Place-based policy effectiveness is one of the most heatedly debated issues among regional economists. The most divisive question on this topic is whether such policies represent just a means to keep alive lagging areas or whether they are capable of putting deprived regions to a higher growth trajectory on a permanent basis. We answer to such a question by investigating what happens when strongly subsidized regions suddenly experience a substantial reduction in external funding. On this matter, the EU regional policy is the ideal policy to analyze, considering that in each programming period, some regions exit the Convergence status and start receiving considerably less funding. In this paper, we analyze an extremely rich database and adopt the mean balancing approach, an econometric technique appositely created for fully exploiting the information contained in time-series cross-sectional (TSCS) data, to estimate the ATT. Such an approach allows us also to investigate the heterogeneity of the impact concerning relevant covariates. Our preliminary findings signal a long-term positive effect of the EU funds on growth and employment.
Our contribution to the existing literature develops along several dimensions. First, by using a recently developed evaluation approach, i.e. the mean balancing approach (Hazlett and Xu, 2018), we simultaneously consider all the regions that have had a considerable reduction of contributions over time, taking into account the differences in the beginning and duration of this exit, therefore fully exploiting the data available. Second, differently from previous literature, in the construction of the counterfactual scenario, we control for past intensity of funds per capita for regions before the exit. This allows us to create a counterfactual scenario that resembles the regions before the loss of the Convergence status, even concerning aid intensity. Besides, the availability of such variable allows us to precisely compute the magnitude of the EU funds reduction. Third, we directly tackle the issue of impact heterogeneity across programming periods as well as across individual treated regions. Indeed, our approach considers different kinds of heterogeneity and their role in explaining regional growth.
Finally, we contribute to the literature on environmental standards in open economies since we wonder whether external support has an impact on the local emissions in these areas.
Our analysis has relevant policy implications. First, our paper tests the long-run effectiveness of the policy. In the face of the increasingly stringent financial statements in Europe, it appears necessary for policymakers to show the actual relevance of financial commitment and above all its transience over time. Second, the investigation of potential sources of impact heterogeneity allows formulating exit paths that are better suited to the actual conditions of the growing/exiting regions.