Indecent proposals: Estimating the impact of regional state aid through EU guideline compliance

Abstract

This paper estimates the causal effects of Flanders' main industrial policy programme, aiming to support economic development in lagging municipalities. The identification strategy exploits a State Aid reform which required Member States to propose a designation methodology and a selection of eligible municipalities in accordance with the new guidelines. While the proposed designation indicators allow us to account for selection on observables, further compliance with State Aid guidelines make causal inference possible. Additionally, we exploit exogenous intervention in the selection of municipalities, as the first regional aid map was not accepted by the European Commission. We find strong evidence for a 10% effect on manufacturing employment, largely explained by jobs safeguarded in declining industries.

Some Causal Effects of an Industrial Policy

“…The level of capital stays the same, but there is a direct transfer of funds from the taxpayer to shareholders. The firm will not voluntarily make investments that earn a rate of return below the outside market cost of capital 9 and can effectively lend out any excess subsidies at this market rate. It is likely that the government's monitoring problem is particularly severe for large firms which will typically be conducting many different types of investments, and an outside agency will have difficulty in assessing whether any grant is truly additional or not.…”

State Aid Impact on Central and Eastern Europe Economies

“…they provide the results that state aid does not affect the economic growth and investment in the EU member states or state aid does not lead to slower economic growth. Stollinger & Holzner (2016), Ramboer & Reynaerts (2020), Bronzini & Piselli (2016) and Criscuolo et al (2012) identified the positive impact of state aid on the macroeconomic indicators in the EU countries and treated state aid as an appropriate tool to promote economic development. State aid to industry has a direct impact on the value added in industrial export, which, in its turn, promotes the development of the industrial sector and national economic growth (Stollinger & Holzner, 2016).…”

The response of regional well-being to place-based policy interventions

“…In recent years there has been a growing interest in the role and effectiveness of place-based economic development policies ( Gobillon et al, 2012 ; Klein and Moretti 2014 ; Ahlfeldt et al, 2018 ; Criscuolo et al, 2019 ; Falck et al, 2019 ; Ramboer and Reynaerts 2020 ). Many papers focus on specific policies with specific objectives and in particular countries, thereby making generalisations to other contexts sometimes rather difficult.…”