Trade Effects of Regional Aid

This paper examines the impact of the EC regional aid policies to finance infrastructure investment in the poorest regions where large disparities in public infrastructure (transport, telecommunications, energy and education) exist. We show that in a model in which trade is based on increasing returns, increasing returns industries tend to locate in countries with better infrastructure. By decreasing the disparities in the levels of public infrastructure, the regional aid policies lead firms to relocate from rich to poor countries. In the context of this model, the regional aid policies can be interpreted as the price paid by the richest countries for the benefits of full trade integration. In the empirical section, we find that telecommunications and education infrastructures are well correlated with industry location and per capita GDP. However, transport infrastructure, on which EC regional aid programmes concentrate, is poorly correlated with either industry location or per-capita GDP