2), other spatial policies (Chapter 3) and selected horizontal policies (Chapter 4). Chapter 5 then reviews those budget-induced interregional transfers which result from government expenditure and taxation policies. A final chapter, Chapter 6, draws together the main findings of the report.

### 1.2 Country Coverage

Given the wide-ranging policy focus of the study, it has proven necessary to limit the range of countries examined in detail. While an overview of the position in EU15 is provided wherever possible - and particularly in the discussion of regional and employment policies - country coverage in most of the chapters which follow is restricted to six countries: France, Germany, Italy, Portugal, Spain and the United Kingdom. However, Sweden is also included as a case study country in the analysis of budget-induced interregional transfers in Chapter 5.
## 1.3 Relative Policy Weightings

Before turning to the detail of the individual policy chap-
ters, it is necessary to provide an overview of the broad

weighting attached to the various elements of policy. A
breakdown of government expenditures by function is
set out in Table 1.1 in respect of the standard case study
countries: France, Germany, Italy, Portugal, Spain and
the United Kingdom. The data are for 1989, the last
year for which information is available for all six countries.

<table><caption>Table 1.1: The Distribution of General Government Expenditure by Main Function(1) (percent)</caption><thead><tr><th>Services</th><th>Portugal</th><th>Spain</th><th>Italy</th><th>Germany</th><th>France</th><th>United Kingdom</th></tr></thead><tbody><tr><td>General government</td><td>15.2</td><td>10.6</td><td>15.5</td><td>15.7</td><td>16.1</td><td>19.2</td></tr><tr><td>Community and social</td><td>35.8</td><td>53.0</td><td>46.6</td><td>59.7</td><td>61.8</td><td>51.3</td></tr><tr><td>Education</td><td>13.0</td><td>9.6</td><td>9.9</td><td>9.4</td><td>10.5</td><td>12.0</td></tr><tr><td>Economic</td><td>13.3</td><td>13.9</td><td>11.8</td><td>9.2</td><td>6.5</td><td>7.2</td></tr><tr><td>Other</td><td>22.8</td><td>12.9</td><td>16.2</td><td>6.0</td><td>5.2</td><td>10.3</td></tr></tbody></table>

Source: EUROSTAT

The table distinguishes between five broad functional
categories. The first heading, General Government
Services, includes activities undertaken by government
which are not associated with services to persons or
to business - including overall monetary and fiscal
services, the conduct of external affairs, defence activ-
ities and public order and safety. The second head-
ing, Community and Social Services, focuses on serv-
ices supplied to the community and to households and
persons directly. It incorporates health, social security
and welfare, housing, community development and
cultural services. While education services are nor-
mally included within this heading, they have been
separated out in the table since educational expendi-
ture can be viewed to have both a social and an eco-
nomic role. The fourth heading, Economic Services,
covers government expenditures associated with the
regulation and more efficient operation of business. It
includes spending in respect of government economic
development objectives as well as services for indus-
try relating to research, trade promotion and sectoral
regulation. It thus incorporates the proactive policies
considered in Chapters 2 to 4. The final heading con-
tains public debt interest charges plus general trans-
fers within government.

Table 1.1 shows clearly the importance of spending on
community and social services - generally accounting
for over half and, in a number of instances, for around
three-fifths of general government expenditure. In
comparison, the other four headings tend to be far
less significant. In particular, spending on economic
services ranges from just 6.5 percent to 13.9 percent
of the expenditure total.

A similar picture is shown by Table 1.2 which relates
the five categories of general government expenditure

to national GDP. The table shows that the average
percentage coverage for community and social serv-
ices within the six case study countries is just over
23 percent compared to an economic services aver-
age of less than 5 percent. In considering differences
by country, perhaps the most significant point to
arise is the far greater emphasis on community and
social services (and accordingly less stress on eco-
nomic services) in the wealthier Member States (and
particularly in Germany and France). Whereas com-
munity and social service expenditure averaged 3.5
times spending on economic services in the three
countries with major Objective 1 regions (Portugal,
Spain, Italy), it represented almost eight times eco-
nomic services expenditure on average in Germany,
France and the UK.

It is clear from the tables that policies pursued proac-
tively by Member State governments with economic
development objectives in mind (ie. economic services
to business) are relatively small-scale when set along-
side services supplied to the community and to house-
holds and persons directly (including health, social se-
curity, welfare and housing). There remains, however,
the issue of the relative importance of those proactive
policies which have an explicit spatial orientation.

One EU-wide source of information on this is the Com-
mission's Fourth Survey on State Aids(2). This Survey

<footnote>(1) Information on the functional distribution of government expenditures is contained in the Eurostat publication, *General Government Accounts and Statistics 1981-1992* Eurostat, Luxembourg, 1994. The breakdown of expenditure by function is based on the United Nations Classification of the Functions of Government (COFOG) (see United Nations, *Classification of the Functions of Government*, Statistical Papers, Series M, No. 70, New York, 1980).</footnote>

<footnote>(2) *Fourth Survey from the Commission on State Aid in the European Union in the Manufacturing and Certain Other Sectors* (COM (95), 365 final, Brussels, 26.07.1995).</footnote>
<table><caption>Table 1.2: General Government Expenditure by Main Function as a Percentage of National GDP (1989)</caption><thead><tr><th>Services</th><th>Portugal</th><th>Spain</th><th>Italy</th><th>Germany</th><th>France</th><th>United Kingdom</th></tr></thead><tbody><tr><td>General government</td><td>6.5</td><td>4.5</td><td>8.0</td><td>6.9</td><td>8.0</td><td>7.7</td></tr><tr><td>Community and social</td><td>15.3</td><td>22.5</td><td>24.1</td><td>26.4</td><td>30.6</td><td>20.6</td></tr><tr><td>Education</td><td>5.6</td><td>4.1</td><td>5.1</td><td>4.2</td><td>5.2</td><td>4.8</td></tr><tr><td>Economic</td><td>5.7</td><td>5.9</td><td>6.1</td><td>4.1</td><td>3.2</td><td>2.9</td></tr><tr><td>Other</td><td>9.8</td><td>5.5</td><td>8.4</td><td>2.7</td><td>2.6</td><td>4.1</td></tr><tr><td>Total</td><td>42.8</td><td>42.6</td><td>51.7</td><td>44.3</td><td>49.6</td><td>40.2</td></tr></tbody></table>

Source: EPRC calculations from EUROSTAT data.

covers the period 1990-92 and focuses principally on national aid to the manufacturing sector, though it also contains information on certain other aspects of national aid systems as they relate to agriculture, fisheries, transport (railways and inland waterways) and coal mining(3).

Limitations on the coverage of the data are made clear in the Survey; in particular, the Survey recognis-

es that "the classification of aid is in many cases somewhat arbitrary because it is necessary to decide which of the objectives declared by a Member State is to be considered as the primary objective"(4). Nevertheless, the Survey is of interest in providing a broad indication of the breakdown of State aid spending by function, distinguishing in particular between regional support, horizontal measures and certain sectoral aids (see Table 1.3).

<table><caption>Table 1.3: State Aid to Manufacturing by Objective (percent) (1990-92)</caption><thead><tr><th></th><th>Portugal</th><th>Spain</th><th>Italy</th><th>Germany</th><th>France</th><th>United Kingdom</th><th>EU 12</th></tr></thead><tbody><tr><th>Horizontal</th><td>34</td><td>50</td><td>30</td><td>21</td><td>71</td><td>45</td><td>38</td></tr><tr><th>Sectoral</th><td>55</td><td>34</td><td>8</td><td>8</td><td>18</td><td>25</td><td>12</td></tr><tr><th>Regional</th><td>11</td><td>16</td><td>62</td><td>72</td><td>11</td><td>30</td><td>50</td></tr></tbody></table>

Source: Fourth Survey, Table 6.

It can be seen that, at the level of EU12, regional objectives account for half of the manufacturing total, with horizontal objectives representing a further 38 percent. Within the horizontal aid grouping (see Table 1.4), most emphasis is placed on research and development (10 percent of the manufacturing total), SME support (9 percent) and export/trade assistance (9 percent). However, these broad percentages mask

very considerable variation at the Member State level, no doubt in part due to the somewhat arbitrary allocation of aid by objective. For regional objectives, for instance, the range for the case study countries is from as low as 11 percent (France, Portugal) to 72 percent (Germany), while for horizontal aid the variation is from 21 percent (Germany) to over 70 percent (France).

<table><caption>Table 1.4: Horizontal Aids as a Proportion of Manufacturing State Aid Expenditure (1990-92)</caption><thead><tr><th></th><th>Portugal</th><th>Spain</th><th>Italy</th><th>Germany</th><th>France</th><th>United Kingdom</th><th>EU 12</th></tr></thead><tbody><tr><th>R&D</th><td>3</td><td>17</td><td>3</td><td>9</td><td>27</td><td>7</td><td>10</td></tr><tr><th>Environment</th><td>0</td><td>3</td><td>0</td><td>1</td><td>0</td><td>1</td><td>1</td></tr><tr><th>SME</th><td>1</td><td>10</td><td>9</td><td>4</td><td>11</td><td>15</td><td>9</td></tr><tr><th>Trade/export</th><td>0</td><td>1</td><td>9</td><td>1</td><td>30</td><td>15</td><td>9</td></tr><tr><th>Energy-saving</th><td>1</td><td>2</td><td>3</td><td>2</td><td>1</td><td>0</td><td>2</td></tr><tr><th>Gen. Investment</th><td>18</td><td>6</td><td>2</td><td>0</td><td>1</td><td>6</td><td>2</td></tr><tr><th>Other</th><td>10</td><td>10</td><td>5</td><td>4</td><td>0</td><td>0</td><td>4</td></tr></tbody></table>

Source: Fourth Survey, Table 6.

<footnote>(3) It does not deal with aid where the recipients are not actual enterprises (eg. aid to households, the handicapped, infrastructure, universities, vocational training centres). Nor does it cover general aid measures, related, for instance, to differences in national tax and social security systems. Nor does it include aid granted by supranational and</footnote>

<footnote>multinational organisations, including Community aid. Nor does it extend to certain individual types of aid. Of particular note in the context of the current study, training and unemployment measures are excluded.</footnote>

<footnote>(4) Fourth Survey, page 20</footnote>
As well as being aware of the considerable variation in Table 1.3 and Table 1.4 by country, it is also important - given the emphasis in what follows on the spatial orientation of policy - to examine more fully the composition of the regional aid spending. In Table 1.5 regional aid expenditure is

presented by country and by country grouping and is related to total regional aid for EU12, to manufacturing State aid in each country covered and to overall State aid by country. As already mentioned, the figures presented are annual averages over the 1990-92 period.

<table><caption>Table 1.5: Regional State Aid Expenditure by Country (Annual Average 1990-92)</caption><thead><tr><th>COUNTRY</th><th>MECU</th><th>% of total regional State aid</th><th>% of manufacturing State aid</th><th>% of overall State aid</th></tr></thead><tbody><tr><td>Greece</td><td>312</td><td>2</td><td>30</td><td>26</td></tr><tr><td>Spain</td><td>217</td><td>1</td><td>16</td><td>4</td></tr><tr><td>Portugal</td><td>50</td><td>0</td><td>11</td><td>6</td></tr><tr><td>Ireland</td><td>213</td><td>1</td><td>69</td><td>38</td></tr><tr><td><strong>Cohesion Countries</strong></td><td><strong>791</strong></td><td><strong>4</strong></td><td><strong>25</strong></td><td><strong>10</strong></td></tr><tr><td>Italy</td><td>7369</td><td>39</td><td>62</td><td>29</td></tr><tr><td>Germany, of which:</td><td>8568</td><td>46</td><td>72</td><td>28</td></tr><tr><td>-East</td><td>4259</td><td>23</td><td>36</td><td>14</td></tr><tr><td>-Berlin/ZBA</td><td>3663</td><td>20</td><td>31</td><td>12</td></tr><tr><td>-West</td><td>646</td><td>3</td><td>5</td><td>2</td></tr><tr><td><strong>Italy/Germany</strong></td><td><strong>15938</strong></td><td><strong>86</strong></td><td><strong>65</strong></td><td><strong>29</strong></td></tr><tr><td>Belgium</td><td>181</td><td>1</td><td>16</td><td>5</td></tr><tr><td>Denmark</td><td>6</td><td>0</td><td>2</td><td>1</td></tr><tr><td>France</td><td>573</td><td>3</td><td>11</td><td>3</td></tr><tr><td>Luxembourg</td><td>38</td><td>0</td><td>66</td><td>13</td></tr><tr><td>Netherlands</td><td>166</td><td>1</td><td>18</td><td>8</td></tr><tr><td>UK, of which:</td><td>808</td><td>4</td><td>30</td><td>16</td></tr><tr><td>- GB</td><td>536</td><td>3</td><td>20</td><td>11</td></tr><tr><td>- NI</td><td>272</td><td>1</td><td>10</td><td>5</td></tr><tr><td><strong>Other EU12</strong></td><td><strong>1773</strong></td><td><strong>10</strong></td><td><strong>17</strong></td><td><strong>6</strong></td></tr><tr><td><strong>TOTAL EU12</strong></td><td><strong>18502</strong></td><td><strong>100</strong></td><td><strong>50</strong></td><td><strong>20</strong></td></tr></tbody></table>

Source: EPRC calculations from Fourth Survey, Statistical Annex.

The key point to arise from Table 1.5 is that no less than 86 percent of the regional aid spending is attributable to just two countries - Italy and Germany. In contrast, the four Cohesion countries account for just 4 percent of the total. Moreover, "regional aid" in such countries is often very widely spread, reflecting the fact that most or all of the territories of the Cohesion countries are viewed as problem regions for regional policy purposes. While regional aid on average represents around half of the manufacturing total, the proportion varies from almost two-thirds for Italy/Germany to one-quarter for the Cohesion countries and an average 17 percent for the grouping consisting of Belgium, Denmark, France, Luxembourg, the Netherlands and the UK. The picture in respect of overall State aid expenditure is similar.

Whereas regional aid amounts to 29 percent of the total in Italy/Germany, it accounts for just 10 percent of overall State aid in the Cohesion countries and around 6 percent in the remaining Member States.

## 1.4 Concluding Points

A number of conclusions can be drawn from this brief overview of government spending by function:

* most general government expenditure (on average, over three-fifths of the total) focuses on services
supplied to the community and to households and
persons directly (in the form of education, health,
social security and welfare, housing etc.);

* by comparison, spending on economic services - that is, services for business and services meeting economic development objectives - is relatively small-scale, accounting for around 10 percent of the total;

* the proportion of spending on community and social services compared to economic services is significantly higher in the wealthier Member States than it is in those countries with major Objective 1 regions;

* in the context of those proactive policies which government undertake primarily with economic development objectives in mind, a considerable proportion of expenditure (around half of State aid for manufacturing) can be characterised as relating to regional objectives, with a further 38 percent associated with horizontal aids (in particular, R&D, SME and export/trade measures);

* however, there is considerable variation by country in the spread of State aid spending within manu-

facturing. Most of the regional spend (over 86 per-
cent) relates to just two Member States - Italy and
Germany - with regional aid expenditure in these
countries representing 65 percent of the manufac-
turing State aid total; elsewhere in the Community
regional aid is far more limited in scale, averaging
one quarter of State aid spending for manufactur-
ing in the four Cohesion countries (Greece, Ireland,
Portugal, Spain) and just 17 percent for the re-
maining Member States.

Having provided a broad indication of the relative im-
portance of different components of government ex-
penditure and, in the context of proactive government
policies, of the different weightings attached to State
aid policies, the remainder of this report focuses on the
spatial impact of four different aspects of policy: Mem-
ber States' regional policies (Chapter 2), other spatial
policies (Chapter 3), selected horizontal policies (Chap-
ter 4) and those budget-induced interregional transfers
which result from government expenditure and taxa-
tion policies (Chapter 5). The main findings of the study
can be found in Chapter 6.
<figure><img src="image_6.png" /></figure>
## 2. Member States' Regional Policies (5)

The aim of this chapter is to provide an assessment of the impact of Member States' regional policies on economic and social cohesion. The chapter first sets out the objectives of regional policy in the different Member States (Section 2.1) before considering the evidence which is available on the regional impact of policy (Section 2.2). In this latter context, the research has been restricted to available evidence and study results. Accordingly, the focus is, on the one hand, on the distribution of national regional policy expenditure by region (Section 2.2.1); and, on the other hand, on a review of recent evaluation studies (Section 2.2.2). The main points to arise from the chapter are highlighted in a concluding section (Section 2.3).

### 2.1 The Objectives of Member States' Regional Policies

In considering the objectives of Member States' regional policies, a notable feature is the variety of the concerns that are addressed. Taking the European Union as a whole, three principal types of regional inequality can be identified:

* disparities in employment, especially high levels of unemployment resulting mainly from industrial restructuring, but also issues of underemployment, especially in the lagging regions

* economic disparities, expressed in terms of the contribution of regions to national GDP and, related, the structure of economic activity

* demographic and geographical issues, especially peripherality, and, associated, outmigration.

All of these factors are a consideration in most EU Member States. Nevertheless, there are very different emphases in different countries. In this context it is possible to distinguish between four broad groups of countries:

i. The four "Cohesion" countries (Greece, Ireland, Portugal and Spain), where issues of economic development are the main preoccupation, but where underemployment and peripherality and, to a lesser extent, industrial decline are also concerns.

ii. Germany and Italy, which are characterised by the dual nature of their economies; these countries display by far the widest internal regional disparities. On the other hand, there remain problem areas within the more prosperous regions.

iii. The central and northern EU countries (Austria, Belgium, Denmark, France, Luxembourg, the Netherlands and the United Kingdom), where employment issues, especially related to industrial restructuring, tend to dominate. However, the nature of the regional problem in these countries is also characterised by its variety, complexity and susceptibility to change; recent years have seen the emergence of acute urban and rural problems, as well as issues associated with the restructuring of industries such as defence. Moreover, peripherality and rural depopulation are often also concerns. In addition, in some countries, there are special situations to address, notably Northern Ireland within the United Kingdom and Corsica in France.

<footnote>(5) The material in this chapter builds on and develops research on regional policy in the EU undertaken at the European Policies Research Centre at the University of Strathclyde since the late 1970s.. The latest published output is Yuill D, Bachtler J and Wishlade F, *European Regional Incentives: 16th Edition*, Bowker-Saur, London, 1996.</footnote>
iv. The Nordic Member States (Finland and Sweden), where the effects of peripherality, climate and geography are the principal issues addressed by regional policy.

This breakdown is in no sense a rigid categorisation, but rather is intended to provide a framework for identifying commonalities and trends across the EU.

### 2.1.1 The “Cohesion” Countries

It is important to recall here that this report is concerned with the policies of the Member States; on the other hand, the scale of EU Structural Fund expenditure in the Cohesion countries (and the influence of the European Commission over how this money is expended) makes it difficult to disentangle EU regional policy from the implementation of what are ostensibly national policy measures. Analysis of the Community Support Frameworks (CSFs) agreed for Objective 1 regions over the 1989-93 period shows that, within the Cohesion countries, Structural Fund support for the productive environment (industry and services) is very significant - varying from 50 percent of the total spend in Spain to over 65 percent in Portugal. Given such levels of EU funding, national and EU regional policy are obviously very closely interrelated in the Cohesion countries.

The four Cohesion countries are characterised by the problem of implementing a regional development policy in the context of national economies which are themselves underdeveloped from an EU perspective. In such an environment, arguments for regional policy are often hard to sustain: the capital city and other relatively developed areas are, realistically, the only parts of the country that are likely to be able to compete internationally, at least in the short term. It is easy, therefore, to argue that the policy focus should be concentrated on enabling at least part of the country to be competitive, instead of spreading resources thinly throughout the country, thereby diluting the concentration of expenditure and its potential impact. However, there are also strong arguments for operating regional policies in the context of underdeveloped economies. First, there are equity-based concerns: that it is simply unjust to abandon large tracts of a country and its population to the pressures of market forces and desertification. Second, there are efficiency-related issues: long-term emphasis on the development of already-prosperous regions may result not only in uneven levels of development, but also in congestion and pollution problems, as well as potential inflationary pressures, as a consequence of inter-regional migration and the overconcentration of activities.

This tension between national prosperity and regional disparity is reflected particularly in the objectives of the

regional policies of Greece, Ireland and Portugal. Over time, all three have experienced a significant shift in priorities and changes in the relationship between national industrial development and regional policies.

In Greece, regional and industrial development policies are provided for within a single legislative framework. However, the priority accorded to regional policy in comparison with national industrial policy has declined over the past decade or so. Initially, the aim of the legislation (Law 1262/1982) was to encourage industrial development outside the Athens and Thessaloniki areas (Region A); projects in these areas could only qualify for assistance if they met certain special criteria, such as environmental protection or investment in new technologies. General regional aid was not available in Region A. The objective of this approach was two-fold: first, to encourage industrial development in the less-developed parts of the country; and second, to ease congestion in the developed areas, especially Athens, by supporting environmental protection investment and relocation projects. At the same time, there was an important national industrial development dimension to policy insofar as support for research and development and investment in new technologies (so-called "special investment") remained available nationwide.

Over time, the regional policy dimension to the legislation in Greece has been eroded. The list of exceptions to the general rule that Region A does not qualify for general regional aid has been progressively extended. The most recent changes to Greek industrial and regional policy legislation took place in 1994 and continued the trend of reinforcing the assistance available in Region A and, by implication, reducing the advantages supposedly conferred on the problem regions. Law 2234/1994 added large investment projects aimed at improving the international competitiveness of Region A firms to the list of project eligible for general regional aid, together with a number of other specified project types.

In Ireland, there is currently little emphasis placed on regional policy. Since the 1920s, the main objective of Irish industrial policy has been the industrialisation of the country; regional policy has, to a large extent, been viewed simply as an extension of industrial policy. In the early 1950s, regionally-differentiated industrial incentives were introduced, marking a commitment to rectify regional imbalances within the Irish economy. However, rising unemployment and large-scale emigration led to a re-evaluation of policy later in the decade. Consequently, there was a shift to an export-led strategy requiring greater participation in the international economy, supported by an active industrial policy and with reduced emphasis on issues of re-
gional inequality. This approach has been at the cen-
tre of Irish economic policy ever since, with regional
policy subservient to the pursuit of national economic
growth, although in the 1970s there was perhaps more
emphasis on influencing the location of industrial in-
vestment than there is at present.

Reflecting the low priority given to regional develop-
ment policy in Ireland, measures for promoting indige-
nous development and for attracting inward invest-
ment are operated more or less on a nationwide ba-
sis. Although higher levels of assistance are, in theory,
available in designated areas, in practice, little or no
differentiation is made. The approach of the Irish au-
thorities is amply illustrated in the 1994 IDA Ireland An-
nual Report which states that:

"IDA Ireland cannot, realistically, expect to de-
liver overseas investors in any great volume to
regions of the country which do not have the
population or infrastructure from which to oper-
ate competitively in international markets. If a
conflict arises between winning an investment
project at all and our regional development re-
sponsibility our priority must be to secure the
investment for Ireland."

Where there is an emphasis on the regional problem in
Ireland, this tends to be in the context of other policies,
for example, measures for the Gaeltacht regions.

In *Portugal* regional policy has a higher profile than in either Greece or Ireland and is now essentially distinct from national industrial policy. The tensions between national economic development and regional policy are evident in the recent history of the relationship between the two policy areas. Portuguese regional policy was substantially reformed following membership of the EU and provided for assistance (the SIBR) to be available throughout the country, but to favour the interior. In the late 1980s, a special EC-funded development programme for Portuguese industry, the PEDIP, was introduced and there were concerted efforts to co-ordinate and dovetail the two policies. The objective was to maintain consistency between the two policy areas (notably by applying the same industrial policy criteria), whilst ensuring a suitable differential between the underdeveloped and the more prosperous areas by offering higher levels of assistance and operating less stringent award conditions in the problem regions. In consequence, the SIBR was restricted to the interior of the country, while the PEDIP provided investment assistance in the more prosperous areas, albeit with lower levels of support.

In practice, however, it was argued that the "competi-
tive edge" of the regional policy package was insuffi-

cient in the context of the (EC-funded) industrial sup-
port which was available nationally; in particular, the
award differential was considered inadequate to offset
the disadvantages of locating in the interior of the
country. More significantly, perhaps, the co-ordinated
approach led to the criticism that regional policy was
being driven by industrial policy criteria and not by dis-
crete regional development objectives. These and oth-
er related criticisms informed the review of regional and
industrial policies in Portugal that took place in 1992/3.

The most significant aspect of the resulting reform was
the explicit separation of regional and industrial poli-
cies. The main features of the reformed regional poli-
cy, the so-called SIR are: first, the emphasis on en-
couraging indigenous development (assistance is re-
stricted to small projects undertaken by small firms);
and second, the extent to which support is shaped by
regional development priorities - regional policy takes
account of industrial policy in order to avoid policy
conflicts, but assistance is operated according to the
needs and potential of the assisted areas. The focus
of Portuguese regional policy is, then, the encourage-
ment of indigenous SME development in the interior of
the country. However, it is also worth noting that the
revised industrial policy, the SINDEPEDIP also com-
prises a regional development dimension; eligible proj-
ects located in the assisted areas qualify for higher lev-
els of support than in the more prosperous regions.

The dilemma facing all three of these countries in op-
erating regional policies is the inherent conflict be-
tween national industrial competitiveness and regional
development. Moreover, the difficulties in resolving this
conflict are heightened by the requirements of the
Maastricht convergence criteria, since the situation is
particularly acute when resources are limited, forcing
governments to choose between various policy op-
tions. Within these three countries, the dilemma is re-
flected in the choice between supporting indigenous
(usually small) industry and attracting mobile (usually
large) investments as the main objective of regional
policy.

Problems of economic development predominate in
much of Spain (most of Andalucía, Galicia, Ex-
tremadura, Castilla-León and Castilla La Mancha). Re-
flecting this, a large part of Spain is designated as Ob-
jective 1 while the remainder is mostly covered by Ob-
jectives 2 and 5b. However, from a domestic perspec-
tive, the nature of the regional problem in Spain is
somewhat different from the other three Cohesion
countries. First, Spain is a significantly larger country
and is less geographically peripheral than the other
three; these two factors have contributed to making
Spain an attractive location to potential inward in-
vestors. Second, the nature of the regional problem is more diverse; the country comprises regions where the issues are more akin to those faced in northern European countries, notably the restructuring of heavy industry. Third, the role of the subnational level of government, the Autonomous Communities, is significant; this reinforces the tension between equity and efficiency arguments for regional policy, with growing pressure for a greater independence of action from the more prosperous regions. On the other hand, there is, in Spain, a constitutional commitment to balanced regional development.

The constitution specifies that the public authorities will "promote the conditions favourable to a more equitable distribution of income" and that to guarantee the realisation of the principle of solidarity the state will "oversee the establishment of a fair and adequate level of economic equilibrium between the different parts of the country". As in the other Cohesion countries, Spanish national regional policy is closely related to EU policy. Taking account of the Cohesion Fund and spending under the three spatial Objectives, EU regional policy spending in Spain is far higher than the national spend. The main instrument of regional policy in Spain is the regional investment grant. This is operated by central government in partnership with the Autonomous Communities. An interesting feature of the implementation of the scheme is that it is not made available in all the areas authorised by the Competition Policy Directorate, DGIV; instead, the Spanish authorities restrict national regional policy assistance to regions where it is considered that the Autonomous Communities are unable to fund financial assistance themselves. In consequence, national regional policy assistance is not offered in País Vasco or Cataluña, even although DGIV authorised regional aid in these areas.

## 2.1.2 Germany and Italy

Germany and Italy are characterised by extreme internal regional disparities; it is interesting that they should both be among the youngest nation states in the EU. In Italy, GDP per head in the poorest region (Calabria) is just 46.7 percent of that in the richest region (Lombardia); in Germany, the differences are yet more dramatic. GDP per head in Thüringen is just under one fifth of that in Hamburg. Indeed, these two regions represent the extremes of EU prosperity; with GDP per head at 38 percent and 196 percent of the EU average, respectively, they are the poorest and the richest regions in Europe. The dual nature of the Italian and German economies means that the emphasis of regional policy in both countries is very much on the underdeveloped regions. On the other hand, both coun-

tries also operate policy in problem areas within their more prosperous regions; Germany has continued to assist the west since reunification and Italy has recently moved away from a policy focused exclusively on the south (the Mezzogiorno).

Regional policy in Italy has undergone radical change since 1992. Its objectives and approach have been transformed in this period. From the 1950s until the early 1990s, Italian regional policy was synonymous with Mezzogiorno policy. The emphasis on the development of the south was reflected in the existence of quite distinct policies (the so-called intervento straordinario or special intervention) and the establishment of separate institutions to manage them. The intention was that special intervention should be applied in the Mezzogiorno over and above standard government policies for industry, environment etc. Whether or not this really took place is a matter of some dispute; some argue that there was a significant substitution effect with standard (supposedly nationwide) government policies in areas such as industrial policy being focused on the north. Nevertheless, 1992 saw the demise of special intervention and the special institutions and the introduction of policies for development areas throughout the country (aree depresse del territorio nazionale). The legal basis for this change is Law 488 of 19 December 1992; however, the text of the law contains no clear expression of the objectives of policy. Moreover, the law is scarcely a coherent basis for regional policy; it provides for financial incentives in development areas in Italy and measures for water management, but its essential purpose is to assure a co-financing counterpart to EU regional policy. Reflecting this point, the spatial coverage of designated areas under Law 488 was closely related to the EU's Objective 1, 2 and 5b areas and indeed was amended in the course of 1995 to take account of the new Structural Fund map. As a consequence, the coverage of the new Italian regional policy map is 48.9 percent of the national population compared with 36.6 percent under the previous Mezzogiorno legislation (Law 64).

In Germany, the lines of responsibility for regional policy are clearly demarcated; the German constitution gives primary responsibility for regional policy to the Länder and the districts. The role of the Federal government is to provide "a suitable framework" for the restructuring and development activities of the Länder and, where appropriate, to offer supporting assistance. The rationale for Federal intervention is to assist the regions with structural problems that cannot be overcome by the regions alone. The core of the regional policy activities of the Federal government lies in the operation of a partnership arrangement with the Län-
der, the so-called Gemeinschaftsaufgabe (GA) 'Verbesserung der regionalen Wirtschaftsstruktur', or "Joint Task". The main policy instrument under this system takes the form of financial assistance to firms, the so-called investment grant (Investitionszuschuß). Some 90 percent of GA spending takes the form of incentive support; the remaining 10 percent is in the form of business-related infrastructure.

The main objective of German regional policy is to ensure that structurally weak regions can take an equal part in the general economic development of the country through a reduction of their locational disadvantages. Regional policy is also designed to support a growth and employment policy. The rationale behind the provision of an active regional policy is that structural change can negatively affect regional development to such an extent that regions are unable alone to overcome structural bottlenecks. From a national economic viewpoint, it is more effective to provide regional assistance for restructuring to those regions particularly affected by structural change, rather than provide subsidies to threatened sectors or enterprises. The creation of alternative jobs in sectors not affected by crisis and the improvement of regional infrastructure provision can alleviate the structural crisis and provide better preconditions for future regional growth.

Underlying this philosophy is the existence in Germany of the so-called "primary effect" as a central condition for firms applying for assistance within the GA. The primary effect exists when the goods and services produced by an enterprise are exported predominantly outside the region and there is a consequent significant, long-term increase in the income of the local/regional economy. Investments made by firms exporting outside the region and facing international competition tend to create the greatest number of jobs and broaden the income base of the region. Assistance to exporting firms provides compensation for any locational disadvantages of the region, whereas aid to locally producing firms can distort internal regional competition without contributing to regional job creation.

The reunification of the Germany has placed new demands on structural and regional policy. The economic transformation of the new Länder requires an all-encompassing structural policy. The concept for this process rests on three main areas: reconstruction and maintenance of a competitive industrial core; an active labour market policy to overcome the time gap between the breakdown of the old and the establishment of the new structures; and, an active regional policy to improve the locational conditions and create new competitive jobs.

Indeed, the GA is one of the primary instruments of investment assistance in the new Länder, and contributes to the renewal of outdated capital stock, a central precondition for the creation of new competitive jobs and a self-generating economic upturn.

### 2.1.3 The "Northern European" Member States

In this group of countries the regional problem tends to comprise a range of concerns; however, a common theme is the preoccupation with levels of unemployment arising from industrial restructuring and associated technological and labour market developments. Moreover, for the most part, regional policy has a relatively low political profile. There are, nevertheless, marked differences between countries with respect to the objectives of regional policy, as well as in the substance of policy itself.

At one end of the spectrum is France with the broad concept of aménagement du territoire, which encompasses spatial development policies in the widest sense of the term. New regional development legislation in France, the 1995 loi d'orientation pour l'aménagement du territoire, describes regional development policy as contributing to national unity and solidarity and identifies two main objectives: first, to ensure equal opportunities throughout the country and to create the conditions for equal access to "knowledge" (accès au savoir); and second, to achieve balanced national development. To these ends, regional development policy aims to reduce disparities in living standards linked to the geographical situation and its demographic, economic and employment consequences. Policy is to compensate for regional disadvantage by adjusting levels of taxation and reducing the disparities in the resources available to local authorities. Moreover, other policies (economic development, social, cultural, sports, education, environment, etc.) are to contribute to the objectives of regional development. Reflecting these broad objectives, the new legislation refers to a wide variety of existing and new policy instruments, ranging from regionally-differentiated business taxation to infrastructure and public service provision, as well as regional incentive policy measures common to virtually all EU countries. The main regional incentive in France is the regional policy grant (prime d'aménagement du territoire, PAT). However, as noted earlier, regional policy in France is very wide-ranging; as a result, the PAT accounts for only a relatively small proportion of that expenditure which might be attributed to the regional policy budget. This is illustrated by the table below.
<table><caption>Table 2.1: Breakdown of Regional Development Spending in France 1989-93</caption><tr><td>Local employment initiatives (FRILE)</td><td>6.5 %</td></tr><tr><td>Decentralisation (FAD)</td><td>1.4 %</td></tr><tr><td>Regional policy grant (PAT)</td><td>27.4 %</td></tr><tr><td>Rural SME aid (AllZR)</td><td>1.3 %</td></tr><tr><td>Regional development (FIAT)</td><td>33.1 %</td></tr><tr><td>Rural development (FIDAR)</td><td>19.9 %</td></tr><tr><td>Mining areas (GIRZOM)</td><td>7.5 %</td></tr><tr><td>Other including mountain areas (FIAM)</td><td>2.9 %</td></tr><tr><td>Total (FF9.2 billion - 1,388 MECU)</td><td>100.0 %</td></tr></table>

Source: DATAR

Notes: Figures refer to actual payments. The FAD and the AllZR did not run for the whole period considered.

In contrast with the situation in France, regional policy in the United Kingdom is narrowly defined in terms of its objectives and comprises few policy instruments. The objectives of regional policy in the Great Britain were reformulated as follows in the 1983 White Paper *Regional Industrial Development*:

> "Although an economic case for regional policy may still be made, it is not self-evident. The Government believe that the case for continuing the policy is now principally a social one with the aim of reducing, on a long term basis, regional imbalances in employment opportunities."

This statement remains the current basis for regional policy; it was restated in 1988 and most recently in 1995, although with a greater emphasis on the issue of regional competitiveness. The government has also stressed that regional industrial policy should be seen as part of the wider government approach to "regeneration policy" which has an explicitly-stated objective of competitiveness. (In this context, it is important to note that urban policy spending has become of increasing importance in the United Kingdom, an issue discussed further in Section 3.1.1). Policies for Northern Ireland are operated separately, but here too there has been growing policymaker interest in stimulating competitiveness.

Unlike France, where regional policy comprises a wide range of instruments and approaches, regional policy in the United Kingdom is equated directly with financial incentives to firms for investment and job creation in the assisted areas. The main policy instrument in Great Britain is Regional Selective Assistance, a capital grant scheme; in addition, more low-key support is available in the form of business premises and Regional Enterprise Grants to small firms in the assisted areas. Selective Financial Assistance provides broadly similar, but higher value, support to firms in Northern Ireland.

The remaining five "northern European" countries fall somewhere between France and the United Kingdom within the policy spectrum. In considering policy objectives, it is useful to divide these countries into two groups: the federal countries (Austria and Belgium); and the remaining centralised states (Denmark, Luxembourg and the Netherlands).

The two federal states present quite different regional policy experiences, although the involvement of the subnational level is, not surprisingly, a notable feature of both.

In Austria, clear objectives for regional policy are difficult to isolate because of the fragmentation of competence across different levels of government and organisation; however, in terms of breadth of objectives, the Austrian approach tends more towards the French notion of *aménagement du territoire* than the narrower UK view of regional policy. Nevertheless, it should be stressed that regional policy has a relatively low political profile in Austria and that regional disparities are not considered significant. The so-called ÖROK concept (Österreichische Raumordnungskonferenz - Austrian conference on regional planning) presents three broad requirements for regional economic policy:

* that it should cover not only regional subsidies to firms, but also support for the business environment and locational factors such as transport, education, quality of life;

* that regional enterprise promotion should encompass more than investment subsidies, given that areas such as overcoming regional barriers to information and advice and creating co-operative networks are key to enterprise development; and

* that regional investment assistance should aim to support endogenous development potential as well as attracting mobile investment.
Regional policy in *Belgium* is the responsibility of the regional governments of Flanders and Wallonia (there are no assisted areas in the Brussels region). Policy is based on the (national) 1970 Economic Expansion Law, but the regional governments are responsible for the implementation of policy within their jurisdictions. This means that, in practice, the concern is with regional disparities at the subnational level, ie. *within* the regions. For the most part, the regional problem in both Flanders and Wallonia is a consequence of the restructuring of heavy industry notably coalmining in Limburg and steel-making in the more extensive development areas in Wallonia. In the case of Hainaut, industrial decline is long-standing and its problems were considered of sufficient severity to merit Objective 1 designation. In considering the assisted areas map as a whole, it is noticeable that most of the border areas are designated. Moreover, the designation of the European Development Pole is shared between Belgium and neighbouring areas in France and Luxembourg.

In terms of policy instruments, Belgium is very much towards the United Kingdom end of the spectrum. The 1970 Economic Expansion Law provides for a package of incentives comprising grants, interest subsidies and associated tax relief measures; these constitute the main instruments of regional policy. These incentives are implemented somewhat differently in the two regions. In Flanders, the emphasis has increasingly been on encouraging investment of "strategic importance" involving, for example, new production methods or the establishment of R&D facilities, but employment creation also plays a key role. In Wallonia, employment creation is the main criterion for assistance, but more "strategic" factors, such as the application of new technologies, also play a part.

In the three remaining countries (Denmark, Luxembourg and the Netherlands) regional policy has a lower profile and priority than elsewhere. This is in part associated with the relative prosperity of the countries concerned, their small geographical size and the absence of severe regional disparities.

In *Denmark*, concern at nationwide levels of unemployment led to the abolition of all regional policy measures in 1991; the assisted areas map was retained as a precautionary measure to enable assistance to be offered to large mobile investments on an *ad hoc* basis (in practice, this facility has not been used). The objectives of Danish regional policy are to identify the strengths and opportunities existing in the assisted areas. However, aside from EU regional policy operated under Objectives 2 and 5b, the only regional policy instruments that can be identified relate to

business support through the creation of enterprise zones and regional development companies; in practice, the implementation of these measures has progressed only slowly.

The nature and objectives of regional policy in *Luxembourg* are fundamentally affected by the small size of the economy and the fact that the whole country is effectively a border region. The regional problem is mainly associated with the restructuring of heavy industry, especially steel, in the south-west of the country where Luxembourg shares the designated European Development Pole with neighbouring Belgium and France; however, there are also areas affected by the decline in agriculture, especially in the north. The main instrument of regional policy is financial assistance to firms in the form of capital grants, and, to a lesser extent, tax relief. However, the way in which assistance is administered reflects issues arising from the size of the economy. In particular, very large projects are treated with considerable caution because of the potential negative impacts of subsequent withdrawal or rationalisation. In addition, sectoral issues are considered very carefully; the number of firms involved in a given activity is likely to be small, so the domestic competition implications of subsidising one firm may be considerable, especially if the products involved are primarily for domestic consumption. Moreover, the fact that the Luxembourg frontier is entirely surrounded by assisted areas in countries with comparable or lower labour costs means that border effects are acutely felt.

Regional policy in *the Netherlands* has been broadened in scope in recent years so that it now tends towards the wider French philosophy of *aménagement du territoire*. Indeed, the current basis for Dutch regional policy is the 1995 Memorandum on *Spatial Economic Policy*; in the past, this has been known as the *regional policy memorandum*. The principal focus of Dutch regional policy is on the north of the country, reflecting the good economic development progress made by the central regions that were previously designated. However, it is interesting to note that parts of the south, notably in Limburg, remain designated as assisted areas (even if only on a temporary, transitional basis). The designation of such areas does not reflect domestic regional policy considerations, but rather is justified by the fact that the neighbouring regions of Belgium and Germany are assisted; a further instance of border effects in northern Europe.

The aim of Dutch spatial economic policy is to create the physical conditions which best support growth in employment, the principal policy goal in the Netherlands. In consequence, the recent Memorandum on Spatial Economic Policy is primarily con-
cerned with infrastructure provision, the focus of which is not necessarily on the assisted areas; for example, key objectives include the strengthening of Schiphol airport and the port of Rotterdam. The main instrument of regional policy per se, as in the United

Kingdom, is the provision of financial incentives to firms under the investment premium (IPR). This accounts for only just over one-third of Dutch expenditure on spatial economic development, as the table below shows.

<table><caption>Table 2.2: Breakdown of Future Spatial Development Spending in the Netherlands (1995-99)</caption><tr><td>Space for economic activity (StiREA)</td><td>25.6%</td></tr><tr><td>Northern development programme (ISP)</td><td>25.5%</td></tr><tr><td>Investment premium (IPR)</td><td>35.5%</td></tr><tr><td>Regional development companies (ROMs)</td><td>4.5%</td></tr><tr><td>Co-financing</td><td>7.0%</td></tr><tr><td>Research and evaluation</td><td>1.7%</td></tr><tr><td>Total (FI 1,430 million - 656 MECU)</td><td>100.0%</td></tr></table>

Source: Dutch Ministry of Economic Affairs

### 2.1.4 The Nordic Member States

Enlargement of the EU to encompass two of the Nordic countries brought with it regional problems of a scale and type previously unknown in the European Community; this is borne out by the fact that EU competition policy rules on regional aid had to be adapted to take account of the specific circumstances of the new Member States. Both Finland and Sweden contain vast sparsely-populated areas which have harsh climates and are distant from the main population centres and national and international markets. However, both countries also share some of the employment problems arising from industrial restructuring. This has been an issue in parts of central and southern Sweden. Similarly, the south-west of Finland is affected by industrial restructuring and consequent high levels of unemployment; moreover, in the south-east of the country, the impact of structural adjustment in traditional heavy industries has been exacerbated by the loss of the Soviet market.

The objectives of regional policy in Finland embrace both efficiency and equity considerations. The priority attached to these twin aims has tended to vary according to the prevailing economic climate. In the current situation of high national levels of unemployment, priority is given to macroeconomic policies as a means of promoting regional economies; however, in the past, when the economic situation has been more favourable, measures to reduce regional disparities (in income, for example) have tended to be viewed more sympathetically. The current legal basis for regional policy in Finland is the 1994 Regional De-

velopment Act; this outlines three aims for regional policy:

* balanced regional development;

* independent development activities of regions; and

* job creation.

To achieve these objectives, the law states that regional policy should focus on:

* the improvement of living conditions and the availability of basic services;

* the infrastructure necessary for regional development;

* the renewal of the production structure of the regions, improvement of the operating conditions of firms and the creation of new jobs; and

* the reinforcement of the regional economy and the skills of the population

Regional policy is viewed as important in the Finnish context; indeed, legislation requires that sectoral policies take account of regional development objectives. Moreover, regional policy in its broad sense is considered to extend beyond regional economic measures aiming at industrialisation and structural adaptation to include the spatial dimension of the Nordic welfare state.

Historically, regional policy in Sweden was aimed at ex-
panding industrial production to help the lagging areas. Peripheral area problems have been a regional issue since the 1950s, with regional policy seeking to achieve a regional balance, rather than promoting the development of all regions simultaneously. Priority was given to the more locationally-disadvantaged regions (ie. the peripheral areas), resulting in a north-south dichotomy which placed large parts of the country outside the designated areas. Policy initiatives in the early years were directed mainly at stimulating jobs in manufacturing in the designated areas, with the goal of contributing towards more evenly-spread economic growth.

Over time, Swedish regional policy has become more ambitious, incorporating a focus on social conditions (ie. people have the right to public sector financial support, the right to continue living in the area they were born etc.) and environmental questions. Often based on the theme of territorial equality for all parts of Sweden, the highest point was reached four years ago, with the stated objective of creating regions which were "economically, ecologically, industrially and socially equal".

Whereas Swedish regional policy until recently emphasised freedom of choice for individuals with regard to type and location of work (resulting in a special focus on rural areas), the latest regional policy legislation formulated by the new Social Democratic government and approved by Parliament in June 1995 identifies the need to support sustained economic growth, equality of opportunity for different regions and the even distribution of wealth.

## 2.2 The Impact of Regional Policy

In addition to providing an overview of the objectives of Member States' regional policies, this project involves an assessment and summary of available evidence and study results with a view to determining the impact of Member States' regional policies. For these purposes, *impact* refers to:

i. the *distribution* of national regional policy expenditures between the regions; and

ii. the *effect* of these expenditures.

These are now discussed in turn.

### 2.2.1 The Regional Distribution of Expenditure

This section considers regional incentive expenditure in the EU of twelve. It will have become clear from the discussion

above that, in many countries, the scope of regional policy extends well beyond the provision of financial incentives to firms. Nevertheless, in all EU countries (with the exception of Denmark since 1991) regional incentives are a key instrument (sometimes the only instrument) of regional policy and as such, analysis of this expenditure is a useful focus for comparisons.

A key objective in this part of the work has been to obtain an accurate picture of regional incentive spending in the recipient regions. To this end, regional breakdowns (to NUTS II where possible) have been sought and obtained for all but one of the countries where this is relevant (the exception is Greece); for the most part this data has not hitherto been published. The observations made here are based on the tables and charts provided in Annex I.

The study focuses on three aspects of regional incentive expenditure:

* first, *trends* in regional incentive spending. Has expenditure been increasing or decreasing in the period under review and are there significant differences in expenditure trends both between and within countries?

* second, the *scale* of regional incentive spending. How significant is the level of regional incentive expenditure in relation to population at the national and regional levels and in relation to national and regional GDP?

* third, the *intensity* of regional incentive spending. How does regional incentive expenditure relate to the population in the *assisted areas* of those regions in receipt of support?

Before considering these issues a number of cautionary points must be borne in mind. One is that the data in the tables and charts in Annex I generally relate to expenditure committed under the main regional capital grant(s) of the countries concerned (EU 12). The focus is on capital grants for two main reasons: first, such grants are far and away the most significant regional incentive measure in nearly all of the countries covered; and second, it is only in respect of regional capital grants that information is available at the regional level on the spatial distribution of expenditure.

In Annex I, the coverage of the data in the tables and charts is reviewed in detail, country-by-country. Information on the broad relationship between regional capital grant expenditure and regional incentive spending more generally is provided in the Fourth Commission
Survey on State Aids(⁶). This shows, over the 1990-92 period, between 97 percent and 100 percent of regional State aid spending took the form of grant support in five countries: Denmark, Luxembourg, the Netherlands, Spain and Portugal. In a further two countries (Belgium and Great Britain), around 90 percent of expenditure was grant-based, while in another four countries (Ireland, west Germany, Northern Ireland and Greece) around three-quarters of the regional State aid spend was attributable to grants. Only in parts of three countries - Germany (in the east and along the now-defunct Zonal Border Area), France and Italy - have grants played a lesser role in expenditure terms. In general,

grants very much represent the mainstay of regional incentive spending across the EU Member States.

Another cautionary point to note is that some of the expenditure on national regional incentives may be co-financed by the Structural Funds, particularly in Objective 1 regions. Unfortunately, information on this is not readily available. Statistics have, however, been produced on the degree of Structural Fund support for the productive environment (industry and services) over the 1989-93 period as part of the CSFs agreed for Objective 1 regions. The percentage contribution of the Structural Funds is set out in Table 2.3.

<table><caption>Table 2.3: Structural Fund Contribution to Support for Productive Investment</caption><thead><tr><th>Country Grouping</th><th>Objective 1 CSF</th><th>Percent</th></tr></thead><tbody><tr><td rowspan="4">Cohesion countries</td><td>Greece</td><td>62.2</td></tr><tr><td>Ireland</td><td>61.7</td></tr><tr><td>Portugal</td><td>65.8</td></tr><tr><td>Spain</td><td>50.0</td></tr><tr><td rowspan="2">Italy/Germany</td><td>Italy</td><td>42.5</td></tr><tr><td>Germany</td><td>50.0</td></tr><tr><td rowspan="2">Other Member States</td><td>Northern Ireland</td><td>54.8</td></tr><tr><td>Corsica</td><td>50.0</td></tr></tbody></table>

Source: Directorate-General for Regional Policy

While these percentages give some indication of the potential for Structural Fund support for the main regional incentives on offer in those regions which qualify for Objective 1 support, no information is available on the actual levels of co-financing which have taken place.

A final note of caution in relation to the tables and charts in Annex I concerns the extent to which meaningful international comparisons can be made. One problem area relates to the fact that, in some regions and in some years, very large awards to single projects may lead to a distortion of both overall trends and the mean level of expenditure. A further issue concerns the various adjustments which must be made to the data to allow international comparisons (for details, see Annex I). In addition, for most countries there are specific qualifications which must be borne in mind when analysing the data (again detailed in Annex I). Notwithstanding these cautions, the picture presented in the annex is such that it remains possible to draw clear and robust comparative conclusions - albeit focusing on broad trends and broad country groupings rather than on the specific detail of individual cases.

### 2.2.1.1 Regional Incentive Expenditure Trends

As far as regional incentive expenditure trends are concerned, these are best reviewed initially at the country level. Although regional-level trends are obviously more variable, in the main they tend to mirror the overall spending pattern for the nation as a whole (see the regional charts in Annex I).

Trends in overall levels of spending can be seen from Table 1b and the associated chart (reproduced here as Chart 2.1). The chart groups the EU countries into the three categories identified earlier as being of relevance to EU12: the four Cohesion countries; Italy and Germany; and the remaining northern European countries. With respect to trends, the clear development across all categories has been for regional capital grant spending to decline, often from a 1990 peak. Decline has been particularly significant in Italy, as a consequence of the demise of the previous Mezzogiorno-based policy in 1992/93 and the delay in implementing the new legislation (Law 488/1992), and also in Spain, following particularly high expenditure in 1990. Only in east Germany has expenditure risen since 1989 - an obvious consequence of re-unification.

<footnote>(⁶) Fourth Survey from the Commission on State Aid in the European Union in the Manufacturing and Certain Other Sectors (COM (95), 365 final, Brussels, 26.07.1995).</footnote>
Chart 2.1

<figure><img src="image_7.png" /><figcaption>Main regional incentive expenditure trends in the Member States, 1989-1993 (1993 prices, ECU, millions)
See Member State Table 1b</figcaption></figure>

The clear picture, then, has been for the emphasis on direct financial support for the problem regions in the form of capital grants to be in decline. This view is confirmed also when a longer-term perspective is taken. In many countries, and particularly those in the northern European group, regional incentive spending has fallen markedly since the early 1980s. This is especially true in countries like Denmark, the Netherlands and the United Kingdom where the decline over this period has been more than two-thirds (Yuill et al 1995, CEC 1994).

As well as highlighting trends in regional capital grant expenditure, Table 1b and the associated chart (in Annex I) display the breakdown of expenditure by country. Over the 1989-93 period, two-thirds of the expenditure recorded was in respect of east Germany and Italy, with a further quarter being accounted for by Spain, west Germany and Great Britain. While expenditure in Spain was high in the early part of the period, it fell to the broad level of the other Cohesion countries after 1990. As a group, the four Cohesion countries represent less than one fifth of the overall regional grant expenditure total.

2.2.1.2 The Scale of Regional Incentive Expenditure

Moving on to consider the scale of regional incentive spending - that is, the volume of expenditure adjusted to take account of country size - two measures of scale are utilised in the tables and charts of Annex I:

one which relates regional incentive spending to GDP in the recipient country or region; and the other which focuses on per capita spending by country and region.

The results on both measures are broadly similar, as the Annex I charts based on Tables 2 and 3 illustrate. These charts are reproduced here as Chart 2.2 and Chart 2.3. They show that, over the 1989-93 period, the scale of regional capital grant expenditure in the four Cohesion countries was, in general, significantly higher than elsewhere in the EU, particularly when measured in relation to GDP. However, a number of qualifications must be made to this broad picture. First, as already mentioned, the scale of spending in Spain fell markedly after 1990 and, thereafter, was on a par with a number of the northern Member States. Second, the scale of Italian expenditure was not dissimilar to the Cohesion countries in 1990 but in subsequent years was significantly reduced prior to the ending of Mezzogiorno-based policy in 1992/93. Third, the high scale of expenditure in Luxembourg directly reflects the size of the country. Finally, from 1990 onwards, per capita spending levels for east Germany are noteworthy, underlining the major emphasis placed on the development of the new Länder following unification.

At the regional level, it can be seen from the Annex I charts that there is considerable variation around the country averages. Some of this variation reflects large "one-off" expenditures in particular regions in particu-
lar years. In Italy, for instance, there was massive regional incentive spending in parts of the northern Mezzogiorno prior to the de-designation of certain areas over the 1990-92 period (see, for instance, the entries for Lazio, Abruzzi and Marche in 1989 and 1990). In Spain, the figure for Murcia in 1989 is almost one hundred

times higher than the entry for subsequent years; in similar vein, spending in Asturias in 1990 was well over ten times the average figure recorded for the remainder of the period. In France, too, expenditure in the Pays de la Loire region in 1990 was some ten times subsequent spending levels.

<caption>Chart 2.2</caption>

Expenditure on main regional incentives 1989-93, as a percentage of national GDP
See Member States Table 2

<figure><img src="image_8.png" /><figcaption>Chart 2.3</figcaption></figure>

Main regional incentive expenditure in the Member States, per capita of the national population, 1989-1993
(ECU, 1993 prices)
See Member States Table 3

<figure><img src="image_9.png" /></figure>
Notwithstanding the above, the broad picture is for regions in the Cohesion countries, as well as in Italy and, particularly, east Germany, to appear towards the top end of the scale ranking (see Chart 2.4). That having been said, a significant number of regions in Spain (especially) and in the Centre-North of Italy are also found

towards the lower reaches of the ranking. By the same token, average per capita spending in northern European regions like Saarland in Germany, Wales in the UK, Limburg in the Netherlands and Wallonia in Belgium are broadly in line with the country averages of Italy and Spain.

<figure><img src="image_10.png" /><figcaption>Chart 2.4</figcaption></figure>

### 2.2.1.3 The Intensity of Regional Policy Expenditure

Turning, finally, to the intensity of regional incentive spending, as noted earlier, this measure involves relating national and regional-level expenditure not to all of the population in the nation/region but only to that proportion of the population located in designated assisted areas. A feature of regional incentive policy in countries where spending is anyway low (and falling) is that there

is often an attempt to focus assistance on those areas where it is viewed to be most needed. Accordingly, assisted area coverage can often be quite limited in such countries. By way of example, according to DGIV figures, the Dutch problem regions (the IPR areas) currently hold just 17.3 percent of the national population, while in Ireland the entire country is eligible for support (see Table 2.4). Taking such differences in coverage into account can significantly influence the ranking of countries and regions in terms of policy intensity.
<table><caption>Table 2.4: Population Coverage of National Designated Areas Approved by DGIV</caption><thead><tr><th rowspan="2">COUNTRY GROUP</th><th rowspan="2">COUNTRY</th><th colspan="3">PERCENTAGE COVERAGE</th></tr><tr><th>OVERALL COVERAGE</th><th>ART 92 3(a)</th><th>ART 92 3(c)</th></tr></thead><tbody><tr><td rowspan="4">Cohesion Countries</td><td>Greece</td><td>100.0</td><td>100.0</td><td>0</td></tr><tr><td>Ireland</td><td>100.0</td><td>100.0</td><td>0</td></tr><tr><td>Portugal</td><td>100.0</td><td>100.0</td><td>0</td></tr><tr><td>Spain</td><td>75.9</td><td>59.6</td><td>16.3</td></tr><tr><td rowspan="2">Germany/Italy</td><td>Italy</td><td>48.9</td><td>34.2</td><td>14.7</td></tr><tr><td>Germany</td><td>37.6</td><td>20.8</td><td>16.8</td></tr><tr><td rowspan="7">Centre/North</td><td>Luxembourg</td><td>42.7</td><td>0</td><td>42.7</td></tr><tr><td>France</td><td>42.4</td><td>2.5</td><td>39.9</td></tr><tr><td>UK</td><td>38.1</td><td>2.9</td><td>35.2</td></tr><tr><td>Austria</td><td>35.2</td><td>3.5</td><td>31.7</td></tr><tr><td>Belgium</td><td>35.0</td><td>0</td><td>35.0</td></tr><tr><td>Denmark</td><td>19.9</td><td>0</td><td>19.9</td></tr><tr><td>Netherlands</td><td>17.3</td><td>0</td><td>17.3</td></tr><tr><td rowspan="2">Nordic Countries</td><td>Finland</td><td>41.6</td><td>0</td><td>41.6</td></tr><tr><td>Sweden</td><td>18.5</td><td>0</td><td>18.5</td></tr></tbody></table>

Source: Directorate-General for Competition

As far as country groupings are concerned, it can be seen from Table 4 and the associated chart in Annex I (reproduced here as Chart 2.5) that the intensity of spending in east Germany, in Italy (prior to the demise of Mezzogiorno policy) and in Luxembourg is significantly higher than in the four Cohesion countries. More

than this, the intensity of expenditure in at least two of the Cohesion countries - Portugal and Spain - is not dissimilar to that recorded in many northern Member States. Indeed, the intensity of spending in both Belgium and Northern Ireland generally exceeds that found in most Cohesion countries.

<caption>Chart 2.5</caption>

Main regional incentives: Expenditure per capita in the recipient assisted areas only, 1989-93 (ECU, 1993 prices)
See Member States Table 4

<figure><img src="image_11.png" /></figure>
A similar pattern is found at the regional level, with certain regions in more prosperous countries (where policy is often more spatially focused) moving markedly up the intensity listing. For instance, average regional incentive spending in Flanders over the 1989-93 period rises to be on a par with spending in regions like Sardinia and Campania in Italy and Asturias in Spain once account is taken of the relatively narrow spatial coverage of policy in Flanders. In similar vein, the intensity of policy in a number of west German Länder moves above that found in most of the Autonomous Communities in Spain. An overview of policy intensity at the regional level is provided on a country-by-country basis in Annex I (Chart 5).

This relates expenditure at the regional level to the population located in designated problem areas within those regions. While the intensity of policy is generally higher in poorer regions - most obviously the east German regions - the chart shows clearly that there are a significant number of regions in the northern Member States where policy intensity is comparable with or above that found in many Cohesion country regions. This point is underlined by Chart 2.6 which sets out the relationship between the intensity of regional incentive spending (as measured by relating expenditure to the population of those assisted areas in receipt of aid) and regional GDP per capita.

<figure><img src="image_12.png" /><figcaption>Chart 2.6</figcaption></figure>
### 2.2.2 The Effect of Regional Policy

In the previous section, the impact of Member States' regional policies on cohesion was considered in terms of the regional distribution of national regional policy expenditures. In this section, the emphasis is on reviews of recent evaluation literature. Existing evaluation studies can usefully be broken down into two groups: those commissioned and undertaken on behalf of policymakers; and those undertaken more or less independently by academic researchers.

As far as policymaker-driven studies are concerned, little in the way of systematic evaluation is carried out by EU Member States. The apparent paucity of the information available partly reflects the relatively low priority accorded to evaluation by regional policymakers in many countries. The United Kingdom does have a now long-standing practice of evaluating government policies; however, policymakers in other EU countries tend to be more sceptical about the reliability of evaluation results and are quick to identify the disadvantages inherent in the different methodological approaches. In consequence, in many countries (such as France and Spain) there are no "official" or commissioned evaluation studies on the effects of national regional policy. There are signs that this may change in the future if policymakers are influenced by the evaluation requirements of the Structural Fund regulations. However, for the time being, there is little national policymaker commitment to systematic evaluation.

In contrast with the virtual absence "official" studies at the national level, in most countries there is a growing body of evaluation work by academics. Such studies use a variety of research methods, policy indicators and spatial scales, when examining regional policy. Broadly speaking, however, there are two main types of evaluation conducted on national regional policy:

* quantitative or macro-level studies examining policy outputs such as employment creation, cost per job or the movement of industry

* qualitative or micro-level studies using various qualitative research techniques detailing the effects regional policy has on particular localities

Research methods used in the former usually take a highly aggregated approach towards data analysis. Longitudinal government statistics are used to track the way regional policy affects the performance of various indicators in assisted areas. Common measurements used to evaluate the effectiveness of regional policies are employment levels or measurements of the movement of industry. Econometric techniques involving

regression analysis and other quantitative research techniques are then used to establish the outputs achieved by any given policy (eg. employment creation, cost per job and regional growth). Owing to the degree of statistical aggregation, this type of study provides only preliminary insight into the effectiveness of regional policy. For example, it says little about the causality between policy instruments and the behaviour of firms. Industrial surveys, on the other hand, can improve knowledge of the motivational forces underpinning either location decisions or issues which generate corporate growth.

One seminal study, Moore *et al* (1986), examined the effectiveness of British regional policy using time series data over the period 1960-81. The authors claim that during this period regional policy created a total of 430,000 manufacturing jobs in assisted areas. According to their research, nearly 2000 manufacturing establishments are estimated to have moved to the assisted areas during this period as a result of regional policy instruments (ie. investment incentives, labour subsidies and location controls in non-assisted areas). In common with other evaluation studies, Moore *et al* calculated the cost per job of Britain's regional policy instruments, suggesting that Regional Selective Assistance (RSA) had a much lower cost-per-job than most other investment incentives such as the, now defunct, Regional Employment Premium.

The optimistic findings of the study (Moore *et al*, 1986) were in sharp contrast to the British government's declared objective of reducing the extent and remit of national regional policy during this period. Nevertheless, other work undertaken on the efficacy of British regional policy (see, eg. Wren and Watson, 1991) concurred with the study that RSA was the most cost-effective policy instrument. More recently, an evaluation of British RSA (PACEC, 1993), discovered that the cost-effectiveness of RSA had been maintained and that, on average, the cost per job in assisted areas was between £5,000 and £7,000. Although selective policy instruments are generally deemed most cost-effective, it is difficult assessing the reliability of the figures given the inherent fallibility of cost per job data. Another problem with this type of historical data is the time-lag between research publication (1993) and the time period scrutinised (1985-1988).

Typically, policy evaluation has focused on the cost-effectiveness of capital subsidies as a policy instrument. However, studies have also investigated the efficacy of labour subsidies in assisted areas. Roper and O'Shea (1991), for example, use a full econometric model to
analyse the historical effects on jobs and output of
labour subsidies in Northern Ireland. According to the
authors, whilst effective in stimulating jobs and output,
labour subsidies have only a small effect on unem-
ployment. This owes to the fact that the subsidies led
to a reduction in out-migration from the province. The
increased supply of labour in the province partially
negated the positive effects of the policy in creating
jobs (Roper and O'Shea, 1991).

Although there has been academic debate over which
policy instrument is better equipped at promoting re-
gional development, the problems of measuring policy
outputs are equally onerous for both labour and capi-
tal subsidies. One method increasingly used when
evaluating such instruments is to undertake industrial
surveys. This approach has the benefit of being able
to provide qualitative information on a sample of firms
in receipt of incentives, thus giving insights into how
much the aid altered firm behaviour. A major European
Commission sponsored study, evaluating national re-
gional policies throughout the EU, used this methodol-
ogy (PACEC, 1990). The benefit of this study was its
use of the same methodology throughout all EU Mem-
ber States. Not only does this help to address some
of the problems associated with the reliability of find-
ings, it also allows for comparative examination of na-
tional regional policies.

Overall, the study claims that the cost-effectiveness of
regional policy varied considerably across EU Member
States. Essentially the researchers found that the less
developed the economy and the less favoured the re-
gions within it, then the less effective or efficient was
regional policy. Basically, Member States with high lev-
els of economic development are not required to lever
in the private sector to the same degree that less
favoured regions must do. It was also suggested that
the most cost-effective incentives were those which
were paid as one-off subsidies on capital investment
and those which contain employment creation criteria.
Overall, more companies favour capital subsidies than
favour labour subsidies; however, this is not the case
for the Mediterranean countries where the preference
is reversed (PACEC, 1990).

A benefit derived from survey research is the findings
they provide on the motivational reasons firms have for
investing. For example, around 30 percent of respon-
dent firms reported that between 40 percent and 50
percent of their investment was attributable to region-
al policy (PACEC, 1990). Hypothetical questions allow
policymakers insight into how location incentives inter-
act with possible future location decisions. The PACEC
(1990) study revealed how cross country differences
arose in this respect. For example, in Belgium only 39

percent of firms said they would be influenced by the
offer of assistance, while in Britain 80 percent of com-
panies indicated they would be strongly influenced in
their location decisions by the availability of regional
policy.

Although PACEC (1990) is a rare example of pan-Eu-
ropean evaluation, the poor response rate of the sur-
vey, together with reliance on the attitudes of individual
respondents, must circumscribe the reliability of the
data collected. Although industrial surveys provide
useful information on certain qualitative issues, they
suffer some drawbacks (e.g. respondent bias etc.).
Another failing of all the studies mentioned above is
the lack of information generated on the exact nature
of employment developed through regional policy. In-
deed, given the problems associated with regional pol-
icy evaluation more generally, it is perhaps unsurpris-
ing that little quantitative evaluation work is currently
undertaken by many EU Member States.

A second strand of academic evaluation research -
and one in tune with the shift towards more discre-
tionary regional policies throughout the EU Member
States - aims to evaluate the level and nature of in-
dustrial development arising from regional policy in-
centives using micro-level data collected via qualitative
research techniques. Rather than trying to quantify the
efficacy of any given regional policy instrument, these
studies commonly aim to understand the qualitative
nature of development generated by regional policy,
using interview methods and case studies.

A major study undertaken for the European Commis-
sion (Amin et al, 1994) evaluated the role played by in-
ward investment in stimulating regional development in
order to gauge whether regional incentives were eco-
nomically effective. Given that the attraction of FDI re-
mains the central thrust of regional industrial policy for
many of Europe's less favoured regions (see Section
2.1), evaluation of this kind seems particularly perti-
nent. Amin et al (1994) discovered that the quality of
FDI varies significantly throughout Europe's regional
economies. Whereas the Rhone Alpes is inhabited by
a number of "quality" plants displaying high levels of
decision-making autonomy, innovative capacity in
terms of R&D, considerable stress on human resource
development, and extensive high quality localised sup-
plier linkages, Objective 1 regions such as Branden-
burg and Portugal were characterised by lower quality
plants with heavily-truncated decision-making struc-
tures, often displaying low levels of material integration.

Countries and regions with a longer history of FDI at-
traction had benefited from pro-active regional devel-
opment agencies in developing the qualitative nature
of incoming FDI. Hence, countries such as Ireland and
Scotland fell somewhere between the two extremes
highlighted above. This variegated picture is particu-
larly stark between core regions such as the Rhone
Alpes and peripheral Objective 1 countries such as
Portugal. This in-depth empirical work provides evi-
dence of the weak development effects generated by
FDI in many of Europe's less favoured regions.

The report concludes that intense inter-regional com-
petition for FDI results in high levels of deadweight re-
gional incentive spending on behalf of less favoured re-
gions. This was particularly acute in very weak indus-
trial milieus such as Portugal. In regions offering a va-
riety of locational attributes (particularly skilled labour)
over and above financial incentives, such as Scotland
and Ireland, incentives were found to play a less cen-
tral role (Amin et al, 1994). One of the study's main
conclusions, therefore, was the need to calibrate dis-
cretionary regional incentives towards upgrading the
'quality' of FDI in Europe's less favoured regions: "to
attract investments likely to have the potential to con-
tribute to the build-up and improvement of a region's
knowledge, research and skill-base, its management
and entrepreneurial capability, and the quality of its
business services and supplier firms" (Amin et al,
1994, p. 52).

Numerous other studies have attempted to evaluate
the role played by inward investment in regional eco-
nomic development throughout Europe. As with pre-
vious evaluative research most of this work is concen-
trated on empirical data from the UK's peripheral re-
gions. This is not surprising given the UK's dispropor-
tionate share of incoming FDI. In practice, most eval-
uation studies seek to provide fresh empirical evidence
of multiplier effects or indirect effects generated by FDI
in Europe's regional economies, often using survey
methods. The findings of these surveys generally con-
firm the view that regions such as the Northern Region
in England and Scotland face continuing problems as-
sociated with weakly embedded multinationals
(Phelps, 1993; Turok, 1993). These sourcing patterns
dramatically reduce the economic impact FDI has on a
region.

While these studies provide useful data on aggregate
sourcing trends, case study analysis has tended to
reveal more in-depth information on the underlying
dynamics affecting intra-regional linkage formation.
This includes analysis of industrial organisation fac-
tors which currently shape linkage configuration. In
fact, the trend towards global sourcing, coupled with
an increased intra-corporate division of labour, is ar-
guably leading to a situation of increased dependen-
cy on branch plant subsidiaries with low levels of de-

cision-making autonomy. Empirical evidence from
firms within the automotive industry in Spain (La-
gendijk and van der Knaap, 1995) and various
branch plant sectors in the Mezzogiorno (Giunta and
Martinelli, 1995) confirms this picture and reveals
continuing weak material integration in Europe's less
favoured regions. Giunta and Martinelli (1995) claim
that branch plants in these areas exhibit certain or-
ganisational attributes:

* the absence of strategic functions at the plant level

* subordinate status of plants within the corporate division of labour

* low propensity to stimulate local linkages

Such results cast obvious doubt on the efficacy of FDI
as a "solution" to regional development ills and, by im-
plication, on the role of regional policy in the attraction
of FDI.

Having briefly highlighted some key evaluative studies,
it is worth commenting on their effectiveness in as-
sessing regional policies. It was noted earlier how
quantitative evaluations often lacked sufficiently robust
data with which to assess fully the effectiveness of re-
gional policies. The problem of additionality is partic-
ularly difficult to resolve because any evaluation is
faced with obvious counterfactual problems: namely,
what would have happened if the policy had not been
implemented? Determining how much expenditure is
'additional' and how much is 'dead-weight' is ex-
tremely difficult. One final problem is the lack of EU-
wide comparative data and the plurality of evaluative
approaches used in different studies. Without good
comparative data, systematic and comprehensive ap-
praisal of the relative effectiveness of different national
regional policies remains elusive.

2.3 Concluding Points

The aim of this chapter has been to provide an as-
sessment of the impact of Member States' regional
policies on economic and social cohesion. This has
been done by reviewing the objectives of regional pol-
icy in the different Member States and the available ev-
idence on the effects of policy, as shown by the re-
gional distribution of national regional policy expendi-
ture and by reviewing recent evaluation studies.

With respect to the *objectives* of Member States' re-
gional policies, the chapter distinguishes between four
broad groups of countries:
* the four Cohesion countries (Greece, Ireland, Portugal and Spain), where issues of economic development are the main preoccupation, but where underemployment and peripherality, and, especially in Spain, unemployment are also concerns.

* Germany and Italy, which are characterised by the dual nature of their economies. These countries display by far the widest internal disparities and extend by far the most on regional policy; both countries extend the focus of policy beyond the most underdeveloped regions and also operate regional policies in the disadvantaged parts of the more prosperous regions.

* the central and northern EU countries (Austria, Belgium, Denmark, France, Luxembourg, the Netherlands and the United Kingdom), where employment issues, especially related to industrial restructuring, tend to dominate. However, the nature of the regional problem in these countries is also characterised by its variety, complexity and susceptibility to change; recent years have seen the emergence of acute urban and rural problems, as well as issues associated with the restructuring of industries such as defence. Moreover, peripherality and rural depopulation are often also concerns. In addition, in some countries, there are special situations to address, notably Northern Ireland within the United Kingdom, and Corsica in France.

* the Nordic Member States (Finland and Sweden), where peripherality, climate and geography are the principal issues addressed by regional policy.

As far as regional policy objectives are concerned, the four Cohesion countries (and especially Greece, Ireland and Portugal) are characterised by the problem of implementing a regional development policy in the context of national economies which are themselves underdeveloped from an EU perspective. This creates tensions between efficiency-related issues and equity-based concerns, between short-term and longer-term considerations and between national prosperity and regional disparity - tensions which have resulted in significant shifts in priorities and changes in the relationship between national industrial development and regional policies over time. Moreover, these tensions reflect the wider picture at the EU level of the potential conflict between competitiveness and cohesion.

A feature of Germany and Italy is their extreme internal regional disparities; this has resulted in considerable policy emphasis on their most underdeveloped regions. In Germany (and in Italy until recently) separate policies are operated for such regions (the Mezzo-

giorno in Italy and the new Länder in Germany) in a range of areas, although regional policy is also among the instruments used.

In the "northern European" Member States, regional problems tend to comprise a range of concerns, though high levels of unemployment are generally at their core; in these countries regional policy tends to have a relatively low political profile. There are, however, marked differences between countries with respect to both the objectives and substance of policy; at one end of the spectrum is France with the broad concept of aménagement du territoire, while at the other comes the United Kingdom with a far narrower policy focus on regional industrial policy.

In the Nordic Member States the regional problems to be faced are different in both scale and type (sparse-ly-populated areas, harsh climates, distance from population centres etc); regional policy in these countries tends to be allocated a higher priority and to include a fairly broad range of policy measures.

With regard to the instruments of regional policy, the chapter has highlighted the considerable variety in policy approaches. In some countries, national regional policy is essentially comprised of financial incentives to firms investing in the problem regions: this is true of Belgium, Luxembourg and the United Kingdom, for example. In others, a range of non-spatial government policy measures are associated with the objectives of regional policy. In France and Finland, for example, regional development legislation makes this link explicit.

There are also considerable differences in the institutional arrangements for regional policy between countries. Among the federal or quasi federal states, the role of the subnational level is key. For example, in Belgium, policy is the responsibility of the regional governments; however, in Germany and Spain responsibility is divided between the national and regional governments according to competences defined in the constitution and partnership is a core component of policy delivery. In Austria, the organisation and competence for regional policy is not allocated constitutionally either to the federal government or to the Länder. In practice, there is an informal allocation both of legislative competence and of the administration of public activities affecting regional development between different bodies at federal, Land and local level. The remaining countries are organised along unitary lines, but there is frequently administrative devolution in the operation of regional policy. This is so, for instance, in France, where the préfets play an influential role in regional economic development policy and, more prosaically, in Great Britain where government regional of-
fices are largely responsible for administering regional incentive policy.

As far as *regional policy expenditure* is concerned, the chapter has focused on regional grant expenditure, in order to obtain comparable and regionally-disaggregated information. A number of points arise from the discussion of the distribution of expenditure at both national and regional levels.

First, in respect of *expenditure trends*, regional capital grant expenditure (and, indeed, regional policy spending more generally) has been in decline in most countries over the 1989-93 period, with particularly significant falls in Italy and Spain; these trends reinforce longer-term developments, especially in the northern Member States where the decline in some countries since 1980 has been more than two-thirds. On the other hand, east Germany stands as an obvious exception to these general trends, with major regional development spending from 1990 onwards. Strikingly, some two-thirds of overall regional grant expenditure relates to east Germany and Italy, just under one-fifth to the Cohesion countries and some 15 percent to the remaining EU12 countries.

Regarding the *scale* of regional grant spending, this is, in general, significantly higher in the four Cohesion countries than elsewhere in the Member States (except Luxembourg); though spending declined markedly in Spain and increased steeply in east Germany from 1990. However the position at the regional level is more varied. While the broad picture is for regions in the four Cohesion countries, in east Germany and in the Italian *Mezzogiorno* to appear towards the top end of the scale ranking - together with Northern Ireland - certain Spanish and Italian regions are found towards the lower reaches of the ranking. In similar vein, aver-

age *per capita* spending in a range of northern European regions (Wallonia, Saarland, Limburg, Wales) is broadly in line with the country averages of Spain and Italy.

When considering the *intensity* of policy, the key point to note is that this involves relating regional incentive spending to the population of those regions actually in receipt of support (the assisted areas). As a result, those countries and regions with only limited assisted area coverage move markedly up the rankings. Thus, the intensity of regional incentive spending in east Germany, Italy (prior to the demise of *Mezzogiorno* policy) and Luxembourg is significantly higher than in the four Cohesion countries, while the intensity of expenditure in Portugal and Spain is not dissimilar to that recorded in many northern Member States. A similarly varied pattern is found at the regional level, with the intensity of regional incentive spending in a number of northern regions exceeding, by some way, that found in many regions in the Cohesion countries.

Turning finally to the review of *evaluation studies*, in general these provide only limited information on the effectiveness of policy. Econometric exercises tend to be constrained by data availability, by the difficulty of establishing the counterfactual and by problems of determining causality, while survey-based research tends to have a quite specific focus - on a particular incentive or a particular region or a particular development process - which creates difficulties when attempts are made to generalise the results. At the EU level, these difficulties are compounded by the lack of EU-wide comparative data and the plurality of evaluation approaches used. As mentioned earlier, without good comparative information, the systematic and comprehensive appraisal of the relative effectiveness of national regional policies will remain elusive.
## 3. Other Spatial Policies Operated by the Member States

In this chapter, the focus is on those spatially-discriminating policies (other than regional policy) which operate in selected Member States (the six case study countries identified earlier: France, Germany, Italy, Portugal, Spain and the United Kingdom). The review is concerned with national government policies. However, it is important to note that, in some areas of spatial policy, subnational levels of government also play an important role; this is particularly true of urban policy. In Germany and Spain, for example, urban policy operates at the subnational level and is not the responsibility of the national government. Moreover, in other areas of spatial policy, EU policies are often important; in some countries, for instance, rural policy is essentially subsumed within EU policies operated under Objective 5b or within the LEADER Community Initiative - again this is true of Spain. Similarly, EU policies are also significant in the context of industrial crisis regions designated under KONVER, RENAVAL, RESIDER and so on.

The spatial policies of Member States identified in this study address a variety of objectives. For the purposes of this review these can usefully be grouped as follows:

* urban policy

* rural policy

* policies for "crisis" areas, essentially closely-defined areas seriously affected by closures in a dominant sector in the region

* policies for particular regions, especially those enjoying a special status arising from a particular historical or political context

The chapter is in three main sections. The first, Section 3.1, considers the broad objectives of Member

States' spatial policies, focusing in turn on each of the above policy areas (urban, rural, "crisis" areas and "special status" regions). Section 3.2 then reviews the evidence available on the spatial impact of these various policies. As was the case with Member States' regional policies, the review centres on two main aspects: the distribution of national expenditures on other spatial policies (Section 3.2.1); and evaluation studies on the effect of such expenditures (Section 3.2.2). The concluding section, Section 3.3, brings together the main points made.

### 3.1 The Objectives of Member States' Other Spatial Policies

The distinction between Member States' regional policies and other spatial policies is not always a clear one. This is particularly true of France where, as described in the last chapter, a broad view of regional development policy is taken within the concept of *aménagement du territoire*. In this context, the 1995 regional development framework law in France makes reference to, and provides for, the designation of three types of assisted area: regional development areas; priority rural development areas; and urban regeneration areas. In contrast, in the United Kingdom, other spatial policies are, for the most part, designed and operated separately from regional policy.

Although the distinction between regional policy and other spatial policies is not always immediately apparent, there is a difference in emphasis between the two. The main objective of Member States' regional policies is economic development and economic development instruments (ie. subsidies to businesses) are the main
measures in place. For other spatial policies, social and political objectives are more immediate; although economic development instruments are usually among the measures used, they are primarily employed for social and political ends.

The multiplicity of policy objectives often appears to be reflected in the policies themselves. For the most part, urban, rural and, to a lesser extent, crisis area policies are characterised by the disparate nature of the policy instruments utilised, the large number of agencies involved in the delivery of policy and the apparent absence of policy co-ordination. On the other hand, a notable recent trend is the degree to which this lack of policy coherence appears to be being addressed. In the United Kingdom, for example, the so-called Single Regeneration Budget has brought together a wide range of funds and governments agencies with a view to rationalising the implementation of regeneration policy. Similarly, in France, a more co-ordinated and integrated approach has been sought by incorporating measures within the five-year State-Regional planning contracts; these provide for so-called PACTs (concerted territorial action programmes) which seek to address rural and urban policy objectives.

### 3.1.1 Urban Policy

In countries where urban policy is given a high priority, the impetus for policy often stems from the political imperatives arising from growing unrest in areas of extreme poverty and deprivation. There is frequently an economic development aspect to the objectives of policy but, where this is so, the emphasis is often on local employment initiatives, partly in recognition of the limited extent to which large-scale manufacturing projects can readily be assimilated within an urban environment.

Among the case study countries, national urban policy measures are of most significance in the United Kingdom. Indeed, during the course of the 1980s and 1990s, urban policy expenditure has risen at the same time as regional policy expenditure has declined. By 1991-2, Department of the Environment spending on the range of urban regeneration policies had reached an estimated £884 million (1,133 MECU); this compares with regional aid spending of around £210 million (269 MECU) under Regional Selective Assistance in the same period. In France too, national urban policy has been of growing importance. Expenditure on urban policy (other than major urban projects) doubled to FF 9.5 billion (1,432 MECU) for the period 1994-99, compared with 1989-93. This is broadly similar to the sum expended on the range of aménagement du territoire policies in 1989-93 (which include measures for

rural and "crisis" regions). Given the relative importance of national urban policy in the UK and France, the remainder of this section focuses mainly on these two countries.

The basis for urban policy as currently operated in France was introduced in 1988. Responsibility for policy is "interministerial" and involves a number of institutions. This reflects the various objectives of urban policy which encompass both the physical environment and social issues. The policy focus is on priority areas which are designated on the basis of socio-economic criteria such as levels of unemployment, the size of the youth population and the proportion of immigrants. Policy is operated in a "deconcentrated" manner involving local representatives of central government in multi-annual partnership arrangements with local authorities. The latter are primarily responsible for policy implementation.

Policy is operated through two main programmes: urban contracts (contrats de ville); and major urban projects (grands projets urbains, GPU). Urban contracts date back to 1992 and followed on from a previous programme of urban social development. The contracts are now incorporated into the wider State-region planning contracts (contrats de plan État-Régions). For 1994-99, 214 contracts have been concluded involving some 1,300 areas. The GPU aim at the radical transformation of large residential areas and improvements in physical infrastructure. Central government commitment for the period 1994-98 is FF 2.25 billion (339 MECU). The interministerial committee for urban policy has designated 12 areas for the GPU policy: eight in the Paris region; two in Rhône-Alpes; one in Provence-Alpes-Côte-d'Azur; and one in Nord-Pas-de-Calais.

In addition to these two major urban programmes, an "urban solidarity grant" (dotation de solidarité urbaine, DSU) was established in 1990. The DSU is aimed at disadvantaged suburban areas and is not financed by central government but rather by a levy on the receipts of the more prosperous regions. In 1994 around 100 towns contributed to the fund (Paris being the main one) and some 500 communes benefited from it. In 1995 the value of the fund was FF 1.3 billion (196 MECU). Finally, certain residential areas in France have been designated as urban renewal areas under the 1995 framework law for regional development. These areas already benefited from a range of fiscal and financial measures which will be enhanced with the implementation of the new law.

In the United Kingdom, as in France, urban policy is primarily concerned with social objectives and the im-
provement of the physical environment. A different range of urban policy measures is operated in the four parts of the United Kingdom, although in practice there is substantial common ground between them. A notable characteristic of UK urban policy is the large number of measures being implemented, the range of organisations involved in policy and the apparent lack of co-ordination between them.

This multiplicity of policy frameworks has been the source of criticism in the past. In response to this, urban regeneration initiatives in England were rationalised in April 1994 along with a range of other economic development initiatives. The so-called Single Regeneration Budget (SRB) was introduced to integrate the various existing initiatives, many of which will be phased out over time. At the same time, the regional offices of four government departments were integrated with a view to improving the delivery of programmes at the local level and ensuring "flexible and effective use of public money". The objectives of the initiatives within the SRB are intended to:

* "enhance the quality of life of local people

* improve the physical environment

* attract private sector investment

* harness the talents of the voluntary sector and the community" (Department of Environment Annual Report, 1995).

The key urban policy measures now subsumed within the SRB and the expenditure incurred in 1993-4 are set out in Table 3.1.

<table><caption>Table 3.1: Main Urban Policy Measures and Spending in England</caption><thead><tr><th>Measure</th><th>1993-4 Outturn<br/>£ million</th><th>MECU</th></tr></thead><tbody><tr><td>Urban Development Corporations and Docklands Light Railway</td><td>371.2</td><td>476</td></tr><tr><td>English Partnerships</td><td>24.2</td><td>31</td></tr><tr><td>City Grant</td><td>24.4</td><td>31</td></tr><tr><td>Derelict Land Grant</td><td>104.3</td><td>134</td></tr><tr><td>Housing Action Trusts</td><td>78.1</td><td>100</td></tr><tr><td>Estate Action</td><td>357.4</td><td>458</td></tr><tr><td>City Challenge</td><td>206.6</td><td>265</td></tr><tr><td>Urban Programme</td><td>166.5</td><td>213</td></tr><tr><td>Inner City Task Forces</td><td>18.0</td><td>23</td></tr><tr><td>City Action Teams</td><td>3.4</td><td>5</td></tr></tbody></table>

Source: Department of the Environment Annual Report, 1995.

The table illustrates clearly that the main items of expenditure are the Urban Development Corporations (1993-4 expenditure on the Docklands Light Railway was some £28 million - 36 MECU) and Estate Action. Together, these accounted for well over half of the 1993-4 urban policy spend in England.

The twelve *Urban Development Corporations* are limited-life bodies that are all due to be wound up between March 1995 and 1998. Their objectives are the regeneration of designated areas by bringing land and buildings into effective use; the encouragement of industrial development; the improvement of the environment; and ensuring that housing and social facilities are available to encourage people to live and work in the area. The UDCs are currently responsible for the regeneration of some 16,000 hectares of inner city land which was previously derelict. The *Estates Action* programme is different in nature; it aims to assist local authorities in transforming unpopular housing estates. It provides resources to improve the physical condition and the management of estates, to secure greater tenant involvement and provide greater variety and choice of housing.

Of the remaining measures listed in Table 3.1, the two most significant are the City Challenge scheme and the Urban Programme, accounting for 15.3 percent and 12.3 percent respectively of the 1993-4 urban policy expenditure total. The *City Challenge* scheme involves allocating funds to local authorities on a competitive bidding basis. The aim is to encourage the submission of "ambitious and realistic" proposals for the revitalisation of key areas of urban deprivation. The *Urban Programme* is the longest-running of the government programmes dealing with urban deprivation in England; however, since 1993-4, the programme has only been meeting its existing commitments. The pro-
gramme is targeted at some 57 designated inner city areas and aims to revive local economies, foster enterprise, improve the environment, rebuild confidence and encourage investment. Grants are given through local authorities to support a range of projects in the field of health, education, job creation and training, and environmental improvement.

In *Scotland*, most central government-led urban policy is carried out under the aegis of the Scottish Office Industry Department, although schemes that are concerned only with housing are directed by the Scottish Office Environment Department. Key features of recent initiatives are the multi-faceted approach which has been adopted and the promotion of partnership across a wide range of agencies. Regeneration in Scotland

has followed similar patterns to that in England and has even led the way in terms of integrated regeneration, with the experimental GEAR project in the East End of Glasgow in the 1980s. The 1988 Scottish Office publication *New Life for Urban Scotland* signalled a shift in the emphasis of urban policy away from the inner cities to the peripheral housing estates. In 1993-4, urban policy expenditure in Scotland amounted to £65 million (83 MECU), most of which was allocated to the *Urban Programme*. This aims to tackle multiple deprivation in urban areas of exceptional need and gives priority to projects which have a strategic focus and are part of a multi-agency approach.

In *Wales*, the main urban policy measures are as set out in Table 3.2.

<table><caption>Table 3.2: Main Urban Policy Measures in Wales</caption><thead><tr><th>Measure</th><th>1993-4 Outturn<br/>£ million</th><th>MECU</th></tr></thead><tbody><tr><td>Urban Programme (now the Strategic Development Scheme)</td><td>16.7</td><td>21</td></tr><tr><td>Urban Investment Grant</td><td>n.a.</td><td>n.a.</td></tr><tr><td>Cardiff Bay Development Corporation</td><td>46.9 (net)</td><td>60</td></tr></tbody></table>

Source: Welsh Office Departmental Report, 1995.

The Welsh *Urban Programme* aims to promote economic, social and environmental developments which benefit areas of social need and assist local authorities with funding for capital projects that cannot be met out of their own budgets. The *Urban Investment Grant* is intended to encourage private sector development on derelict or run-down sites to assist the economic regeneration and environmental improvement of deprived urban areas of Wales. Last, the *Cardiff Bay Development Corporation* was set up to enhance the image and economic well-being of the city and to establish its international profile; most of the funding allocated by the Corporation is assigned to infrastructure projects, including housing.

Urban policy in *Northern Ireland* is principally operated by the Department of the Environment for Northern Ireland. A key feature of policy is that it is implemented through programmes directed at specific areas, notably parts of Belfast and Londonderry as well as some smaller settlements. These include the *Making Belfast Work* scheme; *Belfast Action Teams*; and the *Lagan-side Corporation*. In addition, there is a large number of apparently disparate programmes involving relatively small sums of expenditure.

Finally in this country review, it is worth making brief mention of urban policy in the *Federal Republic of Germany*. In Germany, urban policy is primarily a matter

for the *Länder*. Nevertheless, the federal government can grant supplementary aid for urban measures where the investments serve to improve the conditions for growth in the economy as a whole or to equalise economic strength between the regions. Such measures are intended to contribute to the following objectives:

* developing the physical environment to meet social, public health, economic and cultural needs

* developing the structure of residential areas in line with environmental requirements and the needs of the population

* preserving, renovating and developing existing localities.

These various country examples help underline the significant social, environmental and, in some instances, political aspects of national urban policy. As mentioned earlier, although economic development instruments are usually among the measures utilised, they are employed mainly for social and political ends.

### 3.1.2 Rural Policy

Like urban policy, rural policy combines economic and social cohesion objectives although, once more, it can
be argued that the latter are the prime motivating force for policy. Economic development instruments have a role in reducing social disparities, especially in reducing levels of underemployment and encouraging alternatives to agriculture. Again, however, as is the case with inner urban areas, large scale industry is unlikely to be suited to rural areas and the emphasis is often on the development of crafts and tourism. Moreover, the objectives of rural policy are generally as much political or social as economic. The speed of agricultural change in predominantly rural countries like France in the post-war period has often resulted in unrest and in rural issues being given a high political profile. Furthermore, the emphasis of policy often has a significant social component, associated with maintaining population settlements by sustaining standards of living and by assuring the provision of public services.

Among the case study countries, national rural development policy is of most significance in France. Rural areas cover 80 percent of the French national territory but contain just 20 percent of the population. Moreover, the rural population in France continued to decline into the 1980s. In practice, however, the characteristics of rural areas in France, and, associated, the nature of the rural problem, vary widely. A study by DATAR in 1993 established a socio-economic typology of cantons and identified the following:

* certain cantons are dynamic (mainly those in the bassin Parisien: Île de France; Picardie; Champagne-Ardennes)

* certain cantons are in an "intermediate situation" (these are spread throughout the country)

* other cantons are deemed to be "fragile" (these are mainly in the west and south-west: Basse Normandie; Bretagne; Pays de la Loire; Poitou-Charlentes are particularly affected)

* last, a number of cantons are considered to be in a crisis situation (mainly in Limousin; Auvergne; Corse; and Languedoc-Roussillon).

Until relatively recently the policy response to rural problems in France tended to be sectoral in approach. Under the influence of EC policies, such as the IMPs, recent policy has adopted a more integrated approach. This is reflected in the main policy decisions taken by the CIDAR (interministerial committee for rural development) at its June 1993 meeting. These involved the following measures:

* economic development that encourages "pluriactivity" (incentives for collaboration between employ-

ers, relaxation of the rules on indebtedness in the case of young farmers, start up assistance for firms in the agricultural sector, and the development of the hotel and tourism industries)

* the designation of priority rural development areas (TRDPs) as the basis for government policy in rural areas. These areas qualify for contributions from various interministerial funds, for tax concessions and for certain financial measures

* land and forest management (a three-year programme involving FF 80 million (12 MECU), of which FF 39 million (6 MECU) is contributed by central government)

* housing (including tax exemptions for vacant property put up for rent; some FF 300 million (45 MECU) for 150 housing improvement projects; and an increase in the rate of housing improvement grants in communes with fewer than 5,000 inhabitants).

* public services (updating and reinforcement of the departmental plans for the organisation and improvement of public services; establishment of contracts for the maintenance of the education services in rural areas; improvement of health services).

The main instruments of French rural policy are:

* the FIDAR (interministerial fund for rural development - now subsumed into the national regional development fund, FNADT) which amounted to FF 1.8 billion (271 MECU) for the period 1989-93

* the FGER (rural area management fund, provided for under the new regional development framework law) for which the initial 1995 allocation of FF 500 million (75 MECU) was reduced to FF 313 million (47 MECU) in June 1995.

* the DDR (rural development allocation), distributed through the budget of the ministry for the interior and modified under the new framework law for regional development; the measure seeks to promote economic development by encouraging collaboration between communes (intercommunalité). A quarter of the budget is allocated to communes with fewer than 10,000 inhabitants and three-quarters to groups of communes with fewer than 35,000 inhabitants.

Rural policy in the United Kingdom has a lower profile than policy in France, in large measure reflecting earli-
er industrialisation processes in the UK and the small proportion of the population still engaged in agriculture. In addition, for the most part, the United Kingdom is considerably more densely populated than France. As with urban policy, the instruments and implementation of rural policy differ between the different parts of the United Kingdom. Of most interest are the policy approaches in England and Wales.

In England, rural policy is the responsibility of the Rural Development Commission (RDC), a government agency grant-aided by the Department for the Environment. The RDC's stated goals are that the countryside should be a place where:

* people both live and work, and villages and small towns provide for the varied needs of people in a wide range of circumstances;

* the economy of all rural areas provides a broad range of job opportunities and makes the most effective possible contribution to the national economy;

* residents are not unduly disadvantaged as a result of living in rural areas, while rural communities have reasonable and affordable access to services; and

* development respects and, wherever possible, enhances the environment.

In 1993-4 RDC expenditure amounted to £38.3 million (49 MECU) - little more than one tenth of the expenditure committed under Regional Selective Assistance to firms in the same year. Policy instruments include the provision of funded workspace; small business support; and loans to rural businesses.

Reflecting the different geography of the country, rural policy in Wales is markedly more significant than in England. Rural development policies are co-ordinated under the Rural Initiative, the aim of which is to "create a self-supporting market economy in rural Wales". The Welsh Office works in co-operation with local authorities, government agencies and other bodies, including the Welsh Development Agency and the Development Board for Rural Wales. The total Welsh budget for rural support in 1992-3 was around £56 million (72 MECU).

Finally in this rural policy review, it should be noted that in Spain, national rural policy is largely subsumed within wider measures undertaken in the context of the Objective 1 and 5b plans. In addition, a number of measures are provided for in the LEADER Community Initiative. There is, however, no national rural develop-

ment policy that is distinct from EU measures.

### 3.1.3 Policies for "Crisis" Areas

Policies for crisis regions are those operated in areas that have generally been dominated by a single industry that has undergone often rapid restructuring and, sometimes, terminal decline. There is usually a clear economic development objective underlying such policies in the sense that their primary purpose is to encourage alternative economic activities. However, the intensity with which such policies are implemented (usually the focus is on closely-defined areas and for a set time period) reflects concerns at the devastating effects on the community at large of the collapse of the dominant, sometimes the only, industrial activity. As with urban policy, there is an important social and political aspect to the motivation for action, although in the case of crisis regions the main policy instruments tend to be primarily economic.

In Germany, it was noted in Section 2.1.2 that regional policy is the responsibility of a joint Federal-Land partnership arrangement, the so-called Gemeinschaftsaufgabe (GA). During the 1980s, the rundown of the steel and shipbuilding industries created severe problems of structural change in specific localities which resulted in a series of special fixed-term programmes. Although to some extent distinct from standard regional policies, these programmes made use of GA policy instruments and funding. Their prime objective was to create alternative employment opportunities outside of those sectors experiencing industrial decline.

Such programmes were at their peak in the late 1980s and early 1990s. They included a Steel Location Programme (1982-90) for the creation of alternative employment opportunities outside the iron and steel sectors, a Special Programme for Bremen (1984-89) responding to problems created by job losses in the shipbuilding and steel sectors, a more general Shipbuilding Area Programme (1987-89) and a Special Programme for Aachen-Juelich (1988-91) reflecting coalmine closures (OECD, 1989). More recently, special measures have been adopted in response to more general decline in the coal-mining and defence sectors, often with EU support (RESIDER, KONVER). A feature of these measures is their increasingly close relationship to the GA. In particular, it is no longer the case that such crisis areas can be designated additional to the GA Areas. Instead, and this was made explicit in the last area designation review approved by the European Commission, the designation of such areas must fall within the overall population ceiling for GA Area coverage agreed between the GA and the Com-
mission. In other words, should the need arise for new
crisis areas to be designated this will only be allowed
at the expense of the de-designation of previously-
designated areas, leaving the overall population cover-
age of those areas approved for regional aid purposes
unchanged.

In France, policies for crisis areas had a profile in the early to mid-1980s, although a special fund for the restructuring of mining areas (the GIRZOM) had been in place earlier. The main focus of policy was the designation of a number of pôles de conversion; (for the most part, the areas concerned were affected by the restructuring of the coal, steel and shipbuilding sectors). The interest of this as a policy approach lies in the fact that no new policy instruments were introduced, but that existing measures were co-ordinated and focused on closely-defined areas of industrial decline - involving, for example, accelerated award procedures under the regional policy grant (PAT) scheme and the establishment of a small task force based in the locality.

Although pôles de conversion have never been formally dedesignated, policy has been relaxed over time; in some of the areas there was considerable success in attracting new investment and in redeploying the workforces affected by restructuring. In others, the crisis has remained severe and additional policy measures have largely superseded the pôles de conversion policy. Between 1987 and 1993 enterprise zones were operated in three shipbuilding closure areas. In 1993 two "privileged investment zones" (ZIP) were designated in mining areas in the Nord-Pas de Calais region, providing automatic tax relief for the three years following establishment.

Besides these relatively high-profile approaches to fo-
cusing policy on closely-defined areas, a number of
other measures are operated more widely and are of-
ten incorporated within the State-region planning con-
tracts. These include:

* the use of the regional development fund (FIAT) for derelict land and site clearance

* the industrial redevelopment fund (FRI) which provides assistance to SMEs in areas undergoing restructuring (FF458 million - 69 MECU - over the period 1989-92)

* the GIRZOM, involving FF700 million (106 MECU) in 1989-93

* the industrialisation of mining areas (FIBM) which

allocated funding of FF1.8 billion (271 MECU) over
a decade (1984-94)

* and the industrialisation of the Lorraine region (FIL) which involved FF1.3 billion (196 MECU) for the period 1984-92.

In addition to these measures, which are primarily tar-
geted at economic development, a significant spend
was allocated to a wide range of essentially social
measures providing for early retirement, mobility, long-
term retraining, etc.

In the United Kingdom, policies for crisis regions have also tended to have a high profile. There is a now long-standing policy of designating enterprise zones covering closely-defined areas affected by acute industrial decline. The aim of enterprise zone status is to stimulate private investment in target areas by lifting certain financial burdens and administrative controls. The main incentives take the form of tax relief and a concession on business rates; these apply for a period of ten years from the date of designation. In addition, the planning regime is greatly simplified: developments conforming to the published scheme for each zone do not require individual planning permission, and, where planning regulations remain in force, procedures are accelerated.

The first round of enterprise zones were created in 1981 and expired in 1991-2; the second round expired in 1993-4. There have been 28 zones designated to date. Current zones include Sunderland, Inverclyde and Lanarkshire; and extensions in North West Kent and Swansea. Further zones are being designated in the colliery closure areas of East Midlands, Dearne Valley and East Durham.

A separate initiative, the Programme for the Valleys, was launched by the Welsh Office in 1993. This covers some 2,230 square kilometres and a population of 700,000 (about 25 percent of the Welsh population), comprising some of the most disadvantaged communities in an area formerly dominated by the coal and steel industries. The programme aims to improve the "social, environmental and economic well-being of the Valleys" through job creation, training, environmental improvements and improvements in health and housing provision. Total public expenditure on the programme in 1993-4 was £345 million (442 MECU); the programme is expected to involve £1 billion (1,282 MECU) over its lifetime and aims to attract a similar sum in private sector investment.

In Italy support for steel closure areas is provided for under Law 181 of 1989 in Terni and Genoa in the Centre-North and Taranto and Naples in the Mezzogiorno.
As elsewhere, the main objective is to provide alternative activities for those made jobless by the decline in the steel sector.

### 3.1.4 Policies for Special Status Regions

A final category of spatially-oriented policies arises from the special status of certain regions. Although there is an economic and social cohesion dimension to policy, the primary motivation is to contribute to national political cohesion by reducing economic and social disparities. Moreover, such is the priority accorded to this form of solidarity that separate transfer mechanisms as well as explicit policy measures are usually in place, with the consequence that public expenditure per head in such regions is significantly above the national average.

France, Germany, Italy and the United Kingdom all operate (or have operated) distinct policies for particular parts of their territories. In France, Corsica has a separate legal status from the remaining 21 regions and special economic development measures are in place to reflect this and the particularities that arise from its island status. In Germany, following reunification, special measures apply in the so-called new Länder aimed at facilitating the adjustment process. In Italy, the emphasis on the development of the south (the Mezzogiorno) from the 1950s to the early 1990s was reflected in the existence of quite distinct policies (the so-called intervento straordinario or special intervention) and the establishment of separate institutions to manage them. In the United Kingdom, for well-known political reasons, distinct packages of measures are operated in Northern Ireland in many areas of government policy.

The most significant policies in this category are operated in Germany in the context of reunification. Indeed, in terms of scale, the provisions made for the new Länder overshadow any regional or other spatial policy in the European Union. The central objective of policy is to overcome the internal division in standards of living. It was apparent even before unification that the existing system of horizontal and vertical fiscal equalisation would be overwhelmed by the inclusion of the new Länder, with most western Länder becoming net contributors. When the Unification Treaty was drawn up the western Länder negotiated the provision of special arrangements for the new Länder, in compensation for a five year exclusion of the new Länder from the fiscal equalisation schemes provided for in the Basic Law. The resultant Unity Fund (Fonds Deutsche Einheit), which ran from 1990 to 1994, was initially to be financed in three equal parts by the western Länder, the eastern Länder and the federal government. However,

when the full scale of the financial burden became clearer, alterations were made in 1992 which increased the total funding volume from DM 115 billion to DM 146.3 billion (75,413 MECU) and allowed the new Länder to retain their full VAT revenue. These sums are extremely significant when set alongside total general government expenditure of DM1,084 billion (558,763 MECU) in 1990 and regional incentive spending of just DM110 million (57 MECU) in the same year. A further special fund, the Gemeinschaftswerk Aufschwung Ost provided for a further DM 12 billion (6,186 MECU) in both 1991 and 1992 for investment and work programmes.

The Unification Treaty provided for the following:

* a special programme of economic assistance for the new Länder

* measures to improve the general economic conditions in the communes, with particular emphasis on infrastructure

* measures to encourage the rapid development of SMEs

* measures to promote the modernisation and restructuring of the economy

* debt relief for enterprises.

A key feature of the approach under the Unification Treaty is that all formerly west German federal laws and institutions were applied to the east; with the exception of the Treuhand, there are no separate institutional structures with responsibility for policy in east Germany. A further notable feature is the explicit decision to use regional policy as a component of policy (this is reflected in the very high levels of spend discussed in Section 2.2.1 above).

Policy for the new Länder based on the Unification Treaty is centred around a range of instruments, some of which are exclusive to east Germany and some of which involve enhancements to measures that are available throughout the Federal Republic. The key measures include:

* tax relief in the form of an investment allowance (Investitionszulage)

* a special depreciation allowance

* soft loans from the Credit Bank for Reconstruction (Kreditanstalt für Wiederaufbau, KfW); the German