A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Brown, Adam; Gardiner, Ben; Römisch, Roman; Stenning, Jonathan Research Report Economic Challenges of Lagging Regions I: Fiscal and Macroeconomic Environment wiiw Research Report, No. 421 Provided in Cooperation with: The Vienna Institute for International Economic Studies (wiiw) - Wiener Institut für Internationale Wirtschaftsvergleiche (wiiw) Suggested Citation: Brown, Adam; Gardiner, Ben; Römisch, Roman; Stenning, Jonathan (2017) : Economic Challenges of Lagging Regions I: Fiscal and Macroeconomic Environment, wiiw Research Report, No. 421, The Vienna Institute for International Economic Studies (wiiw), Vienna This Version is available at: http://hdl.handle.net/10419/204193 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu DECEMBER 2017 Research Report 421 Economic Challenges of Lagging Regions I: Fiscal and Macroeconomic Environment Roman Römisch (wiiw, coordinator), Adam Brown (Cambridge Econometrics), Ben Gardiner (Cambridge Econometrics) and Jonathan Stenning (Cambridge Econometrics) The Vienna Institute for International Economic Studies Wiener Institut für Internationale Wirtschaftsvergleiche Economic Challenges of Lagging Regions I: Fiscal and Macroeconomic Environment ROMAN RÖMISCH (WIIW, COORDINATOR) ADAM BROWN (CAMBRIDGE ECONOMETRICS) BEN GARDINER (CAMBRIDGE ECONOMETRICS) JONATHAN STENNING (CAMBRIDGE ECONOMETRICS) Ben Gardiner is Director at Cambridge Econometrics. Jonathan Stenning is Associate Director at Cambridge Econometrics. Adam Brown is Project Manager at Cambridge Econometrics. Roman Römisch is Research Economist at the Vienna Institute for International Economic studies (wiiw). This report was produced as a part of the study 'Economic challenges of lagging regions' (Contract No. 2015.CE.16.BAT.053), funded by the Directorate-General for Regional and Urban Policy of the European Commission. It reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein. The authors wish to thank the Economic Analysis Unit of the DG Regional and Urban Policy, in particular Blazej Gorgol, Lewis Dijkstra, Eric von Breska, Laura de-Dominicis, Moray Gilland, Paola Annoni, Alexandros Karvounis, Angel Catalina-Rubianes and Julien Genet for their useful comments. The authors also wish to thank Ronald Hartwig and Loredana Sementini for administrative support. Abstract The report analyses the fiscal and macroeconomic environment in the lagging regions and the relevant Member States of the EU, as a sound and sustainable macroeconomic framework is a necessary, but by itself not a sufficient precondition for investment and growth in the regions. It starts with identifying relevant indicators to highlight the macroeconomic environment in the lagging regions, assessing the performance of the regions across these indicators, and establishing a framework which sets out the potential causes of these imbalances. This sets the scene for further analysis of the transmission mechanisms which cause the regional discrepancies in these Member States between the lagging and the non-lagging regions, as well as exploring the differences between the low growth and low income lagging regions. The report concludes with a summary of these findings and how they could be used as a basis for policy recommendations which might improve the economic performance of the lagging regions. Keywords: macroeconomic development, regional economic development, EU, lagging regions, regional policy, economic challenges JEL classification: E32, E60, H60, O11, O18, O40, R11 CONTENTS 1. Project overview .............................................................................................................................................. 1 2. Introduction to Part I ................................................................................................................................... 6 3. The lagging regions ....................................................................................................................................... 7 3.1. Low income regions .........................................................................................................................8 3.2. Low growth regions ........................................................................................................................10 4. Macroeconomic environment ................................................................................................................ 13 4.1. Country-by-country assessments ..................................................................................................15 5. Theory of regional performance .......................................................................................................... 18 5.1. Regional impact framework ...........................................................................................................19 6. National imbalances, their transmission mechanisms and impact on regional economic performance ............................................................................................................................. 23 6.1. Public debt, expenditure and investment .......................................................................................23 6.2. Public investment and GDP growth ...............................................................................................28 6.3. The role of public capital expenditure and public investment in the Italian lagging regions ...........31 6.4. Private debt ....................................................................................................................................34 6.5. Access to finance ...........................................................................................................................45 6.6. Regional competitiveness ..............................................................................................................51 6.7. Labour market resilience ................................................................................................................60 7. Approaches to tackling structural deficits....................................................................................... 66 7.1. Investment in human capital ..........................................................................................................66 7.2. Direct investment in high value added sectors ..............................................................................67 7.3. Regulatory reform ..........................................................................................................................67 7.4. Remoteness ...................................................................................................................................67 8. Policy recommendations ......................................................................................................................... 68 Annex I: Measuring indicators in national currency or euros ........................................................... 70 Annex II: List of the 47 lagging regions in the 6 countries .................................................................... 71 TABLES AND FIGURES Table 4.1 / Macroeconomic imbalances indicators .................................................................................. 14 Table 5.1 / Determinants of economic growth .......................................................................................... 19 Table 6.1 / Public expenditure of local government (average over 2012-2014; euros per capita) ........... 33 Table 6.2 / Bank interest rates in 2015 by enterprise size ....................................................................... 47 Table 6.3 / Bank interest rates in 2015 by sector ..................................................................................... 47 Table 6.4 / Impaired loans by sector of economic activity in 2015 (% share of total loans) ..................... 48 Table 6.5 / Non-performing to total loans by sector of economic activity in 2015 (% share) ................... 49 Table 6.6 / Indebtedness of enterprises ................................................................................................... 49 Table 6.7 / Exports (millions of euros, current prices 2015) ....................................................................