What do we owe a place? How the debate about left-behind places is challenging how we distribute public funding and the problems it should address

Introduction

The article “The revenge of places that don’t matter (and what to do about it)” by Andrés Rodríguez-Pose (2018) resonated with many readers because it captured the injustice felt by people living in left-behind places. They think that progress passes by the place they call home, which no longer holds a future for them or their children. This sentiment is eloquently described in “There is nothing for you here” by Fiona Hill (2022). These places may have experienced an economic slowdown or population decline or a reduction of their quality of life compared to other places. Public and private services may have retreated and infrastructure may be slowly crumbling. People living in these places feel ignored by the government because either it failed to acknowledge these problems or failed to fix them.

Some economists, however, argue that these problems cannot be fixed and that allocating more funding to these places is a bad idea because it would generate lower economic returns than investing in more successful places. To the residents of these places, this may feel like adding insult to injury by acknowledging the problems and refusing to fix them. Maybe it should not come as a surprise that so many people rallied around the term “left-behind places”. Policies that boost innovation and transport connections often end up favouring more affluent places. R&D and patenting are highly concentrated in a few very productive regions. As a result, these regions are more successful in attracting research funding and benefit more from tax policies that encourage R&D. Selecting transport projects that generate the biggest reduction costs tends to favour places with a large population and high incomes, as local incomes are used to translate reduced travel time into cost reductions. This is not to say these criteria are wrong, but that the projects selected in this way can be portrayed as benefitting large affluent places more than small, poor places.

Experts arguing that public funding should not go to poor places, but to more productive (and thus affluent) places because in these places the return on investment will be higher, has helped to fuel narratives that elites in the capital are depriving the real people in real places of their fair share of funding (Müller 2016). A wide range of populist and Eurosceptic parties have pushed this narrative and have seen substantial electorate gains exactly in the places that have experienced economic decline or stagnation (Dijkstra et al., 2020; Rodríguez-Pose et al, 2023a). These parties argue that only they care about the people in left-behind places and only their policies will ensure a better future for them. In France, for example, the Rassemblement National argued for a de-metropolisation of France to help the smaller cities and towns.

The spatial distribution of funding can generate strong emotional reactions and political debate. For example, in the Netherlands, a debate has emerged about how much funding should go to the Randstad, which includes Amsterdam, the Hague, Rotterdam, and Utrecht, and how much to the rest of the country.¹ While some people are convinced that their region does not receive enough funding, others may feel equally strongly that exactly the same region has received too much funding for too long.

Big transfers between regions, especially when they become quasi-permanent, can lead to political tension. Transfers that offset a temporary setback, such as a short-term increase in unemployment due to a factory closing can be seen as insurance. All regions could be exposed to such a short-term shock and, therefore, they pool their resources and provide funding to the affected regions to help offset the increased costs. This works for short-term shocks. When the same regions keep receiving large transfers, people living in richer regions, who are paying for the bulk of these transfers, may argue for more fiscal decentralisation, a more federal country and even outright independence. These changes would give the richer regions more control to reduce or even abolish these transfers. The political parties that argue in favour of the independence of Flanders and Catalonia or the UK leaving the EU do not focus exclusively on reducing these transfers, but these transfers do make it easier to convince people they will be better off once they are independent or out of the EU.

To decide whether a region receives too much or too little public funding, we need to answer two questions.

1. How much funding does it receive currently?

2. How much funding should it receive?

The debate about funding is typically held in relative terms. People argue about which places need more or less funding. To frame this debate, however, we should start from the current (absolute) level of expenditure. The current level of expenditure affects that arguments can be used to justify either increasing or decreasing it.

The second question is fundamentally about what values should guide our decisions. Should we be focussing on efficiency or inequality? Should we favour autonomy or reducing disparities? How should we assess fairness? Does it depend on providing all places with the same funding or does it require the same or equivalent outcomes? No single value can guide all decisions, the goal is to understand which values to use, and when.

How much public funding does a place receive?

National public expenditure and investment are carefully monitored and data are regularly published. The sub-national distribution of public expenditure and investment, however, is rarely properly measured. Such a distribution does face a number of methodological obstacles. Public expenditure is large and complex. For example, in the EU public expenditure is around 46% of GDP. It contains many categories that have no obvious sub-national dimension, such as interest payments on national debt, national defence and general public administration.

The expenditure of sub-national governments can be attributed to the area they govern, but the expenditure of the central government is more complicated to disentangle. Public expenditure can be allocated to the place where it was spent or to the places that benefited from the expenditure. For example, does a hospital or a school only benefit the place where it is located in or also the places where its patients or students live? Other types of expenditure are easier to allocate. For example, unemployment benefits can be allocated to where the recipient lives.

Public investment in the EU is around 3% of GDP and thus much smaller than public expenditure. It is typically dedicated to specific projects, which should make it simpler to regionalise. However, only a small number of EU countries publish the regional breakdown of total public investment. For example, Poland has estimated a regional distribution of total government gross fixed capital formation and Spain has published data on investments by local and regional governments, but not central government (EC 2022). To regionalise investment, we need to decide whether to attribute it to the place where it was spent or where the benefits were felt. For example, a bridge for a high-speed train that only passes through the region (and does not stop there) will generate few benefits for that region.

These methodological difficulties are further compounded by the political sensitivity of this distribution. However, a democracy can only function properly if the actions of the government can be scrutinised and debated. Therefore, it is paramount that a regional and local breakdown of public expenditure is calculated and published annually. This work should start with the publication of expenditure by regional and local governments. The OECD has an ongoing project, the Regional and Municipal Government Finance and Investment Database (REGOFI and MUNIFI), where they collected disaggregated data on government finance for each region and municipality.² This work should be followed by a regionalisation of central government expenditure that is most relevant for regional economic development and local quality of life. Using the first level Classifications Of The Functions Of Government, these would be economic affairs (which includes transport), health, education and social protection. To the extent possible, this classification should consider the geographical distribution of the benefits of this expenditure.

Only when we know the current distribution of public funding, can we decide how it needs to change.

How much public funding should a place receive?

The debate about what is a fair distribution of public expenditure within a country is not new, but population decline, stagnating economic growth and austerity have given it a new urgency. To assess what is fair, we need a benchmark. Here, I present six stylised benchmarks.

1. Autonomy: Using GDP as the benchmark would distribute public expenditure according to economic activity. This would amount to treating each region as a separate country without any automatic sharing of resources. It could be described as sovereignty, independence or simply zero-solidarity. It implies that tax revenue stays in each region and is not shared with other regions.

2. Efficiency means allocating public funding to projects where the return on investment is estimated to be highest. This approach is frequently used for innovation funding and transport projects.

3. Continuity: To some, the past provides the most important benchmark. Continuity means that a region should receive the same amount of public funding over time, regardless of changes in its economic fortune, population or the current disparities in per capita funding.

4. Equality of input: Using population as a benchmark would redistribute funding from rich to poor regions. The bigger the income gaps, the bigger the redistribution would be. It ensures that all places can spend the same amount of funding regardless of income, need or opportunity.

5. Equality of output: Here, the benchmark is to ensure that everyone receives the same benefits and the same level of service regardless of where they live. For example, providing the same unemployment benefits in all regions. Many services are provided for identical costs in all regions, such as postal services, broadband, education and health care, despite the higher costs of providing these services in some locations.

6. Anti-disparity: This benchmark goes beyond the equalisation of input or outputs. It aims to reduce or limit disparities by providing the most funding to the regions that are worst off. There is considerable debate on how to define worst off, but many policies rely on low economic development, high unemployment or high poverty.

Sweden³ and Norway⁴ both have a strong local government financial equalisation system. These systems combine input equalisation and output equalisation. Norway calls the former income (for example, tax) equalisation and the latter equalisation of expenditure needs. The first part compensates municipalities for differences in their tax base, while the second part takes into account the higher cost of service provision in some municipalities, so-called involuntary cost differences. The aim of these mechanisms is to provide everyone with an equivalent access to services regardless of one’s place of residence.

The German constitution has an article (107) that calls for equalisation of funding between Länder, that is, input equalisation. In addition, it gives the federal government the right to create legislation to maintain the uniform living conditions, that is, output equalisation.

Output equality thus shifts funding from places where providing these services is cheap (often urban) to places where this is expensive (often rural). In some cases, this benchmark shifts funding to urban places, for example when teachers, nurses or civil servants are paid more in cities to compensate for the higher costs of living.

Three examples of anti-disparity policies are EU cohesion policy, the Rebuilding East Germany policy and the UK Levelling Up policy. All three aim to reduce disparities in economic development, but also more broadly in access to opportunities and quality of life. An anti-disparity policy will require substantially more funding than an output equalisation policy, but it is not a permanent policy. Output equalisation policies are designed to compensate regions for higher operation costs of service provision. This policy is not expected to reduce these higher provision costs, it is only designed to offset them. By contrast, anti-disparity policies are expected to reduce disparities in the medium term. Once disparities have reached an acceptable level, the additional funding would no longer be needed.

Each of these benchmarks can be linked to a particular philosophy, political persuasion or priority. Autonomy can be linked to Tiebout’s work (1956) arguing that people can “vote with their feet”. This theory argues that if municipalities offer different tax rates and different baskets of goods and services, people will move to the municipality with their preferred mix of taxes and services. Empirical research, however, indicates that this only applies to the affluent (Latimer, 2023).

Efficiency appeals to those who want to maximise growth, while continuity appeals to conservatives.

Equality of input may attract people arguing that all places should have a level playing field in terms of public funding. Equality of output would be appealing to fans of Rawls’s theory of justice (2005). Behind the veil of ignorance, you do not know if you will be born rich or poor, whether you will live in place with high or low quality of public services or high or low unemployment rates. Thus, a benchmark that ensures all places offer a similar quality of public services and benefits should fit well with this theory. An anti-disparity approach should appeal to those who are concerned that territorial polarisation may lead to political polarisation.

The benefit of these benchmarks is that it provides a clear structure for a debate about the spatial distribution of public funding. For example, if rural areas are poorer than cities and receive more public funding per capita than cities, this could be justified by arguments in favour of reducing disparities, equality of output and continuity, but not by autonomy, equality of input or efficiency (if funding would, indeed, lead to a higher return elsewhere).

The political impact of left-behind places has increased the interest in reducing territorial inequalities. Three of the six benchmarks ignore territorial inequality: autonomy, efficiency and continuity. The remaining three consider these inequalities to differing degrees: equality of input only evens out territorial differences in public funding per capita, equality of output goes one step further and aims for the provision of equal or equivalent quality services, while anti-disparity aims to help the worst off regions most. In many countries, differences in poverty rates, health and unemployment lead to automatic transfers. While this helps these regions to offset their higher costs, it does not allow them to fix the underlying problems. The debate about left-behind places highlights the inadequacy of a compensatory policy and calls for a more ambitious policy that reduces regional disparities.

The debate about left-behind places also widens the types of inequalities we should consider (see Pike et al., 2023). It should not be limited to economic development or unemployment but should consider a much broader range of issues. Here, I want to discuss two inequalities that are strongly linked to left-behind places: economic decline and population decline.

Do we owe more funding to economically declining places?

When a region goes through economic decline, its unemployment and poverty rates increase. In most countries, this leads to automatic transfers to that region. While these transfers help to limit the impact on the households concerned, they do not necessarily contribute to reigniting private sector growth. Some people may move to a different region to find a job and some new jobs may move to the region as wages and real estate values drop, but recent evidence of growing internal economic disparities (OECD, 2023) and slowing down of migration (McCann, 2023) suggests that it is far from guaranteed that such a region will bounce back quickly. If unaddressed, long-term economic decline will lead to a region becoming so poor that it would qualify for more funding as a less developed region, but this may make it harder and more costly to turn around its economic prospects. Therefore, the recent high-level report on Cohesion Policy (EC, 2024) argued that EU regional development policy not only should go beyond a focus on less developed regions but also should consider regions experiencing long-term economic stagnation.

Long-term economic stagnation drives Eurosceptic and populist voting in the EU and the USA (Dijkstra et al., 2020; Rodríguez-Pose et al., 2023a; Rodríguez-Pose et al., 2023b; Rodríguez-Pose et al., 2021). Helping regions in economic decline can address one of the most neglected negative externalities linked to the growing concentration of economic activity and its ensuing territorial polarisation: the political repercussions of economic decline. The discontent generated by prolonged stagnation is not just a social and political problem but can also become an economic one. When anger turns into support for political extremes or outright revolt, the result is less economic dynamism for all (Funke et al., 2023). Policies aiming at developing lagging and left-behind regions, such as the European Cohesion Policy, have been shown to prevent or at least reduce the rise of discontent (Rodríguez-Pose and Dijkstra, 2021).

Investing in an economically declining region, however, requires a different approach than in a less developed region (see EC, 2024). While less developed regions may still need, and benefit from, investments in infrastructure and physical capital, regions in economic decline may not. If infrastructure and connectivity is not a bottleneck for development in an economically declining regions, it should invest in other measures such as those promoting entrepreneurship, trade, innovation, education, better governance and an efficient business environment.

Public investments in economically stagnating regions are more likely to trigger economic growth if three conditions are fulfilled. The public investments should be truly additional and not be undercut by reductions in other public investments in the same region. These investments need to be big enough and guaranteed for multiple years to send a strong signal to private investors that the government aims to strengthen the investment climate in this region. Finally, the investment should focus on the regional opportunities and needs. In other words, it has to be an integrated, place-based development policy. The UK White paper on levelling up⁵ expressed high ambitions to reduce disparities, but it was unclear to what extent the funding was truly additional or merely a repackaging of investments that had already been planned. The funding was split over a wide range of different programmes, which makes it hard to set up an integrated strategy. Finally, the funding was not allocated to specific regions or places, which meant that private investors did not have a clear picture of how much of these funds would come to their region.

Do we owe more funding to places faced with population decline?

Although many towns and cities have survived for hundreds of years, not all survive. Some places are abandoned because of natural or manmade disasters, such as Pompeii to Chernobyl. Other places are abandoned due to radical economic changes from ghost mining towns to haunted rural hamlets. Nevertheless, many places survive such disasters and changes as well. Cities are rebuilt after fires and earthquakes. Towns reinvent themselves and find new economic opportunities. Villages abandoned by farmers are repopulated by tourists and digital nomads.

Settlements are not only confronted with disasters and economic change but also demographic change. Demographic change tends to happen more slowly, but its long-run impact may be bigger. In a country with a shrinking population, inevitably many places will experience a reduction of their population and some of the smaller settlements will entirely empty out. This also happens, to a lesser extent, in countries with a growing population.

The World Bank has strongly argued that public policies should not fight demographic change and should allow settlements to disappear. Their Report on Reshaping economic geography (World Bank, 2009) argued that we should prioritise funding in cities and encourage people in rural areas to move to the city. This report should be seen in light of a long history of development aid that was heavily focussed on agriculture and keeping people in rural areas to reduce urban growth. If indeed rural areas received more funding than cities, this report may have led to a more even distribution of funding between cities and rural areas; although it advocated for an uneven distribution in favour of cities.

The World Bank’s more recent publication Place, Productivity and Prosperity (Grover et al., 2022) presents a more nuanced argument but still argues strongly in favour of allowing a place to empty out. As an emblematic example, it describes a 19th century mining town in Montana, which has now become a ghost town. What is missing in these two publications, however, is the question of scale. In the coming decades, some small hamlets and villages will become uninhabited, but this is not the case for larger regions or cities.

“The Revenge of places that don’t matter” opens with an economist explaining to the people of Liverpool that the best solution to the decline of their city was to stop investing in Liverpool, as past policies had failed, and that it would be far more cost effective for them to move to a larger agglomeration where opportunities abound. In other words, everyone would be better off if Liverpudlians—and for that sake, the majority of the population of the North of England—moved to London. This anecdote captures the complete disregard for the question of scale very well. What may be the best option for a small island or village cannot, and will not ever, be a realistic option for Liverpool, a city whose size is considerably larger than the prosperous and dynamic Nordic capitals—let alone the North of England.

If we accept that many villages and hamlets will empty out, should we allocate more funding to places with a shrinking population and if so, what for? Within the EU, population reductions already affect 30% of regions, a share that is projected to increase to 50% by 2040 (EC, 2022). This growing prevalence of population reductions argues against allocating more funding to this growing group of regions. In most cases, the reductions will occur gradually and will not have a dramatic impact. Places confronted with rapid and prolonged population reductions, that is, depopulation, will be more strongly affected. The reduced demand for public services, abandoned housing and reduced tax revenue will be difficult to resolve alone. These places may need additional funding to ‘right size’ (that is to down size), their public services, their infrastructure and even their cities and towns.

The pitfall such places should avoid, however, is to try to reverse population decline. This is likely to fail, especially in a country with a shrinking population. Paying or incentivising people to move to a region with a shrinking population is likely to be expensive and unlikely to have a big impact. The funding will inevitably support people who would have moved anyway, which increases costs. In addition, such policies will fail to convince enough people to move to alter the overall demographic dynamic.

Encouraging people in a shrinking region to concentrate in a few of the stronger villages, towns or cities in the region could help to keep local private and public services in those places accessible and affordable. Many towns and cities have the size to provide not just cost-effective public goods and services but also to serve as hubs for dynamic and viable economic activity. Such a decision should not be imposed, but created through a wide public debate on where to concentrate public services. A public commitment to keep the school and hospital in a particular town open, while others may have to close, could entice people to move to that town or to stay there. If such moves generate savings in terms of public service provision and infrastructure, these could be used to offer financial support to people moving out of some of the very small settlements that are likely to end up disappearing as a result of population decline.

But when moving up the population scale, the demographic decline in large but shrinking cities is in a completely different league. Population decline in large but shrinking cities, such as Detroit, Toledo, Louisville in the USA, Glasgow, Belfast, Liverpool, Sheffield in the UK, or many of the mid-size cities in Central and Eastern Europe, does neither mean that these cities will disappear, nor that they cannot rebound from demographic decline. History is full of examples of the rise, decline and rise again of cities. From Athens to Rome to the more recent case of Pittsburgh large cities that undergo demographic decline have the potential to reinvent themselves into new and dynamic cities. As in the case of Pittsburgh, shrewd public investment can make a world of difference in helping these cities take off again.

Conclusion

The debate about left-behind places has reignited a discussion about the spatial distribution of public funding. One of the big obstacles to a more informed debate is the absence of reliable estimates of total public expenditure per region and municipality. While there are many technical and political obstacles to overcome, we should prioritise the publication of annual expenditure per region and per municipality. We should also develop methods to regionalise central government expenditure on economic affairs, education, health and social protection.

The current distribution, however, does not tell us what the right distribution is. This commentary proposes six benchmarks that can be used to allocate public funding. Three of these ignore territorial inequalities: efficiency, continuity and autonomy. The growing popularity of populist and Eurosceptic parties, which promote the narrative of territories neglected by elites, raises questions about the extent to which these allocation mechanisms should be used. The remaining three mechanisms take into account territorial inequalities to varying degrees. Equality of input ensures that all places have the same amount of funding per capita. Equality of output aims to provide a similar level of public services to all places. While both these benchmarks can attenuate some territorial inequalities, they are insufficient to respond to big disparities. Anti-disparity allocates funding to the regions that are the worst off.

The left-behind places debate expands the inequalities that should be taken into account when allocating funding. Two prevalent ones are relative economic decline and population reductions. This commentary argues that relative economic decline should be considered when allocating funding for two main reasons. It can help regions in decline to recover more quickly and avoid economic decline becoming entrenched. It can also help to reduce the appeal of populist or Eurosceptic parties.

Population reductions are more complex and its impact depends both on the scale and the speed of those reductions. Large regions and cities will not lose their entire population and their population may start growing again in the future. For example, both London and Brussels lost population for decades and then started to grow again surpassing their previous maximum population. Only very small hamlets are likely to become completely uninhabited when an ageing population is not replaced. Slow population reductions are taking place in a growing number of regions and countries, which makes it less suited to identify regions that need more funding. Rapid and sustained population losses, or depopulation, may require more funding to adjust public services, infrastructure and housing to the smaller population size. Although local and regional politicians may want to reverse population reductions, this rarely works, especially if the population of the country is also shrinking. Such strategies can become very costly failures. A more suitable approach is to accept the smaller population and focus on maintaining and improving the quality of life of the current residents.

References

Footnotes

Author notes