Sustainable
interregional transfers:
lessons from Belgium
Erik Buyst
VIVES and Center for Economic Studies
Structure
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What are interregional transfers?
Roots of the problem.
Policy responses.
Efficiency of interregional transfers.
State reforms.
Conclusion.
What are interregional transfers?
• Public financial flows.
• For every geographical entity we calculate the:
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revenues from taxes and social security contributions to
finance common public expenditures.
spending flows from the federal government and the
(federal) social security system to a certain geographical
entity.
difference = interregional transfer.
what geographical entity is a net contributor?
Roots of the problem
• Flanders becomes a net contributor from the mid 1960s
(Dottermans, 1997).
• In 1970s and early 1980s transfers from Flanders to
Wallonia increase rapidly (Van Rompuy & Bilsen, 1988).
o from late 1950s: coal mining crisis in Wallonia.
o Flanders benefits from breakthrough of oil: refineries,
chemicals, car assembly.
o oil crises of 1970s hit Walloon economy
disproportionally hard.
Roots of the problem
• Is it just an asymmetric shock/bad luck? (De Grauwe,
1980)
o unit labour costs in Wallonia are 10% higher than in
Flanders.
o Wallonia unattractive for (foreign) investments, no
modernization.
o existing firms focus on labour saving technologies.
o wage cost problem important cause of interregional
transfers.
o first blow to legitimacy of transfers in Flanders.
Roots of the problem
• Origins of unit labour cost problem (Buyst, 2011)?
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high salaries in coal mining demonstration effect.
when mines disappear downward rigidities prevent
wage adjustments.
• From late 1950s: loss of private sector employment in
Wallonia largely compensated by early retirement and
rise in public employment.
• No incentives to correct unit wage problem.
Policy responses
• Even sharp increase in unemployment after 1974 does
not generate wage moderation in Wallonia.
o national wage agreements.
o generous unemployment benefits, unlimited in time.
o Walloon public opinion:
• entrepreneurial failure - holding companies (Société Générale).
• demands economic autonomy - public initiative .
Policy responses
• Late 1970s and early 1980s Belgium as a whole faces
serious competitiveness problems.
o 1982: devaluation of BEF.
o national policy of imposed wage moderation.
o but regional gap in unit labour costs remains (Planning
bureau, 2008).
Wage share (% of value added),
1980-2010
78
76
74
72
70
Flanders
Wallonia
68
66
64
62
60
1980
1985
1990
1995
2000
2005
2010
Policy responses
• Economic recovery in late 1980s much weaker in Wallonia
than in Flanders.
o Walloon unemployment rate remains stubbornly high.
• In Flanders shortages in certain segments of labour
market.
o rapid rise in wages.
o regional wage gap decreases, but in wrong direction.
Unemployment rate, 1980-2011 (in %)
20
18
16
14
12
Flanders
Wallonia
10
8
6
4
2
1980
1985
1990
1995
2000
2005
2010
Efficiency of interregional transfers
• In Belgium long term interregional transfers do not
produce economic convergence.
• Recent economic theory skeptical about efficiency of
transfers (Dupont & Martin, 2006; Padovano, 2007)
o redistributive transfers – income taxes and social
security – slow down relocation of production factors.
• less pressure on wages.
• no incentives to commute.
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generate little or no regional convergence.
hurt economic growth of the country as a whole.
Efficiency of interregional transfers
• Alternative:
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investment in transport infrastructure: outcome
uncertain.
investment in human capital.
• Empirical test: 140 geographical units in 9 Eurozone
countries (Persyn & Algoed, 2009, 2011)
o confirm theoretical predictions.
o simulate effects of reduction of transfers to Hainault by
one third (Persyn, 2010).
• first disposable income falls, but afterwards better off.
Efficiency of interregional transfers
• Other case study: former East Germany (Marcolin, 2012)
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in 1990s same mistakes as Belgium.
Hartz reforms of 2003-2005.
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reduction of redistributive transfers.
more labour market flexibility.
larger regional wage differences.
revival of economic growth.
• French-speaking economists in Belgium.
Efficiency of interregional transfers
• Today Flanders faces its own challenges:
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ageing hits Flanders relatively more.
deindustrialization.
labour productivity advantage is eroding.
high energy costs.
share of exports to emerging economies still too low.
• Flanders cannot afford to finance the transfers much
longer.
o phasing-out program is necessary.
State reforms
• From 1970 series of state reforms.
• Did not affect interregional transfers.
o
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social security system remained federal.
solidarity mechanisms between regions.
• Transfer issue is only top of iceberg.
• Structure of the Belgian federal model as such faces
severe sustainability problem.
State reforms
• Several construction flaws.
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vertical gap: mismatch between competences to
spend – regions and communities – and competences
to tax – federal government (Escolano et al., 2012).
• provides incentives to regions to spend as much as they can.
• moral hazard: bail out, cf. Spain.
• spill-over effects: hike in interest rates.
o
Belgium:
• no hierarchy between the two levels.
• retirement benefits of regional civil servants are paid for by
federal government.
State reforms
• Austerity programs and ageing problem will put additional
strain:
o federal level has to pay retirement benefits.
o federal grants to regions are fixed by law.
o regions & communities responsible for infrastructure
and education.
o requires intense cooperation between various
governments in a context of regional parties and
asymmetric coalitions.
State reforms
• Serious risk that at some point in time it will prove
impossible to reach an agreement.
• For those who believe that the 2011 agreement was the
last state reform:
• “You ain’t seen nothing yet”.