Macro-regional evaluation of the Structural Funds using the HERMIN modelling framework

2. The Structure and Theoretical Foundations of HERMIN

The basic macro-sectoral methodology appears to be the most appropriate approach to
developing a framework for the evaluation of the structural funds at a regional or
macro-regional level. The HERMIN model drew its inspiration from the trans-EU
HERMES model and has reasonably firm macro-theoretical foundations and can be
operationalised even when data for calibration are limited to a few annual
observations.

To be of use for Structural Funds analysis, there were three requirements which the
empirical implementation of the HERMIN model needed to satisfy:

(i) The model must be disaggregated into a small number of crucial sectors which
permits the identification and treatment the key sectoral shifts in a developing
economy over the years of the Structural Funds programme.

(ii) The model must specify the mechanisms through which the Objective 1
national or regional economy is inter-connected to the external world. The
external economy is a very important direct and indirect factor influencing the
economic growth and convergence of the smaller Objective 1 countries,
through trade of goods and services, inflation transmission, international
population migration (mainly in the case of Ireland) and inward foreign direct
investment.

(iii) The modelling framework must recognise that a possible conflict may exist
between actual situation in the less developed Objective 1 countries, as
captured in the HERMIN model calibrated with historical data from the recent
past, and the new configuration/structure towards which these economies are
evolving in the world of EMU and the Single European Market.

Thus the HERMIN model framework focuses on key structural features of an
Objective 1 economy with respect to such issues as:

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