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Place-based policies in the Italian case, part 2: Mind the negative side effects

Place-based policies in Italy have been largely ineffective in reducing regional disparities. This second in a two-column series argues that the policies have also had negative side effects, including increasing corruption, inefficient use of public funds, and disproportionately benefiting richer people. Understanding these side effects is crucial for evaluating policy desirability. The findings suggest that more resources should be invested in education and towards reducing the grip of organised crime on the Italian economy.

In our first column in this series, we argued that place-based policies (PBPs) aimed at reducing regional disparities between the South and the North of Italy have proved largely ineffective. These pieces of evidence are only part of the whole (unsatisfying) story: money can also harm recipient regions. In this column, we focus on the side effects that, taken together, further support our negative view on the role of place-based policies in Italy. Some policy implications, based on both columns, are then provided.

Place-based policies, corruption, and social capital

De Angelis et al. (2020) suggest that EU funding to Southern Italy has a significant positive effect on crimes related to corruption. The economic rationale is twofold. First, incumbent politicians endowed with large budgets, which are not collected locally, have more room to grab political and financial rents without disappointing imperfectly informed voters. Second, corruption-based profits are likely to attract to political office less capable and more corruption-prone individuals, thus further self-reinforcing the relationship between transfers and corruption.

Apart from crime-related issues, Accetturo et al. (2014) show that EU Structural Funds reduce local endowments of trust and cooperation, especially in areas with a low quality of institutions like Southern Italy. This is because funds might tempt people to behave in an uncivic way, thus reducing cooperation and interpersonal trust.

Politicians: Public objectives versus private returns

Politicians play a crucial role in shaping the allocation of funding: they might be able to attract public money and select those top bureaucrats who are in charge of the spending process. For example, Buscemi and Romani (2022) show that political alignment mattered for funds financed by Cassa per il Mezzogiorno. A natural question then arises: do politicians earn some private benefits from this suboptimal allocation of funds? Accetturo et al. (2020) find that this is the case. They study a large plant regeneration programme (Area Contracts) aimed at counteracting the negative effects of industrial decline. This programme has had no effect on the economic fortunes of the targeted territories. But on the local politicians, however, yes! In fact, incumbent politicians in the treated municipalities were significantly more likely to be re-elected than their counterparts in the control municipalities.

Politicians’ incentives are also at the core of the analysis carried out by D’Amico (2022): targeting re-election lowers the quality of regional aid spending. He argues that talented people usually migrate out from lagging areas so that local politicians in practice target less-talented people by supporting or protecting economic activities that are in decline. Not surprisingly, the share of EU Cohesion Funds invested in knowledge-intensive sectors is found to be negatively related to the fraction of low-skilled workers when programmes are managed by local governments, while the negative correlation disappears for programmes managed by the national government (Figure 1).

Figure 1 Correlation between investment in knowledge intensive sectors and human capital, by type of programme

Figure 1 Correlation between investment in knowledge intensive sectors and human capital, by type of programme

Source: D’Amico (2022).

One piece of good news: EU funds reduce populism

Scholars agree that the recent success of populist parties in many Western countries has to do with the increased economic insecurity facing those who lose from recent large economic shocks, such as globalisation, immigration, automation, the Great Recession, and fiscal austerity. The straightforward policy implication is that social sustainability would call for appropriate redistributive policies aimed at compensating the losers. EU funds did that job. Focusing on the 2013 Italian general elections and comparing municipalities near the geographical border that determines eligibility for the Convergence Objective regime, it turns out that EU financing caused a sizeable drop in populism (Albanese et al. 2022): Figure 2 reports the fit of a populism score measure as a function of the distance from the Convergence Objective border (together with 95% confidence intervals), with a clear decline to the right for eligible regions. 

Figure 2 Populism and the distance from the cut-off

Figure 2 Populism and the distance from the cut-off

Source: Albanese et al. (2022).

What about the income distribution in recipient regions?

The ultimate reason for place-based policies is redistributive. One rationale for supporting places instead of individuals is that poor people tend to concentrate in deprived areas. It would be paradoxical if rich people in lagging areas disproportionally benefited from place-based policies, with respect to the poor. Unfortunately, this is the case. Albanese et al. (forthcoming) show that when Molise (one Italian Southern NUTS 2 region) exited the Objective 1 programme, the Gini index (of income) went down when compared to a close control group. Figure 3 shows the evolution over time of the difference between the Gini index in municipalities located in Molise and that in municipalities located in two neighbouring regions (Apulia and Campania, which continue to receive huge support from the EU). The comparison is run at the geographical border. Before 2007 (the year of EU funds retrenchment, year 0 in the graph) the difference is stable; from 2007 onward, it becomes negative and significant (the vertical bars are 95% confidence intervals), indicating a relative decrease in inequality after the removal of funding.

Three transmission channels might explain such a result: (i) landlords, who are in the upper tail of the income distribution, largely benefit from spatially targeted programmes because of rigid housing supply, (ii) the programme generates no additionality, so that rich business owners receive financial compensation for making exactly the same investment or hiring decisions they would have made in the absence of the subsidies; or (iii) local elites extract rents linked to the EU aid.

Figure 3 Difference in the Gini index over time

Figure 3 Difference in the Gini index over time

Source: Albanese et al. (forthcoming).

Place-based policies and the private sector

Place-based policies should stimulate private business. In practice, the case under scrutiny does not support such a view, pointing to substitution effects between public and private funding rather than complementarities. Auricchio et al. (2020) suggest that public employment contractions in the South of Italy have produced beneficial effects on market activities, consistent with the idea that public employment in the South crowds out the private sector (Alesina et al. 2001).

Albanese et al. (2021) study the case of the Cassa per il Mezzogiorno programme. In 2013, more than two decades after the termination of the programme, people living in treated places exhibit stronger preferences for state intervention, measured as political support for parties with pro-state and welfare-oriented platforms. This impact is estimated by comparing treated and control municipalities located near the historical border separating the Cassa per il Mezzogiorno territorial jurisdiction from the rest of Italy and so equalising possible confounders.

Some policy implications

The outcome of regional policies in Italy is among the worst in the European context (see also Ehrlich and Overman 2020). Lack of effectiveness and negative side effects have been highlighted. Past failures provide important lessons. One might be tempted to abolish place-based policies. However, this option is not on the table because of both high governance-related sunk costs (e.g. the EU Cohesion Funds are embedded in the complex EU governance structure and therefore are here to stay) and political sustainability. Against this background, what can be done is to avoid creating new spending programmes before the factors that limit effectiveness are addressed.

Without increasing total spending, funds should be reallocated in favour of two main types of expenditure. First, increasing the share of money devoted to education might improve, at least in the medium-to-long run, the quality of local institutions, even if part of this additional human capital is lost locally because of migration (Barone et al. 2019). Greater human capital also spurs growth per se, irrespective of place-based policies, and students’ skills and work-based competencies in the South are currently lower than those in the North (e.g. Visco 2020). Second, economic resources should be directed more towards reducing the grasp of organised crime on the economy and improving the protection of property rights.

Another line of action has to do with the governance of the spending process. To reduce the risk of political patronage, and given poor institutional quality, policies should not be managed by local politicians, elites, or administrators. While moving the decision centre away from local economies might come at the cost of losing information on local needs, we think that such a cost would be of second order.

The final aspect is only in part related to place-based policies. An additional tool for spatial convergence, which does not require public money but instead strong investment in terms of political capital, would be the introduction of a (more) decentralised bargaining system to allow wages to reflect more closely local productivity and cost-of-living conditions. Boeri et al. (2021) compare the Italian centralised system with that of Germany, a country with similar differences in regional productivity (along the West-East dimension) but one that has a more flexible wage system in place, which allows for some local bargaining. Their estimates suggest that huge gains in both employment and total earnings could materialise, for both the Mezzogiorno and the nationwide economy, if Italy adopted a German-type flexible system. In support of this, Ciani et al. (2019) show that rigidities in wage and house price adjustments play a crucial role in impeding the convergence of different areas. They discuss the relative merits of place-based policies versus interventions intended to allow greater responses of local prices and find that the latter strategy is superior.

Authors’ note: The views expressed in this column should be attributed to the authors alone and not to the institutions with which they are affiliated.


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