Place‑Based Policies for the Future

Executive Summary

Shocks, transitions and structural pressures are reshaping development priorities across OECD regions. Countries are slowly emerging from recent crises, but continue to experience long-term consequences, including more constrained public finances and higher levels of inflation. At the same time, there is an urgent need to support the twin climate and digital transitions and confront economic headwinds arising from demographic change and low levels of productivity growth. On top of this, an evolving global landscape and repeated shocks are refocusing governments’ attention on international competitiveness and resilience.

In the face of these challenges, governments are seeking new approaches to increase competitiveness and accelerate the green transition, while maintaining support for inclusion and cohesion throughout a territory. Balancing these objectives requires well-coordinated, multi-dimensional and effective policy action across all levels of government. While “place-blind” macro-structural and sectorial policies will continue to have an important role in this agenda, they will not be sufficient on their own and are not always the most efficient response for supporting regional economic development. Governments also need complimentary “place-based policies” to enhance the quality of development, to ensure efficient mobilisation of assets throughout a country and to avoid leaving large parts of a country behind. Place-based policies have an important role to address spatially differentiated market failures and enhance local public good provision.

Place-based policies are intentionally spatially-targeted policies that provide support to a place to improve long-term economic development and well-being outcomes. Effective place-based policies aim to efficiently address market failures and can have different – often complementary – objectives linked to productivity, sustainability and inclusion. They are place-sensitive to local conditions and opportunities and focus on integrated cross‑sectorial policy action. They integrate multi-level governance based on an understanding that economic development depends on effective coordination across and among levels of government. Place-based policies matter for all places but are particularly important in places facing long‑term economic or social underperformance, where institutions can be weaker. While place-based policies often have an economic efficiency rationale, they can also be undertaken for non-economic reasons, including political, social, environmental or security objectives.

Place-based policies have experienced renewed interest in recent years. Although place-based policies are not new and have been an important part of government policy for many years, persistent and rising spatial economic disparities, together with the significant spatial impacts of recent shocks and trends, have increased governments’ focus on their potential. In recent years, many OECD countries have adopted or updated large‑scale place-based policies. Among the most prominent are Cohesion Policy in the European Union, the Green New Deal in Korea and several recent policies in the United States, including the CHIPS and Science Act and the Infrastructure Investment and Jobs Act. The renewed focus on place-based policies calls for a deeper understanding of their purpose and effective design in response to current economic, social and environmental challenges.

The case for place-based policies

Many places are underperforming in the OECD, with high economic and social costs. Over the 15‑year period between 2005 and 2020, more than half of OECD countries had at least one region with negative productivity growth. In Europe, while many less-developed regions have converged towards the EU average in terms of GDP per capita, many transition regions have stagnated or are diverging. As of 2021, one‑third of regions have yet to see a return to their level of GDP per capita prior to the global financial crisis in 2008. Similar patterns exist across other OECD countries. On-going transitions and shocks—climate change, demographic change, technological advances and new global trade patterns, amongst others—risk further undermining local economic and social structures, with potentially high social, economic, fiscal and political costs.

Geography matters for economic development. The concept of place-based policies is linked to economic geography. In traditional neo-classical ‘spatial equilibrium’ models with perfect capital, firm and worker mobility, places are anticipated to automatically adjust and converge over the long-term following a negative economic shock. However, mobility is not perfect and capital not fully fungible. The annual rate of inter-regional migration across the OECD is low, currently around 3% of the population each year and less than 1% in some OECD countries. Mobility can also exacerbate divergence as out-migration of highly skilled and younger workers can undermine local economic prospects and create a ‘vicious circle’.

‘Spatially-blind’ policies can be insufficient, ineffective or even problematic in the context of large place-specific challenges. Spatially-blind macro-structural and sectorial policies, such as national regulations or pricing of environmental externalities (i.e., carbon pricing), propose a ‘one-size-fits-all’ approach that does not typically account for their asymmetric impact on different places. As a result, these policies can be inappropriate – and perhaps even harmful – for spatially asymmetric and multi-dimensional policy challenges, such as demographic and climate change. Furthermore, local institutions in an affected place may not be able to respond sufficiently to spatially-concentrated challenges on their own due to capacity constraints and fragmented administrative structures.

Place-based policies can efficiently address market failures. There are at least three main economic rationales for places-based policies. First, they can help to tackle a spatial mismatch between firms and workers that can create ‘untapped potential’ in local economies due to the underutilisation of local assets (e.g., human capital, physical capital). This is linked to inefficiencies in the spatial equilibrium that can potentially lead to over-concentration of firms or workers in some places and to the underutilisation of unmovable or less mobile resources in other places. Second, they can help to upgrade local public goods to create the foundations for local economic development and wellbeing. Third, they can help to respond to asymmetric shocks and transitions. They can also have other rationales such as supporting the strategic industrial and regional diversification of an economy, facilitating policy integration and enhancing innovation by reinforcing local and regional innovation networks.

Place-based policies also have an important role to support social cohesion and help limit regional inequality. Spatial inequalities are persistent in many OECD countries. Today, 70% of the OECD population live in a country experiencing regional divergence in economic performance (when comparing small TL3 regions). Persistent inequalities and economic underperformance can have high social, economic, fiscal and political costs. High levels of long-term unemployment in a community, for example, can result in intergenerational scarring, resulting in lower social and economic outcomes that represent lost potential. Persistent inequalities may ultimately reinforce a ‘geography of discontent’ that risks undermining trust in government, social cohesion and democracy.

Place-based policies can play a role in supporting national competitiveness. ‘Place-based industrial policies’ are becoming more prominent in OECD countries. These polices seek to boost national competitiveness by supporting the development of strategic industries through spatially-targeted incentives and investments. They seek to understand local needs and assets to support investment in strategic industries, complementary infrastructure and human capital. Where these policies are well designed, including the necessary complementary policies for supporting regional and local development priorities and for addressing market failures, they can help to support national competitiveness and facilitate the green transition in a spatially inclusive way.

Empirical evidence indicates that place-based policies have the potential to be efficient and effective. Place-based policies are complex to evaluate given that they are multi-dimensional and have various direct and indirect effects and aims. Systematic reviews covering nearly 15 000 local development policy evaluations (which includes place-based policies) highlight that only 2% of evaluations meet a minimum threshold to be considered as a ‘robust’ study. Of the robust studies, around half show a positive impact in terms of employment and GDP outcomes, and the other half show limited impact. Negative effects are extremely rare. The impact of place‑based policies ultimately depends on how they are designed and implemented.

Effective design of place-based policies requires a place-specific lens

Place-based policies have important benefits, but also face limitations when they are not properly designed. Tailoring policy to local needs, characteristics and assets can enhance long-term policy outcomes but can also increase complexity due to the cross-sectoral action required among multiple levels of government. While place-based policies can provide important local funding for public goods, this can sometimes be volatile and driven by short-term considerations, limiting the potential to develop long-term development strategies and strengthen subnational institutional capacities. To ensure that place-based policies are effective therefore four priority conditions are needed:

1. Targeting regional and local development potential – Defining clear objectives for place-based policies based on a deep and forward-looking understanding of market failures and institutional barriers to making full use of (underutilised) local assets.

2. Ensuring policy coherence – Managing interactions among institutions, sectors and policymaking frameworks to maximise potential synergies and address trade-offs, including with macro-structural and sectorial policies.

3. Seeking efficient implementation – Creating policies that act at the relevant scale with targeted instruments, transparent funding allocation and feedback loops to support continual improvement.

4. Reinforcing multi-level governance – Enhancing planning and coordination mechanisms, subnational institutional and fiscal capacity, place-based leadership, experimental governance and inclusive engagement to ensure effective policy design and implementation.

Global challenges require enhanced use of place-based policies

Greenhouse gas emissions, climate hazards and demographic trends differ across regions so actions will need to be tailored to the specificities of each region. For example, flood risks will require different actions across affected places, depending on geographical conditions, exposure and vulnerability of communities. Similarly, actions to redress the loss of biodiversity and halt the degradation of land require similar place-based actions to address market failures that are spatially concentrated. Places that address their local environmental problems are often better able to deal with the rising national and global environmental challenges. For example, local spatial planning and infrastructure provision that reduces traffic congestion and air pollution by favouring connectivity, active mobility and shared transport also reduces GHG emissions and energy use and does so in a way that can raise wellbeing and limit costs.

Addressing environmental challenges requires local collective decisions to help guide individual decisions. Place-based policies to help protect global environmental commons can trigger local resistance. The most vocal resistance may not come from the most vulnerable groups. To gain support, policy makers should prioritise citizen participation and involvement, as well as effective communication. The temporary, experimental introduction of policy steps, for example towards more sustainable land use, can also reduce resistance, which often subsides when local benefits of the measures start materialising.

In regions exposed to significant demographic change, and in depopulating regions in particular, the adaptation of public services must account for local settlement structures as well as local health, social and education service needs, alongside budgetary resources. A place-based approach is therefore needed, integrating higher-level government as well as local actors. Place-based policies can account for specific local infrastructure and land use patterns and integrate how livelihoods depend on them. They can also harness the knowledge and relationships among local people, creating synergies, integrating transformations across sectors, for new, shared use of abandoned buildings for example.

Monitoring and evaluation should be embedded in the design of place-based policies

Cutting-edge evaluation tools are necessary to better understand the impact of current place-based policies and inform the design and implementation of future ones. For the evaluation and monitoring of place-based policies, efforts are needed to collect spatially granular data, including fiscal data, often in innovative ways and from unconventional sources, as official statistics may not be available or timely. Collecting information on policy progress during implementation on an ongoing basis supports continual improvement in policymaking. Addressing climate change, biodiversity loss and other major environmental challenges requires knowledge of local impacts and opportunities. Integrating local well-being impacts, for example on air pollution or traffic congestion, requires going beyond impacts on GDP and employment, allows to better account for the benefits of climate action. Knowing what works best for different local contexts and why should help expand more effective place‑based policies.

Monitoring and evaluation should be built into the whole policy cycle. Many place-based policies are not systematically monitored and evaluated, as they involve actors from multiple sectors and often generate geographic spillovers. Since they often relate to investment, they often require particularly long timeframes for evaluation, well beyond an electoral cycle. Multiple policies may be acting simultaneously, complicating evaluation. Results need to be communicated in a clear and actionable way.

Effective place-based policies leverage multi-level governance and build capacity

Place-based policies often require coordinated actions by multiple levels of government and private stakeholders, making multi-level governance essential. Subnational governments in OECD countries and EU Member States have taken on increasing responsibilities in policy areas related to economic development, innovation, infrastructure and well-being. With many responsibilities shared among levels of government and the need for close involvement of private stakeholders, place-based policies require high-quality cross-sector and multi-level coordination.

Today’s increasingly complex policy challenges and trade-offs require enhanced planning, coordination, capacity, local leadership and engagement. Place-based policies require strategic planning, coordination mechanisms and collaborative solutions to facilitate integrated policymaking and implementation. Ensuring the availability and adequacy of funding and financing at subnational levels of government is also crucial to support long-term outcomes. Strengthening administrative, fiscal and strategic capacities, especially at the subnational level, and building new capacities for foresight and data‑driven decision-making will also be essential. To better understand and respond to local needs, place‑based policies can also include experimental approaches such as policy innovation labs, policy and service piloting, and participatory budgeting. Effective citizen engagement, civil society and partnership approaches are also key to addressing local priorities and perspectives, including those of private actors.

Forward-looking place-based policies to address tomorrow’s challenges

The “systemic” nature of today’s rising challenges, such as climate change and demographic change, often requires cross-sectorial and local solutions making place-based policies a relevant approach. Environmental challenges are characterised by intertwined layers of local, regional and global externalities, making them “systemic”. These include issues around natural resources or the shared use of knowledge and infrastructure. Place-based policies are also needed to develop locally suitable substitutes for carbon-intensive activities, for example in response to carbon pricing, allowing regional economies to reduce emissions while preserving prosperity. Scaling-up place-based policies can help to meet these challenges but requires foresight to avoid risks to regional development and social cohesion. Similarly, demographic shrinkage and ageing are national and international challenges that require forward-looking place-based policy for public services, infrastructure and spatial planning suited to local conditions.

Support to industries, businesses and workers can support the transformations to reach climate neutrality more successfully if it is place-based, integrating innovation and digitalisation in local contexts. Else these challenges can have long-term scarring effects, leading to inter-generational cycles of reduced social and economic outcomes with high human, social, economic, fiscal and political costs. Proactive place-based action can help prevent a vicious circle taking hold, reducing long-term costs. Forward-looking place-based policies will be essential to enable communities to re-invent themselves as new challenges and opportunities emerge.