Presentation on rethinking regional development policymaking made at the Regional Studies Association Conference held in Seville, Spain on 27 September 2018. Presentation by Dorothée Allain-Dupré, Head of Decentralisation, Public Investment and Subnational Finance Unit, OECD More information: http://www.oecd.org/regional/

1. Rethinking Regional
Development Policy-making
Regional Studies Association Conference
Seville, 27 September 2018
Dorothee Allain-Dupré
Head of Unit
Decentralisation, Public Investment and Subnational Finance
ESG/CFE, OECD
Dorothee.allain-dupre@oecd.org

2. 2
 Guidance on how to improve the design and
implementation of development programmes
for regions and cities
 Series of seminars on 5 critical challenges in
regional policy
 Financial instruments
 Stability vs. flexibility (contracts)
 Conditionalities
 Performance frameworks
 Behavioural insights
 Frontier economic theory + country
experiences (practitioners)
 Multi-disciplinary approach
 Behavioural insights: to address bias in
regional policy
EC-OECD project: Rethinking Regional Development
Policy-making
⇒ Lessons for policy-makers: Building on frontier economic theory
and, it identifies how supra-national, national and subnational governments can
provide better incentives to achieve effective results

3. Common challenges for
regional policy in OECD
countries

4. Regional disparities remain large but their
composition is changing
22.5
23
23.5
24
24.5
25
25.5
26
26.5
27
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Capitals' average GPD share Capitals' median GPD share
%
Across OECD regions, disparities in
GDP per capita are larger within
countries than across countries.
Following the crisis, disparities across
countries are rising again.
However, there is an increasing
concentration of economic activity
within OECD countries. Capital regions
contribute more than 25% to the country
GDP and their share is rising.
0.25
0.26
0.27
0.28
0.29
0.3
0.31
0.32
0.33
0.34
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Coefficient of
variation for GDP
per capita
Average within country Across countries
OECD (forthcoming): Regions and cities at a Glance

5. Decreasing trends of public investment
in the OECD
Change in public investment in the OECD from 2008 to 2016
90
95
100
105
110
115
120
2008 2009 2010 2011 2012 2013 2014 2015 2016
General Government Central Government and Social Security
Subnational Government GDP (real)
+1.2 % in 2016
-0.5 %/year 2008-2016
-0.5 % in 2016
-0.9 %/year 2008-2016
-1.8 % in 2016
-1.1 %/year 2008-2016

6. In nearly half of OECD countries, the share of public
investment to GDP has fallen relative to pre-crisis
levels
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Percentage points difference in public investment
between 2015 and the average over 2000-07
Note: For Korea, the last available year is 2014.
Source: OECD (2017), Economic Policy Reforms 2017: Going for Growth, OECD Publishing, Paris,
http://dx.doi.org/10.1787/growth-2017-en.

7. Subnational governments are key economic and
social actors across the OECD
Subnational government as share of general government in the OECD
Greece Ireland
Chile
Estonia Chile
Canada
Canada
Belgium
Canada Canada
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Expenditure Staff expenditure Investment Tax revenue Debt*
OECD Minimum Maximum
% of general government - 2016
*: Debt OECD definition including, in addition to "financial debt", insurance reserves and other accounts payable. No data for Mexico. n Chile, local
borrowing is prohibited.
OECD: data as of 2015. Source: OECD (2018), Subnational government in OECD countries: key data, http://dx.doi.org/10.1787/regiona-data-en
Brazil: data as of 2013 – Source: OECD/UCLG (2016), Subnational governments around the world: structure and finance.

8. 8
 Under-estimate the complexity of the multi-organisational and multi-
stakeholder nature of regional development policies
o Regional policy: multiple levels of government, sectors
o Timing issues [capital investment, political cycle, budget cycle]
 Lack of capacity
o Key bottleneck - often concentrated in the planning/design phase: how to design a balanced
investment mix that addresses local needs?
o …but also financial capacity in a context of tight fiscal constraints
 Coordination failures
o Across sectors (sectoral priorities dominate over integrated approaches)
o Across national & subnational governments (information asymmetries,, lack of data on local
needs) [vertical coordination]
o Across jurisdictions [horizontal coordination, risks of fragmentation]
 Poorly designed framework conditions at the national level
o Administrative burden and heavy procurement rules
o Fiscal relations across levels of government (lack of subnational fiscal autonomy
o Unclear assignment of responsibilities (infrastructure, economic development, spatial planning,
education, health, etc.)
 Bias in incentives, unintended consequences
Typical multi-level governance challenges
affecting effective regional development

9. Lessons for policy-
makers

10. Cross cutting lessons for practitioners
1. What works there might not work here
2. Capacities first
3. Keep it simple
4. It is the quality of the relationship that
counts
5. Ownership matters
6. Be aware of biases (e.g. risk aversion)
7. Get the incentives right
8. Keep trying and testing
9. Begin with the goal in mind

11. 1# Capacities first
 The lack of adequate capacities – to design and implement policies, to
mobilise financial instruments – at all levels of government: reported as a
major bottleneck for effective regional policy
 Differences in capacity level risks benefitting more the most developed
places – leading to a vicious circle for lagging regions.
Variation of the quality of governance (QoG) across EU regions
In 2017, a slight move toward convergence can be observed compared to 2013, but
the quality of government (QoG) index still significantly varies across regions within
countries
o Countries with lower QoG tend to have wider divergence of QoG at the sub-
national level. In particular, regions in Western Europe are quite heterogeneous
in terms of quality of government.
o Some countries have persistent and large gaps in QoG: Italy, Belgium and France,
and some countries have demonstrated a growing divergence in QoG: Spain and
Czech Republic.
Source: Charron, N. and Lapuente, V. (2018), Quality of Government in EU Regions: Spatial and Tem-poral Patterns, Working Paper Series 2018:2, University
of Gothenburg, https://qog.pol.gu.se/digitalAssets/1679/1679869_2018_1_charron_lapuente.pdf

12. 1# Capacities first: pitfalls to avoid
PITFALLS TO AVOID POTENTIAL SOLUTIONS
● Assume that bad performance is
due to a motivational problem; it
is often related to a capacity gap
● Ignore that capacities is more than
skills and abilities. Capacities are
also financial and institutional.
● Give sole responsibility for the
design and implementation of
regional development policies to
SNGs with an important capacity
gap.
● Ignore that capacity-building is a
learning-by-doing and a long-
term process
● Spend more time in building
capacities and accompany
regional development policies
with technical assistance
● Repeat interactions with
subnational governments (with the
same rules) to build capacities in
practice (learning-by-doing)
● Use a differentiated approach to
build capacities in order to
respond to different needs and
different types of regions

13. 1# Capacities first: the need for simplicity,
stability, flexibility
 Strengthening capacities is a long-term agenda
 Capacity building should not be restricted to training or technical
assistance: also institutional and financial capacities
 A key corollary is also that governments should limit excessively complex
administrative procedures and constant changes in the rules. Keep the
system simple (e.g. number of conditionalities, performance indicators)
 Stability in the rules can be a source of simplicity, in particular when rules for
programming and managing policies are complex.
 Simplicity comes with the need for greater flexibility that allows adapting
programmes to local circumstances and development needs.
 What works there might not work here. Indeed, SNGs differ greatly on
degree of autonomy, types of responsibilities, aggregate productive capacity,
institutional capacities, etc.
⇒ Instruments used to promote regional development in regions and cities
should reflect territorial specificities and be adapted to different contexts, such
as the degree of subnational autonomy, market conditions, or institutional
capacities.

14. 2# Coordination needed: it is the quality of the
relationship that matters
1
7
12
12
14
11
16
1
9
18
12
14
14
16
0 5 10 15 20 25 30 35
Other
Regional development agencies design and implement programmes
under the national framework/objectives
Regional development strategies/programmes aligned with the national
framework/objectives
Formalised agreements among levels of government (e.g. contracts,
partnerships, etc.)
Regular inter-governmental dialogue
Formal consultation of subnational governments when developing
national investment strategies
Co-financing arrangements among levels of government (e.g., matching
grants)
Vertical co-operation mechanisms
Yes, before 2014 Yes, after 2014 Don't know
Coordination mechanisms are needed: a majority of
OECD countries conducting regular dialogues across
national and subnational governments
Costs vs. benefits of cooperation

15. 2# It is the quality of the relationship that matters
PITFALLS TO AVOID POTENTIAL SOLUTIONS
● Undervalue dialogue and co-
operation tools
● Focus on formal arrangements
without taking care of their real
effectiveness and motivation of actors
● Ignore that developing strong,
trusting, and cooperative
relationships is a virtuous circle
that starts with practice
● Underestimate the role of informal
dialogues and social networks that
favour cooperative relations
● Some mutually dependent conditions
that can facilitate an effective
dialogue: simplicity of information
and feedback, transparency, of
rules; transversal engagement,
credibility, ownership
● Use formal instruments (like
contracts) to build trust between
parties
● Avoid unilateral decisions without
consultation
● Find the right balance between
top-down and bottom-up
approaches

16. Traditional thinking
• Improving performance results by improving the quality and accessibility
of performance data or attaching financial incentives to performance.
Focus on compliance that can lead to heavy bureaucracy and perverse
incentive structures or unintended consequences
Frontier thinking
• Integrating behavioural insights to improve grant performance:
– Deeper understanding on what motivates individuals and organisations
– Examination of how people use performance information and process different types of
data
3# Design of performance incentives – frontier
thinking

17. 17
 A mix of hard and soft incentives most likely to be effective.
 Rewards, and not only sanctions, are needed.
 To encourage engagement and better performance, goals need to
be challenging, specific and accepted by practitioners.
 The relationship between inputs, outputs, and outcomes needs to
be clear, known, and measurable.
 A limited number of indicators must capture performance that is
under the control of the actor in the timeframe being measured.
 While incentives need to be linked to rewards, and not only
sanctions, governments should be aware that rewards may
transform into a negative reinforcement, thereby “crowding out”
intrinsic motivation.
 Autonomous motivation can be bolstered, for example, by
encouraging trusting relations and partnerships among people.
3# Effective performance systems

18. 18
 Credibility of the grantor is key
 Minimum incentives effects: size of performance grant matters.
 Aligned with the national and local budgeting cycles
 Performance grants are primarily efficiency/effectiveness – not
equity – instruments
 Grant objectives should be clearly and precisely specified in order to
guide grant design
 The grant programme should be flexible enough to accommodate
unforeseen changes in the fiscal situation of the recipients.
 The grant mechanism should ensure predictability of subnational
governments’ shares
 Performance incentives should be consistent with the rest of the
intergovernmental fiscal transfer system
3# Lessons for better grants performance

19.  Financial instruments are a politically appealing alternative to
grants as a tool to support socially desirable investment by private
and public actors that will promote the economic development of
regions and cities
 Different reasons explain the interest of using them more:
o The credit crunch
o Increase in regional economic divergence
o Technological changes
o Constrained public budgets, resulting in less public investment
o Interest in more pro-active and efficient approaches to economic development:
potential greater impact of financial instruments than grants because funds are
being repaid and may be recycled for future projects which is not the case of
grants
 However, financial instruments are not as widely used as could
be expected both a national and European levels (EU cohesion
policy) 19
4# Financial instruments are increasingly used in
regional and local economic development

20. 20
4# Advantages and drawbacks/limits of financial
instruments compared to grants
• They can ensure higher
probabilities of success for
projects they fund
• They do not create grant
dependency
• They simplify administration
• They can help to create
institutional conditions that
foster the emergence of a
private market for financing
+
• The scope of fundable
projects is limited as
projects funded by financial
instruments need to
generate positive future
revenue streams:
Many projects that create pure public
goods, some social services and
projects aimed at environmental
protection cannot generate revenues
• Government failures can
lead to inefficient
implementation and
distorsions:
Information asymmetries and risks of
political capture and misalignment of
objectives
-
Source: Based on OECD (2018) Rethinking Regional Development Policy Making

21.  Prepare an accurate assessment of the market situation
 Design properly the incentives
 Ensure stability and predictability
 Ensure a suitable regulatory framework which avoid complexity and
administrative burden
 Define the optimal size of funds that administer financial instruments
according to the needs
 Increase risk tolerance of public authorities by focusing on average
repayment rates
 Address demand side issues
21
4# Practical considerations for implementing
financial instruments
Source: Based on OECD (2018) Rethinking Regional Development Policy Making

22. More information: http://www.oecd.org/cfe/regional-policy
Decentralisation, public investment and subnational finance Unit
OECD Council
Recommendation on
effective public investment
across levels of government
Subnational
governments in OECD
countries: key data
(annual edition)
Rethinking Regional
Development Policy Making
Multi-level
governance
studies

23. THANK YOU!
Dorothee.allain-dupre@oecd.org