Place-based policies involve a diverse mix of public and private actors, levels of government and institutions. This means that effective place-base policies require robust multi-level governance supported by cross-sector and multi-level coordination; administrative, strategic and technical capacity; fiscal capacity; place-based leadership; experimental governance; and inclusive engagement. These elements are fundamental for all types of country contexts and institutional settings, including for highly centralised and decentralised countries. Together with these fundamentals, emerging collaborative and digital approaches have the potential to bring greater innovation to multi-level governance for place-based policies.
Place‑Based Policies for the Future
Abstract
Today’s increasingly complex policy challenges call for integrated and collaborative responses.1 The interconnected, rapidly-evolving and place-specific nature of many policy challenges today call for cross-sectoral, multi-level and multi-stakeholder actions. Public, private and civil society stakeholders need to be brought together to navigate complex trade-offs, enhance policy synergies and find innovative approaches to new challenges. In this context, the role of multi-level governance2 for effective place-based policies is more essential than ever.
All levels of government, together with the private sector and civil society, have an important role in the design and delivery of place-based policies. Alongside national governments—and the supranational level in the EU—subnational governments have a key role in financing of place-based policies. Across the 38 OECD Member countries, subnational governments accounted for almost 40% of total government public expenditure on average in 2022 (OECD, 2024[1]). They have significant responsibilities for designing and implementing place-based policies linked to economic development and well-being, including for innovation, infrastructure, education, and housing. In some areas, subnational governments are the main actors, such as for ensuring housing and community amenities, environmental protection, and recreation and culture. In other areas, spending responsibilities are more likely to be shared between the central and subnational levels. This is the case for education, economic affairs (and transport), health and social protection (Figure 6.1).
Subnational government expenditure by functional area in OECD countries (2021), share of general government expenditure in same functional area
Note: The OECD average (unweighted) is calculated for 34 countries (no data for Canada, Chile, Mexico and Costa Rica) with data from 2021. The functional areas correspond the Classification of the Functions of Government (COFOG), which distinguishes 10 areas.
Source: OECD (2024) Subnational Government in OECD countries: Key data.
Subnational governments are also large public investors in a majority of OECD countries, which is often related to place-based policies. In 2022, they accounted for almost 58% of total public investment on average. Almost 40% of subnational government investment goes to economic affairs and transport, followed by education (20%), public administration (11%) and housing and community amenities (9%) (OECD, 2024[1]). Their climate-significant public investment accounts for 69% of general government climate-significant investment in OECD countries (OECD, 2022[2]). Even if part of their funding comes from grants from national governments, subnational governments have a crucial role in addressing many major transitions underway (climate, digital, demographic) given their competencies.
Notes: Averages are weighted. There is no distinction between the state and local government levels for the USA. Data for Australia, Chile, Colombia, Japan, New Zealand and Türkiye are from IMF Government Finance Statistics.
Source: Subnational Governments in OECD countries: Key data – 2024 edition
With many policy responsibilities being shared, it is imperative that governments work with each other, and with local stakeholders. Effective co-ordination mechanisms are especially crucial where there are ambiguities or unclear assignments of responsibilities that can diminish policy efficiency (OECD, 2019[3]). This requires engaging stakeholders in public decision-making, particularly in the identification and design of strategies and policies, during implementation, and later in monitoring and evaluation. An essential part of effective multi-level governance is ensuring that interdependencies and interactions are thoroughly considered in the design and implementation of place-based policies (OECD, 2023[4]).
Multi-level governance can improve place-based policies in six key ways
For place-based policies to be successful, there are a at least six fundamental ways that multi-level governance systems can support them. These concern the actors and institutions in place to design and deliver policy; the frameworks and capacities to support the policy process; and the innovative practices that ensure place-based policies are multi-sectoral and future-focussed. Multi-level governance systems can:
1. Make place-based policies effective by coordinating the relevant actors and sectors
2. Empower place-based leaders to broker broad coalitions of local stakeholders to support and improve place-based policy design and delivery
3. Ensure the availability and adequacy of funding and financing resources to support place-based policies
4. Invest in subnational strategic, administrative and technical capacity to help place-based policies to be successful over the long-term
5. Leverage experimental governance to deliver fit-for-purpose place-based policies
6. Promote inclusive policy design and delivery.
Co-ordination is essential for effective place-based policies. Co-ordination among levels of government (vertical) and across a level of government (horizontal) is critical, and may also involve other public agencies, civil society and the private sector. While these actors often interact in some capacity, formal co-ordination mechanisms and a “joined-up approach” (see Chapter 3) can ensure their involvement and accountability in policy design and implementation (Beer, 2023[5]). The objective of these mechanisms is not to create more layers of governance, but to establish reliable and transparent processes that reduce information asymmetries and transaction costs. Cross-sector co-ordination also offers multiple benefits, such as identifying positive externalities from one sector to another and generating economies of scale (OECD, 2014[6]; OECD, 2018[7]).
Horizontal coordination is essential for place-based policies to act at the relevant scale
Place-based policies need to be implemented at the appropriate scale to be effective. Indeed, co‑ordination between governments at the same level can enhance economies of scale and increase policy synergies among subnational governments, such as through inter-municipal and interregional co‑operation. For instance, in large‑scale physical infrastructure investments and for service delivery, co‑ordination is crucial since the efficient scale often exceeds administrative boundaries. Effective co‑operation across places should leverage the institutional ties and common challenges that unite them.
Place-based policies often cut across administrative boundaries. Policies to foster economic development and improve well-being often stretch beyond jurisdictional boundaries to functional scales that are largely determined by commuting and socio-economic flows. Administrative scales can become rapidly obsolete with socio-economic change (growth in services, transport and ICT) and demographic change. Improving access to healthcare and education networks, for example, can require transport and digital investments that span jurisdictions.
Place-based policies require co-ordination between jurisdictions to take advantage of potential spillovers. Place-based policies can have important benefits for other jurisdictions that are not targeted by a policy, as can be the case with investments in transport infrastructure (Blouri and Ehrlich, 2020[8]) and knowledge diffusion from innovation activities (McCann and Ortega-Argilés, 2013[9]). Co-ordination can help to ensure that place-based policies produce these positive spillovers across multiple jurisdictions by enhancing information flows between jurisdictions and providing opportunities for joint investments. Place-based policies can also help to avoid welfare-reducing policy and investment competition between jurisdictions (Solé-Ollé, 2023[10]).
Co-ordination can help to avoid fragmentation of development and investment strategies between jurisdictions. Many place-based policies are relevant on a scale that extends beyond a single jurisdiction. When each jurisdiction develops its own strategy independently, it can lead to fragmented approaches and inefficient competition for funding. This is especially the case in countries that have very small municipalities, such as Czechia, France and the Slovak Republic, where over 80% of municipalities have fewer than 2 000 inhabitants (OECD, 2023[11]). At the metropolitan scale, research across five OECD countries has found that the more fragmented a functional urban area is in terms of the number of municipalities, the lower its productivity (Ahrend et al., 2014[12]). The presence of a metropolitan governance body can reduce this impact on productivity and help co-ordinate metropolitan-scale policies, including land use and transport policies. Legal frameworks and policies supporting inter-municipal co-operation have been significantly enhanced over the last 15 years in the OECD and EU to generate economies of scale and scope in municipal services and infrastructure. In France in particular, supra-municipal authorities with tax raising powers and a large range of delegated functions have been created to design and implement integrated territorial projects (OECD, Forthcoming[13]; OECD, 2017[14]). The EU Cohesion Policy fund can also help develop inter-municipal cooperation, in particular through territorial instruments, such as Community Led Local Development (CCLD) and Integrated Territorial Investment (ITI). These seek to encourage places to work together at an efficient scale to serve the implementation of a territorially based strategy. They are based on involve local partnership, bottom-up approaches and territorial governance.
An integrated inter-regional approach can generate economies of scale and strengthen economic linkages (ESPON, 2016[15]) (Almazán‐Gómez et al., 2023[16]). Inter-regional co-operation is also essential for smart specialisation, as innovation often relies on exchanges and spill-overs between clusters or knowledge hubs. Co-operation spans a continuum of phases, from policy learning to policy alignment and policy integration. Interregional co-operation that contributes to an overall strategy is likely to have a greater economic impact than a collection of unrelated collaborative projects (Woolford et al., 2021[17]). For example, France supports interregional cooperation through its State-Region Interregional Planning Contracts (CPIER), for example to support the Rhône-Saône Plan and the projects of the many stakeholders operating in the Rhône-Saône basin. Another example is the "Massif Central interregional convention" (CIMAC), an interregional planning contract that brings together the State, 4 regions, 22 départements and EDF Hydro (a state electricity company) to mobilise EUR 216 million over the period 2021-2027 for the self-development of the Massif.
Place-based policies play a role in supporting co-operation across national borders. Cross-border co-operation can facilitate economies of scale and economies of agglomeration across national borders by leveraging neighbouring markets and the free movement of goods, services, capital, people, and ideas (Mission Opérationnelle Transfrontalière, 2020[18]). However, this type of co-operation can be challenging due to significant differences in institutional, regulatory, technical, and tax arrangements, as well as varying cultural approaches to co-operation and risk management (ESPON, 2021[19]). Given the very nature of borders which is a typical case of “inefficiency trap”, external intervention from a higher-level government can be justified (Barca, 2009[20]). Supranational and national administrations are well placed to support cross-border policies, by adapting their national legislative framework and by supporting cross-border initiatives. For example, the EU, promotes cross-border integration by creating appropriate legal tools (e.g. European Grouping of Territorial Cooperation – EGTC, Interreg), providing dedicated funds (e.g. funds from the Interregional Innovation Investment Instrument - I3) to support projects in cross-border areas (home to 33.5% of EU residents), and by promoting knowledge and information exchange. Place-based policies that bring together the public, private and academic sectors can also strengthen cross-border cooperation. The U.S.-Canada cross-border region of Cascadia (covering British Columbia, Washington State and Oregon), for example, has leveraged their complementary capacities in life sciences and technology to work together on public health problems (notably, cancer treatment). The partnership has built on existing institutional relationships, including the Cascadia Innovation Corridor, a lasting partnership between the two regional governments, universities and private sector actors, namely Microsoft (Cappellano and Kurowska-Pysz, 2020[21]).
Vertical co-ordination is essential for place-based policies’ objectives, design and delivery to be aligned across levels of government.
Governments have a variety of co-ordination mechanisms at their disposal to support the design and delivery of place-based policies. Co-ordination mechanisms provide a structured way to align policy objectives, support the identification of opportunities and bottlenecks, improve the management of joint competencies, minimise the potential for multiple investments to work against each other, ensure adequate resources and capacity, seek input from diverse stakeholders and create trust among actors at different levels of government (OECD, 2014[6]; OECD, 2017[14]; OECD, 2019[3]). There are two main categories of coordination mechanisms: informal and formal. Informal mechanisms, such as dialogue platforms or informal meetings, can promote outcomes that are aligned and sufficiently clear to all actors. Dialogue platforms can be strengthened if they have decision-making powers and are tied to clear outcomes, but they can also remain a mechanism for seeking input and discussing options. For their part, formal mechanisms can ensure that policies are adequately resourced and implemented in an efficient, inclusive and timely manner. These include intergovernmental councils, contractual arrangements and deal-making and specific government bodies such as regional development agencies.
Inter-governmental councils can be used to enhance co-ordination of place-based policies between national and subnational governments. Many OECD countries, in particular federal countries, have developed inter‑governmental councils to better organise their relations among levels of government. These bring together members of the executive branch of national and subnational governments, as well as agencies. These platforms are mainly established for consultation purposes and their decision-making authority is limited; in only 9 out of 32 countries do dialogue platforms have decision-making authority (OECD, 2019[22]). For place-based policies, these bodies can be pivotal for encouraging cross‑sectoral collaboration and facilitating the linkages among sectors at a local level for more ‘joined-up’ policy.
Contractual arrangements are a form of co-operation mechanism that embed concrete outcomes and hold parties accountable during the delivery of place-based policies. Contracts define the mutual obligations of parties involved (e.g. national and regional) and support agreements on the assignment of responsibilities, funding, human capital and assets (OECD, 2019[3]; Charbit and Romano, 2017[23]). The importance of formalised contracts for place-based policies is their ability to engage stakeholders at various levels of government in clear, shared objectives, with a focus on the feasibility of implementation and public action. In a context of limited political trust, contracting can facilitate transparency, build capacity among actors, and serve as an accountability framework. Multi-purpose and multi-year contracts for regional development between the national and subnational levels are frequently used in OECD Member and non-Member countries (OECD, 2019[3]). For example, formal arrangements between a region and a state are common in the context of city-regions. This is, for instance, the case of City Deals in Australia and the Netherlands and the Devolution Deals in the United Kingdom (OECD, 2022[24]). In Norway, the government contributes to more targeted and co-ordinated efforts in rural and regional policy between the State and country authorities through “regional growth agreements”. In France, contractualisation is the result of both the territorialisation of planning and the decentralisation process, which has inspired countries like Colombia for example. Iceland also makes extensive use of contracts between the national government and its regions to strengthen the capacities of its regional associations and give them more responsibilities and spending autonomy over time (Box 6.1).
Deal-making can be also used to instil local capacity and build the credibility of local leaders to design and deliver place-based policies. In the UK, a series of ‘devolution deals’ struck by city-regions with the central government have been effective in promoting growth through co-operative relationships (Alonso and Andrews, 2024, forthcoming[25]). These deals have helped to deliver more efficiently in policy areas that transcend existing administrative boundaries (e.g. transport infrastructure, jobs and training programmes, water, grid development, etc.). Not every deal has succeeded, and many continue to evolve. An independent review pointed out that the best cases were backed by a solid ex-ante review of the local economy and governance framework to assess whether such an arrangement would lead to substantive improvements in subnational governance (Institute for Government, 2023[26]).
In France, the national and regional governments have signed the new generation of 2021-2027 State-Region planning contracts, called “Contrats de Plan Etat-Région” (CPER) in continental France and “Contrats de Convergence et de Transformation” (CCT) in overseas France (outermost regions). These contracts are signed by the President of the Regional Council and the Regional Prefect. The content and model of the 2021-2027 CPERs may vary according to regional issues. However, three major common priorities have been defined for all regions: ecological transitions; research, innovation and higher education; and social and territorial cohesion. These contracts focus on topics such as innovation, digitalisation, research, infrastructure, human capital development, cultural heritage, territorial resilience and the green transition.
The CPERs must be coordinated with the 2021-2027 European Funds and the 2021-2022 Recovery and Resilience Plan. They are accompanied by a “regional recovery agreement”, which aims to distribute a part of the credits of the “France Relance” plan used by the State in 2021-2022 in the territories.
The long-standing practice of contracts in France has helped strengthen capacities at both regional and national levels. It has served as a powerful tool to strengthen cross-sectoral coordination and enhance performance monitoring.
Using contracts to achieve the scale and capacity to address key challenges in Iceland
Since 2013, Iceland has used successive five-year contracts between its regions and the national government to ensure the financing and implementation of the regional-level plans. For example, the Northwest Region has signed three consecutive contracts with the Ministry of Transport and local authorities and the Ministry of Education and Culture to support the implementation of its regional plan, which emphasises regional development and innovation, culture, environmental issues and education and population. These contracts ensure funding against clear and measurable indicators established by the region.
The Northwest Region’s experience shows that this approach has significantly fostered trust in the central government. Over time, the region has benefited from fewer regulatory constraints, increased allowances for administrative costs, and the removal of restrictions on distributing funding between priority projects and competitive funds. In addition, the region has gained greater autonomy in appointing members to the Competitive Fund Distribution Committees.
Trust has also increased on the side of the region, as has capacity. There has also been a visible increase in the degree of responsibility given to local governments by the national government. Given this success, there is now also a possibility for other ministries to be part of the contract. Building on experience from the past, regions are developing increasingly stronger plans. For example, also in the Northwest Region, their 2020-24 contract has received support from expert consultants, the costs of which were paid by the Ministry of Transport and local authorities. The plan has a stronger local focus than in the past thanks to the greater degree of autonomy, and measurability is considered stronger.
Source: OECD (2020[27]), The Future of Regional Development and Public Investment in Wales, United Kingdom, https://doi.org/10.1787/e6f5201d-en
Regional development agencies are another tool that can ensure effective co-ordination across and among levels of government by designing and implementing programmes. This is the case in Canada for example, where the federal government is represented in the provinces via regional development agencies, whose interests lie not only in representing the federal government’s priorities in the provinces, but also in conveying provincial preferences to the federal authorities. Regional development agencies often result in tripartite agreements (i.e. formal contractual arrangements among federal, provincial, and local authorities) that support the implementation of infrastructure policies (Allain-Dupré, Hulbert and Vincent, 2017[28]).
The EU governance structure also includes specific mechanisms to promote effective co-ordination and alignment of objectives. The European Semester process, which co-ordinates economic and fiscal policies between the European Commission and Member States, serves as a tool to enhance policy coherence and has been fully integrated into the EU Cohesion Policy cycle over the last two decades, in addition to more traditional co-ordination mechanisms. A key feature is to ensure greater coherence between national and European policies, with respect to links with national and regional fiscal frameworks (Berkowitz et al., 2023[29]).
Place-based policies require leadership to garner support and mobilise resources. Place‑based leaders – which can imply a group of individuals and/or organisations – can broker development by ensuring a broad coalition of stakeholders get involved in, and benefit from, development (Grillitsch and Sotarauta, 2019[30])
Empower place-based leaders to steer policies
Empowering regional and local leaders can contribute to successful place-based policies. Leadership is a make-or-break component. Particularly so when the sustainability of the place-based policies depends on where decision-making power lies. Leadership can come from many places, including the private sector in the form of entrepreneurial leadership or ‘innovative entrepreneurs’ (for example), the public sector in terms of institutional leadership or the community in terms of place-based leadership (Box 6.2). Place-based policies can benefit from having one, two or all three of these groups at the leadership table.
The role of place-based leadership is emerging in the literature as being key drivers of economic and social change at the scale of cities, regions and communities, and therefore an essential element in the success of place-based policies. These leaders are individuals, groups of people (e.g. local business networks, cluster organisations and civic groups) and organisations who have a breadth of experience, networks and assets that they commit to the development of their region. Place-based leadership includes four dimensions:
Place: Place-based leaders advocate for policies that are more sensitive to place (e.g. mayors and their cities), especially when place-blind policies create undesirable results.
Engagement: Place-based leaders seek to connect the public to policy processes, either as facilitators/promoters of dialogue or by empowering actors to be involved in policy design.
Change: Processes of change or transition (demographic or industrial decline, climate change, etc.) create space for place-based leaders to come to the fore to help identify solutions that are inclusive, feasible and cross-sectoral.
Co-ordination: Place-based leaders play a fundamental role in bringing together diverse actors (e.g. chairing a steering committee, facilitating a dialogue forum) around policy challenges.
Source: Authors’ elaboration based on Grillitsch and Sotarauta (2019[30]), Trinity of change agency, regional development paths and opportunity spaces, https://doi.org/10.1177/0309132519853870; Beer (2023[5]), The governance of place-based policies now and in the future?, https://www.oecd.org/regional/place-based-policies-for-the-future.htm; Sotarauta and Beer (2016[31]), Governance, agency and place leadership: lessons from a cross-national analysis, https://doi.org/10.1080/00343404.2015.1119265
Leadership is even more important when facing complex place-specific challenges. When regions undergo transitions – away from fossil fuels, for example – and seek new economic paths, the place-specific opportunities (e.g. for diversification) may become clearer when all actors of change are involved (Grillitsch and Sotarauta, 2019[30]). This is central, for example, to the green transition. In a case study of three Japanese towns, the transition to more decentralised energy through renewables development was facilitated by forward-looking mayors who sought to balance interests across sectors and to broker interests and resolve conflicts among national and local governments and the private and civil society sector (Takao, 2020[32]). In rural areas, place leadership can also enable a place‑based approach to development. A review of research projects shows the role of leaders in collaboration, consultation, capacity building and building networks across boundaries, which can supporting learning and innovation (Horlings, Roep and Wellbrock, 2018[33]; OECD, 2012[34]).
Leaders can be empowered when there is support from good governance arrangements. Even where financial and human resources are scarce, collaborative place-based governance mechanisms can create the right conditions for building consensus and driving a productivity agenda. This has been observed, for example, in the Greater Manchester Combined Authority that was created during one of several devolution deals between the UK national and local governments. This deal enabled the ten local districts to co-operate under a directly-elected mayor to support the economic development of the functional economic area. While the UK example of devolution has been only partially successful given the limited financial flows to these new city-region structures (McCann et al., 2021[35]), it has given important jurisdiction for some education and employment services that were previously considered ‘place-blind’ (The Productivity Institute, 2023[36]). These competences, and the Authority’s close relationship with the Greater Manchester business community, have helped to identify and attract the skills need to improve the local economy and provide an overall sense of continuous leadership (Harding, 2023[37]).
A ‘challenge-oriented’ approach can facilitate the involvement of leaders in industrial transition processes. This approach focuses on tackling cross-sectoral, societal challenges (e.g. delivering a just and inclusive green transition) in a multi-facetted way, rather than focusing on only one aspect of industrial transition (e.g. innovation, entrepreneurship, SMEs, greening, etc.) (OECD, 2023[38]). The ‘Wallonia High Impact Action: Plastics Go Green and Circular Challenge’, for example, was implemented through a challenge-based approach with active involvement of stakeholders (businesses, local authorities, civil society organisations and environmental NGOs). It helped to spread innovative practices in the field of plastics recycling in the region, promoting a collective problem-solving culture that contributed to the development of a sustainable regional ecosystem in the plastics industry. It also provided a forum for regional stakeholders to discuss the broader challenges of industrial transformation and innovation (OECD, 2023[39]).
Place-based policies need to be supported by sufficient and appropriate sources of public and private funding and financing. With the shocks of COVID-19 and the geopolitical situation, as well as the need to address the demographic, digital and green transitions, government budgets are increasingly under pressure. This combination has created a greater-than-ever demand for regional and local governments to ‘do more with less’. In this context, there is a need to focus on efficiency. There is also a need to ensure sufficient and appropriate sources of funding and financing are allocated to (1) support the design and implementation of an administrations’ own place-based policies and, for subnational governments, (2) deliver those delegated to subnational governments in addition of their own policies.
Ensure place-based policies are backed by sufficient and adequate public and private financial resources
Effective governance of place-based policies relies on ensuring the right fiscal and financial framework conditions and the right funding and financing instruments. Place-based policies require mobilising resources from different sources, be they public or private, or from the supranational (e.g. EU funds, international aid), national or subnational levels. These can be complemented by private sources, including from the financial community (e.g. the banking sector, capital markets) and business sector (e.g. public-private partnerships). Combining these various sources requires robust and stable regulatory and fiscal frameworks, which are not always in place and can be complex, fragmented and restrictive (OECD, 2021[40]).
In many EU Member States, crucial elements of place-based policies are funded by the EU. EU cohesion funds, along with some EU sectoral funds and the EU Recovery and Resilience Facility, play a central role in supporting place-based policies (Box 6.3). While all EU Member States benefit from Cohesion Policy funding, its scale and relative importance of this funding source for investment varies. Cohesion policy represented a substantial portion of government capital investment—approximately 14%—during the 2014-2020 period, ranging up to 40% in less developed Member States (Berkowitz et al., 2023[29]).
The EU Cohesion policy plays a crucial role to fund place-based policies in EU countries. There are eight EU cohesion funds which are managed jointly by the European Commission and national and regional authorities in Member States, among which the European Regional Development Fund (ERDF), the European Social Fund Plus and the Cohesion Fund which are specifically designed to strengthen economic, social and territorial cohesion and correct imbalances between regions. Funds are allocated based on the country level of development (see Chapter 7). While 70% of the ERDF and ESF+ are concentrated on the EU’s less developed regions, the Cohesion Fund is entirely allocated to Member States with GNI per capita below 90 % of the EU average.
Within the Cohesion policy, the EU has developed even more targeted support to specific places and regions. For example, the Just Transition Fund illustrates how support can be further tailored to specific territories’ development needs, with a view to addressing pre-identified climate transition challenges. The EU also supports smart specialisation strategies to strengthen regional innovation ecosystems. Similarly, the EU further tailors its support and targets investment to regions according to their different economic profiles and geographical features of regions. This includes for example outermost regions, northern sparsely populated regions, islands, mountainous and coastal regions, border regions, urban areas, or areas affected by industrial transition (European Commission, 2024[41]). Cohesion Policy involves diverse territorial delivery mechanisms, such as Integrated Territorial Investment (ITI), Community-led Local Development (CLLD) and Sustainable Urban Development Strategies, accounting for almost 9% of total EU Cohesion Policy funds in 2014-2024 (Berkowitz et al., 2023[29]). Finally, conceived as a more efficient and sustainable alternative to complement traditional grant-based support, the financial instruments provide ERDF and Cohesion Fund support on the ground through financial products, such as loans, guarantees and equity. In this way, financial instruments can leverage additional public or private resources to address market failures in line with Cohesion Policy priorities. Financial instruments also help recycle funds over the long term (i.e. loans are repaid and equity generates returns) and they offer incentives for better performance because of their “repayable nature” and the use of expertise and know how (European Commission, 2016[42]).
This trend also concerns other EU sectoral policies, managed directly by the European Commission or indirectly by other institutions, such as the European Investment Bank. Several initiatives or programmes are targeted at cities, rural areas or specific regions. For example, the Horizon Europe Programme had developed the concept of “EU missions” to bring concrete solutions to important challenges, many related to territorial issues. Among the 5 missions for 2021-2027, we find “Adaptation to Climate Change: support at least 150 European regions and communities to become climate resilient by 2030” and “100 Climate-Neutral and Smart Cities by 2030”. Similarly, the nine outermost regions are specifically targeted as potential coordinating partners within the Horizon Widening Programme, a programme normally open to associated countries that underperform in terms of R&I performance. The LIFE programme supports the European City Facility to support sustainable energy investment projects.
Finally, the EU Recovery and Resilience Facility (RRF) can benefit regions, although it lacks the place-based and multi-level governance approach of Cohesion Policy. It is managed by the European Commission and central governments in EU Member States. Only some Recovery and Resilience Plans (RRPs) include territorial rebalancing, especially as a transversal priority in all policies. Others dedicate ad-hoc resources to support the most disadvantaged areas, others instead lack a strategy to enhance territorial cohesion (European Commission, 2023[43]).
Source: Author’s elaboration
Place-based policies can be also supported by central government interventions. They include grants, especially earmarked grants and subsidies from sectoral ministries, national funds for regional development, fiscal equalisation schemes, tax incentives, and financial instruments. National governments play a crucial role by providing grants and subsidies (including general and specific-purpose grants) to subnational governments, businesses, and NGOs to support place-based policies. In particular, earmarked grants may serve several purposes, such as internalising externalities, which means encouraging subnational actors to consider the benefits that certain activities or investments could have for others (e.g. gains from improving transport infrastructure within a region); promoting national policy goals at the subnational level; facilitating risk-sharing and co-operation among different tiers of government and with the private sector; and strengthening the administrative capacities of subnational governments or regional development agencies to design and implement regional development strategies (Bergvall et al., 2006[44]; OECD, 2020[27]; Spahn, 2012[45]).
Conditionalities can be attached to grants and subsidies to align spending priorities among levels of government and with other stakeholders, although there are trade-offs to consider. The EU significantly expanded the use of conditionalities in its Cohesion Policy in the 2014-2020 period, including ex-ante conditionalities (both general and thematic) and macroeconomic conditionalities linked to recommendations included in the European Semester. However, there is some evidence that the use of conditionalities has not always been effective in improving economic policies in recipient countries. Therefore, when designing and implementing a grant system with conditionalities, it is crucial to understand the trade-offs and consequences involved, and to consider the objectives, the choice of instruments, the administrative burden, and the capacity of all parties to implement the agreement and achieve the desired outcomes. Ensuring ownership and legitimacy through transparency and mutual accountability is essential, as is maintaining simplicity and flexibility to adapt to specific local circumstances and development needs. While linking conditionalities to outcomes is ideal (for example, through performance-based grants), it is challenging in practice due to issues related to the selection and measurement of outcomes, including the design and evaluation of indicators (Berkowitz, Rubianes and Pieńkowski, 2017[46]; OECD, 2018[7]).
Other challenges may arise in the case of discretionary central government grants. Political factors can influence the distribution of resources, potentially favouring certain regions or localities based on political interests rather than development needs. In addition, disputes may arise over the level of transfers and the criteria used for their distribution, leading to difficulties in reaching consensus between different levels of government. Earmarked grants also limit sub-national autonomy, i.e. the decision-making power of regional and local actors. Finally, earmarked grants may not be responsive to regional and local needs and may not allow subnational governments to tailor their policies to their unique regional needs and strengths, thus contradicting the principles of the place-based approach (see Chapter 3).
National Funds for Regional Development (NFRDs) can serve as a specific type of earmarked transfer from central government to support regional development. These funds may be financed from a variety of sources, including budget allocations, inter-governmental transfers, or specific revenue streams, such as royalties from natural resources (e.g. Norway) (Clark and Monk, 2010[47]). In France for example, the National Fund for Planning and Territorial Development (Fonds national d’aménagement et de développement du territoire, FNADT) provides State support, both in investment and in operation, for actions that contribute to implementing the strategic choices of territorial planning policy. In the United States, the Community Development Block Grant (CDBG) programme, which receives annual appropriations from the federal government, allocates funds to states and local governments for a wide range of community development activities such as housing, infrastructure, and job training (US Department of Housing and Urban Development, 2022[48]). NFRDs offer important advantages, including targeted financial assistance to regions with specific development needs and fostering collaboration among different levels of government to achieve regional development objectives.
Equalisation transfers can also contribute to the achievement of place-based policy objectives, but need to be well designed to avoid counterproductive effects. The main objectives of equalisation transfers are to provide a minimum acceptable level of public goods and services at a comparable tax rate across regions. Equalisation transfers can help regions to operate on a level playing field and use their resources to implement targeted regional development policies, while giving subnational governments more discretion than earmarked grants (Solé-Ollé, 2023[10]; Moisio and Vidal Bover, 2023[49]; OECD, 2021[40]). However, as fiscal equalisation systems can have both positive and negative effects on place‑based policies and regional economic development, it is crucial to design the right mechanisms to avoid counterproductive effects (see Chapter 3).
Place-based initiatives can be supported by non-traditional sources of funding, like philanthropy, foundations and crowdfunding. Crowdfunding can complement regional and local authority funding for small-scale investment projects with high local visibility and impact but limited profitability for traditional financers, such as community-level infrastructure and equipment, green and public space improvement, etc. They can be combined with other instruments at several stages of the investment process. For instance, donation crowdfunding can secure early-stage investments and build support among the local community. Later in the process, as the project’s scope is defined and financial conditions are established, equity crowdfunding markets can become suitable, in combination with other local revenue streams, to finance the project’s construction (OECD, 2020[27]; Gasparro K., 2019[50]; OECD, 2022[51]).
Taxation can be a powerful tool for place-based policymaking, provided that it is used in a balanced manner. Tax incentives are sometimes used to attract firms and investment to specific regions. These incentives can include tax breaks, reductions in corporate income tax rates, or tax exemptions. Similarly, Special Economic Zones (SEZs) are built upon economic regulations and policies that differ from the rest of the country and that, in principle, offer a more favourable business environment, streamlined administrative procedures, or tax benefits (OECD, 2023[52]). The rationale behind these incentives is that the revenue no longer collected through taxes will de facto act as an investment that furthers regional development goals. If adequately designed and targeted to the local ecosystem, these tax instruments can be of particular benefit to lagging regions and in boosting nascent and emerging sectors, as shown by SEZs in southern Italian regions, in Poland, in France (e.g., Zones Franches Urbaines (Urban Free Zones), in the United States (the “Opportunity Zones” programme), and in the UK (“freeports” and “investment zones”). However, these tools need to be used in a balanced manner to ensure that the benefits of increased investment, job creation and infrastructure development outweigh the drawbacks of reducing tax incentives, lack of transparency or unintentionally promoting rent-seeking behaviour (Brussevich, 2020[53]; World Bank, 2017[54]).
Strengthening the fiscal capacity of subnational governments can help deliver policies that are truly place-based. Through their own-revenue sources (i.e. local taxes, user charges, revenues from assets), subnational governments directly support place-based policies but their capacity to support specific regional and local development projects, including through co-financing, may be limited by their weak fiscal capacity. To make multi-level governance systems work, governments should ensure that expenditure needs are consistent with revenues (OECD, 2019[3]). However, in many countries, function is not always followed by finance. The number of under- or unfunded mandates – where the decentralisation of spending responsibilities is not matched by a sufficient revenue severely hampers subnational government capacity to spend and invest to implement place-based policies. Overall, unfunded or underfunded mandates are found to have a negative effect on economic growth (Rodríguez-Pose and Vidal-Bover, 2022[55]). They also tend to deepen the challenge of responding to megatrends, such as climate change, as well as shocks, such as pandemics (Rodríguez-Pose and Vidal-Bover, 2023[56]). In Ireland, for example, the government has rolled out an ambitious Climate Action Plan, but regional and local authorities have struggled to have impact given their weak fiscal and technical capacities. Each local authority is obliged to launch its own local authority climate action plan to align with the national strategy, but without any meaningful transfer of funds or authority for their implementation3 (OECD, 2023[57]).
Fiscal imbalances result in fiscal capacity gaps which constrain the implementation of place-based policies. Subnational governments should have a balanced system based on a basket of revenues (OECD, 2019[3]; OECD, 2022[58]). In addition to a sufficient level of grants (for delegated functions or earmarked investment), this basket should include a mix of shared and own-source tax revenues (composed of tax revenue shared between national and subnational governments, and taxes levied and managed by subnational governments themselves) as well as other sources of own revenues such as user charges/tariffs and fees and property income.
In OECD countries and EU Member States, the structure of subnational government revenues varies greatly across countries and there is no one model of funding. However, the level of fiscal autonomy remains low in several countries, with strong vertical fiscal imbalances. There is a notable gap in fiscal capacity in the European context between non-cohesion and cohesion countries4 (European Commission, 2021[59]).
Enhancing subnational fiscal capacity could unlock the use of borrowing to finance place-based investment projects. Mobilising borrowing is essential to help subnational governments meet the high up-front costs of infrastructure investment and to spread those costs across the future beneficiaries of an investment (OECD, 2022[58]). Borrowing is used by subnational governments to supplement self-funding and capital grants. Weak fiscal capacity has implications for creditworthiness, i.e. the ability to repay debt. Fiscal capacity can be improved through fiscal decentralisation reforms that ensure sufficient, stable and diversified revenue streams, with the ability to adjust in times of shocks, as recently demonstrated by the pandemic, wars and other risks that put subnational finances under stress. Unlocking resources is a prerequisite for unlocking finance to meet investment needs in regions and cities.
Unlocking financing requires appropriate regulatory and legal fiscal frameworks that provide subnational governments with access to finance while managing the associated risks (OECD, 2022[58]; OECD, 2023[60]). Financing instruments for subnational government infrastructure investment mainly consist of debt through loans and bonds, as well as guarantees. In many countries, especially in European countries, loans are the most common form of finance for subnational governments, while bonds are more frequently used in larger and more creditworthy regional and city governments. The use of these financing instruments varies substantially across countries and is highly dependent on the intergovernmental fiscal arrangements in a country, in particular the regulatory framework for borrowing applied to subnational governments. As subnational government debt can create sovereign fiscal risk, many countries place restrictions on the use of borrowing, for example the “Golden Rule” (i.e. borrowing is only allowed to finance capital expenditure) and additional prudential rules on debt stock and debt service. In some countries, subnational governments, especially at the local level, may not be able to access financial markets to issue bonds (OECD, 2022[58]). The challenge is to find the right balance between, on the one hand, the need for some fiscal space and capacity to invest and, on the other, the need to manage associated risks and to provide safeguards, which are essential for lenders and private investors.
Unlocking financing requires having appropriate financial markets, including credit (loans) and capital markets (bonds) suitable for subnational borrowing and offering affordable finance. This can lead to establishing financial intermediaries for subnational governments like state or municipal bond banks (e.g. in the United States), national infrastructure banks (in the United Kingdom), regional development banks (e.g. Länder banks in Germany) and local government financing agencies (e.g. in France, Finland, Japan, New Zealand, Norway or Sweden). Several national development banks also support place-based policies by financing subnational governments and local development projects (e.g. Banque des territoires in France, KfW in Germany). Multi-lateral development banks, such as the World Bank, the European Investment Bank (EIB) or the European Bank for Reconstruction and Development, are also active in this area, offering loans and, sometimes, grants to support regional development projects. These banks generally provide loans with concessional terms, including lower interest rates and longer repayment periods, which help reduce the financial burden on subnational governments. They also usually accompany their financial contributions with technical knowledge and expertise in project design, implementation strategies, policy reforms, and institutional strengthening through capacity building programmes. In the EU, cohesion was one of the original reasons for the creation of the EIB in 1958 and continues to be one of its priorities. The EIB’s cohesion financing supports projects in EU regions with a gross domestic product (GDP) per capita below the EU average. The Bank will dedicate at least 40% of its total financing in the European Union to projects in cohesion regions during 2023-2024, and at least 45% from 2025. In addition, the Bank advises public authorities and project promoters in so-called cohesion regions on how to improve the technical and financial quality of their projects, adopt successful strategies in areas such as transport and climate, reinforce their institutions and attract funding (EIB, 2023[61]).
More innovative financing instruments such as green, social, climate and sustainability bonds or loans, and impact bonds are developing at the subnational level, supporting green and social place-based policies. Many places are harnessing green and social bonds to financing investment programmes, including social and green bonds in Ile-de-France (France), Madrid (Spain), Washington DC (United States), Mexico, or Helsingborg in Sweden, among many other examples. However, subnational governments still represent a small share of green and social bonds issuance at the global level due to various barriers related to the fiscal and regulatory framework, institutional capacity and lack of friendly capital markets (OECD, 2023[60]).
Place-based policies can benefit from leveraging private investment for regional and local projects. While the private sector can drive regional economic growth by injecting capital into a region, mobilising private actors to support specific place-based policies is more challenging. However, this can be done through different types of instruments and investment approaches, including publicly-backed equity to support SMEs (regional capital risks for example), regional and local state-owned enterprises (“public-private enterprises”), and public-private partnerships (PPPs).
Public-private partnerships (PPPs) can present benefits for place-based policies but rolling out subnational PPPs should be done with caution. PPPs are long-term contracts between government entities and private parties, whereby the private party assumes significant risk and management responsibilities to deliver public assets or services (World Bank et al., 2017[62]; OECD, 2018[63]). Governments can reap benefits from PPPs, such as enhanced project selection through private sector analysis and innovation, improved access to private sector expertise, and better lifecycle management driven by long-term incentives, among others. Nevertheless, as the OECD Principles for Public Governance of PPPs state, it is critical to compare benefits, costs, and risks of PPPs against other funding and financing models, and to carefully assess the “value for money” and characteristics of specific projects before opting for a PPP. In addition, subnational governments face risks related to institutional capacity and fiscal and regulatory frameworks when engaging in PPPs. Successful implementation of PPP projects requires substantial institutional expertise, including the ability to assess benefits, costs, and risks, manage project development, procurement, awarding, and contract management, all while ensuring transparency. Not all subnational governments have the appropriate skills to design and manage PPPs. Therefore, PPPs should primarily be utilised by larger cities and regional jurisdictions that possess the necessary fiscal and institutional capacities, under specific conditions and stringent control mechanisms (OECD, 2022[58]).
Leveraging private investment is even more challenging in less-developed regions where return on investment may be more limited. In addition, less developed regions can be confronted with higher perceived risks, lower market potential or uncertain regulatory environments that may deter private capital in these areas. Specific financial instruments can help fill in this gap, such as financial instruments developed in the framework of the ERDF and Cohesion Fund that provide support for investments by way of loans, guarantees, equity and other risk-bearing mechanisms. They can be combined in the same operation with technical support, interest rate subsidies or guarantee fee subsidies (European Commission, 2015[64])
Co-ordination of fiscal policies among levels of government help build adequate fiscal capacity to deliver place-based policies (OECD, 2021[65]). Better aligning fiscal frameworks among supranational, national and the regional and local levels could help to create greater coherence among place-based policy objectives.
Enhancing administrative, strategic and technical capacity to support design and implementation
Designing and implementing place-based policies require having a good set of capabilities at all levels of government. The degree to which governments can achieve lasting and inclusive development depends largely on their administrative, strategic and technical capacities, including to set goals for social, political and economic outcomes, to deliver on their missions/mandates in an efficient, fair, accountable, incorruptible and responsive manner and to perform key functions such as design, plan, monitor, procure, coordinate, partner (including with the private sector), and evaluate activities. Capacity issues remain a major constraint to the effective implementation of place-based policies, particularly in less developed regions (Berkowitz et al., 2023[29]). This is even more the case as governments are being confronted with challenges such as climate change, demographic change and digitalisation that require strong administrative (e.g., management, leadership), strategic (e.g., foresight) and technical (e.g., digital, data) capacities.
Developing adequate administrative and strategic capacities is particularly important at the regional and local levels given their central role in public policies, public investment and place-based policies. Should this capacity be lacking, negative consequences may include delays, inefficiencies, and diminished regional development outcomes (OECD, 2018[7]). The capacity level may be correlated with the quality of governance, which varies significantly across countries but also across regions. The European Quality of Government Index (EQI) shows that the quality of government in a territory is a key factor for understand its social, economic and political progress. High-quality regional governance bodies can create a favourable business environment, attract investment, and promote economic development through policies that support entrepreneurship, innovation, and competitiveness, and ensure that resources are allocated efficiently (OECD, 2023[52]; European Commission, 2024[41]). Disparities in the quality of regional governance can lead to regional economic disparities (Barbero et al., 2022[66]). The 2024 edition of the EQI confirms the main findings of the previous editions: when it comes to the quality of the government, what region you live in matters just as much as what country you live in. It clearly shows that wide disparities still exist across EU regions, with less developed regions lagging behind and their performance worsening since 2021.
In a context where regional and local actors are increasingly involved in the management of EU Cohesion policy in application of the “partnership principle”, the quality of regional governance can act as a key determinant for the effective use of EU funds (Charron, Dijkstra and Lapuente, 2014[67]). Quality of governance can be a notable roadblock in the delivery of large scale investment programmes, such as the EU’s Cohesion Policy, which often depends on subnational governments to manage and invest available funds (Keller and Virág, 2021[68]), although this involvement remains uneven across the EU.
Improving institutional and government quality can lead to better absorption and utilisation of funds, while also leading to an increase trade among regions with similarly high institutional quality. A recent study has shown that a small five per cent increase in government quality across European Union regions increases the impact of Cohesion investment by up to seven per cent in the short run and three per cent in the long run (Barbero et al., 2021[69]). Improving institutional quality is especially important in a lagging-region context whereby even marginal improvements in government quality can have a large impact, such as on innovation potential (e.g. patenting) (Rodríguez-Pose, 2013[70]). Regional governance reforms are an opportunity for developing strategic capacity, in particular on regional development planning and implementation, policy monitoring and evaluation processes (OECD, 2022[24]).
Reinforcing administrative and strategic capacity of public actors and stakeholders is a key dimension to improving government quality, especially at the subnational level. This refers to skills and competencies in strategic planning, policy and programme management, budgeting and finance, project appraisal, regulation, infrastructure investment, procurement, data management, stakeholder engagement, partnership building, monitoring and evaluation and foresight (OECD, 2023[71]). It also requires fostering a learning culture, including providing knowledge exchange opportunities and encouraging continuous training, experience-sharing, learning-by-doing and innovation (OECD, 2018[7]).
Several OECD countries and the EU have invested in strategic capacity-building initiatives to improve the institutional and administrative capacity of public institutions. The EU has substantially increased its support for technical assistance activities for the new programming period 2021-2027 to improve the administrative capacity of managing authorities and beneficiaries to implement Cohesion Policy programmes, for example through actions identified in strategic roadmaps (OECD, 2020[72]; European Commission, 2024[41]). Technical support is also provided to Member States, through the Technical Support Instrument (TSI), to improve the efficiency and quality of public administration tackle, among other things, fraud and corruption. The European Semester process has been instrumental in encouraging Member States to prioritise institutional reforms, including at the subnational level (European Commission, 2024[41]).
Involving all levels of governments and fostering collaboration to build better capacities for place-based policies is key. The Australian New Zealand School of Government (ANZSOG), established in 2002 through the collaboration of major Australian and New Zealand universities and the Governments of the Australian Commonwealth, States and Territories and of New Zealand, is unique for its intergovernmental approach to public sector learning. Its focus is on educating public sector leaders, building new public policy research and management capability, and encouraging public-sector innovation. Capacity development and support can also be carried out in cooperation with local government associations, like in Slovenia (OECD, 2019[22]).
Given the scale and complexity of the challenges confronting subnational governments, there is a need to move beyond a business-as-usual approach. The design of place-based policies is an avenue where new models of governance and new practices can be tested through a process of ‘learning by doing’ that engage a broad cross-section of stakeholders. This is relevant in both leading and lagging regions, although in the latter scenario targeted programmes supported by the national (or supranational) level may be needed to support these processes (Wolfe, 2018[73]).
Embrace experimental practices to improve policy design and co-operation
Place-based problem-solving can benefit from experimental governance approaches. There are many forms of experimentation in policy design and delivery. These include co-design and delivery as well as piloting specific initiatives. In addition, there are tools and mechanisms that can facilitate experimentation which emphasise collaboration across sectors, knowledge exchange and network utilisation (Giest, 2023[74]):
Policy innovation labs: Focus on designing citizen-centred public policies, with the aim of tackling the root causes. Examples include the Solutions Lab within the City of Vancouver, Canada, which tests solutions developed by participants (who vary depending on the policy problem) for climate and citizen well-being.
Data collaboratives: Collaboration among diverse stakeholders to pool data and share knowledge to tackle policy questions. A notable example is the Amsterdam Data Exchange (AMdEX), a cross-sector cooperative that tests innovative data-driven solutions that can inform digital policies.
Collaborative governance regimes: Processes and structures designed for decision making. For example, the Appalachian Regional Commission (ARC), a longstanding economic development- driven entity comprised of 13 U.S. States, the Federal government and municipalities, invests substantially in communities affected by the green transition.
National and regional policy makers can act as facilitators of experimental governance processes. This involves time, experimentation and a gradual approach for optimal results (Giest, 2023[74]). For example, in Germany, regions (Länder) and municipalities are supported by the Federal government to conduct policy experimentation and build evidence-based policies in areas spanning from AI to regional innovation to energy policy (Federal Ministry for Economic Affairs, 2019[75]). The German example, which can take the format of a policy innovation lab or regulatory sandbox, has become increasingly prominent across OECD countries with numerous examples initiated by the public, private, and civil society sectors, as well in partnership with universities (Bellefontaine, 2013[76]). Canada also puts experimentation at the core of place-based regional development policy to foster learning and community capacity building. Pilot policies are one of the tools chosen by Canada to operationalise the hybrid contracts that are the prime instrument of the Canadian regional governance system (OECD, 2018[7]). To encourage non-government actors to get involved in policy labs requires national and regional policy makers to act as facilitators (of firms, academia, civil society groups) and to communicate back to the stakeholders and the public how the process will translate into concrete results (Leckel, Veilleux and Dana, 2020[77]).
Processes such as Local Open Innovation (LOI) can help regional development actors unlock their assets and identify their competitive advantage. Contrary to closed innovation which might occur within an organisation or closed systems of a few actors, in an LOI ecosystem, organisations engage in activities such as joint research projects, technology transfer agreements, co-development initiatives, or knowledge-sharing networks with other local entities – often around a common problem or theme (Leckel, Veilleux and Dana, 2020[77]). By leveraging the collective knowledge and capabilities of the local community, regional bodies can help SMEs accelerate the pace of innovation, address complex challenges, and create value for both them and the broader ecosystem (West and Bogers, 2013[78]). The public sector can initiate LOI processes to serve the dual purpose of inciting a cultural of innovation and solving policy problems. These collaborative networks can have a heightened impact in non-core regions where knowledge spillovers may be limited to the local setting and where firms may have limited capacity to connect with external actors (Meili and Shearmur, 2019[79]).
Place-based policies can help governments test innovative policy practices. They can allow for developing experimental initiatives and adopting an entrepreneurial culture to test ideas on a small-scale before rolling out more broadly. This can be supported by governments partnerships with other sectors (private, academia, NGOs) who are less risk averse (OECD, 2023[38]). The private sector can be especially useful to augment data collection and analytical capabilities of regional and local governments. In the UK, the London Datastore is a data portal that freely distributes public and private data from more than 1 000 datasets and numerous organisations to researchers, policy makers and private sector companies. This can inform a wide range of projects and policies on housing, economic development, air quality, and crime (OECD, 2022[80]). The adoption of artificial intelligence (AI) tools within subnational administrations may help to further streamline tasks and engage with citizens. Already plenty of regional and local authorities are embedding AI in their development strategies (see Box 6.4).
Several international fora exist for making better use of artificial intelligence (AI) while managing its risks, although few have a subnational focus. Yet, there are some examples of policy frameworks emerging which aim to foster a safer, smarter use of the technology:
The city of Boston (US) established its Guidelines for Using Generative AI that helps local public servants use AI tools to improve efficiency including suggestions for effective prompt writing.
The State of Utah (US) launched the Enterprise Generative AI Policy to support its use among State officials with significant attention for managing risk. The State is looking to develop policy sandboxes around AI tools to engage citizens and non-government stakeholders on its uptake.
Catalonia (Spain) has developed an AI Strategy as a public-private collaboration focussing on attracting talent specialised in AI, making the region a European and global hub for AI.
Other regions and cities that have launched strategies to increase capacity and promote economic development include Barcelona (Spain) (2021), San José, California (US) (2022), Helsinki’s AI Register (Finland) (2022), and Connecticut (US) (2023).
Looking ahead, good practices for leveraging AI to deliver effective territorial strategies and to promote better regional and local governance will continue to be established. Moreover, governments close to citizens should remain attendant to the risks associated with AI and inform and educate people on best practices for using AI. Subnational governments may also be well-placed to promote their places for AI-related investment opportunities and to work with other institutions (universities, private sector) to develop the attractiveness of their territories to participate in the AI value chain.
Source: Klaus and Polsky (2023[81]), Subnational Practices in AI Policy: A Working Guide, https://carnegieendowment.org/research/2023/12/subnational-practices-in-ai-policy-a-working-guide
The role of local actors is essential to understand and address the root issues of policies challenges. Fostering a more inclusive policymaking process is core for place-based policies. This requires governments to invest in bottom-up processes to support a healthy, open public sphere that empowers citizens, civil society groups and sectors to get involved. Inclusive engagement is important for building trust and social capital—between citizens and institutions, and among citizens themselves.
Place-based policy should embed community and private sector engagement
Effective place-based policies need to be inclusive of citizens and non-governmental organisations. The depletion of the civic sphere can be salient in places caught in development traps (Rodríguez-Pose, Dijkstra and Poelman, 2024[82]) and become a reason why people and investment leave or avoid a place (Barca, 2009[20]; [83]). Like wages, as people and firms leave a place, social capital can further deplete, leading to further divergence. On the contrary, when social bonds and networks are strengthened, this can inspire further investment in a region and improve overall well-being of residents (McCann, 2023[83]). Building trust is an iterative and long-term process that requires giving agency to local stakeholders and enhancing participation in the design of place-based policies (Beer, 2023[5]).
Place-based policies needs to be based on deep engagement with local actors—including the private sector—to build trust and social capital. Tools for building participation and better co-operating with private sector stakeholders and civil society need to be developed at regional and local levels. Stakeholder dialogue fora can help bring stakeholder groups into policy dialogues. In general, these fora should bring together a combination of national and subnational public, private and third-sector actors in a regular, formalised manner or on an ad hoc basis to address specific policy issues or to respond to shocks (OECD, 2022[24]). An example is Sweden’s Forum for Sustainable Growth and Regional Attractiveness, which brings together central and regional-level politicians, civil servants and civil society to promote a regional lens for considering sectoral initiatives, e.g. in housing, innovation and transport (OECD, 2022[24]).
Marginalised groups can be left out of the place-based policy design due to a lack of data. Place‑based policies must account for disadvantage and groups that are not immediately apparent in top‑down approaches to address regional inequalities. This includes accounting for the ‘nested-deprivation’ – deprivation that may occur in just one housing estate or even one row of flats within neighbourhoods that are otherwise affluent (Boswell et al., 2020[84]). Much has been done to collect data and map the access to key services at regional level, such as with the Neighbour Atlas in the USA (OECD, 2023[71]) (Kind and Buckingham, 2018[85]). Further embedding data on disadvantaged groups and service gaps can help ensure that policies are designed to reach the diverse users, who often rely on public services the most.
Street-level civil servants can be an important stakeholder in the place-based policy design process. As providers of key services, local civil servants are well-positioned to inform policy design (Rothstein and Stolle, 2008[86]). To ensure this happens, subnational governments need resources to engage civil society leaders and educational institutions, who are often trusted local leaders and are well‑positioned to support policy design and to ensure it meets the needs of the groups or firms they represent (Beer, 2023[5]; Moore-Cherry et al., 2021[87]).
Multi-stakeholder approaches to place-based policies can lead to better policy design and improve working relationships across government and sectors. Place-based policies that pursue integrated objectives benefit from coordination across sectors (e.g. aligning transport development with housing requires public and private actors to work in lockstep). An integrated versus more sectoral approach differentiated the experiences of some Czech regions as they transitioned from a command economy. The Moravia-Silesia region, for example, was proactive and collaborative, working with the private sector and academia in establishing new university programmes to address regional needs and elevating business leaders through decision-making processes (Blažek and Květoň, 2022[88]; Beer, 2023[5]). The EU’s region-based Smart Specialisation Strategies (S3) was levered as a coordination tool in the Moravia case and helped implicates the business and academic community in new path development and diversification. The S3 tool, and other programmes like it, have potential to empower civil society, SMEs and entrepreneurs, and others to be part of innovation policy design (McCann and Ortega-Argilés, 2016[89]).
Building trust can translate into more effective and sustainable place-based policies. Fostering trust in institutions, and among society groups, can lead to greater levels of well-being while it also signalling to private investors that a place is well-governed (McCann, 2023[83]). Involving trusted local actors may help remedy the challenges that can arise when decision-making rests largely with actors who are far from the policy problem and who may be perceived to have less knowledge and/or legitimacy to implement policy solutions (Beer, 2023[5]). National policy makers can also consider the often large disparities in government trust that are observed within countries (OECD, 2022[90]) and how this can hinder regional growth and exacerbate regional inequalities, fuelling further discontent (Box 6.5). Inclusive place-based policies have the potential to strengthen trust and build social capital to support long-term development.
Social capital and trust are distinguishable in terms of their impact on regional development. Researchers have distinguished between ‘bonding’ social capital and ‘bridging’ social capital. The former refers to the strength of connections within groups while the latter looks at the links across heterogenous groups and networks (Putnam, 2001[91]). The relationship between social capital and regional economic growth shows that, in particular, bridging social capital is critical for stimulating economic development in low-skilled regions by compensating for the lower human capital in these regions (Muringani, Fitjar and Rodríguez-Pose, 2021[92]). Both bridging and bonding have a stand-alone positive impact on economic growth, however policy makers should work to foster an appropriate balance by attracting and developing human capital and fostering an environment that enables cross-group interactions as much as in-group ones (Muringani, Fitjar and Rodríguez-Pose, 2021[92]).
Higher levels of social capital are not an immediate recipe for growth and development and can even fuel political backlashes. This takes place when not all the ingredients – bridging and bonding – are in place. Problems occur where bonding (in-group) social capital is high, but the population and local economy are in decline. This highlights that the discontent resulting from a gradual erosion of community well-being is voiced at the ballot box (Rodríguez-Pose, Lee and Lipp, 2021[93]).
For policy makers the challenge is to adopt a more dynamic territorial lens which considers long-term declines in the economy, trust and social capital. This includes factors such as out-migration, employment stagnation and industrial change (Rodríguez-Pose, 2020[94]; Suedekum, 2023[95]). This is one fundamental reason why subnational governments require enhanced capacities: to set long-term budgets; to be equipped with the planning and policy tools to design robust strategies; and to be a part of policy delivery, monitoring and evaluation process which ensures continuous improvement in policymaking.
Source: Authors elaboration based on Muringani, Fitjar and Rodríguez-Pose (2021[92]), Social capital and economic growth in the regions of Europe, https://doi.org/10.1177/0308518X211000059; Rodríguez-Pose, Lee and Lipp (2021[93]), Golfing with Trump. Social capital, decline, inequality, and the rise of populism in the US, https://doi.org/10.1093/cjres/rsab026; Suedekum (2023[95]), The broadening of place-based policies – from reactive cohesion towards proactive support for all regions, https://www.oecd.org/en/about/projects/place-based-policies-for-the-future.html
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← 1. This chapter was informed by the fifth workshop in the series on Place-Based Policies for the Future that was held on 15 September 2023 with invited experts. Papers for the seminar were prepared by Professor Andrew Beer (The governance of place-based policies now and in the future?) and Professor Sarah Giest (Policy capacity mechanisms for addressing complex, place-based sustainability challenges?).
← 2. The Recommendation of the Council on Regional Development Policy provides a definition of multi-level governance: “Multi-level governance refers to the institutional and financial interactions among and across levels of government and a broad range of non-governmental stakeholders, including private actors and citizens, when designing and implementing public policies with subnational impact. This interaction is characterised by a mutual dependence among levels of government and runs vertically (among different levels of government), horizontally (across the same level of government), and in a networked manner with a broader range of non-governmental stakeholders (citizens, private actors).” (OECD, 2023[96])
← 3. Funds provided to four Climate Action Regional Office, limited to coordination activities.
← 4. The Cohesion Fund provides support to Member States with a gross national income (GNI) per capita below 90% of the EU-27 average to strengthen the economic, social and territorial cohesion of the EU by supporting investments in the fields of environment and transport trans-European networks.For the 2021-2027 period, the Cohesion Fund concerns Bulgaria, Czechia, Estonia, Greece, Croatia, Latvia, Lithuania, Hungary, Malta, Poland, Portugal, Romania, Slovakia and Slovenia (so called ‘cohesion countries’).