Should New York move to Mississippi ? Would it be rationale for the US Government to make massive investments and provide subsidies for companies to move from New York, its business center, to Mississippi, the poorest state ?
European policy-makers are grappling with similar questions as they prepare for the next EU perspective: should cohesion funds be used to promote spatial efficiency or spatial equity ? Spatial efficiency – that’s the story of New York: a large number of businesses in a well-connected geographic area. Such concentration yield synergies, which in turn generate economic growth. Spatial equity (or the lack thereof) – that’s the story of Mississippi: a state where there are fewer opportunities than people, and where economic conditions gradually deteriorate due to the lack of resources for investments.
Of course, the right approach is somewhere in between. There is a need for both wealth creation and wealth redistribution. And indeed this is what we have seen over the last two decades: the EU has proven to be a very powerful “convergence machine” by enabling the poorer regions to gradually catch up with the wealthier ones. Yet, Europe is now in crisis. Should this affect the ways cohesion funds are used ?
The answer is straightforward: cohesion funds should be spent in a manner that helps Europe achieve its short- and medium-term priorities. Ask not what Europe can do for the regions, but what the regions can do for Europe – and for their people.
The short-term priority for Europe is to reignite its engine of economic growth. In a time of crisis, regional development policies should aim to maximize economic growth, not to try to equalize economic activity across regions. This means supporting market forces, not trying to steer them towards our “Mississippis”. Increase spatial efficiency, even if this comes at the cost of some spatial equity. Leading regions should focus on supporting innovation and the concentration of production, while lagging regions should aim to maintain a solid social infrastructure and to equip people so they can get jobs, wherever they may be. Most regions in Poland fall somewhere between these two extremes: they need to balance both approaches.
In the medium-term, Europe needs more labor mobility. Economic theory shows that for a currency union to succeed and to be resilient to shocks, labor mobility is critical. In the US, people from Mississippi go to New York to seek opportunities (and send back money to their old parents, instead of being unemployed). Economic shocks are less difficult, and less painful to absorb when people can move to better off places. Yet, many regional development policies in Europe have been designed to do precisely the opposite, to keep people in place. For the long-term future of the EU, such policies are counter-productive. The challenge is rather to find the right mix between allowing the necessary labor mobility and making sure those who stay can enjoy sufficient opportunities.
So what should a country like Poland use cohesion funds for ? For those activities that are likely to have the highest economic growth impact: infrastructure that connects, innovation and technology absorption, institutions. And for those activities that will enable people to take advantage of the new opportunities: skills and human capital. Successful regions will be those that find the combination that is “right” for their circumstances.