Enrico Moretti, a leading scholar of urban and labour economics, describes the economic geography of the United States as follows: “A handful of cities with the right industry mix and a solid human capital base attract every more good firms and pay high wages. The cities at the other end of the spectrum are stuck with dead jobs and low wages.”
This assessment is broadly consistent with the recent taxonomy of European regions developed by Iammarino et al.1, who find that urban high-income areas have been far more successful than others along various dimensions. For instance, these regions exhibit higher employment growth, lower levels of unemployment, a greater number of patent applications, more innovative activities, and stronger productivity growth.
Rising regional economic divides have resulted in significant political backlash. Many populist movements in different countries find their strongest support in “places that don’t matter”2, or in declining areas that are experiencing major industrial change. Examples include the 2016 presidential elections in the United States and the Brexit referendum. The outcome of these events differed considerably between thriving metropolitan areas and economically lagging and remote areas. These events demonstrated that regional inequalities are not of economic significance only but have major political implications as well.
Advanced economies are undergoing a gradual shift away from traditional manufacturing towards knowledge-intensive services, which tend to be over-represented in cities. A similar trend seems to apply to digitalization. Various projections have been put forward about which types of jobs are likely to disappear in the future as new digital technologies diffuse more rapidly, and which ones will be in high demand. Many observers do not necessarily anticipate a decrease in the overall number of jobs in the economy, but expect significant changes in job characteristics, including location. Firgo et al.3 have mapped projections of jobs expected to grow and shrink. They conclude that digitalization will primarily benefit jobs currently located in urban areas, while the number of jobs that will disappear will be much higher in peripheral labour markets. Hence, even though the Moretti quote may not yet be a fully accurate description of reality, there is valid concern that his depiction might materialize in the near future.
Place-based versus people-based – Theoretical background of regional policies
The traditional paradigm in economics stipulates that place-based policies are inefficient and cannot be justified in strict economic terms. Specifically, if regional policies divert economic activity away from productive core cities towards unproductive remote areas, the result may be a loss of productivity and output at the national level4, shrinking the pie that is available for redistributive policies. Any redistributive effort should therefore be spatially neutral and focus exclusively on individuals rather than on locations. This approach is summarized in the famous quote by Glaeser and Gottlieb5, who call for: “Subsidize people, not places!”
A gradual paradigm shift towards place-based policies has been evident in recent years. It has been motivated, first, by empirical evidence that perfect individual mobility is a highly unrealistic assumption. For example, Bosquet and Overman6 show that around 40 per cent of Britons had never relocated for a job, instead remaining close to their birth towns (which in many cases was also the birth town of their parents). When faced with adverse shocks to the local labour market or with negative externalities resulting from a brain drain of young and skilled workers, this immobile population typically does not respond with “exiting”, i.e. migrating to thriving cities. They can, however, use the power of their “voice” at the ballot box.
Yet even we accept the notion that place-based policies have a solid economic foundation, the question which instruments are the most appropriate when designing such policies and to bring “jobs to people” is still open. Traditionally, the debate on place-based policies has focused on monetary transfers paid directly to people living in disadvantaged regions. The rationale behind such lump-sum transfers is that they lead to relatively few distortions compared to other forms of regional policies, such as direct subsidies to firms, which might create additional inefficiencies.
Transfer payments also come with substantial drawbacks when implemented in practice. Transfer payments are passive in nature and may carry a stigma for recipients, especially when they take the form of monetary compensation to workers who have lost their jobs due to various exogenous shocks or the structural transformation in areas hit particularly hard by such changes. These workers, who were often employed in manufacturing prior to the economic decline of their region, are looking for new job opportunities in their local labour market, not asking for monetary compensation from the government.
Place-based policies in practice: Some do’s and don’ts
In the real world, regional and place-based policies typically do not take the form of direct monetary transfers to households. Different approaches are applied to shift resources across space, such as various forms of subsidies or targeted infrastructure investments. These instruments aim to “reactivate” economic activity in recipient areas rather than to provide passive income support. This, in turn, raises the question what types of place-based policies are most suitable to deliver the desired goals of spatial economic cohesion while at the same time minimizing resource waste and secondary distortions. To design effective place-based policies, research conducted for the Organisation for Economic Co-operation and Development (OECD) has developed three key principles7.
First, smart specialization: effective regional development programmes should exploit available local competencies, comparative advantages and specializations within the respective region. These programmes should build on those structures to improve them and make them sustainable for the future.
Second, place-based policies should avoid zero-sum thinking and strive for a win-win outcome. They should not be about static redistributions of income and consumption, but about investments with long-term payoffs. This opens up the door for win-win constellations, where eventually everyone benefits if efficiently designed policies are implemented. This is most obviously the case for public investments, especially in R&D and education. It would certainly be an exaggeration to claim that such investments always “pay for themselves”. Nonetheless, there is a growing body of evidence that suggests that investments in education have notable returns, both privately and socially. They spur growth in productivity and output, hence increasing wages and tax revenue, and generate future economic value that would otherwise not have been created without the respective investment.
Third, place-based policies can only be as good as the quality of the institutions that govern them, both at the local and national levels. Local government must have the capacities and resources to effectively absorb the various funding opportunities and to ensure that the funding flows into meaningful projects with noteworthy and sustainable economic returns. Higher levels of government need to monitor the efficient and correct use of public funds. The subtle balance that must be struck is ensuring high-quality public spending without creating a “culture of mistrust” with excessive checks and controls that overburden the involved agents.
Place-based policies will remain a key priority for governments in all OECD economies. They have become an indispensable part of the policy mix, they exist for a good economic reason, and have a fundamental impact on society and politics.
This think piece is based on a paper prepared as a background document for an OECD-EC High-level Expert Workshop “Productivity Policy for Places” funded by the European Union. The content of the paper should not be reported to reflect the opinion or as being endorsed by the OECD or the European Union.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
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