A modern approach to rural policy in OECD countries

The OECD modern approach to rural policy recognises three key elements: i) the growth potential of rural areas; ii) which necessitates a place-based more nuanced approach to investments as well as economic development strategies, and a flexible multi-level governance approach. Each of these form the pillars of the OECD New Rural Paradigm; and iii) facilitating strong relations between the different types of urban and rural areas and building upon their complementarities. This so-called modern approach is a framework that can be adapted to the different characteristics of the three rural regions in Chile and secondly, it should be sufficiently flexible to adapt to the different specificities and needs of the country and regions.

The growth potential in rural areas

The rural economy has an important role in those OECD member countries with higher levels of GDP per capita. The changing role of rural policy as development evolves reflects the changing role of rural in the national economy. Member countries of the OECD have largely completed the transition from semi-subsistence to market economies in the vast majority of the regions in their countries and are now improving the integration of predominantly rural regions with a largely urban economy. Rural policy acts to facilitate this integration. Figure 2.3 shows a positive relationship between the shares of national population living in predominantly rural regions in OECD member countries with levels of development, indicating the increasing role of the rural economy in countries with higher levels of GDP per capita. Simply put, prosperous rural regions help raise average per capita GDP, while poor rural regions lower it.

Figure 2.3. Share of national rural population and GDP per capita in OECD countries

Source: OECD (2013), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en. (accessed on 15 December 2013).

OECD member countries with higher levels of development do not necessarily have higher population shares in functional urban areas (FUAs). The share of national population living in FUAs is not positively related to higher income levels in terms of GDP per capita. In fact a non-linear relationship emerges amongst OECD member countries. A first group of OECD countries with a GDP per capita below USD 25 000, display a negative relationship between their level of development and share of inhabitants living in FUAs. This relationship is reversed in a second group of countries, with a GDP per capita between USD 25 000 and USD 35 000. In these countries higher levels of development go hand in hand with a higher share of population living in FUAs. This relationship is again reversed in the third groups of countries with a GDP per capita above USD 35 000 countries with higher levels of income tend to have a lower share of their national population living in FUAs.

Figure 2.4. Share of national population in functional urban areas and GDP per capita in OECD countries

Source: OECD (2013), OECD Regional Statistics (database), http://dx.doi.org/10.1787/region-data-en, (accessed on 15 December 2013).

National economic growth objectives can be best achieved if all regions reach their potential. There are several reasons for the continuing interest in rural development policy by OECD member countries. The most important is the belief that national economic growth objectives can be best achieved if all regions of the country reach their potential. Lagging rural regions may be seen as justifying incentives to encourage outflows of labour and capital that can benefit faster growing urban regions, but it is not clear that this is always the best solution. In principle, if impediments to growth in rural regions were reduced and local labour and capital retained, then the contribution to national growth could, in principle, be higher than in the case of out-migration. This is the general economic argument for rural economic development policy.

The key elements for promoting growth in lagging regions are endogenous at the regional level, which can reduce dependence on transfers and subsidies. A recent study combining quantitative and qualitative analysis based on 23 case study regions in the OECD identifies 5 critical elements responsible for growth (Table 2.1). Furthermore, when these elements are inadequate or missing in the regions, they are important bottlenecks for development. In addition to the importance of human capital, innovation and infrastructure, the role of policies and institutional factors is critical.

Immobile factors of production and resources, only available in rural regions, can also provide an important rationale for rural policies. In addition, one can make more location-specific economic arguments for rural policy that reflect the importance of specific rural resources that are not available elsewhere. Minerals, forests, national parks and dam sites are only in certain regions. More effective development of these assets benefits both the host region and the country. In a parallel sense, too rapid an outflow of rural workers who have artisanal skills that are valuable in a rural setting, but which have little use in an urban area, leads to a loss of human capital and increased congestion costs and unemployment in urban areas. From this perspective, providing rural development support can be seen as part of improving urban conditions.

Table 2.1. Growth factors and bottlenecks ranked by occurrence in the case studies

Thematic areas

Growth factors ranked

Bottlenecks ranked

Sum

1

Policies

13

13

26

2

Human capital

12

11

23

3

Innovation

7

13

20

4

Infrastructure connectivity

11

8

19

5

Institutions

8

9

17

Source: OECD (2012), Promoting Growth in All Regions, OECD Publishing, Paris,

http://dx.doi.org/10.1787/9789264174634-en.

Box 2.4. Endogenous drivers of regional growth

OECD analysis examining the determinants of growth at the regional level identifies a number of critical drivers, including infrastructure, human capital, innovation and agglomeration (OECD, 2009b). Perhaps the most important findings are, first, that the key factors are largely endogenous, i.e. they are things policy can address (as opposed to natural endowments or physical geography); and, second that that these endogenous factors complement each other, suggesting the need for an integrated approach.

  • • Improvements in infrastructure at the regional level do not automatically lead to higher growth. Such investments need to be combined with improvements in education and innovation. This suggests that it could be useful to co-ordinate policies for building human capital, enhancing innovation and providing physical infrastructure. The effects of infrastructure investment appear to last around three to five years.
  • • Human capital - both the presence of high-skilled workers in the regional workforce and the absence of low-skilled workers - appears to be the most robust support of growth in all types of regions. The effects of improvements in human capital also appear to last around five years.
  • • The third critical element is innovation, insofar as it can be measured by focusing mainly on the science and technology components of innovation for which data are available. Innovation appears to produce positive effects over a longer time span, approximately ten years.
  • • Economies of agglomeration also have a positive impact on growth, although they are neither necessary nor sufficient to ensure sustained growth rates. Both the fact that only 45% of metro regions grew faster than the national average during 1995-2005 and the trend towards divergence among urban regions imply that agglomerations as complex systems work more efficiently in some cases and less efficiently in others.

What is clear in these studies is the importance of endogenous elements for growth at regional level, instead of depending on transfers and subsidies. A follow-up study (OECD, 2012a) combining quantitative analysis and qualitative case studies (23) reinforces the earlier results and, in addition, it finds evidence highlighting the importance that policy and institutional factors. The evidence gathered in this publication confirms the benefits of the new regional paradigm to OECD countries:

Box 2.4. Endogenous drivers of regional growth (cont.)

  • • Investing in less-developed regions makes good economic sense, given their growth potential. Policies targeted at less-developed regions should not merely be advocated on social grounds; these regions have a great deal to contribute to national growth as long as their own assets are nurtured.
  • • A pro-growth, rather than a subsidy-based, policy stance is the most beneficial and sustainable approach. In the long run, it also helps build a fairer society. It can avoid dependency, rent-seeking behaviour and high remedial costs in the future.

The combined analysis points to a number of policy leavers to enhance the effectiveness of regional policy:

  • • Policies that increase the skills of low-skilled workers may be as important for growth as policies aimed at expanding higher education. The “drag” effect on growth of a large low-skilled population appears as one of the most critical factors in less-developed regions.
  • • Infrastructure does not appear to be the binding constraint for the great majority of regions. Thus polices targeting infrastructure in isolation are not usually the most effective tools for strengthening growth in underdeveloped regions. Yet given that the gains from improvements in infrastructure are higher (at the margin) in less-developed regions they are important instruments if they co-ordinate with other policies and realise the benefits of complementarities.
  • • Innovation is not a bottleneck for growth but appears to be a critical pillar for advanced regions.
  • • How policy makers frame the challenges they face does matter. The case studies suggest that a self-conscious shift towards a growth-oriented policy framework is very often a part of the recipe for success. As long as policy makers focus on exogenous sources of support for a region (“levelling up” policies), growth is unlikely to take off and actors are likely to focus on the appropriation of rents from external sources.
  • • Institutional factors are also critical. Formal and informal institutions that facilitate negotiation and dialogue among key actors in order to mobilise and integrate them into the development process are vital, as are those that enhance policy continuity. At times, the challenge is to create institutions that strengthen the region’s “voice” in dealing with other regions and countries and those that foster linkages among the private, public and education sectors.

In sum, this study calls for including geography and place-based factors into the structural policy agenda to increase the growth potential of countries. In addition to efficiency, place-based policies also have the capacity to create a more inclusive and fairer society through their ability to mobilise local actors and ensure they are involved and engaged in the development process.

Source: OECD (2009), How Regions Grow: Trends and Analysis, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264039469-en; OECD (2012), Promoting Growth in All Regions, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264174634-en.

A successful rural policy that increases rural employment opportunities can be a valuable approach to reducing inequality. The high rates of income inequality in Chile have an urban and rural dimension. Although in absolute terms there are more low-income citizens in urban regions, the share of low-income individuals in rural regions tends to be higher. Migration of low-income households from rural to urban regions may lower the rural rate of poverty but it will increase the urban rate and may leave these people worse off since their skills are less likely to be relevant in an urban setting. Consequently, a successful rural policy that increases rural employment opportunities can be a valuable approach to reducing inequality.

Finally, there are important social cohesion benefits from improving public service delivery in rural regions. Countries either explicitly or implicitly establish minimum sets of public services that should be available to all citizens as part of their rights as citizens. While it is typically more expensive to deliver these services in rural regions because of the problems inherent in low density, long distances and lack of critical mass, there is still a responsibility to provide some minimal set of services, although perhaps in a different manner. This problem is particularly acute in the most remote and lowest populated regions where development is the least advanced.

 
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