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Written on 25 Nov 2021 by Dr Davide Luca, Dr Marco Di Cataldo and Professor Riccardo Crescenzi

‘Levelling up’ in the UK: what works across the continent?

Despite the Conservative government’s post—Brexit desire to move away from the European Union’s (EU) orbit, they should look more closely at research on three decades of regional policies in the EU for levelling up longstanding regional inequalities, say Dr Davide Luca, Prof Riccardo Crescenzi and Dr Marco Di Cataldo.

While UK policymakers may be eager to develop brand new post-Brexit policy solutions and are perhaps unlikely to see the EU’s policy agenda as a useful comparator, a number of lessons can be drawn from regional policies in the European Union. After all, UK policymakers, it should be remembered, have previously made an active contribution to the development of EU policies, and it is important to take stock of the evidence accumulated over three decades of their implementation.   

What is the EU Cohesion Policy, and does it deliver?

The introduction of a Europe-wide policy tool to ‘level up’ regional inequality across the Continent owes, in part, to the demands of the UK government following the country’s accession to the European Economic Community (now the EU) in the early 1970s. The EU Cohesion Policy was not established until 1988 under the European Commission presidency of Jacques Delors. But a turning point towards the current policy configuration was reached in 1975, when the European Regional Development Fund was established. This is the key financial instrument of EU regional policy, and it was introduced also in response to the UK government’s request to make new funds available to address the structural disadvantage of the UK’s least developed regions vis-à-vis the more dynamic parts of the country.

Since then, the European Cohesion Policy has become one of the world’s largest place-based policy experiments. It is a key part of the EU’s toolbox, deployed to address socioeconomic disparities across cities and regions, absorbing around one third of the EU budget. What are the specific policy lessons that can be applied to the current UK debate on the ‘levelling up’ agenda?

Most of the existing studies employing counterfactual techniques (‘what would have happened without it?’) in order to identify the impacts of Cohesion Policy conclude that it has had a generally positive effect on regional growth and employment. Recent empirical evidence comparing the UK, Germany, Italy, and Spain, in particular, confirms the way the policy has exerted positive and significant impacts. However, positive effects are not evenly distributed across the regions of all Member States. Some countries have been more effective than others in their use of EU funds. In the UK, Cohesion Policy has produced robust effects on employment and growth, although its impacts have been short-lived in some cases. Even if the intensity of funding for the UK regions has been less than the most deprived areas of Southern and Central Eastern Europe, a consistent focus on human capital and skills coupled with well-targeted interventions have produced positive results. Germany is the other ‘big winner’ from EU Cohesion Policy, with robust impacts on productivity in its beneficiary regions. The picture for Southern European Member States is less rosy, with mostly only short-term positive impacts.

What can be learned from this comparative evidence?

Devolve, but with care, as not all places have the same potential to succeed

First, despite the ongoing UK debate around devolution of resources, competences and powers, and the growing importance attributed in place-based policies to highly localised, mostly idiosyncratic, factors conditioning success and failure, macro-national factors remain key. Macro-institutional conditions and models of intervention make more of a difference, in terms of impacts, than the diversity of local conditions. Early strategic decisions – such as the early focus on innovation in Germany, or on skills in the UK – have significant long-term consequences and are better taken at the national level, with more foresight capabilities as well as more effective coordination. For example, UK empirical evidence suggests that attempts to devolve powers in the area of apprenticeships to Local Authorities as part of the city deals process, did not lead to the expected ‘devolution dividend’. This is not to call for the re-centralisation of responsibilities which, under the EU Structural Funds framework, were allocated to the devolved administrations – a step anticipated by the UK government when announcing the new UK Shared Prosperity Fund. Instead, we aim to highlight the potential inefficiencies linked to excess devolution.

Relatedly, empirical assessments suggest that the positive effects of Cohesion Policy are contingent upon a number of local institutional and policy conditions, such as the absorptive capacity of places being funded. For example, for funding to be productive, one would first need to establish high levels of local institutional capacity, e.g., by ensuring sufficient levels of human capital, and by financing other measures that improve the effectiveness and efficiency of the local public sector.

Innovation is key to success in less advanced regions… but does not need to be ‘smart’; it just needs to match regional existing strengths

The EU policy market has seen the unprecedentedly rapid ascent of ‘smart specialisation’ (S3) as the new mantra for (regional) innovation policies.   The key idea is that innovation strategies should be designed through the mobilisation of local stakeholders coming together through a process of ‘entrepreneurial discovery’ to generate a regional innovation strategy from the bottom up.  While this approach may be appealing on paper, its practical application has proven complicated and not without flaws. This is particularly the case in less advanced areas, where insufficient bureaucratic autonomy and stronger local ‘powerful actors’ have often substantially biased decisions about who will benefit from the policy. Evidence on Europe suggests that S3 strategies have frequently been only loosely connected with the intrinsic conditions of each region, and often mimic what neighbouring areas are doing.  Empirical evidence from Italy highlights, in particular, how an emphasis on ‘too smart’ high-knowledge intensity areas of activity might be a limitation. Where more traditional technological domains can be identified as a potential source of competitive advantage (particularly in less developed regions), policymakers should probably not signal any preference in favour of more advanced sectors when allocating funding.

Place-based interventions need to be complemented by supportive macro-economic policies

Beyond the narrow scope of EU Cohesion Policy, a few other lessons can be learned from a European comparison. First, however well designed and well implemented, any ‘levelling up’ policy efforts will fail if not properly complemented by the right macro-economic policies, and by a coherent distribution of public investment. Recent research from Europe, for example, underscores how the tightening of national monetary policy aggravates regional inequality, while policy easing mitigates it. Besides, research on the territorial allocation of public investment by the central government has shown how past UK regional policy attempts have been frequently run counter to a distribution of resources which privileged London. While ‘Green Book rules’ have changed since then, UK policymakers will also need to ensure that any attempt to address regional inequality is accompanied by broader policy efforts that do not conflict with ‘levelling up’ efforts.

International competitiveness and the attraction of Foreign Direct Investment

When considering the international experience in Europe (and beyond), Foreign Direct Investment (FDI) has been shown to be an excellent catalyst for regional innovation and wealth, making it possible for regions to escape middle-income traps. However, not all FDI projects will have the same local transformational impacts. For example, investments in call centres do not have the same local positive impacts as skilled research centres with links to local universities and local government. And there is also a question of investment size. While larger projects are often more attractive for a country, particularly if they can link an area up with global value chains, smaller projects may be able to produce wider benefits for the local economy, by creating linkages with domestic firms that can generate value for the surrounding environment.

What does the European evidence say about the best ways to attract FDI? Governments should be careful about providing short-term subsidies to attract firms to invest in remote regions. Countries such as Bulgaria and Romania have seen investments leave as soon as subsidies were discontinued. By contrast, a key role can be played by Investment Promotion Agencies (IPAs), which can create conditions on the ground that investors are looking for, and help them to link with the local institutional environment. Evidence suggests that less advanced European regions with an active regional IPA have increased FDI inflows by over 70 per cent, especially in knowledge intensive sectors. This suggests that the UK Government, as part of its ‘levelling up’ agenda, should work much more coherently with the regions to create a sub-national geography that works for investment promotion, effectively tying together areas with common identities and features. And there should be a review of the role of Local Enterprise Partnerships (LEPs) and how they can best be funded and run to deliver maximum benefit for their regions, individually and together.

A strong focus on skills and intangible social factors

Policy initiatives aimed at redressing territorial inequality frequently focus on gaps in income and productivity. Empirical evidence from Europe, however, highlights the existence of societal divides between ‘successful’ and ‘left-behind’ places which are not exclusively linked to economic conditions. For example, across most countries, small town and rural dwellers report significantly higher levels of life satisfaction than urban residents, and similar levels of satisfaction with respect to their material wellbeing, even if they voice higher degrees of political disenchantment and lower levels of trust towards national and supranational institutions.

These findings suggest that what is needed to re-engage dwellers from ‘left-behind’ places may not (only) relate to economic opportunities but (also) to social infrastructures and basic public service delivery. For example, across Europe, countryside dwellers still report systematically lower levels of satisfaction with public service provision than urbanites, especially in countries such as France and Portugal.  UK policymakers should also pay particular attention to this issue. Research on the territorial impacts of public austerity following the 2008 financial crisis in Britain clearly highlighted how a reduction in public service provision can led to substantial rises in political discontent.  

Finally, this message has implications for the UK Government’s levelling-up agenda which, so far, has primarily focused on delivering physical infrastructure, before addressing ‘soft’, intangible factors and social issues. And yet – as highlighted in other levelling up blogs on learning from past experience, and the importance of local social infrastructure – social relationships and connections within and across communities are essential. The sense of worth of residents in ‘lagging behind’ areas may be well related to intangible factors such as feeling part of the broader society and its fast-paced changes, and the ‘levelling up’ agenda should not miss this important intangible aspect.

Photo of Dresden, Germany, by Sangga Rima Roman Selia on Unsplash

  • About the author

    Dr Davide Luca

    Dr Davide Luca is an Assistant Professor in Regional Economics at the Department of Land Economy, University of Cambridge, and Fitzwilliam College’s DoS for his department. His research is interdisciplinary, and focuses on the interactions between territorial inequality, socioeconomic outcomes, and public policy delivery. Before joining Cambridge University, Dr Davide Luca was a Postdoctoral Fellow at Harvard Kennedy School of Government, and worked for the European Commission. He holds a PhD in Economic Geography from the London School of Economics and Political Science. More information about him can be found on his website: https://davideluca.com/

    Davide Luca
  • About the author

    Dr Marco Di Cataldo

    Dr Marco Di Cataldo is a Research Fellow ('Foscolo Europe' UniCredit grant holder) at the Department of Economics of Ca' Foscari University of Venice and an Affiliate Post-Doctoral Researcher at the Department of Geography & Environment of the London School of Economics. He works as a consultant for the World Bank Group and has been a consultant for the UK Ministry of Housing, Communities and Local Government. He holds a PhD in Economic Geography from the London School of Economics. His research focuses on the evaluation of Economic Policies, Regional Development, Political Economy. He teaches quantitative methods for policy analysis and Economic Geography.

  • About the author

    Professor Riccardo Crescenzi

    Riccardo Crescenzi is a Professor of Economic Geography at the London School of Economics and is the current holder of a European Research Council (ERC) Grant. He is also an Associate at the Centre for International Development, Harvard Kennedy School of Government, Harvard University. His research is focused on Regional Economic Development and Growth, Innovation, FDI, Multinational Firms and the analysis and evaluation of public policies. His teaching focuses on the economics of local and regional development. He is the Editor of the LSE Blog "Global Investments and Local Development"