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© 2017 International Bank for Reconstruction and Development / The World Bank1818 H Street NW, Washington DC 20433Telephone: 202-473-1000; Internet: www.worldbank.org

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Acknowledgments /6

Executive Summary /7

Introduction: why focus on lagging regions /9

State of Polish Lagging Regions: Podkarpackieand Œwiêtokrzyskie /13

Competitiveness of Podkarpackieand Œwiêtokrzyskie economies /17

How competitive are the lagging regions? /17

How history shaped economies of lagging regions /22

What determines competitiveness of the regions today? /24

What does global experience tell us about laggingregions? /33

Conceptualizing a policy approach to laggingregions /36

EU investment in Podkarpackie and Œwiêtokrzyskie /38

Absorption of EU funds /38

Results of cohesion policy in Podkarpackie and Œwiêtokrzyskie /39

Conclusion and consideration for EU approachto lagging regions /41

Annex 1. Competitive Cities in Lagging Regions /43

Gaziantep, Turkey /43

Changsha, China /44

Annex 2. Largest EU-supported projectsin Podkarpackie and Œwiêtokrzyskie /46

CONTENTS

6 | POLAND CATCHING-UP REGIONS – KEY REGIONAL DEVELOPMENT DYNAMICS

Acknowledgments

The report was prepared by Dmitry Sivaev, based on the background papersprepared by research teams that consist of: Tomasz Komornicki, Konrad Czapiewski,Grzegorz Gorzelak, Maciej Smêtkowski i Adam P³oszaj, and coordinated by Paul Krissand Marcel Ionescu-Heroiu.

The team would like to thank Commissioner Corina Cret‚u for initiating the Initiative,Minister Jerzy Kwieciñski from Poland’s Ministry of Economic Development forhis invaluable support, and the European Commission’s team for outstandingengagement and support, especially Mr. Patrick Amblard, Mr. Wolfgang Munch,Ms. Justyna Podralska, Ms. Magdalena Horodyñska, and Ms. Karolina Tilman fromthe DG REGIO.

The team would also like to thank Arup Banerji, Marina Wes, David Sislen, CarlosPinerua and Isfandyar Zaman Khan for the advice and guidance provided throughoutthe elaboration of this report.

The report was completed in March 2017.

Executive Summary

The EU has rightfully been dubbedthe convergence machine.1 From Spainto Greece, and from Slovakia to Poland,it has helped 12 countries overcomethe middle-income trap to transition tohigh-income – a feat without precedentin human history. Virtually every NewMember Country has managed to con-verge to the EU mean after joining.

Nonetheless, progress has not beenuniform and not all countries andregions have experienced these ad-vancements. Moreover, within coun-tries, disparities between leading andlagging regions have grown wider;it’s a dynamic that is normal accordingto empirical evidence,2 but a realitythat is nonetheless troublesome to poli-cy makers. In all of the New MemberCountries, national capitals and seve-ral major cities have the highest con-centration of economic activity andwealth, while some of the peripheralregions are falling further behind na-tional leaders.

The EU is determined to improve itsapproach to addressing the challen-ges faced by less developed and lag-ging regions. Less developed regions(defined as regions achieving less than75% of EU average GDP per capita (PPS))have been the major beneficiaries ofEU cohesion policies in recent decades.For the 2007–2013 Programming Pe-riod, lagging regions accounted for82% of funding allocated through EUstructural funds. The DG Region launch-ed the Lagging Regions Initiative to of-fer targeted assistance to regions thatfall in two categories: 1) have a GDPper capita (PPS) that is less than 50%of the EU average (low-income re-gions); 2) have not converged to the EUmean in the past decade (low-growthregions).

This pilot initiative focuses on Pod-karpackie and Œwiêtokrzyskie, whichare representative of less developedregions that, despite achieving stea-dy and high economic growth, havenot been able to close in on thecountry’s leading regions. Both re-gions, located in southeastern Poland,represent “lagging regions”, accordingto the DG Region’s definition. They haveachieved GDP growth of over 6% p.a.in 2003–2014, yet failed to keep pacewith the national economy. Today, com-pared with national averages, their GDPper capita in both regions is below 75%,incomes are lower, and higher sharesof the population is living in poverty(over 10% in extreme poverty).

Global evidence indicates that Pod-karpackie and Œwiêtokrzyskie are ty-pical cases rather than outliers. Deve-lopment does not happen equally acrossareas, and economic activity tends toconcentrate in the most productive pla-ces. The experiences of countries thatwent through phases of rapid growth(like Poland in recent decades) showsthat spatial disparity of developmentand emergence of lagging regions area common side effect. Arguably, grow-ing disparities between leading andlagging regions can be interpreted asa natural result of rapid development.Those lagging regions, just like Podkar-packie and Œwiêtokrzyskie, are typicallylocated in peripheral areas, have pooreraccess to markets and infrastructure,and weaker institutions.

The relatively weak economic per-formance of Podkarpackie and Œwiê-tokrzyskie can largely be explainedby the lack of a critical mass ofcompetitive firms. Both economiesare described by low-export intensity,shortage of foreign direct investments,

POLAND CATCHING-UP REGIONS – KEY REGIONAL DEVELOPMENT DYNAMICS | 7

1 World Bank. 2012. Golden Growth: Restoring the luster of the European economic model.2 See for example: World Bank. 2009. World Development Report: Reshaping Economic Geography.

reliance on public sector employment,weak entrepreneurship, and low laborproductivity relative to the nationalaverage across all industrial sectors.The economy of Podkarpackie is perfor-ming somewhat stronger than Œwiêto-krzyskie, largely due to the presence ofa vibrant manufacturing cluster in thenorthwest part of the region.

Cities are the economic epicentersand the growth engines of Podkar-packie and Œwiêtokrzyskie. Despitedifferences in economic geography,stark developmental divides betweenmajor urbanized areas and rural periphe-ries characterize both regions. Cities andtheir suburbs attract young workers andinvestors, and create most of the jobs.On the other hand, agriculture in ruralareas of both regions contributes rela-tively little to the economy but is im-portant for the livelihoods of residents,who often have limited access to othereconomic opportunities.

Both regions can sustain and stren-gthen economic growth by focusingon improving enabling conditions.In part, the lack of competitivenessin both regions can be explained by pe-ripheral locations and historical legacies.However, some existing institutionalinefficiencies create additional barriersto local economic growth. While therecould be multiple policy approachesthat can be taken to strengthen regionaleconomies, the pilot focused on identi-fying gaps that can be addressed quicklyand can lead to improvements in pri-vate sector competitiveness – the “lowhanging fruit”. Such measures may in-clude improving the business climatethrough streamlining business and pro-perty registration procedures, providingbusiness services that address the de-mands of firms, and bridging skill gapsby establishing closer links betweeneducational institutions and firms.

Both regions were major recipientsof EU funding and their experiencescan inform adjustments to the EUCohesion Policy. Between 2007–2015,Podkarpackie received more EU supportper capita than any other region in Po-land, while Œwiêtokrzyskie was ranked

sixth. Main areas of investment in bothregions included transport, innovation,and entrepreneurship. It is hard to accu-rately evaluate the effect of these in-vestments, however some lessons les-sons on how to support lagging regionscan be drawn and applied to CohesionPolicy.

In Poland, the focus of public invest-ments priorities should shift focusfrom hard, national infrastructure tosoft interventions and basic serviceslike education, innovation, and lo-cal transport. Examples in Podkarpac-kie and Œwiêtokrzyskie show that withthe help of EU funding the regions basicservices have improved (e.g. water sup-ply and sewerage). Similarly, major inter--regional transport projects have in-creased the accessibility of the regions.Now that both regional capitals areno more than four hours away from allmajor urban centers in Poland and wa-ter and sanitation services are availableeven in most remote areas, further in-vestments in these sectors are likelyto lead to diminishing economic gains,and should be subject to thoroughprioritization based on their cost effec-tiveness. The urban areas Podkarpackieand Œwiêtokrzyskie have achieved a le-vel of development where further pro-ductivity growth would require not justa transfer of technologies from abroad(e.g. through foreign direct investments),but also an increased ability to innovate.This requires a focus on education, hu-man capital, and other conditions thatcreate an innovative environment. Con-necting rural areas to cities is importantto provide additional opportunities tothe poorest residents of the regions.These principles have been includedin the EU Multiannual Financial Frame-work for 2014–2020.

The place-based private sector de-velopment policies should be takenwith caution and start with engaginglocal leaders to build their capacity.Global evidence of targeted place-basedsupport programs is not conclusive.Overall, such efforts rarely pay off, butthere are examples of cities and regionsthat manage to turn themselves around.Such success stories are usually charac-


terized by the presence of strong multi--actor coalitions and capable govern-ments that drive the policy effort. Thissuggests that EU support for places--based policies should start from localcapacity and coalition building, and in-volve multiple local actors, which hasbeen the case in the ongoing pilotin Podkarpackie and Œwiêtokrzyskie.

Finally, it is important to accept thatachieving full convergence and uni-formity of development in Poland,or elsewhere, is highly unlikely, and

it should be reflected in EU policytargets and priorities. Since withincountry convergence of regional eco-nomic outputs is unheard of in globalpractice, the success of lagging regions’investments should not be judged bytheir ability to spark economic growththat outpaces the rest of the country.Rather, focus should be shifted to ma-king the most of local circumstancesand providing more opportunities to re-sidents of lagging areas, including focu-sing on improved quality of life, not onlyon economic outcomes.


Introduction: why focus onlagging regionsSpatial disparities in developmentare a major challenge for the EU, andthe expansion countries specifical-ly. While it is mostly inevitable thatdevelopment is a process that is notevenly distributed in space, it is stillimportant to understand how policymakers can and should respond to thistrend. This report offers an overview ofevidence and policy thinking that hasbeen developed in the course of thedesign and implementation of the EULagging Regions Initiative pilot in Po-land. It uses global evidence and bestpractices, and discusses their applica-tion to the case of two lagging regionsin eastern Poland: Œwiêtokrzyskie andPodkarpackie.

Across the EU significant progresshas been made in addressing chal-lenges of spatial inequality in econo-mic development and social welfare.The countries that joined the EU in 2004have consistently been achieving fas-ter economic growth than the EU,on average. Except Cyprus, all of the tencountries that joined the EU in 2004grew faster than the rest of the Union,achieving higher average rates of GDPper capita growth. In fact, nine out of theten fastest growing countries in the EUbetween 2007–2013 all joined in 2004or 2007. Similarly, expansion countriesmake up eight out of ten countries, withthe fastest growing disposable incomeper capita between 2007–2013. (Figure 1)


Figure 1. Annual Average Growth in GDP per capita in EU member countries (2007–2013)

Source: Eurostat

But disparities remain significant,particularly at the sub-national level.In 2014, GDP per capita of 78 out of 276EU NUTS level 2 regions was below75% level of EU average. In 21 regions,GDP per capita is below the 50% ofthe EU average. With the exception ofFrench overseas territories, all of thesepoorest regions are in Poland, Hungary,Bulgaria and Romania. The gap in averagehousehold income between the richestregion – London West, and the poorestregion – Severozapaden in Bulgaria, was10.6 to one. In 2014 in 36 regions, theaverage disposable income of householdswas below 10,000 ppcs,3 while the EUaverage was at 22,500 ppcs.4

At the regional level, substantial EUwide convergence has been achievedover the last 15 years, but progressstopped after the 2008 financial cri-sis. For most of the 2000s both EU sta-tes and EU regions have been conver-ging in terms of GDP per capita, but thisprogress reversed after the 2008 finan-cial crisis. (Figure 2) The crisis itself hitthe leading regions harder than thelaggards, resulting in a fast rate of con-vergence in 2008. But, most economi-cally developed parts of the EU expe-rienced a much faster recovery thanthe lagging regions in the post-crisisyears, which reversed the convergencetrend. The convergence of employmentrates was much more modest between2000–2008. And while leading regions

3 Purchasing power consumption standards (PPCS) – an artificial currency unit obtained by the conversionof the income parameters of private households with specific purchasing power standards (PPS) for finalconsumption expenditure, resulting in purchasing power consumption standards which are comparable.4 Eurostat (2016) GDP at regional level <http://ec.europa.eu/eurostat/statistics-explained/index.php/GDP_at_regional_level#Regional_GDP_per_capita>


Figure 3. Regional employment rates (% of populationaged 20–64)

Source: Postoiu, N., Bus‚ ega, I., (2015) Inter-regional disparitiesin the European Union, Romanian review of regional studies,Volume xi, Number 1

Figure 2. Coefficient of variation for GDP per inhabitantin PPSS

Eurostat Source: Postoiu, N., Bus‚ ega, I., (2015) Inter-regionaldisparities in the European Union, Romanian review of regionalstudies, Volume xi, Number 1

returned to pre-2008 employment levelin five years, lagging regions have expe-rienced a persistent decline in employ-ment rates. As a result, the gap in levelsof employment between leading andlagging regions in 2013 was wider thanin the early 2000s. (Figure 3)

As predicted by theory, EU-wideregional convergence happened atthe same time as disparities betweenregions within countries grew lar-ger. The trend for growing within re-gional divergence has persisted in the

EU member countries since early 80s.5

Today, spatial inequality of developmentcan be observed in the new membercountries. In all of the expansion coun-tries with multiple regions (Slovakia,Czech Republic, Poland, Romania, Bul-garia), the capital regions have muchhigher average disposable incomes thanthe other regions. (Figure 4) This is con-sistent with theoretical prediction, accor-ding to which development concen-trates in major urbanized areas, beforespilling over into secondary and tertiarycities and rural areas.6

5 PUGA, D. (1999), “The rise and fall of regional inequalities”, in: European Economic Review 43(2),February 1999, pp. 303–334.6 World Bank (2008) World Development Report 2009: Reshaping Economic Geography.

Disparities between regions remainlarge, despite the majority of EUfunding being allocated to laggingregions. Of the total €347 billion ofEU spending on development programsbetween 2007–2013, 82% was allocatedto ‘Co Objective’ [formerly ‘Objective 1’]regions – whose GDP per capita is 75%below the EU average.7

The impact of EU investments in lag-ging regions is broadly perceivedas mixed. The available evidence sug-gests that while the EU support has ledto faster economic growth in target re-gions, it hasn’t led to significant growthof permanent employment. Most of themeasurable effects were associated withshort run economic activity spikes pro-duced by infrastructure investments.

This suggests that European regional de-velopment policies have worked moreas income redistribution policies, thanas policies building foundation for long-term sustainable development. Evidencealso shows that in 36% of the recipientregions, the transfer intensity exceedsthe aggregate efficiency maximizinglevel, and in 18% of the regions a reduc-tion of transfers would not even reducetheir growth.8 This findings have beentaken on board and reflected in thefunding framework for the 2014–2020EU programming period.

There are multiple explanations forthe perceived lack of visible successof cohesion policies. Some of the stu-dies suggest that connective infrastruc-ture investments (that make up a signifi-


Figure 4. Disposable income inequalities within countries across the EU

Source: Eurostat (2016) GDP at regional level <http://ec.europa.eu/eurostat/statistics-explained/index.php/GDP_at_regional_level#Regional_GDP_per_capita>

7 European Commission (2016) Ex post evaluation of the ERDF and Cohesion Fund 2007–2013.8 Becker, Egger & von Ehrlich, (2010) Going NUTS: The effect of EU Structural Funds on regionalperformance, Journal of Public Economics, Volume 94, Issues 9–10.

cant part of EU- funded expenditures)do not lead to economic convergence,and often lead to redistribution of eco-nomic activity to more centralized deve-loped areas, away from laggards. Otherevidence suggests that business supportprograms that are often backed by theEU are generally not effective in impro-ving economic outcomes, while invest-ments focusing on human capital don’tget a high enough priority in EU-fundsallocation.9 However, it is also possiblethat since economic development isa slow process, it is too early to evaluatethe effectiveness of cohesion policyinvestments.

In order to address the persistingchallenge of lagging regions, the EUhas launched the Lagging RegionsInitiative. The aim of the Initiative isto identify what holds back growth in lessdeveloped regions, and to provide targe-ted support to unlock their growth po-tential. Thus, these lagging regions will beassisted to involve a broad range of stake-

holders (regional and local administra-tions, education institutions, business sup-port institutions, SMEs, entrepreneurs,investors, NGOs, IFIs) to help respond totheir concrete needs and to maximize theimpact of regional investments.

This report presents the conceptualthinking and the evidence that infor-med the pilot Lagging Regions Initia-tive in Poland. The pilot focused ontwo regions in eastern Poland: Œwiêto-krzyskie and Podkarpackie. This reportpresents evidence of economic perfor-mance of these regions, analyses of thefactors holding them back. The policythinking presented here is backed byglobal evidence on patterns of regionaldevelopment, which provides a concep-tual framework for the proposed policyapproach.

This report was prepared by the World

Bank team that is leading the implemen-

tation of the Poland pilot of the Lagging

Regions Initiative.


9 Andrés Rodríguez-Pose, Ugo Fratesi (2004) Between development and social policies: the impact ofEuropean Structural Funds in Objective 1 regions.10 In this eastern Poland refers to four regions: Podkarpackie, Œwiêtokrzyskie, Lubelskie, Podkarpackie.This should not be confused with Eastern Poland – the officially defined macro-regions, that also includesWarmiñsko-Mazurskie Voivodship.

State of Polish LaggingRegions: Podkarpackieand ŒwiêtokrzyskieThe cases of Podkarpackie and Œwiê-tokrzyskie are representative of lag-ging regions of eastern Poland10. Pod-karpackie and Œwiêtokrzyskie are twoof the five least developed (or lagging)regions in eastern Poland. GDP per capitain all five of these regions is between70 and 73% of the national average, whichmakes them the least developed regionsin the country. The wide gaps betweenPodkarpackie and Œwiêtokrzyskie and theleading regions like Mazowieckie or Dol-noœl¹skie, are broadly representative of

the ever-growing spatial inequality ofeconomic and social outcomes in Polandand other EU accession countries. Table 1shows that between 2000 and 2013,10 least developed regions in Poland fellfurther behind the national average GDPper capita, which is consistent with theEU-wide trend of within country diver-gence in regional economic performan-ce. Podkarpackie and Œwiêtokrzyskie arealso among the regions failing to achieve50% of EU average GDP per capita(48% and 49%, respectively).


Table 1. Polish regions GDP per capita (Poland = 100)

Region

GDP per capita POLAND = 100

2000 2013

Mazowieckie 152.8 160.5

Dolnoœl¹skie 102.9 111 .9

Wielkopolskie 106.8 107.2

Œl¹skie 106.2 104

Pomorskie 98.9 96.3

£ódzkie 88.6 93.3

Ma³opolskie 89.7 88.7

Zachodniopomorskie 99 83.3

Lubuskie 89.4 83.1

Kujawsko-Pomorskie 89.6 82

Opolskie 83.4 80.5

Œwiêtokrzyskie 77.9 73

Podlaskie 73.4 72.9

Warmiñsko-Mazurskie 77.5 71.5

Podkarpackie 72.7 71.1

Lubelskie 71.4 70.7

Source: GUS data

The gap between Podkarpackie andŒwiêtokrzyskie and leading regions ofPoland is multidimensional. Both re-gions are far behind the national averagein incomes. Average wages in Podkarpac-kie are 15% below the national averageand in Œwiêtokrzyskie they are just margi-

nally higher.11 In 2015, the registered un-employment rate in Podkarpackie (13.2%)and Œwiêtokrzyskie (12.5%) was at least fivepercentage points higher than nation-wide. Poverty rates in both regions alsosubstantially exceed the national average.(Table 2)

Table 2. Poverty rates in Polish Podkarpackie and Œwiêtokrzyskie12

Poland Podkarpackie Œwiêtokrzyskie

2014%

Changein 2006–2014

p.p.2014

%


p.p.2014

%


p.p.

Extreme poverty 7.4 -0.4 8.7 -1.7 12.2 0.0

Relative poverty 16.2 -1 .5 21.1 -0.8 22.6 -2.4

Statutory poverty 12.2 -2.9 15.3 -4.6 17.2 -4.6

Source: GUS

11 Central statistical office of Poland.12 Extreme poverty threshold (subsistence minimum) means the level of need satisfaction beyondwhich life, and mental and physical development of an individual are threatened; relative povertythreshold indicated by an amount that is equivalent to 50% of average monthly householdexpenditures; statutory poverty threshold means the amount of income which, under the applicablelaw on social welfare, makes an individual eligible for receiving a cash benefit.


Despite gradual convergence to theEU average level of economic de-velopment, Polish lagging regionsnever managed to close in on the na-tional average. In post accession years(2004–2007), economies of Podkarpac-kie and Œwiêtokrzyskie grew faster thanthe EU economy at-large. However,both regions were hit hard by the after-math of the 2008 crisis, and for boththe convergence stalled in 2009–2013.

Simultaneously, at no point between2004 and 2014 have Podkarpackie andŒwiêtokrzyskie been able to achievesubstantial convergence to the nationalaverage. (Figure 5) Before the crisis,Œwiêtokrzyskie was growing slightlyfaster than Podkarpackie, but in thepost-crisis recovery period Podkarpackiemanaged to keep pace with the nationaleconomic growth, while Œwiêtokrzyskiestarted slowing down. (Figure 6)

Figure 6. Employment creation dynamicin Œwiêtokrzyskie and Podkarpackiein the post-crisis period

Source: GUS

Figure 5. Dynamics of convergence to the Polandaverage for Podkarpackie and Œwiêtokrzyskie(GDP per capita, PLN, ‘000)

Source: GUS

There is no evidence that wagesin the two lagging regions are con-verging to the national average.Economic theory suggests that whilespatial equalization of total output orregional economies is unlikely, equali-zation of wages can happen as peoplemigrate to places with higher wages,thus redistributing the labor supplyacross regions to facilitate a spatialequilibrium. However, this has not beenobserved in the case of Podkarpackieand Œwiêtokrzyskie. In nominal terms,wages in both regions grew by morethan 70% between 2004 and 2015.However, the growth rate was similar tothe national average.13

Economic activity within Podkarpac-kie and Œwiêtokrzyskie is not distri-buted equally. Both Œwiêtokrzyskieand Podkarpackie have low levels ofurbanization with 45% and 42% of po-pulation, respectively, residing in urbanareas, which is far below the nationalurbanization rate of 62%. However, dataclearly shows that urban areas are thedrivers of growth, entrepreneurship andjob creation.

Intra-regional spatial divergenceof development is growing widerin Podkarpackie. The Rzeszów subre-gion (the urbanized area around the re-gional capital of Podkarpackie) wasamong the fastest developing subre-gions in Poland. In 2010–2013, the sub-

13 Based on GUS data.

region improved its GDP per capitavis-a-vis the country’s average by4.5 percentage points, reaching a levelof 87.9% of the national average. In con-trast, the Kroœnieñski, Przemyski and Tar-nobrzeski subregions were among theweakest in Poland fell further behind

the national average over the periodin consideration, all failing to reach 75%of national average GDP per capitain 2013. As a result, the disparities be-tween urban and rural parts of Podkar-packie have grown considerably wider.(Table 3)


Table 3. Dynamics of economic development of Podkarpackie subregions in 2000–2013

GDP per capitarelated to the national average

Change in GDP per capitarelative to the national average

2000 2004 2008 2010* 2013 2000–2004 2004–2008 2008–2010 2010–2013

Kroœnieñski 69.6 65.2 63.6 60.5 60.3 -4.4 -1.6 * -0.2

Przemyski 64.9 62.4 59.6 55.0 53.6 -2.5 -2.8 * -1 .4

Rzeszowski 79.2 80.3 81.7 83.4 87.9 1.1 1 .4 * 4.5

Tarnobrzeski 74.0 78.7 75.9 73.2 73.7 4.7 -2.8 * 0.5

* Changes in the methodology of ESA 2010 accounts (lack of comparability).

Both subregions of Œwiêtokrzyskieare struggling to keep up with the na-tional economy. The capital of Œwiêto-krzyskie, Kielce, is the most developedarea of the region, but it is not as dynamicas Rzeszov, the capital of Podkarpackie.The economy of the Kielecki subregionwas growing faster than the national eco-nomy in the period leading up to the EUaccession. However, the subregion eco-

nomy struggled to recover from the re-cession in 2010, after which its GDP percapita fell below 80% of the country’saverage. The decline is likely due to thedifficulties experienced by the strugglingindustrial regions at the northern bound-ary of the Kielecki subregion. The Sando-mierski-Jêdrzejowski subregion followeda similar trajectory but fell even furtherbehind the national averages. (Table 4)

Table 4. Dynamics of economic development by subregion of Œwiêtokrzyskie in the years 2000–2013

GDP per capitarelated to the national average

Change in GDP per capitarelative to the national average

2000 2004 2008 2010* 2013 2000–2004 2004–2008 2008–2010 2010–2013

Kielecki 83.3 85.4 85.8 85.0 79.8 2.1 0.4 * -5.2

Sandomiersko--Jêdrzejowski

69.7 69.4 69.8 68.3 62.1 -0.3 0.4 * -6.2

* Changes in the methodology of ESA 2010 accounts (lack of comparability).Source: own elaboration based on GUS data

There are substantial differencesin the economic geography of thetwo regions. Œwiêtokrzyskie has oneclearly defined economic pole aroundits capital Kielce. Most of the rest of theregion is agricultural, with an exceptionof the northern part of the provincealong the river Kamienna that is a partof the historic Poland Industrial District.Podkarpackie is characterized by a morepolycentric urban system, and higher le-

vel of spatial dispersion of employmentand population. The towns of Mielec,Krosno, Dêbica and Stalowa Wola areimportant employment centers spe-cializing in manufacturing. These citiesare located in the northwestern part ofPodkarpackie, while the eastern andsouthern parts of the region are ruraland mostly agricultural. The only excep-tions are the southern area of the Biesz-czady Mountains that specializes in tou-

rism, and the area along the Ukrainianborder where cross-border trade activi-ties are prominent.

Urban areas of Podkarpackie andŒwiêtokrzyskie have more dynamicprivate sectors and labor marketsthan the rest of the regions. Urbanareas of both regions have by far largernumber of businesses per capita than

rural areas with the only major exceptionbeing the tourist area of the BieszczadyMountains. (Figure 8). Urban areas over-all also enjoy lower levels of unemploy-ment, with the exception of the urba-nized region in the northern part ofŒwiêtokrzyskie, which has been strug-gling to overcome the challenges ofpost-industrial transition for a while.(Figure 7)


Figure 8. Spatial distribution of entrepreneurshipin Podkarpackie and Œwiêtokrzyskie

Source: GUS

Figure 7. Spatial distribution of unemploymentin Podkarpackie and Œwiêtokrzyskie

Source: GUS

Competitiveness ofPodkarpackieand Œwiêtokrzyskie economiesHow competitive arethe lagging regions?

Competitiveness of the region is de-fined by the presence of dynamic,tradable industries. A competitive re-gion creates conditions for the privatesector to generate economic growth,jobs, and raise the incomes of the po-pulation. Competitiveness can be en-hanced as a result of local entrepreneur-

ship and growth of local companies,or as a result of attracting external inves-tors. However, not all businesses areequally beneficial for local economies.Global evidence shows that most com-petitive places rely on businesses in tra-dable sectors as drivers of growth.In 10% of the most competitive citiesin the world (cities that outperformedtheir countries the most in terms ofeconomic growth), tradable industries

grow 2.5% points faster per year thanin other cities.14 Tradable sectors are di-stinguished from the rest of the econo-my by their ability to sell their productsor services over long distances. Unlikelocal shops or hairdressers (non-tradablefirms), manufacturing producers or soft-ware developers (tradable firms) can selltheir products globally. This means thatthey can grow and reach a broadermarket, achieving economies of scale.By selling their products elsewhere,tradable firms also bring money intothe region, which is then redistributedthroughout the economy, creating addi-tional jobs in the local service sector.Finally, tradable firms face competitionfrom firms in other areas, which pushesthem to be more innovative and produc-tive and invest more in skills, equipmentand research, thus creating positive spil-lovers in areas where they are loca-ted. Exporting firms are the most visibleand measurable subset of trading firms,and economic literature has vast eviden-ce showing that exporting firms tendto be more productive, grow faster andincrease wages.15

Small export volumes from the Pod-karpackie and Œwiêtokrzyskie eco-nomies signal a lack of competitive-ness. Figure 9 shows that most ofPoland’s exports originate from the na-tional capital region, or from urban cen-ters in the western part of the country.Germany is the main trade partner ofPoland, accounting for 27% of total ex-ports (a share almost five times largerthan Great Britain, which is second),which benefits cities and areas loca-ted close to German border. Countiesin southeastern Poland, including thosein Œwiêtokrzyskie and Podkarpackie,make a relatively small contribution tothe total volume of exports. However,the results can only partially be explainedby the remote location and poor con-nectivity of these regions. It is alsoan indication of the overall lack of com-petitiveness.

The Podkarpackie economy is moreexport-oriented than the economyof Œwiêtokrzyskie. Figure 9 and Fi-gure 10 clearly show the concentrationof exporting firms in the western and


Figure 10. Share of exports in total output by subregion

Source: Ministry of Foreign Affairs of Poland

Figure 9. Total volume of exports by county

Source: Ministry of Foreign Affairs of Poland

14 World Bank (2015) Competitive Cities for Jobs and Growth: What? Who? and How?15 Bernard, A.B., Wagner J. (1997) Exports and Success in German Manufacturing; Review of WorldEconomics.

northern parts of Podkarpackie. This ap-plies in particular to the subregion of Tar-nobrzeg, where the largest of specialeconomic zones in the region, Euro ParkMielec, is located. The subregions ofKrosno and Rzeszów also show signifi-cant export orientation, largely due tothe presence of the airspace cluster.Œwiêtokrzyskie, on the other hand,is among the least export-oriented re-gions in Poland (export makes up lessthan 20% of its GDP).16

Lack of foreign investment into localeconomies indicates perceived limi-ted competitiveness and potential ofboth regions. The process of decision--making by investors is complicated butmostly driven by three considerations– search for a market, cheap resources,and efficiency.17, 18 Given that regions ofeastern Poland can’t boast favorablemarket access and do not have vast re-source endowments, the FDI cominginto these regions should look for higherefficiency. However, the flow of FDIinto Podkarpackie and Œwiêtokrzyskie

is small, compared to other regions,particularly in Central and Western Po-land. The highest FDI concentration(in Poland) is in Mazowieckie (the capitalregion), and can largely be attributed tothe international companies that regis-tered their headquarters in Warsaw,although they may have branches andwork sites all over the country. Other re-gions that attract large volumes of FDIare concentrated in western and south-western Poland, where German invest-ment is prominent. (Figure 11)

FDI data points at relatively higherdynamism of the Podkarpackie eco-nomy. Podkarpackie is the unquestionedleader in FDI attraction among regionsof eastern Poland. On the other hand,Œwiêtokrzyskie similar to Podlaskie, wasamong the regions that have attractedthe least foreign investment. A closerlook at locations of projects funded byforeign investment clearly reveals thatthe only significant attraction for inves-tors in Œwiêtokrzyskie is its regional capi-tal, Podkarpackie on the other hand of-


16 Data from Ministry of Foreign Affairs of Poland and Central Statistics Office of Poland.17 Efficiency in this context means ability to increase productivity: e.g. by accessing pull of qualified labor,or locating close to suppliers and service providers, or on an important transport corridor.18 T. Juni Zhu, Yago Aranda Larrey, Valerie-Joy Santos (2015) What do Multilateral Firms Want from Cities?,World Bank.

Figure 12. FDI attraction by county (poviat)in Podkarpackie and Œwiêtokrzyskie

Source: GUS

Figure 11. FDI attraction by region

Source: GUS

fers many attractive locations. Urbanareas such as Rzeszów, Debica and Sta-lowa Wola receive a significant amountof foreign investment, but the mostenticing place for FDI in Podkarpackieis the special economic zone of Mielec.(Figure 12)

Industrial structure of regional eco-nomies also points to a lack of com-petitiveness. High share of public servi-ces in both regions, even though they donot have seats in the national govern-ment, highlights the overall weakness ofthe private sector. This is true for Œwiêto-krzyskie, where tradable industries con-

tribute 6.5% less to output than in Po-land on average. Again, Podkarpackieappears to be in a stronger position dueto the industry sector that contributesmore (in percentage terms) to the out-put of the region than nationwide.(Table 5) Both regions have weakeradvanced service industries than thenational average, which suggests thaturban areas in both regions mostly fulfillthe role of production centers and localservice centers typical for secondarycities, while most of the business servi-ce industry tends to concentrate in themajor metro areas of Warsaw, Wroclaw,and Krakow.


Table 5. The sectoral structure of the economy (gross value added, GVA, in %) and itschanges in 201319

Sector* Poland Podkarpackie Œwiêtokrzyskie

Agriculture 3.1 1.9 4.4

Industry 26.0 29.3 25.2

Construction 7.6 7.6 9.1

Simple services 29.5 28.1 28.0

Advanced services 16.5 12.1 12.3

Public services 17.4 21.0 21.0

Source: GUS

19 * ‘Agriculture’ (NACE section A: Agriculture, forestry and fishing); ‘Industry’ (NACE section B: Miningand quarrying; C: Manufacturing; D: Electricity, gas, steam and air-conditioning supply; E: Water supply;sewerage, waste management and remediation activities); ‘Construction’ (NACE section F);‘Simple services (NACE section G: Wholesale and retail trade; repair of motor vehicles and motorcycles;H: Transport and storage; I: Accommodation and food service activities; J: Informationand communication); ‘Advanced’ services (NACE section K: Financial and insurance activities;L: Real estate activities; M: Professional, scientific and technical activities; N: Administrative and supportservice activities); ‘Public’ services (NACE section O: Public administration and defense; compulsory socialsecurity; P: Education; Q: Human health and social work activities; R: Arts, entertainment and recreation;S, T, U – the remaining activities).

Labor productivity in Œwiêtokrzyskieand Podkarpackie is below the natio-nal average, across all industrial sec-tors. Labor productivity is a factor thatdefines the ability of local businesses tocompete in external markets. It is strikingthat labor productivity in all industrial

sectors in Œwiêtokrzyskie and Podkarpac-kie is lower than the national average,and in most cases by at least six per cent.Additionally, in most sectors productivityhas been growing slower than nation-wide. (Table 6)


Table 6. Labor productivity by industrial sector in Podkarpackie and Œwiêtokrzyskie regions

Sector*

Podkarpackie Œwiêtokrzyskie

Productivity asnational average

= 100

Change in productivityrelative to the national

average 2009–2013(percentage points,

<0 indicate thatproductivity growth

was belownational average)

Productivity asnational average

= 100

Change in productivityrelative to the national

average 2009–2013(percentage points,

<0 indicate thatproductivity growth

was belownational average)

Agriculture 21.7 0.4 53.9 -1.6**

Industry 82.1 1.8 87.2 -17.1

Construction 84.2 -6.7 96.6 -5.0

Simple services 91.2 -1.8 92.3 -0.5

Business services 91.5 -9.4 99.5 -1.8

Public services 91.3 -1 .1 93.2 -1.1

Source: GUS

Dynamics of the “industry” sectorillustrates the difference in the eco-nomic potential of the two regionsand explains observed spatial pat-terns of development. Statistically,“industry” (including manufacturing, mi-ning, and utilities) is the sector of specia-lization for both regions, as it contributesa larger share of GDP than on averageacross the country. At the same time,the dynamics of these sectors are verydifferent in each region. In Podkarpackie,the industry sector has achieved thehighest rate of labor productivity growthexceeding the national average, whilein Œwiêtokrzyskie the industry sectorhas dropped to 13% below the natio-nal average labor productivity, despitebeing ahead before – the phenomenonthat deserves further investigation. Onepossible explanation is that these con-trast in trajectories of manufacturingin two industries captures the differencebetween the declining manufacturingcluster in the north of Œwiêtokrzyskieand the up and coming manufacturingcluster in the northwest of Podkarpac-kie.

The state of agriculture explains thevast rural-urban disparities in forboth regions. Seemingly, agricultureshould be the dominant industry in bothregions. Both Podkarpackie and Œwiêto-krzyskie are less than 50% urbanized,

and according to official data 28% and33% of total employment in regions,respectively, is in agriculture. Despite this,in both regions agriculture makes a re-latively small contribution to the totaloutput (particularly in Podkarpackie,see Table 5). In both regions agricultu-ral productivity is low (in Podkarpackieit is 1/5 of the national average). This lar-gely represents the fact that farmingin both regions is characterized by smallacreages of farms (a mere 3.9 hectaresin Œwiêtokrzyskie), dispersion of plotsand in most parts of the regions rela-tively infertile soils. Local experts sug-gest that level of commercialization ofagriculture in both regions is low, eventhough commercial farming is morecommon in Œwiêtokrzyskie than in Pod-karpackie.

Small-scale farming by a significantportion of the population is sympto-matic of the lack of access to econo-mic opportunities. The large numberof people registered as employed in agri-culture in both regions indicates pre-sence of hidden unemployment, indica-ting their difficulty in accessing econo-mic opportunities outside low producti-vity small scale farming. It is confirmedby the region’s data about the averagenumber of people employed in agricul-ture per 1 ha of farmland. Large num-bers of workers per ha signals low labor

productivity and potential hidden un-employment. Of the 50 Polish countieswith the highest number of agriculturalworkers per ha of land, as many as 17 arein Podkarpackie Voivodship. Only fourcounties in Podkarpackie – those wherestate farms were established followingthe forced resettlement of the Ukrainianpopulation after World War II, i.e. Luba-czowski, Bieszczadzki, Leski and Sanocki– have a lower worker per ha ration.In Œwiêtokrzyskie most counties also fallinto one of the bottom two quintilesof Polish counties for the number ofagricultural workers per ha.

How history shapedeconomies of laggingregions

To fully understand the competitive-ness trends that characterize the eco-nomies of Podkarpackie and Œwiêto-krzyskie today, it is important toaccount for the recent history of theseregions. Economic development trendsin Poland in the last 20 years were largelydefined by the transition from a plannedto market economy. While rebuilding

basic economic institutions was the corepremise of this transition, the process alsohad significant spatial implications, andcontributed to a divergence betweenregions in Poland. Three key factors hadstrong spatial implications: a) collectivefarms and some manufacturing sectorsfailed to adjust to the new economic reali-ty; b) economic development continuedto be concentrated in urban areas; andc) the opening of the Western borderscreated new business opportunities.

Withdrawal of government supportand opening to broader competitionhad disproportional negative effectson selected sectors and areas wherethey were concentrated. Agriculturalareas in northern Poland were affectedby the breaking up of collective farms,which created concentrated areas ofdeprivation. Similar outcomes werefaced by the cities and towns thatdepended on manufacturing industriesand failed to adjust to the new compe-titive environment. The breakdown ofEastern Bloc supply chains, economicdecline across the primary market ofEastern Europe, and enhanced competi-tion from products imported from theWest, led to a decline of many manufac-turing enterprises. This created concen-trated areas of unemployment. Despitethe fluctuation in the national rate ofunemployment over the past 20 years,even today the highest unemploymentrates are observed in the regions ofPomerania, Warmia, and Masuria (areas,where the state farms dominated until1989), and in some of the industrial zonesthat did not succeed in modernizingtheir economies (e.g. the area along theborder of the provinces of Mazowieckieand Œwiêtokrzyskie, including the city ofRadom and the Old Polish IndustrialDistrict). Figure 14 and Figure 15 showthat, along with regions in the north-west and northeast of Poland, the terri-tories of modern Podkarpackie andŒwiêtokrzyskie were amongst the areashardest hit by the spike in unemploy-ment.


Figure 13. Hidden unemployment in agriculture (number ofemployed in agriculture per 100 ha of farmland) in 2013

Source: GUS


Figure 15. Unemployment in Polish regions in 1995(using all administrative divisions)

Source: GUS

Figure 14. Unemployment in Polish regions in 1991(using all administrative divisions)

Source: GUS

Market forces that were unleashedafter the transitional reforms led toa growing concentration of econo-mic activity in major cities. Marketliberalization has led to a fast structu-ral transformation driven by a declinein manufacturing industries, often loca-ted in small single industry towns selec-ted by central planners, and the rapidexpansion of the service industry thatfavors larger cities. The first high concen-tration of private enterprises emergedin Warsaw, which made it the main busi-ness center of the country. Internationalcorporations and investors that arrivedin the country at that time establishedthemselves in Warsaw. This led to a ra-pid expansion of the business services’sector and office space in Warsaw. Lateron, similar processes began in otherlarge cities including Poznan and Wroc-law and only later shifted to seconda-ry cities. Smaller regional centers andtowns, including Rzeszow and Kielce,were left behind. However, overall eco-nomic dominance of urban areas becamea country-wide phenomenon. Today,the 17 largest cities in Poland amass 20%of the national population, but generate60% of the GDP, and have attracted

over 62% of all internal migrants in thecountry.

Finally, the opening of the westernborder led to a reconfiguration ofeconomic geography of the country.The early period of economic transfor-mation was characterized by the rapidformation of private enterprises. Thespatial pattern of this process shows thatthe economic opportunities createdin these areas, proximate to large wes-tern markets, clearly outweighed thosein the eastern part of the country. Whilesmall business growth was evidentacross the country, it was most pro-nounced in the vicinity of the largeagglomerations, as well as in the borderregions (driven by small scale cross bor-der trade), and in tourist regions. Econo-mic activity was distinctly lower in pre-dominantly rural areas, particularly theareas where former state farms wereoperating before 1989. The provinces ofPodkarpackie and Œwiêtokrzyskie werenot among the leaders in terms of de-velopment of small business. The onlyvisible exceptions were the capitals ofthe provinces, some other urban centers(like Przemyœl, located close to the bor-

der with Ukraine), and the area of Biesz-czady Mountains, where the majorityof employees of the struggling forestrysector became self-employed. Figu-re 16 shows that these geographical pat-terns of entrepreneurship are persistingtoday.

What determinescompetitiveness ofthe regions today?

While the historical process playedan important role in shaping theeconomic landscape of the laggingregions, competitiveness of the re-gions today is largely defined by exi-sting enabling conditions. Conditionsthat may affect the productivity andcompetitiveness of local firms can vary

from technical skills of the labor force,to reliability of public bus systems,to quality of public spaces. While all ofthese are next to impossible to capture,it is important to paint an overall pictu-re of enabling conditions by groupingthem into several categories: demogra-phics and human capital, innovation andentrepreneurship, access to markets, ba-sic infrastructure and services, businesssupport, regulatory environment, capa-city of local government. All of these fac-tors have strong, empirically-proven linksto levels of productivity and economicdevelopment. This chapter will offera short assessment of these conditionsin Œwiêtokrzyskie and Podkarpackie.

Demographics and human capital

Podkarpackie and Œwiêtokrzyskieare experiencing contrasting demo-graphic trends. Podkarpackie’s de-mographic situation is characterized byhigh rates of natural population growth(births minus deaths) and negative mi-gration balance (1‰ per year between2004–2014) with lots of people leavingthe region to seek better economic op-portunities in large Polish cities or abroad.In Œwiêtokrzyskie, the migration balanceis similar to Podkarpackie, but the overallpopulation decline is more rapid dueto lower birthrates and thus an inabilityto achieve natural reproduction. (for moredetails, see Figure 17) Because the naturalgrowth in Podkarpackie partially com-pensates the outmigration, it is expectedthat the region will match the Poland--wide trend of gradual population decli-ne in the foreseeable future, maintainingtotal population at 88% of its current levelin 2050. The population of Œwiêtokrzys-kie is expected to decline much moresharply and reach 77% of its current levelby 2050.


Figure 16. Number of registered enterprises per 1000 peopleby poviat (2014)

Source: GUS

The spatial patterns of populationgrowth in both regions are describedby suburbanization and depopula-tion of rural areas. In Œwiêtokrzys-kie, the overall population decline anda large share of retirees are typical formost of the municipalities, with a not-able exception of the suburban ringaround Kielce. This reflects the lack ofeconomic opportunities in the peripheralparts of the region where natural popu-lation decline is combined with rapidoutmigration towards the regional cen-ter or further afield. It also shows thatthe growth of Kielce is largely driven bysuburbanization. As young families arechoosing to live in suburbs, the munici-palities around Kielce have become theonly ones with population growth anda relatively low share of the elderly po-pulation in Œwiêtokrzyskie. In Podkar-packie, the spatial pattern of demo-graphic changes confirms the presenceof a much more polycentric urban sys-tem. However, key trends are similarto those observed in Œwiêtokrzyskie:the highest population growth is seenin suburban areas, and the highest de-cline driven by outmigration is typicalfor the peripheral and rural parts of theregion. Suburbanization has led to higherconcentration of the elderly populationin urban centers of both regions, whichposes important challenges with res-pect to the future planning of publicinfrastructure in cities. This may also indi-cate possible problems with the lowquality of urban amenities or structuralissues of the housing market in cities,which makes suburban life more attrac-tive to young people. (Figure 18, Figu-re 19) The rapid suburbanization mightbe aided by rather relaxed land use plan-ning system in Poland. Currently only20% of the land in the country is cove-red by land use plans. This means thata large share of development decisionsare made on a discretionary basis, parti-cularly outside of major urban areas.


Figure 17. Difference of demographicdynamics of Œwiêtokrzyskie, Podkarpackieand Poland as a whole

Source: GUS

Education profiles of Podkarpackieand Œwiêtokrzyskie are similar to therest of Poland. As with the rest of Po-land, fewer than 20% of the populationsof both regions hold university degrees,and just over 20% have completed onlyprimary education. Data also proves thatdramatic improvement of the education

profile of the populations was typicalfor the focus regions as well as for thecountry as a whole. (Figure 20) Geogra-phy of skills predictably show that thelargest shares of educated people arefound in cities. Rzeszów and Kielce standout as the most educated places in theirregions. (Figure 21)


Figure 19. Share of population in post-productive age

Source: GUS

Figure 18. Spatial patterns of population changesin Podkarpackie and Œwiêtokrzyskie

Source: GUS

Figure 20. Structure of population by highest level ofeducation in 1988 and in 2011

Source: GUS

Figure 21. Share of population with tertiary educationby county/poviat in 2011

Source: GUS

Structural skills gaps might persistdespite improving the educationalprofile of the population. Despite higheducational levels of the populationin both regions, businesses often can’tfind the skilled workers that they requirefor current market conditions. This is thecase in areas that have struggled fromrapid industrial decline, or where the po-pulation is struggling to transition out ofagricultural activities. The issue is exaspe-rated by the failure of the educationalinstitutions to address them. For instan-ce, while the VET system in both regionsis well established it is characterized byrelatively low-quality training. This is par-tially because over the course of a four--year program, students spend less thanfour weeks in a work-based trainingthat is poorly implemented due to lackof capacity both of training schools andfirms. This challenge has been one of thefocal areas of the Lagging Regions Ini-tiative pilot.

Innovation and entrepreneurship

Innovation potential is higher in Pod-karpackie, but a limited level ofentrepreneurship is holding both re-gions back. According to the RegionalInnovation Scorecard,20 developed bythe European Commission, Podkarpac-kie is defined as a moderate innovator(second lowest out of four categories),while Œwiêtokrzyskie falls into a cate-gory of modest innovators (the lowestcategory). (Figure 22) Podkarpackie wasin the group of European regions thathave seen one of the largest increasesin the value of this indicator between2004 and 2010, and after a declinein 2010-12 it has continued improvingits innovation performance in the lastfour years. The main strength of the Pod-karpackie regional innovation systemis large volumes of medium and high--tech exports, growing business R&D,and non-R&D innovation expenditure.While Œwiêtokrzyskie also has significant

amounts of high-tech export and goodtertiary education attainment, decliningR&D investments holds its innovationpotential back. In both regions, a lack ofinnovative entrepreneurs is a constraintto competitiveness.21 The number ofSMEs with organizational, product andprocess innovations has been decliningin both regions and is below EU averageon per capita basis. This is importantbecause entrepreneurs are an essentialpart of the innovation systems thattake ideas and inventions originatingin research institutions or large compa-nies, and bring them to market. Thus,without entrepreneurship innovationis unlikely to become a driver of regionaleconomic performance. One of thecomponents of our work focused on de-velopment of mechanisms for commer-cializing innovations.


20 The Regional Innovation Scoreboard is a regional extension of the European Innovation Scoreboard,assessing the innovation performance of European regions on a limited number of indicators includingR&D expenditure, SME innovation, patent applications, and product and process innovationby businesses ant others.21 European Commission (2016) Regional innovation Scoreboard: Regional Profiles – Poland.

Figure 22. Regional Innovation Scoreboard 2016

Source: European Commission

Connectivity and accessto markets

The regions of eastern Poland havebeen disadvantaged due to pooraccess to markets. The opening ofwestern borders challenged Podkar-packie and Œwiêtokrzyskie because theyare a significant distance from the largemarket of neighboring Germany. Addi-tionally, relatively poor road and railinfrastructure made travel to majorurban centers within Poland slow, whilesignificant trade links with proximateneighbors, Ukraine and Slovakia, neverdeveloped.

Despite improvements in recentyears, access to markets remains re-latively weak for Podkarpackie andŒwiêtokrzyskie. In recent years, majorroad and rail investment projects havesubstantially improved connectivity ofthe regions.22 Podkarpackie has signifi-cantly benefited from construction ofthe national motorway A4 that esta-blished a much better east-west con-nection to the major urban centers ofKrakow and Katowice, and from the mo-dernized railway line E-30 from Cracow

to Lviv. Likewise, there is a significantimprovement in connectivity that resul-ted from the construction of the newbridge over Vistula, linking Podkarpackieand Œwiêtokrzyskie, in Po³aniec. Theseprojects benefited from EU funding.However, even after these improve-ments, Podkarpackie and Œwiêtokrzyskiestill can’t match other regions of Po-land in terms of access to large internalmarkets or the most important foreignmarket (Germany) due to their geogra-phic location. (Figure 23 – Figure 26)

However, major funding to improveregions’ connectivity should be prio-ritized, as evidenced by their signifi-cant impact. Thanks to large scale in-vestment program of recent years sup-ported by the EU, Poland’s transporta-tion system is rather advanced. Todayit takes two hours to drive from Rze-szów to Krakow, four hours to get toWarsaw or Wroclaw, seven hours to Ber-lin and around 10 to Hanover and Ham-burg. Further investments are likelyto deliver only marginal reductions in tra-vel time, and at a high cost. It is alsounclear whether such improvementswill improve the competitive potential


Figure 24. Change in municipality accessibility by rail(2007–2015)

Figure 23. Municipality accessibility by rail

22 The connectivity is evaluated using the accessibility indicator widely applied in academic literature.The index for each of areas is calculated like a sum of populations of all other areas in the countrydivided by travel time to those areas. For details of the methodology please see Komornicki T., Rosik P.,Stêpniak (2014).


Figure 25. Municipality accessibility by road

Source: Komornicki T., Rosik P., Stêpniak, 2015

Figure 26. Change in municipality accessibility by road(2007–2015)

of businesses in lagging regions. Whilesome further investments might be re-quired, particularly those related to con-nections between Rzeszow and War-saw, they should only be consideredif they will significantly reduce traveltime.

Basic infrastructure

Basic infrastructure investments andmaintenance remain important, butare not a constraint to growth. Invest-ment in basic infrastructure is a crucialfoundation of economic developmentand competitiveness, and shouldn’t beoverlooked. In fact, providing access tobasic infrastructure is one of the keypolicies to drive spatial convergence ofwelfare in developed countries. How-ever, evidence suggests that even in lag-ging regions of Poland, the basic infra-structure coverage has reached levelswhere it can no longer be seen as a sub-stantial constraint for economic deve-lopment.

The weakness of water supply andsewerage systems in Œwiêtokrzyskieand Podkarpackie has largely beenresolved, and only targeted invest-ment are still needed. In the 1990s,the shortage of water supplied and the

sewage treatment was one of the mostimportant issues in rural areas. That iswhy over the last 10–15 years investmentin the technical infrastructure, particu-larly water and sanitation, was seen asa major priority. Over the last decade,

Figure 27. Share of population with access to sewerage system

Source: own elaboration based on GUS data

the improvements in the sector wererapid, as shown by growing share of po-pulation serviced by sewerage. Natu-rally, the coverage of the system remainshigher in urban areas, and achievinghigh coverage in some remote areasremains difficult due to complicated ter-rain. (Figure 27) Overall after the recentimprovements basic infrastructure andservices can’t be seen as a constraint toeconomic growth at a national or regio-nal scale, even if improvements are stillrequired in selected localities largelyto improve the living conditions of thepopulation.

Business support

While business support is not ne-cessarily required to improve busi-ness performance, it can help over-come specific local constraints. Notall businesses require business support.Yet, practice shows that running a busi-ness is a difficult skill, and inexperiencedbusinessmen often repeat the same mis-

takes or spend a lot of time and effortovercoming similar challenges. Businesssupport services can help overcomethese issues and increase the overallcompetitiveness of local enterprises.

Results of business interviewsin Œwiêtokrzyskie and Podkarpackiesuggest that traditional businesssupport is not addressing the needsof businesses. Thirty-eight interviewsconducted in the regions of the studyidentified that the constraints impactingthe capacity of businesses to grow oftenstem from an inability to distinguishtheir product or identify a unique marketniche or quality that can help them getahead of competition. Thus, the gapsin knowledge and skills that businessowners want to address through busi-ness support require predominantlystrategic services rather than traditionaloperational services, which are mosteasily accessible to businesses today.The strategic services should includehelping firms change their business mo-


Figure 28. Percentage of firms identifying need for different types of business services23

Source: business interviews (the sample is not representative)

23 This survey is not representative of the entire business population of the regions and the resultsshould be verified.

dels, develop new products, and reachnew markets. The Lagging Regions ini-tiative pilot has proposed a new businessservice delivery model, which shouldhelp regions address this challenge.

Regulatory environment

The “Doing Business” study of theWorld Bank identifies that bothPodkarpackie and Œwiêtokrzyskiecan improve their regulatory envi-ronments. Kielce (the capital of Œwiêto-krzyskie) is ranked 15 out of the 18 largest

cities in Poland on ease of doing busi-ness. It is particularly bad in terms of diffi-culty of starting a business (ranked 16)and registering property (ranked 15),While Rzeszów is ranked seventh overall,it also has specific issues with regard tobusiness permitting process (ranked 17).(Figure 29) In both cases, these challen-ges are largely related to institutionalinefficiencies that can be addressedthrough better use of technologies, andbetter management and coordination,which has been attempted as a part ofthe Lagging Regions Initiative pilot.


Figure 29. Variation in ranks of major Polish cities on different measures of ease of Doing Business.

Source: World Bank 2015

Local Government Capacity

Local governments can play an im-portant role in promoting economicdevelopment in Poland, but utilizingtheir power requires capacity. Thelaw on territorial self-government, pas-sed in 1990, granted additional powersto municipalities, gave them an inde-pendent legal status, as well as economicsovereignty through the right to ownmunicipal assets and generate theirown revenues that are complementedwith transfers from the state budget.Today, local administrations are obligedto carry out a number of activities, bothof operational character and related tocapital investment, strengthening theeconomic potential of the respective

areas and improving the living condi-tions of its inhabitants. However, not allmunicipalities have the capacity to ma-ke the most of the powers offered tothem.

Urban municipalities are much betterresourced and more self-sufficient,which suggests higher capacity. In themain urban centers of the selected re-gions, Rzeszów and Kielce, the revenuesof local budgets reach 5 000 PLN percapita, which places them amongst therichest municipalities in the country.The remaining municipalities, on average,have budgets of around 3 000 PLN percapita, which puts them at the other endof the scale – among the poorest in thenation. (Figure 30) Another aspect of

the urban-rural fiscal capacity gap is thedifference in dependence of nationaltransfers. While major urban centers ofboth regions raise more than 50% oftheir total revenues, most of the ruralareas get at least 60% of total revenuefrom transfers. (Figure 31) Greater finan-

cial self-sufficiency and larger budgetsof urban municipalities will allow themto retain more qualified staff, designbetter policies, and implement themat a larger scale and with higher quality,all of which can be critical conditions foreconomic development.


Figure 30. Budget revenue of municipalities per capita

Source: GUS data

Figure 31. Share of own revenues in total revenues ofmunicipalities

The analysis of the competitivenessof Podkarpackie and Œwiêtokrzyskielead to the following key conclu-sions.

• In recent years, the developmentpathways of the two regions di-verged. Podkarpackie has managedto keep up with the national growthrates and built on its competitiveadvantages to drive growth in themanufacturing cluster in Mielec andthe aerospace industry across thenorthwestern part of the region.At the same time, Œwiêtokrzyskie’seconomy never fully recovered fromthe aftermath of the 2008 crisis whichmay be reflective of its reliance onsectors of the economy that were hitparticularly hard (e.g. traditional ma-nufacturing), however this requiresfurther investigation. And while theold industrial heartland of the regioncontinues to decline (which is shown

by the drop in labor productivity),no new growth drivers are emerging.This divergence is underpinned bya difference in a number of under-lying conditions: attractiveness to fo-reign investors, demographic trends,and innovation capacity.

• While spatial organization of re-gions is different, cities are theireconomic epicenters. Both regionshave urban cores that drive economicgrowth: Kielce in Œwiêtokrzyskie, andRzeszów and other secondary citiesin the northwestern part of Podkar-packie. But the rural areas of both re-gions are lagging with high levels ofhidden unemployment in rural areas,mostly due to the relatively small con-tribution of agriculture to the regio-nal economy and lack of access toother economic opportunities. Whilethe growth potential of these areasis unlikely to change, more can be

done to provide the rural populationwith better access to economic op-portunities like those in urban areas,and increase access to urban marketsfor farmers that will incentivize far-mers to commercialize and improveproductivity.

• Addressing specific gaps in en-abling conditions may improveeconomic outcomes for both re-gions while requiring relativelylittle effort and funding. Weaknessof entrepreneurship in both regionslimits growth potential and createsobstacles for innovation, as well asadoption and commercialization oftechnology, which restricts produc-tivity growth. While fundamentalunderlying factors, like culture anddemographics, cannot be shifted,a number of enabling conditions canbe improved, which became the prio-

rity of the Lagging Regions Initiativepilot:

– Unnecessary regulatory barriersto business and property registra-tion (often related to the inefficientprocedure for processing requestsor limited use of technology) canbe removed.

– Business support services can betailored to the needs of entrepre-neurs. For instance, generic busi-ness skills’ development can be re-placed with support in identifyingspecific market trends relevant tothe business’ strategy and deci-sion-making.

– Specific skills gaps can be addres-sed through better coordinationbetween business and educationinstitutions.


What does global experiencetell us about lagging regions?Economic activity is spread unevenlyand development leads to concen-tration of production in cities andleading regions of countries. Urba-nization has a most notable effect ata local level, where it is manifested byrapid divergence between rural andurban areas. The process of urbanizationis mostly complete by the time countriesreach middle-income status. Whencountries reach the level of 3,000 EURper capita, cities account for a majority ofconsumption, after which further diver-gence between urban and rural areasslows down. At national level, econo-

mic activity also tends to concentratein “leading regions” that achieve higherlevels of economic density. This processhappens fast at early stages of develop-ment, but after countries reach GDPper capita of 8,500–13,000 EUR thedisparities between the leading andlagging regions remain stable as deve-lopment proceeds. Importantly, the glo-bal evidence suggests that there is noreason to expect spatial equalization ofeconomic development at local or na-tional levels, even as countries becomerich.24 (Figure 32)

24 World Bank (2008) World Development Report 2009: Reshaping Economic Geography.


Figure 32. Global trend of regional concentration of economic output(historical evolution)

Source: World Bank, 2008

Convergence in living standards andwelfare of population is possible, butit might take a long time. Local gapsin consumption and access to servicesbetween urban and rural areas shrinksubstantially by the time most coun-tries reach high-income status. Regio-nal gaps in incomes are also reversible,but this process takes much longer.Overall, regional inequality of welfarewithin countries tends to follow a re-verse U-shaped pattern, growing rapidlyat early stages of development, parti-cularly when countries go through fastgrowth phases, like China and other EastAsian countries. But, as countries growricher, regional inequality in welfaretends to decrease gradually. (Figure 33)

Social welfare convergence at natio-nal and local levels should be drivenby a combination of market forcesand policy interventions. The growingconcentration of population and eco-nomic activities in major urban areas gra-dually leads to growing congestion coststhat can only partially be offset throughplanning and infrastructure investment.

These increasing costs gradually forcecertain types of economic activity toother major cities (until they too reacha saturation point in congestion costs),and then to second tier cities. Over time,spatial reallocation of resources (migra-tion) results in a gradual move towardsa spatial equilibrium on labor marketswhere real incomes of workers areequalized both between different citiesand urban and rural areas. The experien-ce of countries where welfare conver-gence between regions and rural andurban areas was achieved still pointsat the important role of public policyin this process. Urban rural convergenceis achieved largely through the equaliza-tion of access to basic services, whichmost countries achieve at the upper--middle income level of development.At a regional level, welfare convergencepolicies may include redistribution ofresources focused on providing goodsocial services in lagging regions in orderto make populations more mobile andthus facilitate equalization of incomeand welfare outcomes through migra-tion, as occurred in Japan.25

25 World Bank (2008) World Development Report 2009: Reshaping Economic Geography.


Figure 33. Reverse U-shaped curves of divergence in regional welfare in the process ofeconomic development

Source: World Bank, 2008

Divergence between leading andlagging regions, as occurred in Po-land, is typical for countries expe-riencing rapid growth. Rapidly grow-ing countries of East Asia and EasternEurope have experienced a similar di-vergence between regions as Polandhas in recent decades. Economic activityin a number of these countries is stillconcentrated in a small number of favo-red leading areas, with agglomerationeconomies increasing their productivity,wages, and income per capita. Addi-tionally, while Polish regions are stilldiverging in terms of economic output,overall disparities in wages and incomeshave grown smaller over the last decade(even though it is not true for Podkar-packie and Œwiêtokrzyskie), suggestingthat Poland might have passed the peakof the inverse U-curve.26 It is also impor-tant to remember that overall the last20 years have been a “race to the top”for Polish regions. While according tosome measures “leading areas” outper-formed the laggards, residents of allregions benefited from growing eco-nomic opportunities and increasing in-comes.

Polish lagging regions are not a uniquecase. Development processes in mostcountries left some areas behind. It istypical for such lagging regions to be

remote and have poor access to eco-nomic density which implies poor integra-tion into economies of leading areas,their markets for labor, capital, goods,services, and ideas. As a result, it is typicalfor lagging regions to experience lowergrowth and productivity, and higherunemployment and poverty rates. Fromthis perspective, the cases of Podkarpac-kie and Œwiêtokrzyskie should be seenas normal instances of countries’ deve-lopment experiences.

This however doesn’t mean that in-dividual lagging regions are doomedto stagnation. While spatial inequalityis inevitable, particularly during stretchesof rapid growth, this should not beseen as a death sentence for regionsthat have found themselves behind.Global experience shows that individualremote areas, and specifically cities, canachieve significant growth despite ad-versity: location, climatic factors andhistoric legacies. Examples include citieslike Changsha in China, and Gaziantepin Turkey, that, despite unfavorable cir-cumstances, have become leaders ofeconomic growth in their countries,and even globally. Both cities are in re-mote locations in their countries. Gazian-tep is located in southeastern Turkey,in the Anatolia region known for cen-turies as a less industrialized and less-

26 Based on analysis of GUS wage data for Polish regions in 2004–2014.

-developed part of the country. Simi-larly, Changsha is a capital of an inlandChinese province that didn’t enjoy thebenefits of access to foreign marketsthat drove the development of coastalareas. However, through a combinationof national and local policies, both citiesmanaged to integrate into a broadereconomic context, address local growthbarriers, and work on making the most

of local economic potential. (see Annex 1)Of course, not every remote city canrepeat this achievement, and expecta-tions should be set low. However,it is clear that through removing localgrowth constraints and tapping intolocal opportunities, most cities can im-prove economic outcomes for theirresidents and residents of surroundingareas.


Conceptualizing a policyapproach to lagging regionsRegional development policy shouldn’taim to achieve equal distribution ofeconomic activity across space. Globalevidence shows that achieving spatialeconomic uniformity is an unrealistic tar-get. Policymakers should accept thateconomic growth and economic activi-ty will concentrate in more productiveplaces. This means that policy targetsfor investments into lagging regionsshouldn’t be formulated in terms of con-vergence to the leaders. Instead, deve-lopment and growth achieved by everyarea should be appreciated on its ownmerit and targets should be set on thebasis of economic trends and poten-tial of individual regions. On the otherhand, in upper-middle income countriesit is achievable and important for publicpolicy to aim for spatial convergencein welfare outcomes such as income andaccess to services.

Ensuring access to basic services andinfrastructure everywhere should bea policy priority for all governments.This includes human capital investmentsthat are proven to benefit the laggingregions, but most importantly benefitthe people by expanding their economicopportunities. In Brazil, the educationalsystem accounts for a large proportionof disparities in individual outcomes

as well as in regional economic deve-lopment.27 Investing in basic infrastruc-ture and services in remote areas is alsocritical as it improves quality of life andcreates basic conditions for human de-velopment. Local governments in lag-ging regions are often underfinanced,which means that providing access toinfrastructure and services in laggingareas often requires transfers fromhigher levels of government.

Improving institutional environmentsin lagging regions is critical to ensurethat the regions are not facing addi-tional barriers to economic growth,which can reinforce divergence. Suchinstitutional handicaps may include inef-ficient land markets that make it difficultfor businesses to maximize their pro-ductivity through location selection andrestrict agglomeration effects. Anotherexample is household registration sys-tems (like hukou in China), that restrictmigration of people from less produc-tive (mostly rural) to more productive(usually urban) areas, thus impeding pro-gress of individuals and the economyat large.28 Finally, cumbersome businessor property registration systems reducethe productivity of local businesses thatare already in a disadvantaged positiondue to their location.

27 World Bank (2008) World Development Report 2009: Reshaping Economic Geography.28 World Bank (2008) World Development Report 2009: Reshaping Economic Geography.

Improving connectivity is critical forintegrating remote areas into the na-tional economy. Improved connectivityprovides better access to markets forbusinesses in the lagging regions, whilesimultaneously exposing them to greatercompetition from businesses in leadingareas, which may be beneficial for somebusinesses in the lagging region, butthreatening for others. Activities that re-spond better to improved infrastructureare those that benefit less from agglome-ration economies: agriculture, agro-pro-cessing, and labor-intensive manufactu-ring. While governments should beaware of possible negative effects of im-proved connectivity for some of the localfirms, they should encourage this policybecause it creates incentives for capitaland R&D investments for local businessesas they face tougher competition andgives local residents access to cheaperand better products and services.

Cities in the lagging regions are wherethe opportunity for enhanced growthis concentrated. Examples of Gaziantepand Changsha (See Annex 1) show thateven in lagging regions, cities can utilizelocal endowments and agglomerationeconomies to create growth opportuni-ties. This observation doesn’t mean thatplace-based policies should be givenpriority, particularly at the national level.Rather, they should be taken withcaution, as many of them have misfiredin the past. The work of What WorksCenter for Local Economic Develop-ment29 in the UK and of Newmark andSimpson30 shows that few locations--based initiatives lead to measurable po-sitive job creation outcomes. But, if spacespecific interventions are considered,they should focus on cities, and local go-vernments and other local actors shouldbe granted greater authority to leadeconomic development, as long as theyhave sufficient capacity and resources.

A broad diversity of policies can leadto positive outcomes at a city level,but cities should keep in mind themain principles of the what, who andhow of city competitiveness. Since thecontexts of individual cities are extremelydiverse, there is no “one size fits all” scena-rio for promoting local competitiveness.However, the findings of the recentWorld Bank flagship report “CompetitiveCities for Jobs and Growth: What? Who?And How?”31 show that there are simila-rities in the characteristics of most suc-cessful cities. These cities combine poli-cies addressing economy-wide enablingconditions with policies targeting specificsectors. If cities choose to target sectors,they give priority to tradable industriesand identify sectors that are rootedin their economy, rather than aim to buildnew “Silicon Valleys” or “bio-tech clusters”.To overcome the limits of their mandatesand capacities, governments of success-ful cities involve broad coalitions, inclu-ding the private sector in policymakingand implementation. They also leveragepartnerships with national authorities andneighboring cities and regions. Finally,successful cities focus on effective imple-mentation of policies, by setting deve-lopment priorities and reflecting themin the budget allocation and buildingcoordination mechanisms that allowteams in the government to focus on sol-ving problems, rather than reportingachievements, and helping them colla-borate across the silos of governmentdepartments. A number of these ideaswere incorporated into the EU supportedResearch and Innovation Strategies forSmart Specialization that were rolled outacross Europe, but further integration ofthese principles into funding allocationis required. For instance this approachshould be used in the implementation ofIntegrated Territorial Investments, thatwere introduced in the 2014–2020 EUprogramming period.


29 http://www.whatworksgrowth.org/policy-reviews/30 Newmark, D., & Simpson, H. (2014). Place-based policies; Said School of Business, University of Oxford.31 World Bank (2015) Competitive Cities for Jobs and Growth: What? Who? And How?

EU investment in Podkarpackieand Œwiêtokrzyskie

Absorption of EU funds

Both Podkarpackie and Œwiêtokrzys-kie were major recipients of EU cohe-sion policy support in recent years.Within their Regional Operational Pro-grams (ROP) (which doesn’t include na-tional and macro regional programs) be-tween 2007–2015, Podkarpackie received€1.2 billion in EU funds, while Œwiêtokrzy-skie received €0.8 billion. Additionallya €2.4 billion Operational Program “De-velopment of Eastern Poland” (PORPW)covered Podkarpackie and Œwiêtokrzy-skie, along with three other regionsin Eastern Poland32. On a per capita basis,Podkarpackie received the second largestamount of EU support among Polishregions between 2007–2015, while Œwiê-tokrzyskie was ranked seventh out of 16,receiving almost 2,000 PLN per capitaless. (Figure 34) However, both regions re-

ceived a larger proportion of total EUfunding allocation to Poland than theirshare of population or GDP.

Spatial allocation of funding withinthe regions was not even. The moreurbanized and developed municipalitiesand counties received a larger share ofEU funds than the rest. The provincialcapitals and their functional areas ab-sorbed an especially large share of funds.Amongst all of the Polish regions, thebiggest funding gap between a capitaland the rest of its territory was observedin Podkarpackie. (Figure 35) The agglo-meration of Rzeszów received 1 753 PLNmore funding per capita than the restof the province. Œwiêtokrzyskie wasfourth among the regions in terms ofthe size of this gap (the differencebetween the capital and the restreached 1 410 PLN per capita).


32 Here Eastern Poland refers to the macro region that includes 5 voivodships.33 These maps do not account for 100% of EU funding as a large proportion of it cannot be disaggregatedspatially, for instance large transport infrastructure projects.

Figure 34. Distribution of EU funding per capitain 2007–2013 funding period

Source: GUS

Figure 35. EU Cohesion policy funds 2007–2013per capita (PLN), NUTS333

Source: GUS

The focus of EU support is best revie-wed by individual program.

• In the Podkarpackie ROP, the largestshare of funds was assigned to thepriority axis II (technical infrastructure)– 1.6 billion PLN, closely followed bypriority axis I (innovative economy)– 1.3 billion PLN. The largest projectsincluded in the ROP were transport--related projects: modernization ofthe provincial road Zagórz – Komañ-cza (162 million PLN, of which 129 mil-lion PLN were contributed by the EU),and modernization of the railroadRzeszów – Jas³o. In fact, nine out of10 of the largest EU supported pro-jects in the region were in the trans-port sector. (See Annex 2, Table 7)The University of Rzeszów was a be-neficiary of several other large pro-jects (University Centre of Innovationand Technical and Naturalist Know-ledge Transfer and Bio-Medical Scien-ces Centre of Innovative Research).

• In Œwiêtokrzyskie ROP, the biggestchunk of funding was designated tothe priority axis III – transport – closeto €200 million, followed by theaxes I (development of entrepreneur-ship) and axis II (support for innova-tion) – roughly €125 million. Transportaccounted for seven out of 10 largestEU funded projects. (see Annex 2,Table 8) Transport investment largelywent into improving connectivity ofperipheral areas of the region to thecapital, this included upgrades toregional highways, secondary roadsand enhancing the capacity of therailways. The list of other large pro-jects includes the recapitalization ofthe Loan Fund of the province, revi-talization of the historical downtownof Kielce, as well as upgrading theIT infrastructure of the local govern-ments.

• In the macro-regional program “Deve-lopment of Eastern Poland” (PORPW),close to half of the projects and more

than one third of the funds weredevoted to the “modern economy”axis that focuses on providing inno-vation support services and expan-ding university infrastructure. The in-formation society infrastructure axisincluded one large project, the broad-band web network, spanning all ofeastern Poland. Additionally, signifi-cant funding was devoted to trans-port-related investments as a partof axis III (public transport in the ca-pitals of the provinces) and axis IV(road projects). The projects from thesustainable tourism axis primarily fo-cused on the development of bikingroutes.

Results of cohesion policyin Podkarpackieand Œwiêtokrzyskie

There is hardly a robust way to evalu-ate the impact of cohesion policieson Podkarpackie and Œwiêtokrzys-kie. Lack of economic convergencemight be interpreted as a failure of thecohesion policies. But, as mentionedearlier, according to global evidence thisis hardly a fair way to judge the policy.In reality, it is next to impossible to se-parate the effects of EU investors fromother factors at a regional level. Thus,only evaluations of individual interven-tions or of perceptions of overall effectsare available.

Survey of municipalities reveals that,according to local governments, EUinvestments have had limited im-pacts on the local economies. In bothŒwiêtokrzyskie and Podkarpackie, onlya fifth of the municipalities have repor-ted a strong impact of EU funds on eco-nomic growth. A similar share of muni-cipalities reported improved businesscompetitiveness, even though this sharewas higher in Podkarpackie. Finally, onlyaround one in 10 municipalities thoughtthat EU support helped to attract inves-tors or create jobs. (Figure 36)



Figure 36. Municipal government perception of impacts of EU funds

Source: EUROREG (2013) municipality’s survey

In terms of individual interventions,EU investments can be credited withimproving accessibility of laggingregions, but its potential effect oneconomic performance is unknown.The connectivity improvements aremost visible in northern and central partsof Podkarpackie along the A4 motor-way, and in the majority of the areaof Œwiêtokrzyskie along the express-way S7. The most significant improve-ment has been on the eastern edges ofPodkarpackie, where economic perfor-mance remained rather weak. (Figure 37)Again, this emphasizes that the connec-tivity improvements might not havesignificant impacts on local economicoutcomes, either because they lead todisplacement of local business frommarkets through greater competition,or simply because in Polish scale theachieved gains in access to markets aretoo modest to lead to major economicshifts.

Figure 37. Changes in accessibility as a result of EU support(2007–2015)

Source: Oszacowanie… 2015

Conclusion and considerationfor EU approach to laggingregionsInvestment effectiveness evaluationand fund allocation shouldn’t be dri-ven by economic convergence tar-gets. For now, the significance of theeffects of EU investment on the long-term economic potential of the regionsis unclear. However, it is clear that thetarget of achieving long-term conver-gence in terms of GDP per capita is mis-construed. Instead of comparing eco-nomic growth rates, the evaluation ofcohesion investments should focus onabsolute growth targets that reflectconditions of individual regions. Additio-nally greater emphasis should be givento the role of cohesion policy in im-proving quality of life in lagging regions.This will encourage more investmentsin urban upgrading, protection of naturalhabitat and environmental sustainabilityprojects.

The focus on investment in urbanareas and improving access to urbanservices and markets for rural areasshould be officially recognized bythe EU. Though not official, the currentallocation of funds heavily prioritizesurban areas. This is largely a result ofgreater absorptive capacity of the urbangovernments. But, according to theory,global evidence, and patterns of eco-nomic growth in lagging regions of Po-land, investments in urban areas aremore likely to lead to growth and im-proved outcomes for beneficiaries.

Interregional connectivity invest-ments have been beneficial for Po-land in the past, but local connec-tivity and transport sustainabilityshould be prioritized in the future.The fact that the largest EU supportedprojects of recent years focused on con-nectivity is consistent with the conclu-sions from theory and global evidence.However, at a regional level the addi-tional effect of these projects in Poland

is likely to be limited going forward,because de facto travel time gains aregoing to be marginal. Instead, greaterattention should be given to invest-ments focusing on improving connecti-vity within regions, and offering resi-dents of rural areas better access tourban markets and employment oppor-tunities through multimodal transportoptions. This is of particular importanceto Podkarpackie and Œwiêtokrzyskie,where hidden unemployment in agricul-ture are prominent. Additionally, betterlinks between rural areas and urbanmarkets may support further commer-cialization of agriculture. Local trans-port investments are likely to be muchcheaper than major national corridorsand are likely to have a more direct effecton economic outcomes of people andcommunities.

Focus of investments in laggingareas should shift from basic infra-structure to education and health. In-ternational development experiencesshow that basic infrastructure and servi-ces (along with basic institutional condi-tions) have the most significant impactat low-levels of development, whileat latter stages of development, humancapital plays a critical role. Recent WorldBank analysis of growth patterns in750 of the world’s largest cities showedthat human capital and innovation areimportant determinants of growth forcities of upper-middle and high-income,but not at low-income level.34 This isespecially true for countries and regionsaiming to transition from a middle-in-come economic model, which achievesproductivity growth through technolo-gy adoption, to a high-income economicmodel, where innovation is the source ofproductivity gains. In Polish lagging re-gions, access to basic services and infra-structure is already at a sufficient levellargely due to EU investments of the


34 World Bank (2015) Competitive Cities for Jobs and Growth: What? Who? And How?

last decade. Additionally, at current le-vels of development of lagging regions,further growth and transition to highincome status will require innovation.Thus, greater attention should be givento investments into education, health-care, and other forms of human capitaldevelopment and innovation infrastruc-ture, rather than basic service provisions.

Place-based private sector develop-ment policies should start with enga-ging local actors and building theircapacity. Generally, place-based poli-cies do not work, though there are caseswhen they do. Cities that have managedto turn themselves around, despite ad-versity, were characterized by an inclu-sive and well-informed approach to poli-cy making at a local level. They oftenhad broad based coalitions of actors,and rather sophisticated and capable

governments.35 This suggests that to po-tentially succeed, place-based policiesshould be driven by local actors andimplemented through coordination ofmultiple actors and joint prioritizationof investments. But first, the investmentsshould focus on building capacity of lo-cal actors for designing and implemen-ting economic development initiativesin an inclusive manner. This may includesupporting development of formalpublic private dialog structures, tech-nical trainings, improving planning andbudgeting practices, increasing transpa-rency and accountability of governingbodies and optimizing organizationalstructures to promote focus on imple-mentation. Integrated Territorial Invest-ments in traduced in the 2014–2020programming period of the EU Cohe-sion Policy creates a great opportunityfor this approach to be implemented.


35 Doner, R. F., & Schneider, B. R. (2016). The Middle-Income Trap. World Politics.

Annex 1.Competitive Cities in LaggingRegionsGaziantep, Turkey

30 years ago, Gaziantep was a medium--sized city in a lagging region of Turkey.It was poorly integrated into the grow-ing economy of the coastal west, anddidn’t have natural resources or arablelands to kick start its economy. Migra-tion to the coast was seen as the big-gest life goal by most of the residents ofthe city.

Today, Gaziantep is one of the fastestgrowing metropolitan economies in theworld. It is a city that has exported itsway to prosperity. Its economic successstory is dominated by indigenous lightmanufacturing firms, which now selltheir products in some 175 countriesaround the globe. Some top-level num-bers are impressive: Gaziantep’s popu-lation has grown from 600,000 as re-cently as 1990, to about 2 million inha-bitants today; merchandise exports in-creased tenfold in just 11 years, from$620 million in 2002 to $6.2 billionin 2013. Prosperity is evident in the city’sstreets, and Gaziantep remains a mag-net for tens of thousands of newcomerseach year. This once quiet corner ofTurkey has emerged as an internationalmanufacturing hub, and increasinglya tourist destination.

The road to prosperity for Gaziantepwasn’t straight-forward and its successstory has flaws. The city benefited froma positive national policy context, parti-cularly trade liberalization, and from na-tional government investments in infra-structure. The light manufacturing ex-port driven growth model also wouldn’thave been possible without the city’sfavorable geographic location on esta-blished trade routes. However, the keyactors in the city played a major rolein making the most of these encourag-ing conditions.

Local leaders have prioritized ensuringa business environment conducive tocompany growth, which includes a di-verse package of initiatives. In additionto lobbying the central government fornational investment in climate improve-ments, successive mayors have workedtogether to streamline bureaucracy, re-duce the administrative burden on com-panies, and provide adequate infrastruc-ture for production and market access.Being in southeastern Anatolia, Gazian-tep also benefits from comparativelylow business costs, including land andlabor.

Gaziantep’s Organized Industrial Zones(OIZs) have been an important, and likelyvital, ingredient in the metropolitaneconomy’s export-driven success. Loca-ted 15 kilometers northwest of the city,the OIZs host more than a thousandcompanies employing over 100,000workers. Bringing together businessespreviously scattered geographically, theOIZs offer: quality infrastructure (ener-gy, wastewater treatment); expeditedpermitting/one-stop service centers; theclustering of similar firms; and an effi-cient, less bureaucratic private-sectorregime. Four OIZs are currently in opera-tion, one is under construction, anda sixth one (larger in size than the pre-vious five combined) is planned for a lo-cation southwest of the city, and thuscloser to Mediterranean ports. Based ona national law, OIZs exist all over Turkey,but have been much more successfulin Gaziantep than the government-runones in Adana or Mersin, primarily be-cause of their private-sector characteri-stics: they were initiated by the Chamberof Industry (GSO), forming a new legalentity which acquires land, allocates itto firms, and can withdraw it again ifland is not used productively. Firms con-tributed to the OIZs’ construction, andlater become shareholders. The OIZs


are run by five-member managementboards. While some of Gaziantep firms’growth might have happened anywaywithout the OIZs, it is clear that by pro-viding critical infrastructure and a con-ducive regulatory regime not availableelsewhere in the city, the OIZs haveplayed a key role in helping Gaziantepcompanies to expand, export, collabo-rate with similar adjacent businesses,and benefit from other effects usuallyassociated with geographic agglome-ration (knowledge spillovers, the de-velopment of a specialized labor pool,etc.).

But most impressively, Gaziantep provi-des a stellar example of effective stake-holder engagement (or public-privatedialogue – PPD) and collective action foreconomic development. The city’s pri-vate sector is well developed, with signi-ficant institutional capacity and funding,but also a keen interest in shaping thecity’s development. Since at least thelate 1980s, Gaziantep’s business leadershave had the ear of the city government,and particularly the Mayor of the Metro-politan Area, who instituted a series ofpro-business initiatives and greatly en-hanced the city’s functionality and livabi-lity during his 15 years in office. Althoughinformal relationships remain important,the institutional framework for this en-gagement is provided by the City Coun-cil, a sort of metropolitan parliamentin which government and stakeholderscome together to discuss issues andformulate recommendations, includingon economic development. Its greatestaccomplishment is facilitating dialoguebetween business leaders, universitiesand communities, which otherwisemight not happen. On the whole, localgovernment in Gaziantep has beena valuable partner to business, withoutseeking to dominate economic deve-lopment, nor does it directly benefitfrom business growth through increa-sed fiscal receipts, for example. Collecti-vely, Gaziantep’s business and electedleaders have also been able to leveragetheir political influence in Ankara, actingas champions for the city and securingcentral government support for sucheconomic development priorities astransport, OIZs, technology develop-

ment, and capital access and exportassistance for SMEs. In fact, in Turkey,Gaziantep is known as a city that re-gularly punches above its weight politi-cally.

Changsha, China

Changsha is a mid-size (for China), se-condary city that has grown its economyby nurturing and diversifying its coreindustries, and systematically buildinghuman capital. Changsha lacked theadvantages of other Chinese cities in thecoastal provinces, whose promotion ofhigher value-added manufacturing be-nefited from strong transportation link-ages and external connectivity, as well ashigh levels of human capital. HoweverChangsha has managed to expand itsmanufacturing base, both attracting andfostering the growth of firms that havebecome globally competitive. Outsidemanufacturing, the city is home to oneof China’s most dynamic media compa-nies, albeit largely as a result of provincialactions. The city’s success is partly due toendowments and national and provin-cial factors. Yet, the city’s own govern-ment has been an important catalyst forgrowth, effectively addressing perennialproblems such as inter-agency coope-ration, government support for local bu-sinesses, and improvements to humancapital levels.

Above all, the municipal governmentstrategically intervened to capitalize onthese national trends and location ad-vantages. The municipal governmentmade deliberate investments to improvethe city’s competitiveness, prioritizingthe growth of existing firms as well asthe attraction of new firms. Changshais an example of a city that simulta-neously utilized all of the key levers thatcities can use to promote economic de-velopment as defined by the WorldBank flagship report “Competitive Citiesfor Jobs and Growth: What? Who? AndHow?”. They are: improvement of regu-latory environment, development ofskills and fostering innovation, focusingon providing infrastructure and accessto lend and providing support to busi-nesses and entrepreneurs.)


The municipal government actively sup-ported the growth of primary industries,and in particular, the construction machi-nery industry. The most unique govern-ment initiatives were intended to pro-mote firms that could be globally com-petitive by providing market informationto firms, promoting sourcing from topglobal input suppliers in lieu of local pro-curement requirements, and support forR&D and attraction of top talent to thecity. Through promoting individual firms’competitiveness, the government hasconsciously and unconsciously cultiva-ted a fierce competition between localfirms. The construction machinery indu-stry in Changsha has accounted for over100,000 direct jobs, generated workertraining programs and contributed signi-ficantly to municipal tax revenues andincreased incomes that have improvedwelfare as well as competitiveness.

The city placed a high and sustainedpriority on human capital and developeda two-pronged approach to improveupon existing levels of human capitalin the city. First, the city attracted high--level talent both domestically andabroad: leveraged national talent attrac-tion programs; and initiated municipalprograms of their own to effectively tar-get, recruit and compensate new ta-lent willing to relocate to the city. Simul-taneously, the city addressed existingpools of talent through the regulation

and promotion of vocational degreeprograms and increased employmentthrough the development of specialized“in-demand” skill sets. Both strategieshave been successful, with vocationalschools teaching applicable skills and ta-lent programs attracting thousands ofhigh-level “talents” to the city.

These initiatives were successful largelydue to Changsha’s extremely effectivegovernance model. The government uti-lized effective inter-agency coordinationmechanisms, called “Leading Groups”to coordinate investment attraction andinvestor aftercare across various depart-ments and levels of government. Manycities find investment attraction hardto execute in practice, with investmentsfrequently getting stuck due to govern-ment departments working in silos.However, the Leading Groups helpedthe city to avoid these silos by providinga framework with clear roles, and repor-ting requirements and accountabilitymechanisms. For instance, one of thekey rules of Leading Groups is that onlyunresolved problems are elevated tothe next level, not reporting of achieve-ments, and employees are encouragedto resolve issues at the lowest level pos-sible. At the same time, the city was disci-plined in letting go of industries thatwere not competitive, or competitiveonly in the presence of permanent sub-sidies.


Annex 2.Largest EU-supported projectsin Podkarpackieand Œwiêtokrzyskie


Table 7. Biggest EU supported projects – Podkarpackie region

No Project

Value in PLN

SectorTotal project EU support

1

Construction of the motorway A-4 sectionsTarnów – Rzeszów, Krzy¿ – Rzeszów Wschód,and the section of the expressway S-19 RzeszówZachód – Œwilcza.

5 295 490 060 2 969 050 618 transport

2Construction of the motorway A4 Rzeszów– Korczowa

4 754 825 500 2 890 243 729 transport

3Modernization of the rail line E30/C-E30, sectionKraków – Rzeszów

3 440 923 905 2 054 842 573 transport

4Improvment of the rail traffic safety, construction ofthe new, high standard rail interchanges

582 924 050 445 362 086 transport

5Modernization of the national road No 4, sectionMachowa – £añcut

590 494 386 439 068 566 transport

6Organization of the integrated public transportin Rzeszów and vicinity

333 110 069 250 555 783 transport

7Modernization of the rolling stock PKP Intercity S.A.for the rail line Przemyœl – Szczecin – Etap II

421 530 697 239 447 059 transport

8Broadband Internet network for eastern Poland– Podkarpackie voivodeship

322 011 631 222 845 377Telecommunication

and e-services

9Construction of the expressway S19, sectionStobierna – Rzeszów

259 552 913 201 224 582 transport

10New rail rolling stock for the connection betweenvoivodeships, operated by regions Ma³opolskie,Podkarpackie, Œl¹skie i Œwiêtokrzyskie

273 957 691 188 977 859 transport


Table 8. Biggest EU supported projects – Œwiêtokrzyskie County

No Project

Value in PLN

SectorTotal project EU support

1New rolling stock for PKP Intercity S.A. passengerrail transport – 20 electric trains

1 156 610 820 658 050400 transport

2Construction of the expressway S7 Radom Jedlinsk– Jedrzejów, including Kielce ring road

837 326 440 629 254 375 transport

3Construction of the expressway S7 sectionsRadom Jedlinsk – Jedrzejów and Skar¿ysko-Kamienna– Wystêpa

719 147 927 504 927 129 transport

4Improvement of the rail traffic safety, upgrading ofrailway crossings

582 924 050 445 362 086 transport

5Construction of the expressway S12/S74, sectionKielce – Cedzyna

354 652 501 266 618 634 transport

6Public transport development in KielceMetropolitan Area

341 568 102 227 753 837 transport

7New rail rolling stock for the connection betweenregions Ma³opolskie, Podkarpackie, Œl¹skieand Œwiêtokrzyskie

273 957 691 188 977 859 transport

8 Construction of the waste utilization plant in Kielce 306 003 585 165 076 182Environmental

protection

9 Broadband Internet network development 200 728 909 139 420 589Telecommunication

and e-services

10Development of the infrastructure ofJan Kochanowski Kielce University – of the UniversityCampus construction

161 737 852 135 506 669Science andeducation

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