Keystone sector methodology applied to Portugal
In the last two decades, European Structural Funds allocated within a market-
oriented policy, were supposed to provide investment in infrastructure to increase factor
mobility and EU intra-trade. In its origin, European Regional Policy had three main
components: FEDER - for regional infrastructures, FEOGA - for organization and
agricultural survival and FSE -for social equity. This design appeared to be complete
while it took in account the needed physical investment in transport infrastructures. It
anticipated possible disruption in agricultural landscape and farm work conditions, and
investing in human capital hopefully enabled people to get new labor skills guarantying
higher labor mobility and labor market clearance.
Unfortunately the outcome of these combined policies was not satisfactory. It
happens that, overall, reductions in transport costs worked against the economic
development of low-density places (or rural areas). They favored urban polarization
with increased congestion costs; secondly, incentives to avoid agricultural disruption
did not provide sufficient and diversified amenities in rural areas and finally, firms and
people did not spread out enough to equilibrate labor markets, increasing
unemployment rates above unexpected levels (two digits). Up to now European
Regional Policy has been a failure.
Theoretical approaches exclusively based upon neoclassical utility
maximization framework are important and able to partially explain this outcome; but if
decisions about location were freely chosen and optimal, concentration in cities is
predicted and regional policies will be useless. However, funds have been allocated
based upon population/income criteria, without considering any of the important policy
agency problems. Competition for European funds is thus completely biased and
success is dependant on everything but the real needs of people. Scale,
complementarities and spillover effects are barely considered for projects and
application for funds, which turn out in inefficiencies.
Because sub optimality exists1, new approaches, which consider social
interaction among players in a competitive arena, help to provide additional
understanding of equity goals and policy design.
Small towns located in rural areas built specific social network patterns along
time, which can be crucial to explain people attraction/repulsion. Therefore,
1 For further discussion see Kilkenny (1998).