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SERC/Urban and Spatial Programme Discussion Paper
Impact of Structural Reforms on Regional Growth: Distance to the Frontier Matters
Sabine D'Costa, Enrique Garcilazo and Joaquim Oliveira Martins July 2016
Paper No' SERCDP0203:
Full Paper (pdf)

JEL Classification: R11; R58; O18

Tags: structural reforms; regional growth; lagging regions

This paper aims to understand the impact of nation-wide structural policies on the productivity growth of OECD regions. In particular we explore how this impact varies with the productivity gap of regions with their country’s frontier region. We use a policy-augmented growth model that allows us to estimate the effects of macroeconomic and structural policies on regional productivity growth. We estimate our model with an unbalanced panel dataset consisting of 265 regions from 24 OECD countries covering the period 1997 to 2007. We find that the effects on regional productivity growth are differentiated with respect to the regional productivity gap: Relaxing employment protection legislation on temporary contracts or lowering barriers to trade and investment would enhance productivity growth in lagging regions, whereas reducing the amount of state control has the opposite effect on lagging regions. Macroeconomic factors also influence regional performance: trade openness and the government debt to GDP ratio are more beneficial to lagging regions. These results reveal that average relationships between nation-wide policies and the productivity of regions can hide strong differentiated effects according to the distance to the country frontier. This carries important policy implications, mainly that these region-specific effects should be taken into account in the policy design.