For approximately three years now, the World Bank has been part of the Lagging Regions Initiative, a platform created in 2015 by the European Union (EU) Commissioner for Regional Policy. This Initiative aims to identify factors hindering growth in less developed regions and provide a set of recommendations to unlock the growth potential of those regions.
The World Bank, together with the EU, is working to provide analytical and policy support to address the challenges faced by lagging regions in Poland, Slovakia, Romania, and Croatia. A recently published report, entitled Rethinking Lagging Regions developed a set of recommendations to that end.
One of the main findings from the report is that lagging regions tend to, by-and-large, be peripheral - meaning they are either distant from the economically well-developed core of the EU and/or have a low population density, thus lacking large and dynamic urban agglomerations.
The European Commission has identified two types of lagging regions:
- Low growth regions, which cover the less developed and transition regions that did not converge to the EU average between 2000-2013. These include the south of Italy and Spain, and much of Greece and Portugal (South of Europe).
- Low income regions, covering all the regions with a GDP per capita below 50% of the EU average in 2013. This group covers the eastern part of Poland and Hungary, and much of Romania and Bulgaria (Central and Eastern Europe).
Due to their relatively better geographical position and closeness to the EU core, lagging regions in Central and Eastern Europe (CEE) have performed better than lagging regions in the South of Europe (SE). In fact, if current trends continue, lagging regions in CEE will surpass lagging regions in SE (in GDP per Capita at Purchasing Power Standard) by 2025. The best performing regions will be those with strong urban areas that can act as locomotives for the rest of the region.
This can already by seen in the case of Constanta, on Romania’s Black Sea coast. This city represents one of the strongest urban centers in one of the EU’s most eastern regions and had a higher GDP in 2015 than Seville, Bari, Porto or Thessaloniki.
Will lagging regions in CEE be capable of sustaining current growth rates and overtake lagging regions in SE? Lagging regions in the South of Europe offer important lessons that are critical for lagging regions in Central and Eastern Europe, including:
1. Address demographic decline. Fertility rates in the South of Europe dropped below replacement levels in the 1970s and, despite in-migration, these regions have not managed to stop their demographic decline. In economic terms, a decline of the population translates into a loss of markets. For example, between 2000 and 2015, the EU lost 15 million people aged 20 to 35 – primarily due to low fertility rates in virtually every EU country. Given that the average EU citizen consumes around €25,000 per year, this translates into a lost market value of €375 billion - more than twice Romania’s entire GDP. Unless CEE lagging regions become more open to attracting migrants in the short- and medium-terms, while simultaneously supporting pro-fertility policies over the long-term, they will likely hit a growth plateau in the same way the South of Europe did.
Countries with managed migration programs (e.g. the US; Canada; Australia; New Zealand) have performed much better in recent years than countries with stricter migration controls, such as Japan (which was a growth leader in the 1990s).
A well-managed migration program in the EU can help address the challenges of demographic decline.
2. Promote and encourage high value-added sectors. Demographic challenges imply the need to generate growth from productivity gains. In the long-term, productivity gains can only be sustained from high value-added sectors. In practice, this means that a region’s labor market needs to have a high share of people who are skilled and competitive at the global level. In the South of Europe, more than a third of the labor force works in low value-added sectors such as hospitality, food, retail or transportation.
Ireland serves as an excellent example of how a focus on high value-added sectors can help spur economic growth and development. Ireland was one of the poorest EU members states when it joined the Union in 1973. Today, due to the presence of high-tech giants such as Microsoft, Google, Apple and Facebook, Ireland has the second highest GDP per capita at purchasing power parity in the EU after Luxembourg.
3. Diversify export markets. EU lagging regions primarily trade within the EU. This is a good thing. However, given that internal EU markets are shrinking, due to a population decline, lagging regions need to start exploring other overseas markets in the Americas and Asia. For example, the sale of private cars dropped by 0.6% annually in the EU between 2005 and 2015. During the same decade, the sale of private cars in China increased by 11.8% annually. Over 24 million cars are now sold annually in China, as opposed to around 14 million in the entire European Union.
Exports from the port of Constanța increased from 1.5 billion Euro in 2007 to 2.5 billion Euro in 2014 and they have targeted markets primarily outside the EU, including North Africa, East Asia and non-EU states such as Ukraine, Moldova, Serbia, and Turkey. This diversification of exports has fueled the growth of the city in recent years and has created stronger economic activity in the region.
For policy-makers across the EU, it will be critical to reconsider how Cohesion Policy can be effectively prioritized, targeted, and delivered in the next program cycle beginning in 2021 to maximize the impact on lagging regions.