Regional policy in a multiregional setting: when the poorest are hurt by subsidies

Despite the allocation of more than a third of the EU budget to the Structural and Cohesion Funds, which are intended to bring about convergence in economic opportunity across regions, evidence of these policies ’ effectiveness is at best mixed. Though convergence is occurring between countries, it is not occurring between regions. This paper demonstrates a possible explanation for the ineffectiveness of EU policies that results from the effect that these policies have on the long-term distribution of manufacturing activity. By seeking to encourage manufacturing throughout a large, underdeveloped area, the probability that manufacturing survives in small clusters that would otherwise act as natural ‘regional centres’ is reduced, which reduces the overall level of manufacturing in the subsidised area and adds to its deprivation. On this analysis, the Structural and Cohesion Funds should have a greater focus on encouraging clusters of manufacturing in poorer areas when this is feasible