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Synthesis Report Ex-post Evaluation of the ERDF 2000-2006 4 Chapter 4 – The effect of cohesion policy on economic growth and regional development This chapter is divided into two parts. The first part examines the effect of cohesion policy on the growth of the economies receiving assistance on the basis of two macroeconomic models which attempt to isolate these effects from other influences; the second part considers developments in the regions concerned in different Member States in more detail and relates these to the nature of support provided by the Structural Funds. 4.1 USING MACROECONOMIC MODELS TO ESTIMATE THE EFFECTS OF COHESION POLICY 4.1.1 Main points • The use of macroeconomic models is the only feasible way to estimate the quantitative effect of cohesion policy on the economic development of the regions receiving Structural Fund support. • At present, the models available can estimate the effect of the receipt of Structural Funds only at national level rather than in individual regions. • These models attempt to represent the behaviour of economies as best they can, but there, of course, remains uncertainty, and debate, about how economies work in practice. • Two different models constructed on somewhat different views about how economies work were used in the evaluation to estimate the effect of cohesion policy over the 2000- 2006 programming period. • According to both models, cohesion policy had significant effects in increasing economic growth in the countries receiving support. • Although the timing of these effects differs between the two models, in both cases, there is a long-term increase in the productive potential of economies as a result of the support received. • The QUEST model, which estimates the adverse effect of the higher taxes needed to fund cohesion policy as well as the beneficial effect of the additional expenditure financed, indicates that the net effect of policy is to increase the overall growth rate of the EU and not simply to transfer growth from one country to another. 4.1.2 Introduction As emphasised above, it is not possible to observe a direct link between cohesion policy, and the funds made available to support this, and the development of the regions assisted, even if the latter happen to grow faster than those not assisted. The use of simulation models is, in practice, the only means of taking account of the very many factors which affect regional development and of explicitly allowing for these in order to isolate the effect of policy. Macroeconomic models have, therefore, been developed in an attempt to capture the way that economies work and to trace the effect on GDP, employment and so on of the increased public expenditure which the Structural Funds make possible. Such models have been used in the past to estimate the contribution of cohesion policy to economic growth in EU Member States in previous programming periods. 112
Ex-post Evaluation of the ERDF 2000-2006 Synthesis Report These models have become more sophisticated over time. This applies to the way they represent both the support provided by the Structural Funds – by incorporating more accurately the time profile of payments as well as the types of expenditure being funded (infrastructure, business support and so on) – and the behaviour of the economy. Nevertheless, although they attempt to reflect the results of research into the way that economies behave and, in particular, into the effects of public expenditure of the kinds supported by cohesion policy on economic variables (GDP, employment, productivity, inflation, etc,), these effects remain open to debate. As the authors of one of the models emphasise: ‘the model, while drawing on and synthesising available theory and evidence, is still somewhat experimental’ 38 . The models which have been developed are limited to examining the effect of policy on national economies or, at best, macro regions of economies (southern Italy and eastern Germany, in particular), rather than on individual regions. As such they can provide only a partial indication of the effects of policy, which is concerned with regional disparities across countries as much as with disparities between countries. Despite the limitations of models and the ongoing debate about the behavioural relationships which they incorporate, it is still useful to examine what the effects of the Structural Funds are estimated to be on the basis of the understanding of the way that economies work which they encapsulate. 4.1.3 The macroeconomic models used in the evaluation Two different macroeconomic models were used in the evaluation to assess the effects of policy over the period 2000-2006. One is the QUEST model used in the European Commission for macro-economic policy analysis but especially adapted to examine the effects of structural reforms. The other is the HERMIN model (or more precisely the Cohesion System of HERMIN Models – CSHM), which has been specifically developed for examining the effects of cohesion policy. The two models incorporate different, though related, assumptions about the workings of the EU economies, though both reflecting prevailing strands of thought about how economies work 39 . The main differences relate, first, to the effect which an increase in public expenditure financed by EU funding has in boosting demand, which in the QUEST model is smaller than in the HERMIN model, due to the nature of the interactions with private demand which are assumed. Secondly, they relate to the scale of the effect of investment in infrastructure, human resources and RDTI on productive potential (on the supply side of the economy), which is larger over the medium-term in QUEST than in HERMIN, due to the explicit incorporation in the model of endogenous growth effects (i.e. the effect of the investment concerned on growth of GDP). Accordingly, the funding provided has a quicker effect in stimulating economic growth in the latter than the former, while the longer-term consequences for productivity and, therefore, growth are larger in QUEST than in HERMIN. 38 John Bradley and Gerhard Untiedt, Analysis of Cohesion Policy 2000-2006 using the CSHM. 39 The very summary outline of the two models which follows is in no way intended to give a full description of the two models or of the differences between them but merely to indicate one or two features which affect the estimates they produce. For more details, see: John Bradley and Gerhand Untiedt, op cit. and Janos Varga and Jan in 't Veld, A model-based analysis of the impact o cohesion policy expenditure 2000-06: Simulations with the QUEST III endogenous R&D model 113
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