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Administration Agreement between the European Commission and the International Bank for Reconstruction and Development concerning the Part II Europe 2020 Programmatic Single-Donor Trust Fund Trust Fund (No.TF072592) (EC Contract No CCI2014) Acknowledgments /6 Executive Summary /7 Introduction: why focus on lagging regions /9 State of Polish Lagging Regions: Podkarpackie and Œwiêtokrzyskie /13 CONTENTS Competitiveness of Podkarpackie and Œwiêtokrzyskie economies /17 How competitive are the lagging regions? /17 How history shaped economies of lagging regions /22 What determines competitiveness of the regions today? /24 What does global experience tell us about lagging regions? /33 Conceptualizing a policy approach to lagging regions /36 EU investment in Podkarpackie and Œwiêtokrzyskie /38 Absorption of EU funds /38 Results of cohesion policy in Podkarpackie and Œwiêtokrzyskie /39 Conclusion and consideration for EU approach to lagging regions /41 Annex 1. Competitive Cities in Lagging Regions /43 Gaziantep, Turkey /43 Changsha, China /44 Annex 2. Largest EU-supported projects in Podkarpackie and Œwiêtokrzyskie /46 Acknowledgments The report was prepared by Dmitry Sivaev, based on the background papers prepared by research teams that consist of: Tomasz Komornicki, Konrad Czapiewski, Grzegorz Gorzelak, Maciej Smêtkowski i Adam P³oszaj, and coordinated by Paul Kriss and Marcel Ionescu-Heroiu. The team would like to thank Commissioner Corina Cret‚u for initiating the Initiative, Minister Jerzy Kwieciñski from Poland’s Ministry of Economic Development for his invaluable support, and the European Commission’s team for outstanding engagement and support, especially Mr. Patrick Amblard, Mr. Wolfgang Munch, Ms. Justyna Podralska, Ms. Magdalena Horodyñska, and Ms. Karolina Tilman from the DG REGIO. The team would also like to thank Arup Banerji, Marina Wes, David Sislen, Carlos Pinerua and Isfandyar Zaman Khan for the advice and guidance provided throughout the elaboration of this report. The report was completed in March 2017. 6 | POLAND CATCHING-UP REGIONS – KEY REGIONAL DEVELOPMENT DYNAMICS Executive Summary The EU has rightfully been dubbed This pilot initiative focuses on Pod- the convergence machine.1 From Spain karpackie and Œwiêtokrzyskie, which to Greece, and from Slovakia to Poland, are representative of less developed it has helped 12 countries overcome regions that, despite achieving stea- the middle-income trap to transition to dy and high economic growth, have high-income – a feat without precedent notbeenabletocloseinonthe in human history. Virtually every New country’s leading regions. Both re- Member Country has managed to con- gions, located in southeastern Poland, verge to the EU mean after joining. represent “lagging regions”, according to the DG Region’s definition. They have Nonetheless, progress has not been achieved GDP growth of over 6% p.a. uniform and not all countries and in 2003–2014, yet failed to keep pace regions have experienced these ad- with the national economy. Today, com- vancements. Moreover, within coun- pared with national averages, their GDP tries, disparities between leading and per capita in both regions is below 75%, lagging regions have grown wider; incomes are lower, and higher shares it’s a dynamic that is normal according of the population is living in poverty to empirical evidence,2 but a reality (over 10% in extreme poverty). that is nonetheless troublesome to poli- cy makers. In all of the New Member Global evidence indicates that Pod- Countries, national capitals and seve- karpackie and Œwiêtokrzyskie are ty- ral major cities have the highest con- pical cases rather than outliers. Deve- centration of economic activity and lopment does not happen equally across wealth, while some of the peripheral areas, and economic activity tends to regions are falling further behind na- concentrate in the most productive pla- tional leaders. ces. The experiences of countries that went through phases of rapid growth The EU is determined to improve its (like Poland in recent decades) shows approach to addressing the challen- that spatial disparity of development ges faced by less developed and lag- and emergence of lagging regions are ging regions. Less developed regions a common side effect. Arguably, grow- (defined as regions achieving less than ing disparities between leading and 75% of EU average GDP per capita (PPS)) lagging regions can be interpreted as have been the major beneficiaries of a natural result of rapid development. EU cohesion policies in recent decades. Those lagging regions, just like Podkar- For the 2007–2013 Programming Pe- packie and Œwiêtokrzyskie, are typically riod, lagging regions accounted for located in peripheral areas, have poorer 82% of funding allocated through EU access to markets and infrastructure, structural funds. The DG Region launch- and weaker institutions. ed the Lagging Regions Initiative to of- fer targeted assistance to regions that The relatively weak economic per- fall in two categories: 1) have a GDP formance of Podkarpackie and Œwiê- per capita (PPS) that is less than 50% tokrzyskie can largely be explained of the EU average (low-income re- by the lack of a critical mass of gions); 2) have not converged to the EU competitive firms. Both economies mean in the past decade (low-growth are described by low-export intensity, regions). shortage of foreign direct investments, 1 World Bank. 2012. Golden Growth: Restoring the luster of the European economic model. 2 See for example: World Bank. 2009. World Development Report: Reshaping Economic Geography. POLAND CATCHING-UP REGIONS – KEY REGIONAL DEVELOPMENT DYNAMICS | 7 reliance on public sector employment, sixth. Main areas of investment in both weak entrepreneurship, and low labor regions included transport, innovation, productivity relative to the national and entrepreneurship. It is hard to accu- average across all industrial sectors. rately evaluate the effect of these in- The economy of Podkarpackie is perfor- vestments, however some lessons les- ming somewhat stronger than Œwiêto- sons on how to support lagging regions krzyskie, largely due to the presence of canbedrawnandappliedtoCohesion a vibrant manufacturing cluster in the Policy. northwest part of the region. In Poland, the focus of public invest- Cities are the economic epicenters ments priorities should shift focus and the growth engines of Podkar- from hard, national infrastructure to packie and Œwiêtokrzyskie. Despite soft interventions and basic services differences in economic geography, like education, innovation, and lo- stark developmental divides between cal transport. Examples in Podkarpac- major urbanized areas and rural periphe- kie and Œwiêtokrzyskie show that with ries characterize both regions. Cities and the help of EU funding the regions basic their suburbs attract young workers and services have improved (e.g. water sup- investors, and create most of the jobs. ply and sewerage). Similarly, major inter- On the other hand, agriculture in rural -regional transport projects have in- areas of both regions contributes rela- creased the accessibility of the regions. tively little to the economy but is im- Now that both regional capitals are portant for the livelihoods of residents, no more than four hours away from all who often have limited access to other major urban centers in Poland and wa- economic opportunities. ter and sanitation services are