Regional Policy Design: An Analysis of Relocation, Efficiency and Equity

Despite substantial regional expenditures at both national and community level, European regional policies do not appear to deliver. The evidence suggests that neither efficiency gains nor reduced regional inequalities are attained. If there is any positive impact at all, then it is at the most a redistributional one. If transfers are mainly redistributional in nature, would policies based on non-distortionary financing be a better route to follow? We ask what are the alternatives to a distortionary regional policy forcing the delocation of activity. Are non-distortionary policies always more efficient than distortionary alternatives? We analyze these questions employing a new economic geography model, where we also take into account the importance of knowledge spillovers for productivity, industry location and policy. It is shown that the effectiveness of different regional policy depends on (i) intra-industry knowledge spillovers, (ii) inter-industry knowledge spillovers and (iii) trade costs. Our analysis provides insight into what may be the reason for the lack of success of EU regional initiative.