Econometric Evaluation of EU Cohesion Policy – A Survey

More than one third of the total EU budget is spent on so-called Cohesion Policy via the structural funds. Its main purpose is to reduce disparities among EU regions and to promote economic growth and convergence. Therefore, the convergence process of EU regions is a question of high political importance. The overall empirical evidence points to a small convergence effect of all or at least some European regions. However, whether or not this potential success results from EU Cohesion Policy remains an open question. The existing empirical evidence has provided mixed, if not contradictory, results. While some authors do find evidence of a positive impact of structural funds on economic growth, others find little to no impact at all. Against this background, this paper provides a fundamental review of the econometric evaluation of EU Cohesion Policy in order to shed light on the reasons for the diverging results. It has been shown that the econometric evaluation of EU Cohesion Policy is hampered by several econometric issues. Based on these issues we discuss potential solutions on how to cope with these problems and discuss the related literature.The most that can be concluded from empirical studies using country-level data is that Cohesion Policy seems to be only conditionally effective. Given a good quality institutional setup or decentralised governmental structures, Cohesion Policy has a positive impact on growth. However, using regional level data might be the preferable alternative because, first, EU Cohesion Policy focuses on the development and convergence of regions and, second, the robustness of the results is increased by the higher number of cross sections. The majority of the studies based on EU regions find at least a weak positive effect. One explanation for the weak results might be the fact that almost all studies are derived from a neoclassical growth model assuming that EU Cohesion Policy increases investments, and ultimately raising the economic growth rate. However, there is some empirical evidence that Cohesion Policy may only have a modest impact on investments. Moreover, we know very little about the labour market impact of EU Cohesion Policy. Hence, one task for future studies will be to investigate more thoroughly the channels through which EU Cohesion Policy works. Another reason for the inconclusive empirical results might be that the allocation of funds is at least partly determined by political-economic factors.In this context, the allocation of Cohesion Policy is not solely based on clear-cut criteria, rather there is room for political bargaining and/or side payments. This might result in the funding of politically feasible, and less economically efficient, projects.

Hagen, Tobias and Philipp Mohl (2009), Econometric Evaluation of EU Cohesion Policy – A Survey, ZEW Discussion Paper No. 09-052, Mannheim.