Memorandum by Dr John Bradley and Professor
Dr Gerhard Untiedt
Question 1: What should be the objectives
of the EU's Structural Funds? How can the Funds become more effective
in supporting public policies in Member States and regions? What
mechanisms of delivery could make the policy more performance-based
and more user-friendly?
The EU Structural Funds (henceforth, "SFs")
have been enhanced over the last two decades to support the lagging
Member States and regions in their objective of generating wealth
and convergence in income with the more prosperous regions of
the EU. The objectives of EU Structural Funds have always been
to facilitate the provision of improved levels of physical infrastructure
(henceforth, "infrastructure"), higher standards of
job-relevant training and vocational-oriented education (henceforth,
"human capital"), and policies aimed at giving direct
assistance to firms targeted at enhancing output growth and productivity
(henceforth, "direct aid"). These three policy instruments
are targeted at the supply-side of the supported economy and are
accepted by all modern growth theorists as being essential primary
or necessary drivers of convergence within developed globalised
economies. Modern theories also point to the fact that growth,
once it starts up, can become cumulative, under certain conditions
(so called "endogenous" growth).
A general problem since 1989, the year in which
the proportion of the EU budget devoted to Structural Funds was
greatly expanded, is that relatively little formal consideration
has been given to two major "conditioning" factors that
strongly influence the effectiveness of Structural Funds:
(a) The appropriate balance between the three
main SF policy instruments (ie, infrastructure, human capital
and direct aid).
(b) The appropriate supporting policies that
are desirable to achieve maximum "return on
investment" from SF policy instruments.
An illustration of point (a) is the different
emphasis placed on physical infrastructure and human capital by
the Portuguese and Irish SF programmes. Portuguese SF expenditures
were heavily weighted towards infrastructure, even though education
and training standards in the labour force were relatively low.
Irish SF expenditures, on the other hand, were initially heavily
weighted towards human capital and direct aid, and only in the
more recent 2000-06 SF programmes (largely funded out of own resources)
did the emphasis shift towards investment in infrastructure to
address emerging congestion bottlenecks. This points to a potentially
serious problem with the design of SF programmes, namely the need
for correct diagnosis of development barriers and in the imperfect
integration of SF-supported investments into wider national development
plans.
An illustration of point (b) is the relatively
poor performance of Greek SFs, compared (say) to those of Ireland
and Spain and can be attributed largely to macro instability and
a poor record of institutional reform in Greece.
These kinds of timing and identification problems
are also observable for East Germany or the Italian Mezzogiorno
and being repeated in the new member states, where the dynamics
of post-Communist recovery can give rise to overheating on the
demand side (consumer and property booms), poor restructuring
performance on the supply side (the problem of misallocated "legacy"
industries), and problems with institutional capacity (weak and
disorganised public sectors). Latvia is an illustration of this
phenomenon, and raises questions concerning the relatively rigid
and sometimes inappropriate timing of SF programmes.
Within the present arrangements in the European
Commission it may be difficult to guide SF policy from a top-down
perspective towards greater effectiveness. DG-Regional Policy
(responsible for design, monitoring and evaluation of SF interventions)
has only a restricted remit in the sphere of economic policy-making,
confined to structural policies, and operates separately from
DG-Economic and Finance, which is (responsible for wider economic
and monetary policy concerns). Such a divide within the Commission
between public investment policy and overall co-ordination and
oversight of all aspects of economic policy is seldom found at
the level of individual member states, where the strong influence
of the Finance Ministry (or Treasury) comes into play and forces
greater accountability within national policy making.
The wider aspects of EU development aid may
be too fundamental to be left to a Directorate-General whose remit
is, essentially, to administer a system of investment expenditures.
The tensions that have arisen between the wider remit of the renewed
Lisbon Strategy and the narrower remit of SFs (tensions noted
in the Sapir Report of 2003) are a manifestation of a deeper
malaise at the core of the EC's role in promoting cohesion and
growth within the EU. The fundamental issue here is not one of
"user friendliness" and "performance-based"
interventions, as noted in the question above. Rather, it is one
of integrating and linking all relevant strands of EU development
policy and cohesion more closely to the budgetary expenditures
that are currently aimed more narrowly at the three main SF instruments.
The real targets of the SFs concern the long-run transformation
of the supported economy. Short-term "performance-based"
indicators that are associated with the spending phase of SF aid
are likely to be misleading measures of the desired long-term,
post-programme impacts.
Question 2: Do Structural Funds meet the
principle of subsidiarity? Could the same cohesion objectives
be met through repatriation of the distribution of these funds?
It is important here to distinguish two areas
where the concept of subsidiarity arises with respect to SFs.
First, there is the provision of development "aid" in
the form of co-financed funds. Second, there is the question of
the actual design and implementation of SF-aided public investment
programmes in infrastructure, human capital and direct aid.
The spirit of the term "subsidiarity"
as applied to the provision of funds suggests that it is fulfilled
in situations where the recipient countries would generally find
it very difficult, and sometimes impossible, to make up for deficiencies
in infrastructure, human capital and direct aid out of their own
financial resources. Other problems, of course, are associated
with the provision of development aid: moral hazard, deadweight,
market distortion, etc. But the wider aspects of the Stability
and Growth Pact tend to ensure that such problems are well monitored
and minimised as the new member states progress towards membership
of the euro zone.
The issue of subsidiarity with respect to SF
design and implementation is more complex. The European Commission,
through DG-Regional Policy, exercises considerable power over
the design of National Development Plans (NDPs) or National Strategic
Reference Frameworks (NSRFs). However, member states retain a
high degree of authority over SF planning, if they desire, or
have the institutional capacity, to use it. The role of the European
Commission here is to act as a watch-dog, and discourage poor
use of funds through insisting on rigorous ex-ante evaluation
and ex-post financial controls. In the early years of expanded
SF programmes (eg, 1989-93 and 1994-99) monitoring and evaluation
procedures were less well developed. More recently (2000-06 and
2007-13), the monitoring and evaluation processes have begun to
operate more effectively and have tended to promote rigorous and
open evaluation of public investment at the member state level,
often in situations where the post-Communist legacy (but also
the administrations in some old Member States) was hostile to
such processes. Achieving the correct balance is a difficult and
challenging task, but a very important one.
We assume that the term "repatriation of
the distribution of these funds" used in the Committee's
question refers to the removal of the EC over-sight role in SFs
or the switch to a "net fund principle", and not the
dismantling of the SF process with a view, perhaps, to reducing
member state EU budgetary contributions. Would this be better
than the present situation? Our judgement is that the EC oversight
role—when exercised effectively—is a crucial element
of the value-added of the SF process. Simply to hand out SFs to
poorer member states, some with poorly trained and inefficient
public administrations, and exercise no oversight on what is done
with these funds would be very ineffective. Within the EU SF programmes,
the balance between member state "ownership" and EU
"oversight" is a delicate one and a source of constant
negotiation. The experience accumulated over the past 20 years
has largely worked to the benefit of recipient states, and SF
aid has largely avoided the serious problems that bedevil aid
programmes addressed at the less developed economies of the Third
World (as described in William Easterly's highly critical analysis
of Third World development aid).
Question 3: What impact has enlargement had
on Structural Funds, and are any changes necessary to meet the
challenges of further enlargement?
The early main recipients of SF aid (Greece,
Ireland, Portugal and Spain) were already market economies, albeit
rather poor and inefficient ones. In general, SF aid was absorbed
relatively easily into their public sector planning systems that
could now operate at a higher level of activity without distorting
already strained public finances. In addition, public accountability
systems were well developed since all four countries had been
long-time members of the OECD and the IMF.
Ten of the new member states that acceded between
2004 and 2007 had undergone massive institutional change in the
transition from Communist central planning to liberalised, market-based
economies (Cyprus and Malta being the two exceptions). The post-Communist
transition to a modern role for the public sector has been slow,
and is still incomplete (particularly in Bulgaria and Romania).
The role of government as "strategic organizer" in a
global economy driven by market forces is very different from
the previous role of Communist governments as "central planners",
and has to be learned. Government as "strategic organizer"
carries out its functions in collaboration with private
sector actors and not as a substitute for the market economy.
In the case of development planning, the government must target
the provision of a range of public goods whose availability and
quality are essential inputs to the growth of any modern economy.
Within the EU SF process, the planning and implementation of physical
infrastructure, of human capital and of industrial strategy are
at the centre of the government's developmental role. Experience
suggests that some of the new member states are fast learners—Estonia,
Poland, Slovenia—and that the SF process is at its most
efficient when the recipient state already has a well thought
out development strategy and implements it through working in
collaboration with the Commission.
Any future enlargement in the Balkans is unlikely
to generate new challenges for the SF process, since these are
small states that face developmental challenges similar to—say—the
Baltic States and Slovenia. In terms of economic development,
the accession of Turkey, with its population of around 74 million,
would be more challenging, mainly due to its size and to the large
regional disparities between the relatively developed west and
the very under-developed east and south-east that greatly exceeds
regional disparities found in the present member states.
By the time of an eventual Turkish accession,
some of the large regional disparities in Turkey are likely to
be much attenuated, but the level of income per head is still
likely to be low compared to the EU-average. Preliminary calculations
suggest that—everything else being equal—the spatial
distribution of the SFs will then alter dramatically towards Turkey
and this may introduce difficult distributional discussions among
the EU Member States.
Question 4: How will the EU's commitments
on combating climate change manifest themselves in the distribution
of Structural Funds for the post-2013 period? How will the response
to other challenges facing the EU economy (eg, migration, growth
of the service sector) shape future policies?
The SF initiatives are focused on growth and
social cohesion within the EU and should largely remain concentrated
to these targets. An overload of targets would destroy the possible
effectiveness of the Funds by dispersing their focus and marginalising
their impacts. Nonetheless, the wider challenges likely to confront
the European Union over the next decades range from changes in
the sectoral structure of the economies to climate change, ageing
societies, migration etc. These have implications for the intervention
areas of the SFs, that will have to be considered when future
SF programmes are designed.
(a) SFs, the environment and climate change
The research challenge is to examine the complex
links between the economy and the environment and to look at the
impacts of the Structural Funds on these links. Since the main
aim of the SFs is to foster the economic development of the recipient
economy in terms of increased income per capita, leading to increased
welfare levels, a useful starting point for looking at the connection
between growth and the environment is the so-called environmental
"Kuznets curve", which states that the relationship
between income per capita and certain kinds of pollution and environmental
consequences is roughly shaped as an inverted U. Empirical evidence
suggests that economic growth is associated with increased air
and water pollution at the initial stages of industrialization,
but as countries become more wealthy, the association becomes
negative in later stages (ie, higher growth is associated with
less pollution). The standard rationale for this general finding
is that production technology makes some pollution inevitable,
but that more advanced technologies are less polluting and the
demand for higher environmental quality (by citizens) rises with
income.
Of course, this characterisation of the "Kuznets
curve", that seems to claim that if countries promote growth,
the environment will eventually take care of itself, is incomplete.
Pure reliance on growth to solve pollution would result in a sub-optimal
outcome, so there must also be effective government regulation.
The interesting contrast is obviously the "old" Cohesion
States on the one hand and the New Member States and the candidate
countries, on the other hand, since it is possible that these
groups may lie on different sides of the "Kuznets curve".
In other words, the wider global challenge of facilitating growth
in very poor countries, even if this leads initially to higher
pollution levels, is replicated, to a degree, within the now rather
heterogeneous EU.
What are the implications for the SF programmes?
Macroeconomic impact analysis suggests that these programmes accelerate
cohesion, albeit to different degrees. In some countries, this
will be more rapid than in others. As income per capita increases
towards EU average levels, the evidence suggests that the energy
intensity of GDP will decline. The case of Ireland shows that
this decline can be quite rapid, and the Irish example may turn
out to be followed by the smaller New Member States like Estonia,
the Czech Republic and Slovenia. But the more gradual decline
(or static performance) of Greece, Portugal and Spain is likely
to be the pattern that will be followed by the larger new member
states, such as Poland and Hungary, and the most underdeveloped
states (Romania and Bulgaria), and future member states (Turkey).
(b) SFs and migration
An unexpected development after the EU enlargement
of 2004 was the large-scale migration from some of the new member
states to the UK and Ireland and, to a minor extent, Sweden (three
states that opened their labour markets to the accession states).
Historical experience suggests that the duration of such migration
tends to be mainly temporary, although can last for many years.
As development progresses and increased job opportunities appear,
reverse migration usually sets in and returning migrants bring
back higher skills and wider experience, which are very beneficial
to economies in a development phase.
The relationships between migration and SFs
are complex. For example, in Poland skill shortages have developed,
particularly in the construction sector, as a result of the large
out-migration flows after accession in 2004. This makes it difficult
for Polish policy makers to plan long-term infrastructural projects,
since wage costs escalate and become difficult to predict. In
cases of serious labour shortages, SF projects may be delayed
and/or prices are driven up and unit costs rise so that the physical
outcome of the SF spending is lower than expected.
However, the migration process has self-correcting
tendencies, since the demand-side impacts during the SF implementation
phases boosts demand for labour, and serves to reduce out migration.
The Irish case may be typical of what can be expected for the
new member states, with a legacy of large-scale out-migration
that was reversed dramatically as the economy grew and converged
during the 1990s.
(c) SFs and the service sector
The increase in the share of market services
is a characteristic of post-Communist countries, since this sector
was repressed during the era of central planning. Increasingly,
market service activities have become complementary to manufacturing
activities, through out-sourcing and hybrid activities (eg, ICT
equipment (manufacturing) combined with software (services)).
Model-based analysis of the likely impact of SF programmes has
examined spillover benefits for manufacturing and market services,
and suggest that these complementarities are very important in
modern development. The current tension between the role of SFs
in promoting the Lisbon Strategy suggests that there are
unresolved issues here that will need to be addressed in the negotiations
on the review of the EU budget. But this is an argument for integrating
SFs and the Lisbon Strategy, and not for a reduction and/or termination
of the SF process.
Question 5: What criteria should guide decisions
on the proportion of the EU budget to be allocated to Structural
Funds?
There is no easy way to judge what proportion
of the EU budget should be allocated to the SFs. SF spending competes
with other spending categories of the EU budget. Some of these
categories are defended for political reasons (eg, the CAP), and
not on grounds of economic efficiency. Others are often attacked
on ideological grounds, even when there is evidence of relatively
high efficiency (eg, SFs).
From a theoretical point of view, the EU's limited
financial resources should be directed to those tasks that promise
the highest marginal return (social and economic) on investment.
This could mean that in the context of a politically determined
EU budget (say 1% of EU GDP), the SF share might be reduced compared
to the Lisbon Strategy forms of interventions (for example non-spatial
bounded support for R&D), but might be expanded compared the
share absorbed by the CAP. The former trade-off (Lisbon versus
SFs) lies at the core of the future design of SF programmes. If
SFs are not fully integrated with Lisbon, existing tensions will
grow, strategy will become confused, and outcomes will be inefficient.
However, the absorption capacities of the recipient
Member States have to be taken into account. The quality of the
policy-making establishment in the recipient country is vital.
Poor planning, implementation and administration capacities lead
to waste of EU resources. Furthermore, the nature of the business
cycle in the recipient country is important, so that the additional
inflow of SFs does not lead to overheating of the economy. Finally,
the EU's decision on whom and/or what to support, defines the
expenditure share of its programmes. For example, if a narrower
definition of the SF defining property of "lagging-behind"
by member states and regions were implemented, but the financial
allocation was to be fixed in terms of share of GDP, then the
share of SFs in the overall EU budget would obviously drop, and
vice versa. The present defining share of 75% of average EU GDP
is quite arbitrary. But, there is no obvious way of knowing that
a lower level of relative income of 60%, or a higher one of 85%
of the EU average would be more effective.
Question 6: Are the current eligibility tests
for regions to receive support under the EU's Structural Funds
relevant, fair and appropriate? Should they remain in place after
2013? Is it appropriate that they are discussed simultaneously
with wider agreements on allocating EU budget spending?
At first glance, the eligibility tests for regions
or Member States to receive SF aid seem to be transparent and
comprehensible. The classification as "convergence"
region at the NUTS 2 level rests on the threshold that the income
per capita in PPP is less then 75% of EU average. All other NUTS-2-region
are classified under the wider "competitiveness and employment"
target. Furthermore, member states are classified as eligible
for Cohesion Fund resources if there gross national income (GNI)
per capita measured at purchasing power parity is less then 90%
of the EU average. The available funding rests mainly on population,
corrected by some other economic indicators. Beyond these clear
analytical rules, several specific exceptions are negotiated.
The main problem with this classification results
from the use of administrative NUTS-2 regions, whereas the use
of a functional spatial classification would be useful, in the
following sense. The main problem introduced by using the NUTS-2
classification is that areas where people have their home and
work outside the region (or abroad) are favoured. This is one
area where the eligibility tests could be improved. An other area
concerns the question of just supporting those Member States that
are below a defined threshold, but this would introduce a series
of severe problems within the Member States that are above the
threshold.
Question 7: What would be the effect of linking
the availability of Structural Funds with compliance to Broad
Economic Policy Guidelines?
The "Broad Economic Policy Guidelines"
(BEPG) define a set of macro-economic and micro-economic policy
guidelines for all EU Member States. Some of the recommendations
are complementary to the SF interventions while others are directly
linked with the SFs. As a consequence of the Stability and Growth
pact and the renewed Lisbon Agenda, the BEPG can operate as guidelines
for all member states.
But due to the different stages of development,
as well as quite different societal preferences, it would be very
difficult to link the allocation of SFs merely to compliance with
the BEPGs. The introduction of rules that are linked to the BPEG
would introduce a quite different system for directing EU Structural
Fund to the less developed Member States. This would also lead
to the need to define very precisely what exactly would be the
best implementation of the BEPC for each Member State. This seems
to be impossible, since the Member States follow different routes
and have different institutional set-ups. Compare, for example,
the economically successful countries Ireland and the UK (on the
one hand) with the even more successful Nordic countries, Denmark,
Sweden and Finland (on the other hand). With respect to labour
market regulations, all such states are likely to claim that their
economic policies are successful, even though they can be radically
different. Ever worse, national governments could not even agree,
in the preamble to the BPEG, that the only task of monetary policy
would be to pursue price stability.
Obviously there are links between the efficiency
of SFs and the BEPGs. As mentioned in our response to Question
1 above, macro and micro stability are "conditioning"
factors that can affect the nature of SF impacts. Serious deviations
from the BEPGs are often associated with poor economic performance
generally, and poor SF impacts specifically. Conditionality of
SF aid based on the BEPGs is not in question. Merely the extent
to which other factors are also to be taken into account.
9 January 2008
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