EUKN - European Urban Knowledge Network - “Regional policy should focus on growth potential, not redistribution”

“Regional policy should focus on growth potential, not redistribution”

21-02-2007

European regional policy should focus on regions that have potential for growth and an underexploited comparative advantage. Its focus should not be on redistributing resources to relatively poor regions. This is the opinion of Mario Pezzini, working for the Organisation for Economic Cooperation and Development (OECD). Pezzini heads the Regional Competitiveness and Governance Division. The OECD recently published yet another Territorial Review, this time on the Newcastle city region. In this interview, Mr Pezzini gives his view on the role of cities and regions in exploiting urban and regional potential to the fullest.

The assessment and recommendations of the Review start with the notion that compared to large metropolitan areas medium sized metropolitan areas face increasing challenges arising from globalisation and the shift to a knowledge based service economy. Given this competitive edge of the larger metropolitan areas, what does the future hold for the Newcastle area and other medium sized metropolitan areas?

Let me start by saying that there is no relation between population size and the level of competitiveness of a city. This is illustrated by, amongst others the OECD. GDP per capita, for instance, increases with population size up to cities with seven million inhabitants. In cities of bigger size, a gradual decline of GDP per capita can be observed.

What is important to see is that there is not just one trajectory to successful urban development. What works for one city does not necessarily have the same effect in other cities. What is the most important lesson for medium sized metropolitan areas is that they should not try to imitate their bigger counterparts. This implicitly acknowledges the false notion of one single trajectory for urban development. Blindly imitating will lead to development strategies that are very likely not to deliver.

The Review calls greater potential for a better social and natural environment a possible advantage of medium sized metropolitan areas. How do such areas provide for a better social environment?

To answer this question I would like to refer to the work of classic sociologists such as Durkheim. According to Durkheim, a favourable social environment is grounded in a community built upon face-to-face relationships. In this way, sense of belonging is facilitated by city size. Following this notion, bigger cities cause its residents to feel anonymous and isolated. Smaller communities, such as rural towns, provide too much closeness. Here, stringent social control has a negative influence on the social environment. Based on this, intermediate cities provide the best potential for an optimal social environment.

In government interventions in economy there is always the question whether to ‘back the winners’ or to ‘support the stragglers’. In the Review, it is the OECD’s advice to focus on the sectors with higher than average productivity and growth potential. Do these sectors really need targeted support?

The strategy of backing the winner mostly goes for the services industry. Large metropolitan areas are multi-sectoral. The size of medium sized metropolitan areas does not allow for multiple sectors. In order to achieve critical mass, needed to be competitive, medium sized need to specialise. Their markets are just too small to support multiple sectors. So it is crucial to focus on those sectors in which the area has shown potential for growth and creating competitive advantages.

Of course being specialised in one sector makes you more vulnerable to changes in that sector. This is a risk that should be accepted. Firms active in specific sectors, face this risk, too. It is a fact of life. A way to partially meet this risk is to cooperate with other metropolitan areas. By being closely connected to other cities, both physically and through networks of government and business, a multi-polar economy is created. Such a multi-polar economy is not dependent one single sector and therefore less vulnerable.

How can cities successfully identify the sectors with growth potential?

This is a very tricky question. Identification of these sectors can not be centralised. It is very important, however, to identify the sectors with underexploited comparative advantages. In identifying these sectors, it is important to bring together all stakeholders. The role of government in this should be to produce a process of selection. The government can give incentives for stakeholder participation. If the government is to give support to sectors, or to give grants to research, the receiving parties could be asked to explici tly identify the potential of their work for the competitiveness of the economy.

The report states that support for the ‘winners’ should be balanced with support for sectors rich in (lower end) jobs. In the face of globalisation, isn’t there the threat of local protectionism? Could such a strategy really be successful?

This question actually relates to two separate issues. Firstly, should policy only address weak areas? Secondly, could only high tech sectors be competitive or is there also potential for low tech in the OECD countries?

Let me start with the first issue, by taking the example of EU regional policy. For years, the practice of regional policy has been to redistribute resources over the European territory. In my opinion, this is not a strategy that will lead to the highest benefits. EU regional policy should focus on those areas that have an underexploited comparative advantage. These areas are not necessarily the weakest regions. Regional policy should focus on areas with growth potential. The same goes for cities.

This leads me to the second issue: do only high sectors hold grow potential? Or is there also underexploited comparative advantage in the low tech sectors? My answer to this last question is ‘yes’. Of course, there is competition from cheap labour countries. But in this sector, too, there is room for innovation, for rising productivity.

What lessons can other metropolitan areas learn from the ‘Newcastle case’? What would be the biggest mistake that could be made, by Newcastle, or any other medium sized metropolitan area?

One conclusion that can be drawn is that many regions, both urban rural, have underexploited comparative advantages. Not all regions will be able to exploit these advantages and reap their benefits. These regions will be confronted with stagnation or even decline.

A big mistake would be to try to focus one some recipe for urban development. As mentioned before, there is not just one single trajectory for urban d evelopment. It is important for every city and every region to identify their own strengths and weaknesses and to identify those areas in which comparative advantage is not yet fully exploited.

What should be the role of the EU in strengthening regional competitiveness? What should the EU definitely not do in respect to fostering regional competitiveness?

Again, the focus of regional policy should not be on redistribution but on fully exploiting the potential of areas. The Common Agricultural Policy is a form of redistributive EU policy that actually led to an increase in social disparity and inefficiency. Here, redistributive policy has distorted trade, created an attitude for assistance. The policy has not addressed the real issues at hand. Policies solely aimed at redistribution lead to the creation of ‘cathedrals in the desert’.

EU policy should try to help regions to identify their potential for growth and to exploit this to the fullest. The EU is on the good way. It has encouraged regions to learn to draw up strategic plans, to set realistic and tangible goals. The EU has created financial incentives to perform, by linking the attribution of resources to performance.

Investment does not necessarily go to the places with the biggest growth potential. In this sense, the free market is an illusion. Lobbyists, for example business, government or organised labour, influence decisions based upon their own rationales. This can happen unseen and unconsciously. A policy that is consciously directing investment to places, with a possibility of error, is to be preferred to a situation that is perceived to be free market, but in effect is biased as well.