Different Prices Levels Across Eu Regions

Published Date: 02 Nov 2017

Nuruddeen Usman

Dept:

Department of Economics, Year 1

Title:

Examine

(a) the economic case for EU level regional (cohesion) policy, and

(b) with reference to recent research, what economic impact this policy has had.(3)

Tutor :Tobias Ketterer

This essay looks at the case for EU regional cohesion policy and the economic impact of the policy.

The economic and social situations is very different across the European region, the main objectives of the EU regional(cohesion) policy is to reduce the gaps by promoting economic growth and competitiveness across the whole of the European union. In other words, these are sets of policies aimed at developing less developed regions in the European Union. Many projects are set up to help the develop European regions such as : (I) The European regional development fund which was formed in 1972 (Ii) The cohesion fund and (iii) The European social fund, which together represent more than one-third of the EU budget. Most funding goes to poor regions based on their per-capita incomes .

Causes of regional differences in the EU

Wide & persistent differences in output per worker, employment levels and income levels across EU regions.

Loss of competitiveness of some industries-declining sunset industries

Consequence of European integration

Lack of development due to dominance of traditional agriculture.

Different prices levels across EU regions.

The case for an EU-level regional (cohesion) policy

There have been different views about the establishment of the regional policy across the EU

Advantages

Under the advantages there are two views about the argument, first there is the equity argument and then the efficiency argument.

Equity: equity arguments care about other states in the EU, all regions should share rise in living standards.

Efficiency: under this argument, regional policy could raise the total productivity in Europe i.e invests where it yields high returns. This is because, most national governments are unable to fund valuable investment projects in poor regions

Political argument: politicians believe to avoid having a break-up of the European union, all regions must gain from integration and side-payments should be used to support weaker countries

Anti-regional cohesion

some believe the level of disparity across regions were self-inflicted due to corruption and bureaucracy and suggest instead of the establishment of the policy, less developed areas try and copy rich regions.

Why do regional economic differences persist in the EU?

The theoretical explanation of the evolution in regional disparities is based on two views, (i) the neoclassical view and the (ii) cumulative causation view.

The neoclassical view

According to this view, market models lead to equilibrium, differences in earning will disappear with free trade, migration and the movements of capital across the region. This trade theory predicts, convergence will lead to specialization through trade of goods and services in which they have comparative advantage (the ability to produce a particular good or service at a lower marginal and opportunity cost over another). Traditional trade theory (heckscher-Ohlin model) predicts that all regions benefit from this specialization process and that differences in wage rates and cost of capital are eliminated, this equalization is due to labour migration from low wage regions to high wage regions and on capital investments in disadvantaged regions attracted by lower wages and abundance of labour supply. The combination of free trade and large scale factor mobility are key factors for the neoclassical view to take place. However, the criticism of this view is that these forces operate very slowly and that it might take time before the effects come into place. Also, there are concerns on whether migration is an acceptable corrective mechanism.

Cumulative causation model( Myrdal 1957,Hirschman 1958)

According to this theory, economic integration increases existing regional differences. It is argued that economic integration lead to firms clustering around an area due to economies of scale and due to the location and collection of economies in the form of better access to labour, Skills and transport. "leading regions benefit from self-reinforcing internal& external economies"(Robert Hine).this leads to a situations where core regions with large markets and industries will attract even more firms from the regional periphery, this will lead people to migrate to those core regions due to job prospects and investment opportunities. In conclusion, this will lead to a "brain drain" from the poorer regions to the rich regions; richer regions with established industries will get even richer whilst poorer regions with fewer industries will get even poorer. However, according to the model, there is a risk that there will be over congestion once the core has been crowded which might lead to the dispersion of activities to the periphery. s

With reference to recent research, what economic impact this policy has had?

In order to analyze the significance of Structural Funds/projects and their help to provide a way to foster economic growth, the economic impact of these funds and projects has to be looked at. There are two ways it can be looked at:

Qualitative view :

Coordinating national regional aid policy : rich countries are not supposed to heavily favor their poor regions and the EU commission on regional policy are unable to supervise aid effectively.

Financial transfers: under the demand side effect, expenditure benefits incomes in poor regions. Also, supply side effects, e.g. increase in investment, take longer to come into place but have a lasting effect.

Quantitative view :

(i) micro models(small projects): cost-benefit studies of individual projects are relatively few and ignore wider effects. In Italy, firms with aid increased sales, employment but not productivity relative to competitors (synthesis report)

(ii) macro models : under simulation, expenditure effects relatively straightforward, supply side effects – increase in infrastructure provision and education and training lead to higher output productivity.

(iii) growth modeling estimates : (boldrin and Canova 2001) suggest there is no evidence in time series analysis off regional policy on incomes/ productivity in supported regions and also no link between capital/labour ratios and per capita incomes. (Boldrin and Canova 2001) found regional policy is not on efficiency ground rather equity grounds. However, (Garnier 2001) criticizes work, that it is too fragile.

Conclusion

EU has increased regional aid, but more aid isn’t making the region better as there are factors such as opportunity cost, efficiency use, administration cost of projects and subsidy might distort choice. The fact that the structural fund is hotly debated and the fact that the EU has a wide range of regional development policies is based by mainly political decisions.