EU STRUCTURAL POLICY INDICATORS FOR THE IDENTIFICATION OF PROBLEM REGIONS
REGI 104

2. THE ROLE OF INDICATORS


sty12x18 2.1. Introduction
sty12x18 2.2. Policy Context
sty12x18 2.3. Current Structural Fund and Proposed Revisions
sty12x18 2.4. The Use of Indicators
sty12x18 2.5. Some Alternative Economic Indicators
sty12x18 2.6. Conclusions

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2.1. Introduction

This chapter reviews the relevant context for establishing indicators for ERDF interventions. It looks first at the general policy context in terms of the overall themes of the EU which act as the parameters for Regional Policy. It then highlights the salient parts of the current Structural Fund regulations and the proposed revisions both in terms of the explicit criteria and the underlying objectives. The next section discusses in general terms the role that indicators have to play in guiding policy interventions. The final section of the chapter discusses some of the shortcomings of GDP, which is the principal economic indicator for Structural Fund eligibility, and some of the steps which have been taken to improve this measure.

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2.2. Policy Context

The objectives of regional policy intervention are constrained within the parameters of broader EU policy. Whilst in many case themes such as sustainable development, economic and social cohesion, additionality, partnership and decentralisation will be complementary with the objectives of regional development, there may be areas in which these pull in competing directions, creating tensions.

For the medium-long term the expansion of the EU eastward will have very significant implications for regional development in general and for the Structural Funds in particular. The candidate countries have GDP per capita figures well below the EU average and are likely to be significant recipients of Structural Fund aid.

For this reason the 2000-2006 Structural Fund allocation may be the last under which many past recipients of Structural Funds continue to qualify. To date, because the overall ranking of regions in terms of GDP tends to vary little, qualifying regions tend to maintain their position as major recipients from one allocation to the next. The level of GDP per capita is not a volatile indicator, bar exceptional circumstances, such as oil-based economies. Thus between 1988-94 only four NUTS II regions moved from below 75% of EU per capita GDP at PPS to above it. (1)

But the eastward expansion of the EU is only one of the factors which will affect the future development of the Structural Funds. The introduction of Monetary Union, for example, is likely to exacerbate existing differentials between rich and poor regions. So even without this impetus there would be a need for a review of the Structural Funds.

Need for Review of Structural Policies Post 1993

Since the 1993 reforms, the EC has recognised that there is a need to revise the regulations setting out the tasks and objectives of the Structural Funds. The proposed changes are intended to continue support to the regions and social groups in difficulty in the Member States and to integrate the applicant countries into the Union.

Disparity in per capita income between member states has been substantially reduced since 1988. However, although average net per capita income has increased in the less prosperous regions, within Member States disparities in income, unemployment and employment have increased. Furthermore, unemployment is highest amongst the relatively disadvantaged social groups ­ young people, women and those without qualifications. Consequently, the proportion of the European population living below the poverty line is increasing fastest within some of the more prosperous and urbanised Member States.

Other shifts in EU policy necessitating a review of the Structural Funds were confirmed by the Treaty of Amsterdam and include emphases on employment, sustainable development and equal opportunities.

For these reasons economic and social cohesion remains a high political priority. The First Report on Economic and Social Cohesion in November 1996 recognised the effect that this would have on regional issues and proposed changes that would make EU structural policy more effective.

The proposed reforms therefore focus on three main themes:

  • To maintain expenditure for the new seven year programming period (1999 to 2006) at the 1999 level.
  • To continue the resolution decided at the Edinburgh European Council to promote the development and conversion of the regions whilst ensuring that assistance from the Funds becomes more targeted.
  • To ensure greater cost-effectiveness by clarifying the roles of the various parties involved in regional development, through simplification, evaluation and monitoring.

The Political Approach to the Reform of the Structural Funds Post 1993

The goal of economic and social cohesion introduced by the Single European Act and confirmed by the Treaty on European Union and the Treaty of Amsterdam remains a political priority. The EC has recognised that solidarity makes an essential contribution to reducing development disparities between regions, and that the role of the Structural Funds should be to remove such inequalities by stimulating competitive, environmentally sustainable development, economic growth and job creation, economic and technological innovation and the provision of a skilled and flexible labour force.

Consequently, the Community priorities for structural policies are defined in the draft Explanatory Memorandum to the proposed reforms as:

  • Ensuring the conditions for sustainable economic development: growth, competitiveness and employment.
  • Increasing competitiveness and innovation and supporting SME development.
  • Employment: developing human resources.
  • The environment and sustainable development.
  • Equal opportunities.
  • Establishing community guidelines for each of the Objectives.

More concentrated financial assistance is to be achieved by:

  • Concentration on three priority Objectives (instead of seven) and three Community Initiatives (instead of thirteen).
  • Concentration on areas of priority assistance which encourage an integrated approach to development rather than a fragmentation of operations, aimed at both regional and national needs and the priorities of the Community.
  • Geographical concentration so that by 2006, after a series of transition periods, some 35% to 40% of the Community population will be covered compared to 51% at present.
  • Financial concentration which continues to give priority to the regions whose development is lagging behind, at a level equivalent to that currently prevailing.

Integrated strategic programming is to be achieved by reducing the number of Objectives and Community Initiatives, and integrating Community regional actions into a single regional programme at the NUTS II level.

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2.3. Current Structural Fund and Proposed Revisions

In this section we review both current and proposed Structural Fund indicators for defining eligibility. We consider these in turn as they relate to Objective 1, Objective 2, and the new urban criteria for Objective 2.

Objective 1

The current definition of Objective 1 remains unchanged from that adopted in the 1988 reforms as does the eligibility criteria. That is:

"The regions at NUTS level II whose per capita GDP, on the basis of figures for the last three years, is less than 75% of the Community average".

The criterion measures the productive abilities of a region in terms of its ability to generate wealth. The poorest regions qualify for assistance which aims to raise the productive capacity of their region. At present, the eligibility of regions is established for the full six years of the current programming period (1994-1999) with Community Support Frameworks (CSF's) being adopted for the same period. For measures carried out in areas eligible under Objective 1, the ceiling on the Community contribution is "a maximum of 75% of the total cost and, as a general rule, at least 50% of public expenditure".

Within the overall allocation there are no subsidiary indicators which are used to determine the proportions each region should receive, either in terms of its relative GDP, compared with other qualifying regions, or other policy priorities, for example equal opportunities as may be expressed by the proportion of women to men in the labour force.

Objective 2

Unlike Objective 1, the indicators for Objective 2 are employment and unemployment. Objective 2 is concerned with "converting the regions, frontier regions or parts of regions (including employment areas and urban communities) seriously affected by urban decline". Its structural element is expressed in terms of unemployment and sectoral employment.

Currently, areas must represent or belong to a NUTS level III areal unit which satisfies all of the following criteria:

a) The average rate of unemployment recorded over the last three years must have been above the Community average.
b) The percentage share of industrial employment in total employment must have equalled or exceeded the Community average in any reference year from 1975 onwards.

There must have been an observable fall in industrial employment compared with the reference year chosen in accordance with b).

Community assistance may also extend to areas adjacent to an Objective 1 region and urban communities which have high unemployment rates or have suffered severe jobs losses in key industrial sectors.

The current Objective 5b, on the other hand, aims to promote rural development by facilitating the development and structural adjustment of rural areas. Its main criteria are concerned with an economic structure dependent on agriculture or fisheries, particularly where this was low value or vulnerable to restructuring; and concerns with depopulation. Peripherality in relation to the EU's main growth poles and pressures on the environment and countryside are other potential qualifying criteria.

The draft General Regulation has revised the definition of Objectives 2 and 5b to a single Objective covering, 'Areas undergoing economic and social conversion',and includes industrial, rural, urban and fisheries dependent areas facing structural problems of socio-economic restructuring, including the restructuring of services.

The new Objective 2 focuses on the most seriously affected areas. The Member States are to propose to the Commission the areas that they consider to be the most seriously affected by social and economic conversion. The population covered by Objective 2 for the next programming period is not to exceed 18% of the EU figure, and the EC is to fix a ceiling for eligible population for each Member State.

Areas dependent on fisheries are required to be located in coastal areas in which the number of jobs in the fisheries industry as a percentage of total employment is significant and which are facing structural socio-economic problems relating to the restructuring of the fisheries sector.

Other areas or sections of the population that may be eligible include: areas adjacent to industrial, rural and Objective 1 regions; rural areas with socio-economic problems arising from the ageing of the agricultural working population; and areas facing or threatened by a high level of unemployment arising from an ongoing or planned restructuring of an activity of key importance for the agriculture, industrial or service sector.

The allocation of Structural Funds to eligible areas under the new Objective 2 will be based on the following distribution in terms of the total population of the EU:

Industrial and service sector areas. 10%
Rural areas. 5%
Urban areas. 2%
Areas dependent on fishing. 1%

We have noted that the qualifying criteria for Objective 2 are provided by indicators of employment and unemployment. Of these two indicators unemployment is a very strong indicator in that it enables good spatial targeting, and is a measure explicitly of the under-use of labour which has been identified as a particular problem Among its weaknesses is that it is sensitive to changes in the economic cycle and that there are some problems of comparability. Even with standard definitions of unemployment there are significant local differences in character dependent on labour market customs and practices.

The employment reference criteria are only measures of quantity and relate to crude sectoral aggregations. They take no account of the quality of employment. No distinction is made between part-time and full-time employment, between high wage and low wage employment, nor between temporary and permanent employment.

In May 1996 the EC issued guidelines setting out priorities for new programmes covering the second three year period for Objective 2 areas. These are:

  • Employment ­ Job creation as a key priority.
  • Small Firms ­ Promoting competitiveness and development through quality strategies, practical IT applications, and the adjustment of professional qualifications to management requirements, organisational processes and the need for technological innovation.
  • Research and Development ­ Optimising use of existing facilities and research results.
  • Environment ­ Resolving problems of industrial degradation with a view to increasing the areas attractiveness, and exploiting environment linked products, services and technologies as a future competitive asset.
  • Equal opportunities ­ An intensification of efforts to promote equality between men and women.

Whilst these are used as policy priorities for allocating funding in Programme areas, there are no defined monitoring indicators for these priorities. For instance, an indicator for equal opportunities might be the number of women per 100 men in the labour force; or for Research & Development the number of patents issued.

The Urban Agenda

With the proposed new Objective 2, Member States are permitted to make other proposals based on the remaining criteria in the draft General Regulation, including those for urban areas and areas dependent on fishing, at an appropriate geographical level and utilising national statistics and other information. These criteria allow a greater degree of flexibility and discretion in determining eligibility, particularly in urban areas. The urban areas are to be densely populated and should meet at least one of the following:

  • A rate of long term unemployment higher than the Community average.
  • A high level of poverty, including precarious housing conditions.
  • A particularly degraded environment.
  • A high crime rate.
  • A low level of education among the population.

Urban areas account for about 40% of the total ERDF Budget for Objectives 1 and 2 and suffer higher concentrations of social and economic disadvantage. Unemployment, crime, poor housing, pollution, congestion are all common facets of the urban experience. Yet whilst nearly 80% of the EU's population lives in urban areas, current indicators of growth do not reveal the complete extent of the economic, social and environmental problems an area may face. Regions can be a very broad brush policy area containing within them significant disparities of wealth. Whilst indicators become more fine grained at NUTS III sub-regions than NUTS I, there are still intra-regional disparities. For example, the European Commission report 'Regional Development Studies' noted that, "The use of indicators of regional problems does not adequately identify examples of severe urban problem within more prosperous regions". High levels of GDP produced by financial institutions in big cities such as Paris and London, mask the social and economic deprivation in the co-existing inner cities (2).

Problems Facing Island Regions

Island Regions are a geographical subset which face a particular form of economic disadvantage. Island regions are defined by Eurostat as any territory permanently surrounded by sea, without a fixed link to the mainland and which does not contain the capital of a member State. These regions face additional transport costs and poor infrastructure which makes them uncompetitive locations for business.

It is not only the business sector which faces disadvantages from poor infrastructure. Island regions frequently face additional costs in terms of water supplies, where the geological structure can cause problems for water collection and storage, and energy supplies, which need to be imported.

In terms of the social infrastructure Island regions often lack adequate health care facilities and higher education facilities are absent resulting in the loss of the young better educated workforce. The cumulative effect of this together with the lack of other job opportunities has frequently resulted in the population age structure of island regions having a high proportion of elderly people and a consequently high dependency ratio.

Whilst tourism is often one of the major economic sectors for such regions this sector does itself place additional demands on the fragile infrastructure of the islands. The costs of maintaining a large coastline, keeping the sea clean and fighting the problems of coastal erosion are substantial burdens island region must bear as part of their environmental responsibility.

But islands are frequently classified with larger mainland regions and hence do not qualify for Structural Fund assistance. As with poor urban areas assistance provided on the basis of regional economic criteria is not necessarily sufficient to pinpoint the areas of greatest economic disadvantage.

The attempts to simplify and concentrate the Structural Funds discussed above have much to commend them. But this short discussion of the problems facing Island regions acts as an example of particular problems which simple broad criteria may not identify. Even if further subsidiarity is introduced into the allocation process there is no guarantee that areas such as island region would benefit as they frequently lack any independent self-government and are economically and politically dependent on their wider region.

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2.4. The Use of Indicators

The study brief defined three distinct roles which it required Structural Fund indicators to fulfil. These were to be appropriate to:

  • define areas of ERDF intervention
  • define levels of aid eligibility for ERDF areas
  • monitor the effectiveness of interventions

"Indicators are signals. They are tools to simplify, measure and communicate success". (3) Indicators need to be both appropriate and measurable. To be appropriate they must accurately reflect the objectives of the programme. So whilst there are a number of standard indicators such as GDP and unemployment, the choice of which is most appropriate will depend on what form of problem the aim of the intervention seeks to address. For instance a form of intervention which aimed to transfer resources to the poorest or most deprived people within a region may require different indicators to a programme which sought to maximise the economic development potential of a region.

With the move towards greater subsidiarity in relation to projects and programmes the importance of having the right indicators to enable progress to be assessed grows. Unless these are simple and accessible, the task of monitoring becomes difficult to manage in practice. A recent review of Structural Fund Indicators quotes an EC official as commenting, "we do not know much about what they really do with the money, we are unlikely to know more in future given the principle of subsidiarity, we could not cope with more detailed project information, and we do not really want to know more" (4).

To be measurable and capable of carrying out the role required of them by the brief the selected indicators need to be:

  • available - the data must be readily available from existing sources.
  • acceptable ­ the indicators must be accepted by those who will use and apply them and ultimately be judged on them.
  • comparable ­ there must be standard methods for defining, collecting and reporting across the EU.

Availability of Indicators

A test for availability needs to distinguish different categories of non-availability. An indicator may not be available because the data for it is not maintained; information may be maintained but not collated at the appropriate level; or even it may be due to a lack of familiarity and knowledge of the data source. Each category requires a different response, from primary data collection to education, with a correspondingly different timescale for it to be introduced.

There are two further sub-sets of problems with availability: that they are not available at the appropriate territorial level and that they are not available with sufficient timeliness. There may be technical reasons why data is not available. GDP, for example, is a national accounting concept and works less well at lower levels of disaggregation. But equally it may just be because of existing custom and practice, data is collected at unit level but only published at national aggregates.

We have found from previous studies that there is often a gap between the suitability of the selected indicators and the availability of accurate information to monitor them, particularly at NUTS III level.

Acceptability

Acceptability can be the biggest barrier to the development of new indicators. Whilst there may be agreement on the imperfections of existing indicators, it is far harder to secure agreement over new ones. This is partly technical reason, there will always be a lively professional debate over such matters, but also for political reasons, indicators define winners and losers and people have a vested interest in arguing their corner.

With regard to introducing sustainable development indicators for the Structural Funds a report by the New Economics Foundation (NEF) commented that:

"The increasing recognition that sustainable development needs to be integrated into policies at the EC level bodes well for the development of appropriate indicators for the Structural Funds process. In practice, however, the process is complicated by:

  • the trend towards Sustainability in decision making.
  • the vested interests of major recipient nations in current allocation systems; and
  • lobbying by industries which currently stand to benefit from unsustainable use of resources." (5)

Comparability

Comparability implies like for like comparisons. This goes beyond standardisation of indicators and definition. It includes collection, collation and reporting methods. It is important to develop definitions and methods which are theoretically sound, practically feasible and above all consistent across measure and place.

Thus the use of purchasing power standard (PPS) in comparative GDP definitions is an attempt to account for the fact that the cost of living varies from country to country and a given level of income would buy a different bundle of goods. But even so it can be difficult to accurately standardise for cultural differences with statistics. For example, it is likely that in the less developed regions there is more uncounted income in subsistence agriculture and intra-family exchange. Or with labour market data economic activity rates vary enormously between, say, the UK and Spain for reasons which are not wholly economic.

Clarity

A further quality, particularly where an indicator is being used to define eligibility is that of clarity. An indicator which is simple and unambiguous. The current criteria for Objective 1 eligibility is a good example of clarity in an indicator. The allocation is to the poorest regions as measured by GDP per capita and the decision making process is both transparent and beyond question.

This is a strength, although the criticism of simple indicators is often that they fail to identify complex issues.

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2.5. Some Alternative Economic Indicators

The principal indicator for defining eligibility is GDP per capita. This is calculated at Purchasing Power Standard (PPS) to account for fluctuations in exchange rates and the different relative purchasing power in each member state. GDP provides a measure of goods and services produced for the market. It is not a measure of welfare and arguably was never intended to serve the role it has been accorded. GDP is probably best viewed as an intermediate indicator which enables the final goal of economic welfare to be delivered.

The inadequacies of GDP as a measure of economic welfare are increasingly being highlighted and attempts being made to construct alternative measures of welfare. Costs of modern urban economies, such as commuting, pollution and law enforcement are counted as components of GDP yet do not contribute to economic welfare. Externalities are not captured as it is private rather than social costs which are counted. Conversely non-monetised activity such as unwaged household work which contribute to welfare are excluded from GDP. Leisure itself is not counted but market expenditure on leisure is. The list of anomalies could go on.

In response a number of alternative indicators have been floated. Some adopt the approach of a composite index. One of the best established of these is the UN Human Development Index (HDI) which is an index of economic (GDP), health (life expectancy) and educational (attainment) indicators.

Others have attempted to make qualitative adjustments to GDP as for example with the Index of Sustainable Economic Welfare (ISEW) and General Progress Indicator (GPI), which attempt to make adjustments to GDP to treat items such as pollution as costs rather than benefits. (For example, the ISEW for the UK peaked around 1978 and has been declining ever since whilst GDP has continued on a steady upward trend). But such approaches have been criticised for making arbitrary adjustments.

A third approach has been to develop satellite accounts which attempt to adjust for resource depletion and pollution. For example, in April 1994 the US Department of Commerce Bureau of Economic Analysis announced its economic-environmental accounting framework, or "Green GDP". This include entries to record the degradation of natural assets in order to provide a clearer picture of the nation's wealth and a measure of sustainable income.

Another problem with GDP is that it only counts 'official' transactions. The 'off the books' economy is either unrepresented or under-represented. Whilst estimates of the extent of the grey and black economy are made through the different measuring mechanisms of GDP, this element of the economy varies considerably across the EU with its differing socio-economic customs and norms.

GDP has further limitations when applied at a sub-national and particularly sub-regional level. It is, after all, a concept designed to measure 'National Income' - an alternative name for GDP. It measures wealth produced on a workplace basis and thus is not a measure of resident income. This is significant in areas where there are large commuter flows. As Eurostat point out:

"It should be borne in mind that GDP is not synonymous with the disposable income ultimately available to private households resident in a country or region. GDP or per capita GDP cannot therefore be used to make statements such as 'The people in region A are more prosperous than the people in region B'".

But the likelihood of GDP being replaced in the short term is remote. As one earlier commentator reviewing this topic concluded:

"I suggest that attempts to correct or replace GNP by some 'green' income-based measure should continue, but I am afraid that

a) they will not be sufficient to influence policy, and
b) they will not be developed even to a second-best level of acceptability in the near future

Whilst this work goes on, I think it is extremely important that research is oriented towards developing a small and consistent set of Sustainability indicators to be produced in conjunction with GNP. Together with physical environmental indicators, these economic indicators could be regarded as arguments or variables in a social welfare function or policy objective function". (6)

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2.6. Conclusions

The Structural Fund criteria are defined by clear and simple indicators which identify areas of low GDP for Objective 1 and high and structural unemployment for Objective 2. Despite any perceived weaknesses with these indicators they are likely to form the core of decision making for the medium term future.

But the simplicity of the indicators which is a strength also has a corresponding weakness in that it does not necessarily target the areas of greatest need. In particular they do not recognise the very different social and economic conditions which are faced within regions. Two particular examples of this are the contrasting circumstances and disadvantages experienced in inner urban areas and Island regions.

There are tensions emerging as the principle of greater subsidiarity collides with the objective of concentrating financial assistance to meet EC goals. Whilst these can survive the present review of the Structural Funds, more fundamental reforms will be needed for subsequent rounds.

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NOTES


1. Statistics in Focus (Regions) - Eurostat 1997 PPS Purchasing Power Standard is a common unit representing an identical volume of goods and services in each country.

2. In the UK, for example, Greater London, a NUTS III region, has by far the highest per capita GDP of any UK region, yet it contains the three most deprived boroughs in the country (Hackney, Newham and Tower Hamlets)

3. Signals of Success: A Users Guide to Indicators, WWF/New Economics Foundation.

4. See footnote 3.

5. Indicators for Sustainable Development, New Economic Foundation, 1994.

6. Opschoor, H., 'GNP and sustainable income measures: some problems and a way out', Search of Indicators of Sustainable Development, Eds. Onno Luik, Harmen Verbruggen, 1991.


© European Parliament: September 1998