Place‑Based Policies for the Future

3. Design of effective place-based policies

Abstract

Place-based policies can deliver important benefits if well-designed—they can improve economic development and well-being outcomes by better accounting for local needs, help to mobilise untapped local assets and support integrated policy action across sectors—but they can also face limitations. Designing and implementing effective place-based policies requires enhancing potential benefits and managing limitations. This chapter highlights four policy priorities to support the design of ‘effective place-based policies’: (1) targeting regional and local development potential; (2) ensuring policy coherence; (3) seeking efficient implementation; and, (4) reinforcing multi-level governance.

Towards effective place-based policies

Place-based policies are a key part of government policymaking, so it is essential to get them right.1 Place-based policies constitute an important part of public budgets in many OECD governments. Across the EU, for example, Cohesion Policy accounts for approximately 64.2% of the total amount redistributed through the EU budget among EU Member States and up to 1.85% of annual GDP in some countries (Berkowitz et al., 2023[1]). Given the important role of place-based policies, it is essential for policy makers to effectively design and implement these policies.

Current economic circumstances, the emergence of new challenges and fiscal pressures call for an even stronger focus on effectiveness. The global economy continues to confront the challenges of inflation and low growth, with tighter financial conditions, weak trade growth and lower business and consumer confidence (OECD, 2023[2]). Public debt to GDP ratios are at high levels and governments face mounting fiscal pressures stemming from multiple sources, including ageing societies and the need to tackle climate change (OECD, 2023[2]; OECD, 2022[3]). In this context, governments will need to make difficult choices about allocating resources. Supporting effectiveness can help to ensure place‑based policies are a relevant policy-making tool to confront current and future challenges.

Understanding the benefits and challenges of place-based policies

Our understanding of when and how to use place-based policies is improving. While gaps remain, expanding research is providing a deeper understanding of the potential benefits and limitations of place‑based policies (Box 3.1). Benefits and limitations can be considered across different geographical scales (e.g., local, regional, national) and time horizons (e.g., short-term and long-term). During policy design, policy makers can seek to enhance the potential benefits of place‑based policies and manage their limitations to improve effectiveness.

Box 3.1. Enhancing the benefits and managing the challenges of place-based policies

The table below summarises benefits and challenges of place-based policies according to where and when they occur. Specific benefits and limitations of a policy will ultimately depend on an individual policy design.

Table 3.1. Potential benefits and challenges of place-based policies

Location and timescale of impact	Potential benefits (To be enhanced)	Potential challenges (To be managed)
Policy impact on the targeted place	Better accounting for local needs, circumstances and characteristics through targeted policies (asymmetric) Leveraging local assets, knowledge and networks to unlock untapped potential Proactively reducing long-term local impact of negative shocks or transitions Integrating across policy domains to breakdown silos and align policy action Enhancing local buy-in through deeper engagement with local communities, private sector service providers and employers Supporting policy experimentation by testing policies in one place before broader adoption	Fragmentation of policies and reductions of economies of scale and scope, particularly if a policy could otherwise be harmonised across a large area Increased complexity of policy design and governance structures risking a high need for coordination and clarity in responsibilities, which may increase implementation cost. Risk of benefits being captured through rent‑seeking and political interest Challenges to support policy learning due to decentralised implementation and difficulties to measure and evaluate Risk of insufficient local administrative and fiscal capacity to mobilise financial and non-financial resources that match policy design and implementation responsibilities (see Chapter 6)
Policy impact beyond the targeted place	Enhance policy alignment across levels of government Potential to create positive spillovers that also benefit other places (e.g., knowledge, financial) Potential to avoid negative spillovers that may come from decentralised policymaking (e.g., tax or investment competition)	Risk of reducing overall welfare by lowering incentives for mobility or by less efficient allocation of resources Risk of reduced harmonisation of investments and public service provision across jurisdictions and lower sectoral policy coherence Risk of negative interactions with other policymaking frameworks reducing sectoral policy coherence
Long-term impacts from place-based policymaking	Reinforcing local governance structures and enhancing local democracy, social capital and trust in government Avoiding widening gaps in territorial inequalities and supporting long-term social cohesion and political stability	Varied impact on local administrative and fiscal capacity building if place-based policies are of a short-term ‘start and stop’ nature Lower fiscal flexibility of subnational governments if there is ongoing reliance on place‑based policies for investment

Source: Authors’ elaboration building on OECD (OECD, 2011[4]), (2014[5]), (2016[6]), (2019[7]), (2021[8]), (2023[9]), OECD Regional Outlooks, https://www.oecd.org/en/publications/oecd-regional-outlook_2dafc8cf-en.html; Green, Beer, Solé-Ollé and Suedekum, (2023[10]), (2023[11]), (2023[12]), (2023[13]), Papers from Place-Based Policies for the Future, https://www.oecd.org/en/about/projects/place-based-policies-for-the-future.html

Priorities for effective design and implementation of place-based policies

This chapter highlights four priorities for the design and implementation of effective place-based policies. These have been selected based on an existing body of knowledge and emerging literature, including past OECD research (2011[4]; 2014[5]; 2016[6]; 2019[7]; 2021[8]; OECD, 2023[9]) and papers prepared by Solé-Ollé (2023[12]) and Green (2023[10]). They are also consistent with two main OECD recommendations linked to place-based policies: the OECD Recommendation on Regional Development Policy (OECD, 2023[14]) and the OECD Recommendation on Effective Public Investment Across Levels of Government (OECD, 2014[15]). The four policy priorities are:

• Targeting regional and local development potential: Defining clear objectives based on a deep understanding of current and future needs, characteristics and assets of a place to unlock new pathways for development.

• Ensuring policy coherence: Assessing the interactions across institutions, sectors and policymaking frameworks to maximise potential synergies and manage trade-offs.

• Supporting efficient implementation: Designing policies to act at the relevant scale with targeted instruments, transparent funding allocation and integrated policy learning processes.

• Reinforcing multi-level governance: Supporting policy implementation by building local institutional capacity, ensuring coordination, empowering place-based leaders and promoting an inclusive policy process (Note: This is covered in Chapter 6).

This chapter aims to provide policy makers with an overview of the literature to support effective policy design and implementation, while also drawing out emerging focus areas. Although many of priorities covered in this chapter have been documented previously, there is still an important need to get the core elements of place-based policies right. The chapter includes emerging dimensions such as the need to enhance the use of futures foresight, better understanding interactions with fiscal frameworks and integrating policy learning into place-based policies.

Target regional and local development potential

Place-based policies should have clear objectives targeting regional and local development potential. These should be based on a deep understanding of the potential drivers of long-term transformative change in a particular place. This requires developing a strong understanding of local context and assets, long-term trends and existing policy evidence during design. This understanding can be used to identify clear objectives to unlock development potential beyond what would be possible without the policy. Key elements for this are:

• Understanding local needs and characteristics to ensure policies are sensitive to place

• Harnessing foresight to ensure policies are aligned with future needs and risks, and

• Seeking to leveraging local assets, knowledge and networks to unlock regional and local development potential.

Understand local needs and characteristics to ensure policies are sensitive to place

Places have diverse geographical, historical, cultural, institutional and socio‑economic contexts. They also have differing policy preferences and needs that reflect the diversity of their population (OECD, 2023[9]). Rural areas, for example, may be faced with youth out-migration or gaps in public transport infrastructure, while major metropolitan areas may face challenges from congestion or unemployment. Variations are not limited to different classifications of regions—even across different classifications of areas within a country there can be significantly variations in local contexts. Given the diversity and specificity of challenges across places, ‘one-size-fits-all’ policy approaches are often inappropriate and place‑based policies are essential (Iammarino, Rodriguez-Pose and Storper, 2019[16]).

Policy impact depends on policy makers developing a deep understanding of the local context to inform policy design. Policy-makers need to properly diagnose the challenges and opportunities facing a region to identify relevant policy objectives. They also need to understand the institutional and cultural context to engage with the right actors and institutions for implementation. This requires, for example, identifying key public or private organisations and community groups in that place. Ultimately, taking into consideration the local context is essential to achieve policy as it helps to avoid a misalignment of policy objectives with local needs and can ensure local buy-in.

A combination of top-down and bottom-up approaches is often needed to understand local needs and characteristics. Top-down approaches can support the identification of places in need of support to enhance solidarity across territories, ensure the mobilisation of funding, support alignment with national policy priorities and increase efficiency by standardising certain policy elements or levels of service (e.g., universal access). For example, to help direct funding (e.g., through formula-based funding arrangements and equalisation grants), policy makers may develop data‑driven indicators to provide an understanding of the places most in need of support. At the same time, bottom‑up approaches, such as inclusive stakeholder engagement (see Chapter 6), are needed to ensure that local priorities are understood and to help mobilise local actors. Indeed, local private companies can have a strong understanding of the factors limiting their growth that may not be visible from a top-down perspective. In Australia, a recent study to identify regional strengths and infrastructure gaps by Infrastructure Australia—the government’s independent infrastructure advisor—adopted both top-down and bottom-up approaches by including a national analysis of data key indicators alongside local stakeholder interviews (Box 3.2).

Box 3.2. Understanding regional strengths to identify infrastructure gaps in Australia

Infrastructure Australia (IA) is an independent government body that advises Australian governments, industry and the community on investments and reforms to deliver better infrastructure. As part of its role to identify infrastructure priorities, Infrastructure Australia prepares research to support better infrastructure decision-making.

In 2022, IA prepared a report on 2022 Regional Strengths and Infrastructure Gaps and the accompanying methodology report Strengthening Communities: A rubric to support place-based strategic planning in response to Regional Strengths & Infrastructure Gaps. These reports were developed through engagement with more than 1,000 stakeholders, including focused engagement in each region (defined by Regional Development Australia boundaries).

The report 2022 Regional Strengths & Infrastructure Gaps adopted a place-based approach to support the identification of future infrastructure investment priorities. The approach was based on 10 key elements (meaningful community engagement, respecting culture, collaboration, developing a shared local vision, acknowledging complexity, leveraging existing strengths, evidence-based decision-making, not leading with solutions, resilience, closing the loop). The report followed a five-step “Strengthening Communities Rubric”:

• Step 1: Understand place through Australia’s geography

• Step 2: Demographic and economic indicators

• Step 3: Strengths – Identify existing assets and growth indicators

• Step 4: Infrastructure – Identify infrastructure gaps, prioritise infrastructure gaps and evaluate infrastructure assets

• Step 5: Enablers and tools for success – Social inclusion, strategic land use, economic and industry, liveability, governance and the environment.

Source: Infrastructure Australia (2022[17]), Strengthening Communities: A Rubric to support place-based strategic planning in response to Regional Strengths & Infrastructure Gaps, https://www.infrastructureaustralia.gov.au/publications/2022-regional-strengths-and-infrastructure-gaps

Beyond understanding local needs and characteristics, adopting a systems-thinking approach can help better identify the key interactions within a geographical area. Policy-makers need to be aware of the underlying systems that affect a place to more comprehensively address the potential impact and interactions of policies (Suedekum, 2023[13]). Effective climate action, for example, requires identifying the linkages between economic, social, environmental, and other systems that operate in a geographical area (Matsumoto and Ledesma Bohorquez, 2023[18]). Systems thinking provides a methodology that can help to identify the key interactions across different scales that can affect a potential policy. Ultimately, this can help to provide a deeper understanding of local needs and characteristics.

Harness strategic foresight to ensure policies are aligned with future needs and risks

Long-term trends and transformations are underway that will impact all places and require new policy approaches. These include the transition to low-carbon economy and demographic change (see Chapter 4 for further discussion), which have different local impacts and risk reinforcing existing regional inequalities (OECD, 2023[9]; OECD, 2022[3]). These long-term trends call for major local transformations. The transition to a low carbon economy, for example, will disrupt regions specialised in energy-intensive industries and may require transitioning workers to new sectors. If these transformations are not proactively managed, they can depress employment and living conditions over the long-term (Bartik, 2022[19]).

In the face of these long-term trends, place-based policies should be designed with foresight. Understanding potential future scenarios and assigning resources towards policies aligned with future needs and risks requires acting with foresight. Strategic and territorial foresight techniques can provide a structured approach to explore possible future changes and their implications (Box 3.3). Undertaking foresight requires mobilising data and evidence to inform scenario development and analysis that accounts for possible futures. By harnessing foresight, place-based policies can seek to account for the effects of different scenarios, long-term trends and build in adaptability to manage shocks.

Box 3.3. Role of territorial foresight to support more forward looking policymaking

The OECD defines strategic foresight as a structured and systematic way of exploring different plausible futures that could arise, the opportunities and challenges they could present and using those ideas to make better decisions and act now. Strategic foresight is not forecasting. It does not attempt to offer definitive answers about what the future will hold. Foresight understands the future as an emerging entity that is only partially visible in the present, not a predetermined destiny that can be fully known in advance (predicted). There are no hard facts about the future and the evidence base is always incomplete. The objective is not to “get the future right” but to expand and reframe the range of plausible developments that need to be taken into consideration.

Territorial foresight has specific characteristics. First, territorial foresight approaches are inherently multi-faceted and consider the economic, social, environmental and political dimensions that make up regional economies and ecosystems. Second, the scope of territorial foresight exercises looks beyond administrative boundaries to consider the multiple connections a region shares with neighbouring regions and other parts of the world. Third, territorial foresight serves as a tool to reconcile different perspectives and priorities among actors of the same region by providing a platform for dialogue (e.g. workshops, reflection groups, fora, etc.) where these actors can confront different views of what is possible and desirable in the future, and the risks and opportunities they need to anticipate, which in turn fosters collective learning and strategic planning.

Examples of territorial foresight exist in many OECD countries, such as in Australia, Finland, France, Spain, United Kingdom and the United States.

Source: OECD (n.d.[20]), Strategic Foresight, https://www.oecd.org/strategic-foresight/ourwork/; OECD (2023[9]), Regional Outlook 2023: Chapter 4: The future(s) of OECD regions: Scenarios 2045, https://doi.org/10.1787/92cd40a0-en

Faced with the impacts of long-term trends, place-based policies are becoming more proactive and forward-looking. A shift is underway towards more proactive place-based policies that seek to prevent places from falling into development traps regardless of their level of development (Suedekum, 2023[13]). Intervening proactively is seen to provide an opportunity to help avoid painful adjustments, such as those that occurred in manufacturing regions in the United States exposed to globalisation (Hanson, 2023[21]). An example of the turn towards more proactive place-based policy is highlighted by recent shifts in three major regional development policies in Germany (Box 3.4).

Box 3.4. Shift towards more proactive place-based policies in Germany

Three recent shifts in the national place-based policies in Germany illustrate the broadening and gradual shift of policy towards more proactive approaches.

First, the Joint Task Regional Economic Structure (Gemeinschaftsaufgabe Regionale Wirtschaftsstruktur, hereafter GRW) underwent its most substantial reform in over 50 years in 2022. The GRW is Germany’s primary instrument for regional policy and has provided (co-)finance to over 150,000 corporate investments and helped improve municipal infrastructure in less developed regions. Recent reforms have broadened the aim of the policy beyond its traditional support for job creation and income convergence. It now focuses on four main aims: mitigating disadvantages affecting commercial activity, creating and safeguarding jobs, fostering growth and prosperity, and accelerating the transition to a climate-neutral and sustainable economy. They have also relaxed pre-conditions for funding climate-friendly investments and research-intensive companies.

Second, in July 2020, two laws were adopted to support the transition away from fossil fuels: the "Kohleausstiegsgesetz" (Coal Exit Act) and the "Strukturstärkungsgesetz" (Structural Strengthening Act). This legislation provided the legal foundation for the implementation of structural aid programmes designed to support the three main regions in Germany where lignite mining is concentrated. The effect of this has been to direct funding towards two 'less developed regions’ and one ‘most developed region’, namely Rheinisches Revier, which was not a primary recipient of regional transfers in the past. The municipalities in the three lignite areas are set to receive substantial financial aid amounting to a staggering EUR 40 billion until 2038.

Third, in response to risks arising from the transition to electric vehicles, a new EUR 1 billion Future Fund for the Automotive Industry (Zukunftsfonds Automobilindustrie) was established in 2021. Around one-third of the funds are allocated to establishing agencies for regional transformation. These seek to help set-up and finance platforms where local stakeholders can develop "transformation strategies" for small and medium-sized enterprises (SMEs). While the recipients of this support scheme include many traditional recipients of GRW, such as Saarland, Pfalz, and Eisenach in Thuringia, a significant portion of the funds is being allocated to high‑income areas in Bavaria or Baden-Württemberg that are currently not eligible for GRW funding or transition funding under EU Cohesion Policy.

Source: Suedekum (2023[13]), The broadening of place-based policies – from reactive cohesion towards proactive support for all regions, https://www.oecd.org/regional/place-based-policies-for-the-future.htm

Intervening proactively can come with risks but may reduce long-term costs. Given that resources are limited, prioritising proactive place-based policies might come at the expense of other funding priorities, in particular support for under‑developed regions (Suedekum, 2023[13]). However, proactive policies can often be justified as a means to maintain the strength of a place and ensure its ability to continue contributing to future policies targeting less developed places (Suedekum, 2023[13]). Furthermore, as the future is uncertain, investing proactively can risk that resources are allocated to address challenges that do not fully eventuate. The benefits, risks and costs associated with adopting a more proactive resilience or risk management approach should be understood. Intervening early to support a place to find a new economic development pathway could potentially be much more cost effective than action after a place has declined. It can also avoid high long-term social, fiscal, economic and political costs that can arise after a place has declined from a previous economic level.

Leverage local assets, knowledge and networks to unlock regional and local development potential

Places have different assets, knowledge and networks that can create diverse opportunities for development. The infrastructure, human capital, connections and natural resources that a place is endowed with will shape its future opportunities. By understanding these underlying assets, policy makers can seek to identify the strengths and comparative advantage of different places and identify a unique pathway for long-term development. Focusing on a place’s comparative advantage can help to enhance complementarities across regions and sectors and avoid policy makers investing in activities that are unlikely to succeed in the place in the long-term, helping to support the efficient use of limited resources. The concept of ‘smart specialisation’ in the European Union is a prime example of this. This policy seeks to encourage regions to identify their strongest assets in research, innovation and entrepreneurship to help prioritise investments (Box 3.5). Many other examples exist. In Australia, the 2022 Regional Strengths and Infrastructure Gaps report included an explicit step to identify existing assets to inform the identification of regional infrastructure priorities (see Box 3.2).

Box 3.5. Regional Smart Specialisation

Smart specialisation is a concept designed by the European Commission to encourage regions to identify their strongest assets in research, innovation and entrepreneurship so they can then select priority investment channels and build their regional comparative advantage around them. The objective of a smart specialisation strategy (S3) is to help regions diversify their economic base – their industrial specialisations – in fields with the greatest socio-economic potential for their region. The concept emphasises the role of entrepreneurial knowledge to identify regional priorities to encourage entrepreneurial discovery process. The 2021-2027 EU Cohesion Policy programming period dedicates a large proportion of its budget to promoting a Smarter Europe, which emphasises innovative and smart economic transformation.

Source: OECD (2021[22]), Regional Innovation in Piedmont, Italy: From Innovation Environment to Innovation Ecosystem, https://doi.org/10.1787/7df50d82-en; OECD (2021[23]), Internationalisation of the next Smart Specialisation Strategy: Opportunities and barriers in the Friuli Venezia Giulia region, https://doi.org/10.1787/067c3a60-en

A focus on innovation is important as it is a long-term driver of growth and development. Policy makers can seek to enhance knowledge production, networks and transfers to increase idea generation and dispersion (McCann and Ortega-Argilés, 2013[24]; McCann, 2021[25]; Balland et al., 2019[26]) and implement complimentary reforms to support growth (Braga de Macedo, Oliveira-Martins and Rocha, 2014[27]). Investments in sectors such as education and infrastructure, for example, can have higher potential to support innovation. Cluster policies can also help to efficiently direct resources towards more promising sectors and create opportunities for spill-overs between firms and with the university sector.

Ensure policy coherence

Place-based policies have positive and negative interactions with other policymaking frameworks that need to be understood and managed. They can support more coherent and integrated policymaking at a local level and have positive spillover effects that enhance welfare both within and beyond the targeted place. They can help to manage policy and investment competition between decentralised governments (Solé-Ollé, 2023[12]) and support policy alignment across and among levels of government. At the same time, they can risk resulting creating differences in the quantity, quality and mix of investment and public service provision across places (Green, 2023[10]). Where place-based policies are short-term in nature, they can also result in more volatile subnational government finances (Solé-Ollé, 2023[12]). Effective place-based policy should seek to enhance synergies and manage trade-offs by:

• Supporting ‘joined-up’ policymaking at a local level

• Enhancing alignment of place-based and sectoral policies

• Seeking ‘win-win’ policies to increase benefits beyond the targeted jurisdiction, and

• Managing interactions of place-based policies with fiscal equalisation systems.

Support ‘joined-up’ policy-making at a local level

Place-based policies can support more ‘joined-up’ and integrated policy-making to address complex local policy challenges. By facilitating cross-sectoral policy action at a local level they can help to breakdown silos and better align and pool resources to address local gaps in service provision. More integrated solutions are better able to address embedded inequalities and intertwined policy challenges that face a place, particularly for places facing ‘regional development traps’ where they are unable to retain their economic dynamism in terms of income, productivity, and employment (Diemer et al., 2022[28]). Given the complex and interconnected challenges that many places face, no single instrument is likely to be successful in supporting economic transformation, highlighting the need for joined-up approaches.

Place-based policies allow for enhanced local integration of services and policy actions to increase the potential for long-term change. Policy makers can seek to address the multiple barriers that can prevent economic development in an integrated way targeted to the local community. They can ensure that multiple sectoral policies (e.g., health, education, etc.) are synchronised to help overcome entrenched disadvantage. In England, for example, the New Deal for Communities was an intensive cross-sectoral and community-based policy that encouraged transformative change by providing intensive individual and place-based support (Box 3.6). It resulted in long-term and transformative change for many communities.

Box 3.6.  New Deal for Communities initiative in England

The New Deal for Communities (NDC) initiative in England sought to transform 39 neighbourhoods in England (with a population of around 10,000 on average) over a ten-year period from 1998. It involved a cross-sectoral programme with intense efforts to establish partnerships and engage communities in the planning, design, delivery and review of local programmes. The programme focused on three place-related outcomes: crime, housing and physical environment quality, and three people-related outcomes: education, health, and worklessness.

NDC Partnerships spent approximately GBP 1.71 billion of funding for around 6,900 projects or interventions (on average GBP 50 million was spent per community). A further GBP 730 million was levered in from other public, private and voluntary sector sources to support the project.

Between 2002 and 2008 NDC areas saw an improvement in 32 of 36 core indicators spanning crime, education, health, worklessness, community and housing and the physical environment. For 26 out of the 27 indicators, this change was statistically significant. The biggest improvements were for indicators of people’s feelings about their neighbourhoods: residents recognised the change brought about by the programme and were more satisfied with their neighbourhoods as places to live.

The initiative also performed well against various benchmarks. They saw more improvement than the national equivalent for 18 of 24 indicators, more improvement than parent local authorities for 10 of 13 indicators and more improvement than competitive areas for 21 of 34 indicators. The programme was also considered to provide value for money (benefits substantially exceed costs) and enhance long-term partnerships and engagement with local communities beyond the funding period.

Source: Batty et al. (2010[29]), The New Deal for Communities Experience: A final assessment, https://extra.shu.ac.uk/ndc/downloads/general/A%20final%20assessment.pdf; Green (2023[10]), When should place-based policies be used and at what scale?, https://www.oecd.org/regional/When-should-place-based-policies-be-used-and-at-what-scale.pdf

An important way to support more ‘joined-up’ policymaking is by incorporating place‑based policies into existing regional and local development strategies. Regional and local development strategies are guiding documents that can help to identify and align the cross‑sectoral action required to support long-term and sustainable development at a local level. They are a key element of regional development policymaking (OECD, 2023[14]) and are essential for guiding policy actions to support transformation. Recent research on ‘turn around’ cities has highlighted that ensuring that policy actions are integrated into local development strategies is a key element of a successful ‘turn around’ of a place (Frick et al., 2023[30]). The city of Dortmund in Germany, for example, had a clear strategy for “liveability” that involved urban regeneration and building carefully placed mixed-use spaces and housing to retain and attracting young families that supported its ‘turn around’ (Frick et al., 2023[30]). While these strategies can be useful to support ‘joined-up’ policymaking, there is also a need to avoid the duplication and fragmentation of local development strategies and to ensure that place-based policies are designed to act at the relevant scale (see Target effectiveness by acting at the relevant geographic scale).

Seek alignment of national sectoral policies and place-based policies

Trade-offs can exist between place-based approaches that foster cross-sectoral policy coherence at a local level and sectoral approaches that support vertical policy coherence. There can be an “inherent tension” in aligning national priorities with local responsiveness (Green, 2023[10]). Across many sectors—such as education and healthcare—governments often seek to adopt policies to provide standardised levels of public services or investment to citizens with the aim to support equity. But standardised public services or investment can be insufficient to overcome entrenched challenges in some places, which can create a need for place-based policies (see Chapter 2 for further discussion). However, this can risk reducing vertical policy alignment.

Policy makers should seek to find a balance between national, regional and local priorities. National governments can provide leadership and support the standardisation and harmonisation of key policy elements for efficiency and solidarity, while also allowing for local tailoring of policies depending on place‑specific needs. Indeed, across many policies areas higher-level functions such as advocacy, strategy and planning functions may be more relevant at larger geographical scales, while policy delivery may be more suited to local or neighbourhood scales (see Table 3.3) (Green, 2023[10]). In general, higher tiers of government are well placed to provide leadership on the overall direction of the policy, while allowing for regional priorities to be considered (Solé-Ollé, 2023[12]). Roles and responsibilities should be clarified. Establishing a country-level policy-framework that distinguishes between sectoral and place‑based policy responsibilities can help to ensure that both are implemented effectively and contribute to overall economic growth (Solé-Ollé, 2023[12]).

Sectoral policies can also adopt place-based approaches. The emergence of ‘place-based industrial policies’ highlights how sectoral policies can also adopt more place-based approaches. In the US, for example, more than USD 80 billion has been directed to these types of policies (Muro et al., 2022[31]). This type of industrial policy is targeted towards places in need with some comparative advantage (e.g., specialised in the car industry) or towards regions with declining industries (e.g., retraining programs for workers or incentives to attract new business to unused factories) (Solé-Ollé, 2023[12]). They seek to support broader economic development by helping local economies through tailored engagement with local industries and understanding the spatial concentrations of talent, suppliers and knowledge (Solé-Ollé, 2023[12]).

Place-based policies can have important implications for multi-level governance frameworks and decentralisation processes. Many place-based policies are designed and implemented by higher-levels of government. While this can be essential to align interests among levels of government, it may also create a risk of policies being used for recentralisation processes (Solé-Ollé, 2023[12]). At the same time, properly designed place-based policies may have the potential to help support decentralisation and regionalisation processes by helping to establish or strengthen institutions and coordination structures. The role of higher-level governments in place-based policies should be considered and clarified, with a potential focus on acting as a ‘clearing house’ for policy proposals, providing policy leadership and managing a national policy-framework (Solé-Ollé, 2023[12]).

Target ‘win-win’ policies to provide benefits beyond the targeted jurisdiction

Place-based policies should seek to create benefits for places beyond the targeted jurisdiction. Ideally, place-based policies should seek to create positive spillovers that benefit other jurisdictions and the broader economy. These spillovers can be sought by focusing on knowledge creation, diffusion and connectivity, which can benefit the targeted place and the national economy (Suedekum, 2021[32]; McCann and Ortega-Argilés, 2016[33]). Place-based policies can also support job growth across a commuting area beyond the targeted place, for example with Enterprise Zones (Neumark and Simpson, 2015[34]). In addition to these benefits, place-based policies also have the potential to enhance social cohesion and support political stability over the longer-term, with national benefits.

Place-based policies can also support more effective decentralised policy-making. In decentralised countries, subnational governments can face choices that involve a trade-off between supporting local and national economic development. This can sometimes manifest as tax or subsidy competition, which can result in a negative ‘race to the bottom’ (Solé-Ollé, 2023[12]; Blöchliger and Pinero Campos, 2011[35]). It can also manifest through investment decisions made by subnational government who may not fully consider the impacts beyond their jurisdiction. Place-based policies can help to attenuate these spillovers given they typically involve central government allocation of resources (Solé-Ollé, 2023[12]). The construction of interstate highways in the United States, for example, was supported by federal capital grants to subsidise state construction, which provided a strong incentive for subnational governments to spend on the programme to create cross-jurisdictional and national benefits.

A move towards ‘proactive’ place-based policies highlights the need to focus on ‘win-win’ outcomes. Focusing on ‘win-win’ outcomes can enhance the justification for both proactive and reactive policies, rather than focusing on the risk of drawing resources away from less developed regions (Suedekum, 2023[13]). It highlights that proactive support for more developed regions can be essential as it can allow them to maintain their fiscal capacity and continue to provide the resources needed to support least-developed regions (e.g., through contributions to fiscal equalisation mechanisms) (Suedekum, 2023[13]). Focusing on ‘win-win’ potential can guide place-based policies to limit potential trade-offs.

Understand interactions of place-based policies with fiscal equalisation systems

Fiscal equalisation grants are distinct from place-based policies but can also support regional economic development. While place-based policies are explicitly focused on regional economic development, fiscal equalisation refers to financial transfers aimed at reducing disparities in subnational government fiscal capacity. These can be due to differences in revenue-raising capacity (partly due to differences in GDP per capita) or in public service expenditure needs (partly due to demographic or geographic factors). These transfers seek to ensure that all governments can provide public services at a similar level regardless of their fiscal capacity provided they exert the same tax effort (Solé-Ollé, 2023[12]; Moisio and Vidal Bover, 2023[36]; OECD, 2021[37]). Unlike place-based policies, which can often come in the form of earmarked grants from higher levels of government towards national government policy priorities, equalisation systems often provide expenditure discretion to subnational governments.

Fiscal equalisation schemes can involve a significant transfer of resources to less developed places, much higher than total funding from place-based policies in some countries. In countries where they do exist the size of fiscal equalisation can be significant. In Germany, for example, national (Länderfinanzausgleich) and state schemes redistribute an amount equivalent to approximately ten percent of aggregate tax revenue, totaling around EUR 90 billion annually (Suedekum, 2023[13]; Henkel, Seidel and Suedekum, 2021[38]). This amount surpasses the combined EU cohesion funds allocated to German regions and is much larger than funding allocated by the German federal government for place-based policies (e.g., the GRW, with an annual budget of less than EUR 2 billion) (Suedekum, 2023[13]). In Sweden and Spain, equalisation transfers represent around 4.4% of total government expenditure, in Japan they represent 8.8%, and in Australia they represent around 12% (OECD, 2021[37]). Given the importance of fiscal equalisation, it is relevant to consider how these schemes can be mobilised to support regional economic development, which calls for additional empirical research (Box 3.7).

Box 3.7. Fiscal equalisation and regional development policies: Is there a case for enhanced synergies?

Fiscal equalisation and regional development policies have often been perceived as separate policy fields. Indeed, while the former seeks to reduce fiscal disparities by providing a similar level of public services at comparable tax rates across regions, regional development policies generally aim to support economic development across places and people. Academic literature – as well as policy makers – have thus often analysed, designed and implemented these policies in isolation, in line with Tinbergen’s Rule of one goal, one policy. As a result, little is known about their potential interactions. Recent OECD work has established a stylised conceptual framework that seeks to explore how the synergies between these two approaches can be enhanced in a way that avoids or minimises trade-offs. However, this framework remains theoretical and thus calls for an empirical approach that clarifies to what extent both equalisation and regional development policies can have both redistributive and allocative effects.

Source: Moisio and Vidal Bover (2023[36]), Fiscal equalisation and regional development policies: Is there a case for enhanced synergies?, https://doi.org/10.1787/0d28a879-en

Fiscal equalisation schemes can have both positive and negative effects on place-based policies and regional economic development, so there is a need to better coordinate these policy areas. Understanding the potential effects can help to ensure that both fiscal equalisation schemes and place‑based policies coherently work to support long‑term regional development (Table 3.2). Positive effects include ensuring subnational governments have sufficient fiscal resources to provide the foundations for economic development, ability to respond to economic conditions and a stronger incentive to use funding effectively. These need to be balanced against risks, such as that fiscal equalisation can be insufficient to promote local development on its own, which is especially true in depopulating areas where the formulas may not sufficient off-set the loss of population. Fiscal equalisation instruments may also reduce incentives for subnational governments to build their own capacity and can be highly complex and lack transparency. Co-operation forums can be established to facilitate communication between national and subnational governments and policy makers responsible for equalisation grants and place‑based policies to manage these risks and overlapping roles (Solé-Ollé, 2023[12]).

Table 3.2. Potential effects of fiscal equalisation on regional economic development

Positive effect on regional economic development

Negative effect on regional economic development

Can provide resources needed to build the foundation for economic development. Fiscal equalisation can provide subnational governments with resources to invest in public goods and services that improve wellbeing and support private investment. Fiscal equalisation can create a level-playing field and facilitate interregional movement of labour and business on economic rather than fiscal benefits. Can allow subnational governments to respond to local economic conditions and priorities. Use of non-earmarked funding can allow subnational governments tailor their policies to the unique needs and strengths of their region. Can create an incentive to use funding effectively Avoidance of earmarking can encourage subnational governments to use funding more effectively as funding a bad project has a high opportunity cost (i.e. missed opportunity to invest in a better project). Can provide stability of resources and support longer term decisionmaking. Fiscal equalisation grants tend to be stable and predictable, allowing subnational governments to plan investment and expenditure over a long timeframe. It can also encourage saving during good economic conditions and investment when economic conditions are worse.

May be insufficient to promote local development on their own. Improving quality public services might be insufficient as other factors might be more relevant (e.g., lack of capital and skilled labor, lack of agglomeration economies). This might instead call for a ‘big push’ approach to get a place out of a development trap. May reduce the incentive of subnational governments to invest in their own productive capacity. Depending on the specific design, equalisation grants may reduce the responsiveness of local revenues to economic growth. May deter migration and hence reduce economic convergence. Improvement in the quality of public services led to a better quality of life and reduction of the push factors for migration. May result in sub-optimal funding allocation. Myopic local voters might find optimal to use funding for consumption rather than for investment purposes (e.g., to subsidise public sector jobs or inefficient firms). There can also be a ‘race to the bottom’ (Bucovetsky and Smart, 2006[39]) if fiscal equalisation is too strong. May create a risk of ‘tax laziness’. Subsidised municipalities may exempt their own taxpayers and may not make a sufficient effort to generate necessary revenues to cover their needs. Can also create a dependency effect when equalisation funds are a majority of municipal revenues. Low quality of government may mean that resources are not used well. Weak institutions may not be able to absorb and use the funding effectively, which is more likely in under-developed regions. This could be partially addressed through conditionality and incentivised reforms.

Source: Author’s elaboration, adapted from Solé-Ollé (2023[12]), When should be place-based policies used, and how should they be articulated with other policy instruments?, https://www.oecd.org/regional/place-based-policies-for-the-future.htm; Moisio and Vidal Bover (2023[36]), Fiscal equalisation and regional development policies: Is there a case for enhanced synergies?, https://doi.org/10.1787/0d28a879-en

Ultimately, it is the specific mix and design of the fiscal equalisation schemes and place-based policies that matters. Ensuring an impact on economic development requires choosing the right mix of equalisation and place-based policies, considering the extent of fiscal equalisation to create the right incentives (full or partial), and establishing a dialogue between government bodies taking care of fiscal equalisation (typically Ministries of Finance) and place-based policies (Ministries of Regional Development and other sectoral ministries) (Solé-Ollé, 2023[12]).

Seeking efficient implementation

While place-based policies can have important benefits, achieving these benefits depends on the effective implementation. Place-based policies can risk being burdened by bureaucratic procedures and red tape that can lead to delays in project implementation and make it harder for subnational governments to access funding (Solé-Ollé, 2023[12]). Policy makers need to have discipline when designing a place‑based policies to ensure that they make the most of available resources. In addition to having clear objectives linked to regional and local development potential and ensuring policy coherence, this requires:

• Targeting effectiveness by acting at the relevant scale

• Ensuring transparent and evidence-based funding allocation

• Leveraging appropriate instruments, and

• Striving for continual improvement.

Target effectiveness by acting at the relevant geographic scale

Decisions on the appropriate scale for a policy are ‘fraught with complexity’ (Green, 2023[10]). Determining the spatial scale for a policy requires understanding how conditions vary across space, the potential for spillovers, and the specific economies of scale or scope at different geographic scales (Green, 2023[10]). Although there might theoretically be an ‘ideal’ geographical scale for a specific policy, pragmatic considerations and governance are also important (Green, 2023[10]). Beyond effectiveness considerations, policy makers also need to consider existing the governance structures, capacities (administrative, technical, fiscal) and coordination structures. Often there will be a misalignment between scale and administrative structures. Mobilising existing governance arrangements may help to avoid costs associated with creating new institutions but may also require compromises on scale.

Some policies may be more appropriate at certain geographical scales. Policies with that can be standardised across space, or that are highly specialised, can be more appropriate for delivery at larger geographical scales (Table 3.3). For example, specialist education and innovation, international trade and investment promotion or major infrastructure investment may be more suitable for delivery at pan‑regional and regional scales (Green, 2023[10]). Conversely, policies that require intensive engagement with communities—such as employment support, skills training and further education—may be more appropriate for delivery at local or even neighbourhood scales. The appropriate geographical scale can also vary according to functions of advocacy, strategy and delivery (Green and Rossiter, 2019[40]). A general principle that can guide policy makers is that of subsidiarity—that social and political levels should be dealt with at the closest possible level to citizens—which is a guiding principle in the European Union.

Table 3.3. Appropriate geographical scales for discharging selected functions and activities

Function/ Activity	Pan-regional	Regional	Sub-regional	Local	Neighbourhood
Employment support and skills
Advocacy	√	√
Strategy/ planning		√	√
Delivery		√	√	√	√
Further Education
Advocacy		√	√	√
Strategy/ planning		√	√	√
Delivery			√	√	√
Higher Education
Advocacy	√
Strategy/ planning	√
Delivery	√	√	√
Enterprise/ Incubators
Advocacy	√	√
Strategy/ planning	√	√	√	√
Delivery		√	√	√
Independent R&D centres
Advocacy	√
Strategy/ planning	√
Delivery	√	√
Enterprise zones, incubators
Advocacy	√	√
Strategy/ planning	√	√	√	√
Delivery		√	√	√
Generic business support
Advocacy	√	√
Strategy/ planning			√
Delivery			√	√
Business finance
Advocacy	√	√
Strategy/ planning	√	√
Delivery	√	√
Inward investment promotion
Advocacy	√	√
Strategy/ planning	√	√
Delivery	√	√	√	√
Local transport infrastructure
Advocacy	√	√
Strategy/ planning		√	√
Delivery		√	√	√
Digital infrastructure
Advocacy	√	√	√	√	√
Strategy/ planning	√	√
Delivery		√	√	√	√

Notes: The functions and activities identified are: (1) advocacy: working with and between government, public sector and private sector decision makers to create the right policy and investment environment for desired outcomes; (2) strategy/ planning: a plan (or plans) of action designed to achieve a long-term or overall aim; and (3) delivery of services.

Source: Based on Green and Rossiter (2019[40]), Geographical scales and functions: the case of the Midlands Engine, http://irep.ntu.ac.uk/id/eprint/38261/

Place-based policy increasingly focus on functional areas and typologies of different places. The increased focus on function areas recognises that the appropriate scale is often beyond a jurisdictional boundary—this makes place-based policies more important. A functional urban area (FUA), for example, is composed of a ‘city’ and surrounding less densely populated local units that are part of the city’s labour market (‘commuting zone’) (Dijkstra, Poelman and Veneri, 2019[41]). Traditional regional policy tended to be framed by sectoral policies implemented by specific administrative units (McCann, 2023[42]), which risked omitting economic relationships across administrative borders and limiting the ability to capture agglomeration economies (Green, 2023[10]). Separately, the increased focus on typologies of regions—mountainous areas, islands, remote regions, chronically disadvantaged areas, depopulating areas and cross-border regions—recognises that these places can face common challenges. Place-based policy can focus on similar types of places to provide targeted solutions and encourage knowledge sharing.

Horizontal coordination becomes even more important when seeking to act at the relevant scale. Increased focus on functional areas makes horizontal coordination more important as jurisdictional boundaries often do not align with functional urban areas. Effective cross‑jurisdictional collaboration becomes critical (OECD, 2019[43]). While the allocation of different responsibilities to different geographical scales is important, ultimately it is how governance works that is crucial: “the manner in which different tiers of government work together is as important as the nature of any functional division of labour between them” (Green and Rossiter, 2019[40]).

Ensure transparent and evidence-based funding allocation

Like many policies, place-based policies can be affected by rent seeking behaviour and political interest. One of the most longstanding critiques of place-based policies is that of ‘pork barrel politics’ (policies being selected primarily to gain political support) (McCann, 2023[42]). Indeed, place-based policies—like many other policies—can have “risks of misallocating resources, creating a dependency culture and favouring rent-seekers over innovators” (Barca, 2009[44]). While these are important risks given the substantial resources involved, the transparency benefits of place-based policies should also be recognised. In particular, the geographic nature of implementation can help to support verification and citizen scrutiny (Barca, 2009[44]). Arguments remain about the conditions and extent to which the benefits of place-based policies may be captured and the potential political distortions (Jensen, Malesky and Walsh, 2015[45]; Slattery, 2020[46]; Slattery and Zidar, 2020[47]; Castells and Solé-Ollé, 2005[48]; Curto, 2012[49]). Nonetheless, it is an important risk and some evidence shows that, for example, regions with higher electoral significance do receive more project grants and public investment (Castells and Solé-Ollé, 2005[48]; Solé-Ollé and Sorribas, 2008[50]; Curto, Solé-Ollé and Sorribas, 2018[51]).

Effective place-based policies should seek to support a portfolio of place-based policies to manage risk and allocate funding based on evidence. Governments are not always well placed to ‘pick winners’, so place-based policies should be seen as a portfolio with an understanding that some projects may fail (Juhász, Lane and Rodrik, 2023[52]). In addition, funding processes should seek to transparently and efficiently allocate funding through competitive grants and formula-based funding. Governments should consider the benefits, limitations and opportunities of different funding mechanisms (Table 3.4). For example, competitive grants—such as the USD 1 billion Build Back Better Regional Challenge in the United States (Box 3.8)—can support the allocation of resources to places with the highest need based on a transparent and fair processes. Integrating technical assistance and staged funding into the award process can help to avoid a risk that funding goes only towards higher capacity administrations.

Table 3.4. Approaches to allocate funding for place-based policies to subnational governments

Process	Description	Benefit	Challenges	Opportunities to enhance
Competitive	Allocation based on assessment of applications	Can support allocation highest potential projects. Can encourage applicants to prepare high quality projects for funding. Can supports alignment of beneficiary priorities to funder priorities. Can encourage all current and potential future applicants to improve planning and evaluation to become more competitive.	May result in funding going towards administrations with higher capacity for preparing applications (i.e., not necessarily those most in need) May require subnational governments to use scare resources for applications, with a risk that no funding is received. May encourage preparation of projects based on evaluation criteria (which may or may not be well defined), rather than local needs	Implement coordination meetings and technical assistance to help align the priorities. Establish stable programmes to encourage development of a viable project pipeline. Ensure governments have sufficient fiscal, administrative and technical capacity for applications.
Formula based	Allocation based on quantitative criteria	Can support allocation to places with highest need. Can avoid subnational governments expending scarce resources to access funding. Can provide efficient process to allocate funding.	May have limited buy-in from recipients to programme. May reduce opportunities for supporting vertical alignment of policies.	Define clear criteria for funding allocation, in line with overarching policy objectives.
Performance based	Allocation based on past performance	Can encourage performance of beneficiaries during the implementation of a current grant.	May be difficult to relevant identify to indicators evaluate performance. May be politically difficult to punish bad performance. May incentivise excessive focus on KPIs, which may not align with longer term development priorities.	Ensure KPIs align to overall long-term economic development objectives.
Discretionary	Allocation at the discretion of the funder	Can support timely and responsive allocation of funding during times of crisis.	May create a risk of favouritism, clintelism and allocation based on political incentives. May reduce subnational government accountability.	Limit use unless timing is an imperative. Ensure transparency and disclosure of grant recipients for accountability.

Source: Authors’ elaboration, building on Solé-Ollé (2023[12]), When should be place-based policies used, and how should they be articulated with other policy instruments?, https://www.oecd.org/regional/place-based-policies-for-the-future.htm; Spahn (2012[53]), Conditioning Intergovernmental Transfers and Models of Interagency Cooperation for Greater Effectiveness of Multilevel Government in OECD Countries, http://www.oecd.org/cfe/regionaldevelopment/Conditioning-Intergovernmental-Transfers-paper.pdf

Box 3.8. Build Back Better Regional Challenge

The USD 1 billion Build Back Better Regional Challenge (BBBRC) is a large-scale place-based policy developed by the U.S. Economic Development Administration (EDA) and supported by the 2021 American Rescue Plan. It aims to provide transformational investments to develop and strengthen regional industry clusters across the United States, while embracing equitable economic growth, supporting good-paying jobs, and enhancing global competitiveness. It is a competitive grant programme that provides large scale support for sucessful ‘coalitions’ to enhance local economic development.

The Build Back Better Regional Challenge included several practices for supporting effectiveness:

• Coalition building – Applicants were invited to form regional coalitions to apply for funding, which focused on enhancing (public and private) collaboration even during the application process.

• Clear objectives: Applicants were encouraged to select three to eight distinct but related projects in their application that were identified in coordination with industry and community partners and aligned around a holistic vision to build and scale a strategic industry cluster.

• Staged competitive process: A two stage process was adopted, with only selected applicants being required to develop a full application. In Phase I, coalitions were first required to prepare an initial concept proposal, with 529 concept proposals submitted. From these, 60 finalists proceeded to Phase II where they recieved support to help improve the quality of proposals.

• Technical assistance to applicants: To support the preparation of their proposal, Phase II coalitions recieved USD 500,000 in technical assistance funds. Large scale technical assistance was planned during implementation.

• Additional support: Sucessful applicants are also being supported to seek addition funding from other sources. In particular, EDA is facilitating coordination with state and federal agencies and philanthropy to enable finalists to leverage other funding for their projects.

• Transparency as practice: All 529 applications were posted online (it was the first competition in EDA’s history to make applicant information public), along with the concept proposals.

• Policy learning: EDA has made three additional grants to national organisations to work with finalists to build Community of Practice, support evaluation and perform research.

Although the BBBRC is still in the implementation phase, there are promising signs of initial impact. The 21 winners bring over USD 300 million in additional local matching commitments and plan to leverage support from over 450 private sector and 27 labour unions or workers organisations. Many non-selected coalitions matured during the application process and have indicated that they will move forward with proposals.

Source: US EDA (n.d.[54]), Build Back Better Regional Challenge: Supercharging Local Economies, https://www.eda.gov/funding/programs/american-rescue-plan/build-back-better ; US EDA (2022[55]), Build back better regional challenge: Technical fact sheet, https://www.eda.gov/sites/default/files/2022-11/Build-Back-Better-Technical-Fact-Sheet.pdf

Policy makers should seek to establish a transparent and accountable decision-making process to support efficient resource allocation in line with policy objectives. Based on insights from the literature, some key elements of this include:

• Having well-defined objectives and results (Barca, 2009[44]);

• Adopting funding approaches with clear and robust evaluation of applications based on defined evaluation criteria that are easily accessible to the public; (Solé-Ollé, 2023[12]; Boone, Dube and Kaplan, 2014[56]).

• Streamlining processes and make it easier for subnational governments to access funding (Solé-Ollé, 2023[12]);

• Building robust governance mechanisms to limit political interference and corruption, and facilitate long-term collaboration (Solé-Ollé, 2023[12]) (McCann, 2023[42]; Bolter et al., 2022[57]);

• Placing conditionality on funding for subnational governments (Barca, 2009[44]; OECD, 2018[58]; Berkowitz, Rubianes and Pieńkowski, 2017[59]), where relevant (see next section);

• Establishing evaluation processes by a credible external authority and giving a voice to stakeholders (including the public) in policy design, funding decisions and evaluation processes (Solé-Ollé, 2023[12]); (Barca, 2009[44]).

Leverage appropriate instruments

Place-based policies mobilise a wide-range of instruments. These instruments target diverse beneficiaries and are allocated through a range of processes with different conditions attached (Table 3.5). Instruments supporting place-based policies can range from earmarked grants for public investment to tax incentives that seek to encourage private investment in certain places to concessional loans that improve access to finance for productive investments. Often multiple instruments are combined provide a more comprehensive approach with the aim to support more transformational change.

Table 3.5. Examples of instruments in place-based policies

FINANCIAL (GRANT AND NON-GRANT) INSTRUMENTS	NON-FINANCIAL INSTRUMENTS	TARGET BENEFICARIES (direct and indirect)	FUNDING ALLOCATION PROCESSES	FUNDING CONDITIONS
Specific-purpose grants	Infrastructure provision	Subnational governments	Formula-based	Earmarking
Tax incentives	Service provision	Firms	Competitive	Matching (Co-financing)
Loans	Coordination mechanisms	People	Performance-based	Performance requirements
In-kind use of land, facilities or equipment	Research and Innovation Support	Non-government organisation	Discretionary	Reporting
Guarantees or insurance	Education and Training	Higher education		Reforms
	Incubators
	FDI attraction

Source: Authors elaboration, building on OECD (2022[60]), G20-OECD Policy Toolkit to Mobilise Funding and Financing for Inclusive and Quality Infrastructure Investment in Regions and Cities, https://doi.org/10.1787/99169ac9-en

Grants can have important implications for subnational government finances. Place-based policies implemented through grant funding can have positive and negative impacts on subnational government budgets (Solé-Ollé, 2023[12]). Earmarked grants, for example, can alleviate or intensify fiscal stress on subnational government budgets (Table 3.6). In general, grants can have a positive impact on subnational government budgets where additional resources are provided to those governments, but can worsen fiscal stress if they negatively impact other subnational government programmes, revenue collection or create additional unfunded mandates (Solé-Ollé, 2023[12]).

Table 3.6. Possible effects of grants on subnational public finances

Type	Positive	Negative
General	Provides additional funding for new programmes. This funding may help to meet local needs and priorities, which may allow other subnational budget resources to be used for other local priorities. Funding for place-based policies are mostly fungible and can reduce subnational fiscal stress (Note: although if it is fungible, it means resources do not necessarily advance the priorities of the funder).	Funding can be volatile due to large funding amounts and short time horizons. This can bias subnational government spending towards new investment and temporary hiring, rather than long-term needs, such as maintenance. Funding grants can result in encroachment. The higher-level government may decide on subnational government competencies. This can blur the attribution of responsibility and erode accountability.
Instruments specific	Competitive grants can encourage all current and potential future applicants to improve planning and evaluation to become more competitive. Matching/ co-financing requirements can help to align incentives and reduce fungibility. Earmarking can support coordination across levels of government and help to internalise positive spillovers (e.g., construction of interstate highway system.)	Competitive grants require that scare subnational government resources are used to apply for funding, with a risk that no funding is received, increasing fiscal stress. They can also bias governments with higher administrative and fiscal capacity, who can dedicate more resources towards grant applications. Matching / co-financing requirements can generate fiscal stress, especially in regions with low fiscal capacity Earmarking may limit fiscal flexibility of subnational governments making it harder to fund their priorities. Discretionary grants can create a risk of favouritism and allocation based on political incentives, which may erode democracy and reduce subnational government accountability.

Source: Author’s elaboration based on Solé-Ollé (2023[12]) , When should be place-based policies used, and how should they be articulated with other policy instruments?, https://www.oecd.org/regional/place-based-policies-for-the-future.htm

One of the main challenges of place-based policies is identifying how funding will be sustained over time (Solé-Ollé, 2023[12]). Volatile and short-term funding for place-based policies can risk biasing subnational government spending towards new investment and temporary hiring, rather than long-term investments and maintenance of existing investments. Certain funding instruments may also reduce the fiscal flexibility of subnational governments and limit their ability to tailor policies to local needs (e.g., strict earmarking grants are recieved).

Place-based policies should harness relevant instruments based on an understanding of the local context and long-term objectives. Specific instruments will depend on a range of factors, such as the capacity of local actors and development needs. Where a policy is targeting a less developed place, grants to subnational governments may be essential to help provide basic infrastructure needed for development that would otherwise be beyond the capacity of governments. Where a place is more developed but at risk of an industrial transition, direct support may be needed to help re-train workers or support firms with a transition. Concessional loans, guarantees and equity investments also have a role to help upgrade local public infrastructure and improve the attractiveness of a place for private investment.

Policy makers need to consider a range of factors when selecting instruments for place-based policies. These include the speed (e.g., formula-based funding can be faster to distribute), duration (e.g., long-term funding stability can support capacity building), motivation (e.g., co-financing can help to align incentives) and capacity of the regions (e.g., competitive grants can help to enhance local buy-in but also require local resources and skills for preparing applications, which may bias higher capacity administrations). Combinations of instruments will often be appropriate to address specific challenges related to each instrument (e.g., technical assistance for preparing applications to address low capacity for competitive grants).

Strive for continual improvement

Wherever possible, place-based policies should be designed to be improved during implementation. Place-based policies should not be seen as static. Flexibility and adaptability should be built-in to policy design to better respond to changing circumstances and evolving needs (Suedekum, 2023[13]; Green, 2023[10]). This requires incorporating monitoring and evaluation into the entire policy cycle (see Chapter 5) and ensuring that policies are designed so that they can be adapted if needed. Adopting a ‘portfolio management’ perspective can help to acknowledge that not all policies or investments will be sucessful, but that successes will outweigh the failures in the long-term.

Place-based policies should be adaptable to changing information and circumstances, and unsuccessful policies should be stopped to avoid sunk costs. A range of different policy dimensions can impact the adaptability of a policy, such as its scale, structure, timing (including any decision‑making gateways), financial and non-financial instruments, governance and stakeholder processes. To build in policy learning for the USD 1 billion Build Back Better Regional Challenge, for example, the U.S. Economic Development Administration has sponsored three research projects to help identify and disseminate policy learnings from the initiative to influence the future of this policy and other policies (EDA, n.d.[61]). It also included a staged application process with feedback loops to allow for information to be incorporated into application processes (see Box 3.8, page 18). In Sweden, the Innovation Agency (Vinnova) has adopted a staged funding process and portfolio approach when it gives grants to promote sustainable growth in regions that is contingent on past performance (Box 3.9). The staged process helps to provide feedback to recipient organisations and allows projects that are not meeting pre-defined objectives to be ceased at defined stages.

Box 3.9. Integrating policy learning into decision-making processes in Sweden

Sweden’s Innovation Agency (Vinnova) has a mission to strengthen Sweden's innovative capacity and contribute to sustainable growth. The organisation places a high value on policy learning though monitoring, evaluation and analysis.

Vinnova’s undertakes a wide range of programmes to support research and innovation in Sweden. The VINNVÄXT programme is a specific competition targeted to promote sustainable growth in regions. The programme provides competitive long-term financing to support the coordination of companies, academia and the public sector to develop products, services and ideas that are internationally competitive. Financed initiatives often relate to strategies for smart specialisation.

Continuation of funding in the programme is linked to past performance. In order to receive continued funding, Vinnova evaluates how the initiative reached the goals they have set themselves. Evaluations also support comparisons between the various initiatives and are an important part of both Vinnova's and the initiatives' learning. Evaluations take place after 1, 3, 6 and 12 years respectively.

• Year 1 - assurance that the processes have started.

• Years 3 and 6 - evaluation of the chosen strategy. Are you on your way to the region's goals? Some power measurements are also made.

• Year 12 - the last evaluation must be carried out two years after the end of the program and concerns effects on the processes and growth.

Source: Authors’ elaboration based on OECD (Forthcoming[62]), Implementation Report on the Recommendation on Effective Public Investment Across Levels of Government; Vinnova (2021[63]), What is Vinnväxt?, https://www.vinnova.se/en/m/ecosystems-for-innovative-companies/winegrowing/om-vinnvaxt/

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Note

← 1.  This chapter was informed by the second workshop in the series on Place-Based Policies for the Future that was held on 12 May 2023 with invited experts. Papers for the seminar were prepared by Professor Albert Solé-Ollé (When should place based policies used and how should they be articulated with other policy instruments?) and Professor Anne Green (When should place-based policies be used and at what scale?).