Monday, 17 April 2017

The impact of EU development funds in poorer UK regions and the prospect of Brexit

Posted by Marco Di Cataldo, LSE 

This is an updated version, originally posted on here on EUROPP.

Brexit means that UK regions would no longer be entitled to receive EU Structural Funds. Have EU funds been effective, and what might be the consequences of an interruption of EU financial support to British regions?

Recent empirical research (Di Cataldo, 2017) has looked at the economic evolution of two UK regions, Cornwall and South Yorkshire, recipients of EU Regional Policy for ‘less developed regions’ - the highest form of EU aid. 

Figure 1: EU classification of ‘less developed regions’ in the UK, 1994-2020
Shaded areas: less developed regions 
In order to single out the effects of the EU funds in the two regions, 1992-2014 regional trends of unemployment in Cornwall and South Yorkshire are compared to those of ‘counterfactual regions’ being similar in all characteristics to Cornwall or South Yorkshire except for not having being eligible to obtain the same proportion of EU Structural Funds.

The results provide clear evidence of a significant impact of EU grants in reducing unemployment. Over the fifteen analysed years in which Cornwall has been in receipt of EU funds, the proportion of unemployed people has been consistently and significantly lower than in the counterfactual comparison. In Cornwall unemployment has declined by 30 percent more than the counterfactual region. The empirical analysis makes sure that this effect is driven by EU funds and not by other potentially confounding policies.

Figure 2: unemployment in Cornwall and counterfactual region, 1992-2014 



Unlike Cornwall, South Yorkshire has been categorised as a ‘less developed region’ only for seven years. Its improved economic conditions relative to the EU average entailed that in 2006 the region lost the status of area in highest need of help and the proportion of available grants reduced substantially.

Has this change in eligibility affected the region? The evidence unveils that all the labour market improvements achieved in the period of highest financial support – certified by a lower unemployment relative to the counterfactual during 2000-2006 – are completely offset when eligibility for EU grants as ‘less developed region’ is lost. As shown in the figure below, after 2006 South Yorkshire’s unemployment trend gradually went back to the one it would have had in absence of EU funds.

Figure 3: unemployment in South Yorkshire and counterfactual region, 1992-2014


The study also indicates that the per capita GDP in the two regions follows similar trajectories to those observed for unemployment. Both regions converge to higher levels of income while being considered ‘less developed’ by the EU, however this trend is reverted in South Yorkshire when its GDP overcomes the 75 threshold and the region can no longer benefit from the highest form of EU aid.

Figure 4: GDP per capita in treated and counterfactual region, 1995-2014

Cornwall

South Yorkshire



Hence, while EU funds can have a positive impact on the creation of jobs and the promotion of regional economic growth, these outcomes may not be persistent and long-lasting, rather they may quickly disappear after the end of the high-intensity funding period.

These findings should foster a careful reflection over the future of poorer UK regions in the event of an imminent exit of the country from the EU. Losing the possibility to access EU Structural Funds is likely to expose the economy of less developed UK regions to potential adverse effects. A region like Cornwall, which has benefitted from EU regional development policies for a long period of time, faces the highest risks. In this sense, the experience of South Yorkshire may represent a valuable lesson; losing eligibility for the highest form of EU financial support can produce a short-term shock, and the labour market and economy can continue to struggle in the medium-term.

While European regions losing the status of ‘less developed’ are always entitled to receive a form of transitional funding from the EU, Cornwall would not be eligible for this stream of funding in case of Brexit. Hence, the loss of EU subsidies may be more likely to produce negative consequences on its economy if the UK national Government does not put in place any compensatory policy supporting its transition in funding environment. These potential repercussions apply not only to Cornwall but also to all economically disadvantaged regions dependent on EU aid, such as West Wales and The Valleys, the other UK ‘less developed region’ at the time of the Brexit vote.

References 
Di Cataldo, M. (2017). The impact of EU Objective 1 funds on regional development: Evidence from the UK and the prospect of Brexit, Journal of Regional Science, forthcoming. DOI: 10.1111/jors.12337


No comments: