Regional economic policy review: paper 3 - international perspective

2. Trends In Regional Disparities

2.1 International trends

2.2 The most recent overview of disparities and problems in the EU is provided by the 8^th Cohesion Report (8CR).^[2] Its opening message is that “Cohesion in the European Union has improved, but gaps remain”.^[3] This reflects the positive progress with convergence between less-developed regions and the EU average, but concern with the economic stagnation or decline of middle-income and less developed regions, especially in the southern EU Member States, and suggestions that they are in a ‘development trap’. Recent regional GDP data show a continued and pronounced core-periphery map of economic disparities across Europe, as well as significant gaps between capital city / metropolitan regions and other regions.

2.3 Regional disparities in key labour market indicators are still higher than before 2008, indicating the long shadow of the 2008-10 financial and economic crises. Crucially, there has been mixed progress in reducing disparities in some of the key growth factors (e.g. innovation, entrepreneurship) that explain the widening differences between so-called ‘frontier regions’ or ‘regional high-income clubs’. Indeed, the 8CR notes that “the regional innovation divide in Europe has grown”.^[4] Other indicators in areas such as basic digital infrastructure, environmental pollution and quality of governance also remain wide.

2.4 Further challenges have arisen from the impact of the COVID-19 pandemic, which is estimated to have increased the number of people at risk of poverty and social exclusion by five million in 2020. And looking forward 30 years, there are new so-called ‘drivers of disparities’ – the green and digital transitions, demographic change, threats to social mobility and quality of life - potentially exacerbating the geography of discontent. The 8CR concludes that “without a clear territorial vision of how these processes will be managed….a growing number of people may feel their voices are not heard and the impact on their communities are not considered, which may fuel discontent with democracy”.^[5]

2.5 Key trends for comparator countries

2.6 Relatively limited socio-economic disparities, but challenges of demographic change and physical geography.

2.7 For the selected countries in this paper, regional socio-economic performance is generally better for core GDP and employment indicators than OECD and EU averages. New Zealand has the lowest regional disparities among 30 OECD countries with comparable data, when the richest and poorest regions representing at least 20% of the population are taken into account, and regional inequality has been declining over time.^[6]

2.8 Territorial disparities become more pronounced at a greater level of disaggregation, revealing problems in specific regions/sub-regions related to demography (e.g. population density, migration, ageing, labour shortages) and physical geography (e.g. remoteness, accessibility, climate) (NO, DK, FI, SE).

2.9 There are notable inter-regional differences in terms of the well-being indicators,^[7] with the largest disparities across the analysed countries observed in the areas of access to services (CA, FI, IE, NZ), safety (CA, DK, NZ), health (CA, NO, NZ), jobs (FI, NZ, SE), and housing (CA, NO, SE). In Iceland, the well-being regional gap is insignificant across all indicators, with all of its regions ranking among the top 20% of OECD regions in the dimensions such as access to services, environment, jobs, life satisfaction and sense of community.

2.10 There are also marked differences in terms of the types of challenges faced by different types of regions. In Sweden, for example, the key issues for northern regions are related to remoteness and demographic challenges of declining and ageing population, labour shortages, and the perceived lack of social network support; whereas the urban areas predominantly in the south are facing issues related to infrastructure and housing shortages, balancing growth with environmental considerations, and addressing increasing social polarisation problems.

Territorially differentiated patterns of productivity growth

2.11 Analysis of productivity growth across regions within countries since 2000 points to the marked differences between two groups of countries. On the one hand, Denmark, Finland, Ireland, Norway and Sweden have followed a regionally distributed productivity growth model, wherein differences in productivity growth rates across regions are mainly limited, with no single region standing out and few large differences. By contrast, the two non-European countries (Canada and New Zealand) followed a regionally concentrated productivity growth model, wherein regions at the productivity frontier contribute disproportionally to aggregate productivity growth, there is a clear gap between the region with the highest contribution to productivity growth and all remaining regions, and regional disparities in productivity levels have widened over time.[8]

Persistent gap between capital region / large urban centres and rural/peripheral areas

2.12 Despite the relatively limited socio-economic disparities, the urban-rural divide, and particularly the gap between the capital / metropolitan regions and remote / rural areas, remains prominent. For example:

• Ireland: the main regional divide is between the Dublin and Mid-East areas versus the more rural west and south-west.
• Norway: the highest employment rates are in Oslo and the coastal regions from Rogaland to Trøndelag.
• Sweden: economic activity and population are concentrated in the metropolitan regions (e.g. Stockholm) and regions with larger cities that are able to offer more attractive and diverse opportunities for people and businesses. The opposite prevails in many remote and rural regions, especially in northern Sweden but also in other areas such as in the south-east of the country. Highly educated and young people in particular are drawn to larger urban (metropolitan) regions, while smaller and medium sized (more peripheral) regions experience out-migration.

2.13 Challenges related to demographic trends and physical geography inhibiting growth prospects in remote / rural regions

2.14 Rural / peripheral regions often face specific challenges related to the demographic structure, service provision, labour and skills shortages, productivity, as well as physical geography, such as climatic conditions, accessibility and long distances to services and markets.

• Ireland: particular challenges face the more remote and rural regions, which have an older population, higher rates of part-time employment, higher dependence on SMEs, lower median incomes, higher dependency ratios and higher poverty rates than the national average.
• Denmark: productivity is beginning to lag behind in the small and relatively peripheral region of Northern Jutland.
• Norway: labour and skills shortages, age dependency ratios, quality of public services and challenges of business development in remote and rural areas have become pressing issues. While the proportion of elderly people in the population is expected to increase in all counties, the more remote areas are expected to be more affected.
• Sweden: economic development in rural/peripheral areas is challenging due to the lack of skilled labour, increasing old-age dependency rate, weakened tax base, and the increased need to provide essential services. This development pattern has made it more difficult to deliver equal public services across the country and further intensified the existing regional disparities, deepening the gap between metropolitan and rural regions.^[9] Overall, growth prospects in the rural heartland areas, sparsely-populated rural areas as well as in smaller cities and towns are estimated as being considerably lower.
• Iceland: while the population in the capital region has been growing in recent years, population development has been less positive or negative in many of the remote and rural areas, particularly in northwest and east of the country.^[10]
• Canada: ageing challenges are affecting most non-metropolitan regions. While major city-regions have low elderly dependency rates (27%), around one-quarter of small regions have an elderly dependency rate of 40% or higher.

2.15 Patterns of physical geography, including distance from services / main economic centres, remain an important factor behind regional disparities.

• Denmark: the main spatial differences within each of the regions mainly reflect distance from the main agglomerations / urban economic centres in the eastern parts of Zealand (metropolitan Copenhagen) and East Jutland.
• Ireland: the average distance to services in more remote and rural regions is longer than in urban areas, which raises challenges for delivery of services.
• Norway: accessibility and long distances are also among the key issues at the core of territorial disparities.

Spatially differentiated impacts of COVID-19 within countries

2.16 The crisis triggered by the pandemic has had a highly differentiated impact within countries and across different types of regions. Economically stronger and more globally integrated (e.g. into international value chains, global markets and mobility networks) regions, especially capital regions and large metropolitan areas, have been particularly strongly affected by the effects of the pandemic and containment measures, including in terms of GDP, employment and business liquidity indicators.

2.17 Across all countries, regions with higher specialisation in the tourism sector have been particularly affected e.g. western counties of Ireland (Galway, Mayo, and Roscommon). Containment measures were particularly challenging for border regions, especially those with a high number of businesses and trade linked to markets in a neighbouring country. In Sweden, areas located on the border with Norway (Västra Götaland) faced an increase in unemployment of ca 75% between November 2019 and November 2020 due to the interruption of cross-border trade and services.

2.18 The concentration of economic activity and population is often expected to continue to favour large urban areas in the recovery stage. Recovery rates are expected to be slower in lagging areas, with potentially increased long-term unemployment. There are particular challenges for more remote and rural regions, although the increase in distance working and some relocation of people from cities to rural and remote areas (in Finland, Norway and Sweden) could provide new development opportunities, especially for those areas that are experiencing depopulation.