The long and winding road to find the impact of EU funds on regional growth: IV and spatial analyses
Published in Regional Studies 58(3), 2023
Co-authored with Jan Fidrmuc and Olga Zajkowska
Abstract
We contribute to the analysis of the impact of European Union funds on European regional development. We find that the European funds have a significantly positive effect on regional economic growth in the European Union. This result is obtained both with ordinary least squares (OLS), and with two-stage least squares (2SLS) using the presence of environmentally protected areas as an instrument. Furthermore, we find that interregional spillovers are important: a significant part of the favourable effect seems to take place in nearby regions rather than in the recipient region.
Motivation
- European Structural and Investment Funds (EU Funds) are the primary tool of the EU to improve the regional inequalities within the EU, as not all regions benefit equally from EU integration.
- Evidence on their effect on regional growth rates is mixed, possibly also due to overlooked endogeneity or spillover effects (Dall’erba and Fang, 2017).
Research question
- What is the impact of EU Funds on regional growth?
- Can we observe spillover effects of EU Funds on other regions?
Contribution
- Reliance on an original instrumental variable (presence of environmentally protected Natura 2000 sites) as a solution to a likely presence of endogeneity.
- Estimation of the spillover effects of EU Funds over a longer period and in an enlarged EU.
Empirical strategy
- Application of the Solow-Swan growth model (Mankiw et al., 1992, Ertur and Koch, 2007) for 272 NUTS2 regions from 1997 to 2014.
- Dependent variable: regional GDP per capita growth rates.
- Variable of interest: EU Funds to regional GDP as the variable of interest (instrumented by the ratio of area of Natura 2000 sites to the area of a NUTS2 region).
- Control variables: lagged level of regional GDP per capita, population growth rate, ratio gross fixed capital formation to regional GDP, country level composite indicator of the world governance indicators.
- Method: OLS, 2SLS, SDM.
Results
- Positive impact of EU Funds on regional growth rates, with a degree of heterogeneity in the results.
- When endogeneity is accounted for, the positive impact increases (downward bias of the initial OLS results).
- Positive spillover effects of EU Funds on nearby regions, although these effects are less robust.
- Negative correlation between the EU Funds and the votes for the Conservative party in the 2017 elections.
References
Dall’erba, S. and Fang, F. (2017). A meta-analysis of the estimated impact of Structural Funds on regional growth. Regional Studies, 51.
Ertur, C. and Koch, W. (2007). Growth, technological interdependence and spatial externalities: Theory and evidence. Journal of applied econometrics, 22(6):1033–1062.
Mankiw, N. G., Romer, D., and Weil, D. N. (1992). A contribution to the empirics of economic growth. The quarterly journal of economics, 107(2):407–437.