Stability And Growth: What Role For EU Cohesion Policy?


Remarks by Angel Gurría, OECD Secretary-General, delivered at the EU Cohesion Forum

Brussels, 1st February 2011

Ministers, Commissioner Hahn, Dear colleagues, Ladies and Gentleman,

It is a great pleasure to address this important Forum and discuss this crucial topic of regional policy. Let me thank the EU Commission and, in particular Commissioner Hahn, for the opportunity to share my views on the future of the European Cohesion Policy.

The European Union faces serious challenges today, with public finances in poor shape, weak long-term growth prospects and an unemployment level close to 10%. In almost one-fifth of EU regions, more than one in eight workers is unemployed and inequalities affecting youth access to jobs are large. All this is dangerous for cohesion, be it economic, social or territorial. But the Europe 2020 strategy sets out ambitious objectives to make the EU a smart, sustainable and inclusive economy, echoing our OECD objectives of a stronger, cleaner, fairer global economy.

How to breach the gap? Regions are the place where policies can effectively complement each others to achieve these ambitious objectives. Regional policy is the place for policy coherence. The Cohesion Policy will thus play a key role in meeting Europe’s objectives and challenges. Regional spending accounts for 36% of the EU budget. Let me offer you the OECD’s perspective on how to get the best results from it.

It is first necessary to clarify an important point. Propping up underperforming or inefficient economic sectors with fiscal support can no longer be a policy goal, not least in today’s budgetary situation. Regional policies should thus focus on harnessing regional assets to generate strong and sustainable economic growth. As shown by the experience of countries like Spain, robust economic convergence must come primarily from better integration into EU and world markets. The OECD therefore endorses the aims of the EU’s cohesion policy to stimulate endogenous growth and untapped development opportunities in all regions.

But a paradigm shift is needed in order to harness this growth potential. Some argue that location doesn’t matter and that national policies are sufficient. We reject this view at the OECD and support a place-based approach. Yes, location matters. Whether resources are natural, human or intangible (such as culture), they are located in a geographic space.

Once the approach to national growth becomes place-specific, sectoral policies need to be adjusted to the specific local economic, social and environmental conditions. We have underlined this need for greater differentiation of policy actions at national level and appropriate local institutions in our recent Economic Survey of the Euro Area.

More fundamentally, this place-based approach requires advanced and effective vertical and horizontal governance mechanisms. It implies a deep and coordinated engagement of regional and local governments in achieving national short- and long-term development outcomes.It also entails nurturing specific institutional arrangements to sustain the dialogue between the public and private sectors, academia and training institutions and community-based non-governmental organisations.

My main message today is that this place-based approach can help in achieving both short- and long-term objectives, starting with fiscal stability across the EU.

In the short term, sub-national governments have first an important role to play in fiscal consolidation. Cities and regions face, indeed, great challenges in this regard. Local tax revenues have decreased and central-government transfers drastically reduced, while demand for social services has been rising. Faced with this “scissors effect”, sub-national governments are delaying or cancelling planned investment projects, while they are responsible for about 2/3 of all public investment in OECD countries!

The acceleration of the disbursement of their Cohesion Funds helped to cushion the impact of the crisis. It can now help to sustain long-term investment during a period of budgetary consolidation, particularly for countries in central and eastern Europe. Action is needed to make sure that all countries and regions access these funds fully and in a timely way.

The need for fiscal discipline at the local level leaves limited room for manoeuvre. Countries and regions cannot afford to get it wrong with public investment. EU cohesion funds are in this context crucial to help balancing consolidation constraints with growth perspectives. But it is important that every euro be spent efficiently with visible outcomes for European citizens. This requires, in particular, avoiding the proliferation of small scale projects to try to satisfy everybody. It is also essential to build robust and transparent governance processes at all levels to improve the selection of projects and their effective implementation.

Beyond cyclical considerations, regional policy can also contribute to long-term growth sustainability. Policies that improve regional performance in a synchronised way could indeed have a substantial impact on aggregate growth potential.  While a few large urban centres (4% of regions) contribute around 1/3 of aggregate growth in the OECD, the remaining smaller regions generate the remaining 2/3 of aggregate growth. Regional policy should thus be a critical piece in an EU growth strategy.

Why so? Because regional policy is at the core of innovation, a key component of any growth strategy. Here again, the landscape of technology-based innovation is not flat.  Around 13% of OECD regions account for half of its R&D investment, and our recent Innovation Strategy highlights that regions are nodes in global innovation networks. This calls for a place-based policy framework.

We will soon launch in Brussels, with the European Commission, a major report on Regions and Innovation Policy. It provides a roadmap for how policies from different sectors and different levels of government can contribute to innovation-driven regional and aggregate growth.

Regional policy may indeed allow SMEs to benefit from the knowledge available within the universities and research centres in their regions. It can broker the emergence of regional networks linking up all key public and private actors. It can also build bridges with other national or global knowledge networks. As regional growth trajectories differ, so do the “smart” policy mixes each region needs to develop.

Part of the rationale for encouraging innovation is the need for a transition to a low carbon and more resource-efficient economy. Public finance and public policy will play a central role to enhance the risk-return profile of green investments, thus stimulating and laying the ground for the much needed private investment.

Sub-national governments are here again pivotal, particularly to unlock policy complementarities. They can do so through an arsenal of innovative tools, such as greening public procurement; supporting greener local industries; raising consumer awareness; or catalysing R&D of green-tech clusters.

This is evidenced by the role of cities, which have indeed been at the forefront of the green revolution. They can achieve economies of density and reduce the environmental pressures from the transportation and housing sectors.

The city of Chicago, for example, has reduced air pollution and energy costs from polluting industries by providing technical and financial support through its Industrial Rebuild Program. In Berlin, the local government supports energy services companies providing energy-efficiency retrofits to homes, repayable through future energy savings. In Japan, Kitakyushu has evolved from a high-polluting declining manufacturing region to become the country’s top industrial recycling centre.

Beyond cities, green growth also offers tremendous opportunities for rural development. Some rural regions have already developed systems that integrate energy production, heating and cooling from renewable sources of energy, such as Gaspésie in Québec, Totara Valley in New Zealand, Nord Carelia in Finland or Colorado or Nebraska in the US.

These actions by cities and regions require an integrated and coherent framework for investment across different areas – infrastructure, innovation, skills development, business support, etc. This is what regional policy is all about, and I am happy that this dimension is fully acknowledged in the most recent EU Cohesion Report.

But for this to work, you need to make sure that the policy is properly implemented. The results of the EU’s Cohesion Policy will only be as good as its implementation. And this is a challenge. The 2007 to 2013 framework was a step forward in terms of focussing help on regions most in need, aligning regional policies with EU objectives and increasing the efficiency of delivery.

In 2007, our Economic Survey already pointed the way to further improvements. Key recommendations  concerned the need to implement credible incentives for Cohesion Fund spending as well as clearer priorities for the project selection. In this regard the current debate about conditionalities for the next Cohesion Policy Framework will help to agree on common approaches about incentive mechanisms.

All Member States and regions should have in place the appropriate conditions for investments the Cohesion Policy to be effective. Better targeting, monitoring and evaluating is a strategy that benefits all, as it has been observed in many policy fields and countries in the OECD.  The effort made by the European Commission to improve the statistical base, which is also a key asset of the OECD, must also be continued and extended towards the measurement of societal progress beyond GDP.

Ladies and gentlemen,
We are looking for a new growth model, in the EU and elsewhere, based on innovation and green growth, inter alia. Such a growth model needs to harness all endogeneous growth assets, most of them being regionally-based. Regional policy is thus crucial to unleash the growth potential of our economies. This is the reason why it is so important to update, upgrade and strengthen the EU Cohesion Policy to make it more efficient. The OECD stands ready to continue to help you in this strategic endeavour.
Thank you!


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