Ex-post impact assessment of EU Cohesion Policy 2007-2013

Ex-post impact assessment of EU Cohesion Policy 2007-2013

Francesco Di Comite

Regional Economic Modelling team

European Commission,

Joint Research Centre, IPTS

WORKSHOP ON PUBLIC FINANCES,

Bank of Latvia, Riga, 21/06/2016

What is the Joint Research Centre?

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• The DG JRC is the Commission's in-house science service;

• Mission: provide EU policies with independent, evidence-based scientific

and technical support throughout the whole policy cycle.

• The IPTS research institute is located in

Seville and focuses on "policy challenges that

have both a socio-economic as well as a

scientific/ technological dimension";

• Our unit (KfG) deals with ex-ante regional

impact assessment; innovation policies; smart

specialisation strategies.

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Recent examples of KfG support to policy making

Example of a 1% positive shock on "TotalFactor Productivity", "Labour Productivity"and "Transport Costs" in all EU NUTS2 regionsin the spatial CGE RHOMOLO.

Eye@RIS3 JRC platforms to allow policy makers totrack and learn from the investment strategies ofother regions.

Quick facts about the RHOMOLO model

• RHOMOLO is the model developed by the JRC for ex-ante impact assessments of EU Regional Policy;

• It shows how "policy shocks" are expected to affect economic and social outcomes at the regional level, as deviations from baseline;

• It allows policy makers to have an idea of the trade-offs and general equilibrium implications of their policy choices.

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Presentation Outline

• Why a regional CGE model for impact assessment?

• Short description of the RHOMOLO model;

• Simulating European Cohesion Policy;

• Simulation results for the overall EU;

• Latvia-specific simulations;

• Conclusions.

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• Conclusions.

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Growing need for efficient/effective use of public resources:

Declining government tax revenue due to economic/financial crisis;

Decreasing returns on some public investment items (e.g., infrastructures).

Impact assessment of Regional Policy particularly important:

With 50 billion/year Cohesion Policy is the largest expenditure category in

the 2014-2020 EU budget, and covers a wide variety of different

programmes (R&D, human capital, infrastructure, etc.);

It is directed at regions, which are the ultimate decision makers on its use;

Maybe surprisingly, regional disparities (even within countries) can be

larger than national disparities.

Why do we need regional policy impact assessment?

Regional disparities: per capita GDP (PPS), 2013 (EU28 average =100)

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Ital

yItaly,

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Illustration: international (EU) variation vis-à-vis regional (IT) variation (EU28=100, year 2011)

National GDP per capita (PPS): 0.44 (BG) to 1.35 (NL) of EU28

Regional (IT) GDP per capita (PPS): 0.64 to 1.51 of EU28

Standard deviation in EU28 regional GDP per capita: 54.8 (IT:26.4)

Standard deviation in EU28 national GDP per capita: 42.6

Sector composition: increasing demand for goods in specific sectors

benefit disproportionately regions specialising in their production;

Spatial configuration: central regions face lower transport costs to

source their inputs and serve their costumers (and may benefit from

stronger spatial spill-overs because of their location);

Knowledge/skill pools: activities such as research and development

may cluster in advanced regions to leverage local skills and assets,

thus accentuating spatial income differentials.

Economic integration itself may foster regional disparities

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Policies simulations with RHOMOLO

• RHOMOLO is suited to simulate the impact of the following policy areas:

• Infrastructure (focus of this presentation);

• R&D and innovation;

• Human capital;

• Subsidies to companies;

• Structural reforms.

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• Conclusions.

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Sector disaggregation

• 5 NACE 1.1 regional sectors (AB, CDEF, GHI, JK, LMNOP) + national R&D sector;

• Sectors can be perfectly or imperfectly competitive, the latter with finite number of

firms and "small-group" monopolistically competitive pricing strategies

Geographical coverage

• 27 EU Member States + ROW (Croatia is currently being introduced);

• 267 NUTS2 regions (French overseas territories are excluded);

• Number of equations/prices per year: 831,190.

Time dimension

• Base year for calibration: 2010;

• Annual frequency (with update of stocks in every period);

• Horizon for simulations: 10-30 years and longer.

Structure of RHOMOLO

Including R&D

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Data on asymmetric biateral transport costs from TRANSTOOLS: accessibility index

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Latvian accessibility index

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LV vis-à-vis EU average accessibility

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Sources of spatial interactions

Region Asector 1

Region B sector 2

Imports

Exports

Taxes and transfers

R&D

Investments

as

Final consumption

Other firms' input

Savings cross borders

Inter-regional activity with spillovers







• Conclusions.

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• The Cohesion Fund (CF), for Member States with gross national income per

head below 90% of EU the average. Mainly for infrastructures/environment;

• The European Social Fund (ESF), to provide assistance to Member States for

labour market restructuring, (lifelong learning, social integration and inclusion);

• The European Regional Development Fund (ERDF), co-financing

investments benefiting the regions directly: investment in infrastructures (R&D,

ICT, energy and transport); innovation; cooperation, information and support.

Notice that Cohesion Policy funds

+ EAFRD: European Agricultural Fund for Rural Development;

+ EMFF: European Maritime and Fisheries Fund;

= ESIF: European Structural and Investment funds.

EU Cohesion Policy: a tale of three Funds

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The Cohesion Fund (CF)

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Regional eligibility for structural funds (ERDF, ESF), by NUTS level 2 region(% of EU-28 average)

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2006-2013 2014-2020

Aggregation of expenditures

Total amounts (€347bn - 35.7% of total EU budget)

per Fund:

• Cohesion Fund (CF): €70bn • European Social Fund (ESF): €76bn • European Fund for Regional Development (ERDF): €201bn

per Objective

• Convergence: €283bn;• Competitiveness and Employment: €55bn;• European territorial cooperation: €9bn.

Reaggregated into:

• Infrastructure: €168bn;

• Human resources: €73bn;

• Research, tech. development and innovation: €42bn;

• Aid to the private sector: €42.5bn;

• Technical assistance: €16bn.23

Cohesion Policy 2014-20 total expenditures

Region type # GDP 2007 R&DAid to private sector

Infrastructure

Human Resources

TechnicalAssistance

Total %

Less Developed Regions 65 1,147,683 25,250 27,127 129,128 38,408 12,162 232,075 68%

Transition Regions 51 1,407,194 5,772 6,218 14,339 10,201 1,585 38,115 11%

More Developed Regions 151 9,120,647 10,916 9,101 24,167 24,196 2,954 71,335 21%

Total 267 11,675,524 41,938 42,447 167,634 72,805 16,701 341,525

% of total CP 12% 12% 49% 21% 5% 100%

Notice that: • Total Cohesion Policy (7 years) ≈ 3% of EU annual GDP;

• Per year, it is ≈.4% of total EU GDP, with peaks of 4-5% for some regions.

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Time profile of ECP (EU cohesion policy) funding

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Cumulative Cohesion Policy Expenditures (% of total)

Cohesion Policy Expenditures (% of total)

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ECP annual gross and net receipts as a share of GDP

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Example:

Infrastructure investments

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Turning investments in infrastructure into shocks

Three steps:

Aggregation of ECP expenditures on infrastructures;

Definition of a pairwise spatial dimension to regional

ECP expenditures;

Translating ECP expenditure EUROS into trade cost

reductions.

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Transport infrastructure investments mainly concentrated in convergence regions

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Trade cost reductions and their impact on GDP







• Conclusions.

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Impact on entire EU

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0,00

0,10

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0,90

1,00

2007

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EU average ECP investments EU average GDP change

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2007

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Less Developed Regions Transition Regions More Developed Regions

Decomposition of impact on EU

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0,1

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0,9

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Total ECP funding Transport Labour Productivity Capital Productivity

Public capital TFP Total Temporary Shocks Overall Impact

EU impacts by region groups

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Impact on EU regions' GDP

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2007 2015 2030







• Conclusions.

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Latvia-specific simulations exploring alternative scenarios

6 scenarios analysed for Latvia:

I. Actual ECP disbursements;

II. Actual ECP disbursements, excluding Latvia;

III. Actual ECP disbursements, Latvia contributing but not

receiving investments;

IV. Actual ECP disbursements only to Latvia, financed by

whole EU;

V. Actual ECP disbursements only to Latvia, without

permanent effects financed by whole EU;

VI. Latvia paying for itself for ECP actual investments.37

I scenario: actual ECP disbursements

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-5

0

5

10

15

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GDP LV00 Output LV00 Export LV00

Import LV00 Employment LV00 HH consumption LV00

real price of capital LV00 Investment LV00 CPI LV00

II scenario: actual ECP disbursements, excluding Latvia

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2007 2015

II scenario: actual ECP disbursements, excluding Latvia

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-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8




III scenario: actual ECP disbursements, Latviacontributing but not receiving investments

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2007 2015

III scenario: actual ECP disbursements, Latviacontributing but not receiving investments

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-1

-0,8

-0,6

-0,4

-0,2

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IV scenario: actual ECP disbursements only to Latvia, financed by whole EU

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2007 2015 2025

IV scenario: actual ECP disbursements only to Latvia, financed by whole EU

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-5

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15

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IV scenarios: impact on selected regions over time

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V scenario: actual ECP disbursements only to Latvia, without permanent effects financed by whole EU

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2007 2015 2025

V scenario: actual ECP disbursements only to Latviawithout permanent effects financed by whole EU

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-5

0

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15

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VI scenario: Latvia paying for itself for ECP investments

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2007 2015

VI scenario: Latvia paying for itself for ECP actualinvestments

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Summing up scenarios:

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Actual ECP All ECP but LV All ECP but LV, LV pays

Acutal ECP only LV Acutal ECP only LV Temp LV fully pays its ECP

Summing up scenarios:

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0

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ECP investments (%GDP) LV ECP All LV ECP Temp

0

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ECP investments (%GDP) LV ECP All full pay All ECP

LV receiving ECP or investing on its own

Only LV receiving ECP, full and temporary effects







• Conclusions.

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A few final caveats

On model features:

• Given its dimensionality, RHOMOLO is currently recursively dynamic: with

intertemporally optimising agents, different adjustment paths in the short run;

• Technologies/taste parameters are assumed fixed over the simulation horizon;

• There is a scarcity of estimates for elasticities and spill-overs at the regional

level (macro literature focuses on national data and innovation literature on

specific sectors of geographical areas).

On policy simulation:

• The model assumes that regions spend the entire envelope of Regional Policy;

• Dozens of specific spending categories are aggregated into three or four sources

of model shocks;

• The “quality” of spending is homogeneous across regions time-invariant.53

Conclusions

• The Spatial CGE model RHOMOLO can be usefully deployed as

one of the tools to assess ex-ante and ex-post the impact of

Cohesion Policy investments;

• ECP investments have both short-run and long-run impacts, the

former implying a temporary redistrubution of resources within

the EU, the latter spreading beyond recipients regions and

benefitting the EU as a whole;

• Given the complexity of spatial interactions and both supply- and

demand-side effects, it would not be possible to assess the impact

on individual regions without a general equilibrium model;

• Feedbacks are most welcome!54

RHOMOLO web interface for non-experts to runsimple simulations

Example of a 1% positive shock on "TotalFactor Productivity", "Labour Productivity"and "Transport Costs" in all EU NUTS2 regionsin the spatial CGE RHOMOLO.

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http://rhomolo.jrc.ec.europa.eu

http://rhomolo.jrc.ec.europa.eu/

RHOMOLO simulation results included in the 5th and 6th

Cohesion Reports;

Policy Reports, Refereed journal publications, ad-hoc

requests from Policy DGs

REMO output: scientific policy support

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For more information on RHOMOLO:

Website:

https://ec.europa.eu/jrc/rhomolo

Web simulation tool:

http://rhomolo.jrc.ec.europa.eu

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Ex-post impact assessment of EU Cohesion Policy 2007-2013

Economy & Finance

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