Macroeconomic effects of EU Financed Programs

The aim of this presentation was to inform the participants about the macroeconomic experience of the so-called “cohesion countries” with the EU financed

21 This section summarizes the presentation by Sarantis E. G. Lolos.

structural programs. The impacts are evaluated from the point of view how the policies succeeded in fulfilling the objectives of the EU support. The methodology proposed should also allow for comparing the efficiency of alternative investment decisions.

The structural funds are targeted in accordance with the following objectives:

• Promoting the development and structural adjustment of regions whose development is lagging behind (Objective 1);

• Supporting regions affected by industrial decline (Objective 2);

• Combating long-term unemployment (Objective 3);

• Facilitating the occupational integration of young people (Objective 4);

• Speeding up the adjustment of agricultural and rural development (Objective 5).

The management of community structural policies includes the setting up of Community Support Framework (CSF) aiming at promoting growth in its regions and the Operational Programs that are co-financed by EU transfers and national sources (public and/or private). The intensity of the CSF spending is illustrated in Table 3.

Table 3: The Size of CSF Spending in the Cohesion Countries

Indicator Greece Spain Ireland Portugal Four

countries total 1989-1993

Total interventions (1994 ECU bn) 17.5 30.3 11.4 21.7 80.9

Total interventions in % of GDP 4.4 1.5 5.8 6.0 2.8

Community interventions in % of GDP 2.6 0.7 2.6 3.0 1.4

National interventions in % of GDP 1.8 0.8 3.3 3.0 1.4

1994-1999

Total interventions (1994 ECU bn) 34.8 82.2 13.1 31.8 161.9

Total interventions in % of GDP 6.9 3.1 4.2 6.6 4.1

Community interventions in % of GDP 3.5 1.6 2.4 3.7 2.2

National interventions in % of GDP 3.4 1.5 1.8 3.0 1.9

The above Community funds, coming as capital inflows of the CSF, plus the matching domestic commitments of co-financing, have certain effects on the national economies. Their estimation requires the measurement of impacts in the following transmission mechanism:

Demand side:

• Public investment spending (e.g. infrastructure and investments of public enterprises), as registered in the Public Investment Program;

• Improvement of human resources and skills that implies additional personal incomes (secondary transfers to households) and additional profits of enterprises.

• Changes in the structure of productive capacities and the competitiveness in trade that have impacts on the aggregate demand structure.

Supply side:

• Long-run improvements in the productive capacity of the economy due to investments into physical and human capital in various sectors.

CSF evaluation methodology is based on traditional cost-benefit analysis (usually at the microeconomic level) or on macroeconomic structural modeling and its empirical testing by using alternative development scenarios. In the past, the CSF impacts on cohesion countries were modeled by a variety of macroeconomic models such as:

computable general equilibrium (CGE), input-output and various econometric models.

The presenter concentrated on explaining the latter approach. There the demand side was described by behavioral equations for consumption, private investment, government expenditure, exports and imports. The supply side of the model included the determinants of the productive potential, such as infrastructure, labor, human capital and investments (physical capital) as well as their impacts on the output. The analysis of employment effects required the data on the labor market (labor demand and supply, including labor migration). The government sector had to be broken down into various types of expenditure and the types of goods and services provided.

The empirical ex-ante estimation of the CSF effects (estimated for Objective 1 support) revealed that the impact on growth could vary by economies. For example, for Portugal the average annual growth rate in 1989-1993 was estimated to increase by 0.7 percentage points - from 3.4% (without CSF) to 4.1% (with CSF). For Greece it was by 0.5 points, while for Spain, Italy and UK it was by only 0.2 points. The impacts on GDP for 1994-1999 were even higher in all of these countries, ranging between 0.6 and 1 percentage points. The expected impact on job creation, albeit lower in terms of growth rate than for the GDP, was also significant.

There are three conditions for a successful estimation of the CSF effects on the economy:

• that the model describes the economic conditions for development correctly;

• that the CSFs are fully absorbed in the amounts committed (what influences the demand side of the economy);

• that the CSFs are efficiently implemented (what influences the supply side and the managerial capacities responsible for investment).

The obvious next question is: how the estimated impacts have been actually realized in the real economies? It was assumed that the real effect should be lower than the hypothetical effect because not all CSF expenditures could be absorbed under ideal conditions modeled ex-ante. Some of the funds were not absorbed, or the marginal efficiency of the additionally provided production factors (mainly in the fixed capital formation) could have diminishing returns. The shortfalls in the real effects can be thus further analyzed by the model and unveil the causes for such frictions. Economic policy can therefore react and deal with the impediments.

Conclusions:

• The quantitative assessments of the CSF on recipient economies show that its effects are significant, especially for the less developed economies.

• The effects have been increasing in time, as the CSF was larger and the management of funds was improving.

• In case we assume that the co-financing domestic funds were not be invested without the CSF, then the impact on growth should be taken as double of the results we have estimated for the CSF alone.

• The learning of the participants at all levels (EU, central national, regional and local) and the improved governance of CSF has positive effects on the global efficiency of CSF.

• CSF has an externality effect on the economic policies in the recipient countries, since the management of CSF reveals various local leakages, frictions and inefficiencies and exerts a pressure for their removal.

• The Euro-solidarity towards the South European regions has been particularly important for their real economic convergence to the average EU levels of income. Without it the closure of their development gap would most probably not be possible.