OECD Regional Outlook 2023

THE LONGSTANDING GEOGRAPHY OF INEQUALITIES

 OECD Regional Outlook
2023

THE LONGSTANDING GEOGRAPHY OF INEQUALITIES

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Please cite this publication as:

OECD (2023), OECD Regional Outlook 2023: The Longstanding Geography of Inequalities, OECD Publishing, Paris,
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 3

Foreword

Over the last two decades, while income gaps between OECD countries have narrowed, gaps between
regions remain significant and within many countries have grown. Large metropolitan regions have
continued to pull away from other areas, many of which are confronting shrinking, ageing populations and
lower quality infrastructure and public services. Impacts of recent shocks, including the COVID-19
pandemic and Russia’s war of aggression against Ukraine, and megatrends, threaten to widen gaps
between regions, deepening the longstanding geography of inequalities.
However, this is not inevitable. This publication shows that over the past two decades, several countries
have been able to narrow gaps between regions. As policymakers seek to emulate their success, they
must look to seize the opportunities and address the risks presented to regions by climate change,
automation, digitalisation and demographic shifts, as well as changing patterns of globalisation.
This sixth edition of the OECD Regional Outlook supports policymakers across OECD countries in their
efforts to tackle inequalities and achieve more inclusive prosperity and well-being in regions, cities and
rural areas. The report presents new evidence on the evolution of inequalities between regions over the
past 20 years. It also sheds light on the critical role of productivity in addressing regional inequalities and
the importance of improving infrastructure and public services in lagging regions as a platform for their
revival, and for resilient, sustainable and inclusive growth. It shows how virtuous or vicious cycles can
develop within regions, with far-reaching implications for the opportunities available to residents.
This OECD Regional Outlook emphasises the importance of policy frameworks that are agile and flexible
to respond to future shocks. The report explores different forward-looking scenarios that contribute to
ongoing reflections on future-proofing regional development policy to deliver more equal opportunities
across regions. Governments in OECD countries need to take bold action to tackle the longstanding
geography of inequalities, and the OECD Regional Outlook 2023 concludes with a policy roadmap to guide
those efforts now and in the future.

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Acknowledgements

This publication was produced by the OECD Centre for Entrepreneurship, SMEs, Regions and Cities
(CFE), led by Lamia Kamal-Chaoui, Director, as part of the programme of work of the Regional
Development Policy Committee (RDPC).
This publication was co-ordinated by Delphine Clavreul, policy analyst, under the supervision of
Dorothee Allain-Dupré, Head of the Regional Development and Multi-level Governance Division of CFE.
Delphine Clavreul drafted Chapters 1, 4 and 5, and edited the report. Ana Moreno Monroy drafted
Chapter 2, under the supervision of Enrique Garcilazo. Federica Daniele drafted Chapter 3 under the
supervision of Rüdiger Ahrend and Alexander Lembcke. Frédéric Weill (Futuribles) provided important
written contributions to Chapter 4. Delphine Clavreul and Mauricio Sepúlveda Vargas co‑ordinated the
development of the country pages (available online) complementing the report, with the support of Tainá
Souza Pacheco. Eric Gonnard and Claire Hoffmann provided valuable statistical support, while Mauricio
Sepúlveda Vargas helped with the oecdplot R package.
This report benefitted from insightful comments and inputs from colleagues in CFE: Nadim Ahmad,
David Burgalassi, Betty-Ann Bryce, Claire Charbit, Isabelle Chatry, Amal Chevreau, Marcos Diaz Ramirez,
Michael Flood, Peter Haxton, Soo-Jin Kim, Lukas Kleine-Rueschkamp, Michelle Marshalian,
Tadashi Matsumoto, Maria Varinia Michalun, Atte Oksanen, Cem Özguzel, Andrew Paterson, Anna Rubin,
Raffaele Trapasso, Geoff Upton, Miquel Vidal Bover, Stephan Visser, Alison Weingarden,
Courtenay Wheeler, Yingyin Wu and Isidora Zapata. Trish Lavery and Dexter Docherty of the OECD
Strategic Foresight Unit also provided useful feedback on Chapter 4. The OECD Secretariat thanks David
Castells Quintana (Autonomous University of Barcelona), Philip McCann (Alliance Manchester Business
School) and Joaquim Oliveira Martins (European Commission) for their valuable comments. Pilar Philip
prepared the report for production.
The OECD Secretariat thanks the delegates to the RDPC for their valuable comments on earlier versions
of the report and for providing inputs to the country pages. Thanks are also due to those RDPC delegates
who participated in the foresight workshops organised in November 2022 and March 2023 as part of the
preparation of the report. The report was approved by the RDPC through written procedure on 29 June
2023 (CFE/RDPC(2023)7-REV1).

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Table of contents

Foreword 3
Acknowledgements 4
Abbreviations and acronyms 9
Executive summary 11
1 The global economic outlook could heighten regional inequalities in OECD
countries 15
The repercussions of Russia’s war of aggression against Ukraine are not felt equally across
OECD countries 16
The energy crisis is taking a particularly heavy toll on some predominantly rural regions 16
Overall, subnational government finances are in relatively good shape but could deteriorate
going forward 17
References 18

2 Twenty years of regional inequalities: Trends in OECD countries 19

Introduction 21
People’s well-being at the centre of regional inequalities 22
Regional income inequality: Past, present and future outlook 30
Annex 2.A. OECD regional data and methodological notes 48
Annex 2.B. Summary tables 52
References 54
Notes 59

3 Productivity and regional income inequality 61

Introduction 63
Disparities in labour productivity within countries are large 64
Leveraging labour productivity to reduce GDP per capita inequality 66
Productivity growth through reallocation towards high-productivity sectors 70
Increasing productivity in all economic sectors and regions 72
Managing the gains and risks of trade integration 76
Towards productive and green regions 78
Annex 3.A. Supplementary figures and tables 80
Annex 3.B. Hysteresis and the effect of the global financial crisis 83
Annex 3.C. Rising dissimilarities in the local importance of tradeable sectors 85
References 87
Notes 90

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4 The future(s) of OECD regions: Scenarios 2045 93

In Brief 94
Introduction 95
Why think of the future(s)? 95
Territorial foresight to futureproof regional policy making 99
Scenarios for OECD regions in 2045 104
Strategic considerations to future-proof regional development policy 111
References 115

5 A policy roadmap to address regional inequalities now and in the future 117
In Brief 118
Introduction 119
Leaving regional inequalities unchecked: The consequences of inaction 119
A policy roadmap to address regional inequalities effectively 126
References 146

FIGURES
Figure 2.1. Change in share of population in metropolitan TL3 regions, 2001-21 24
Figure 2.2. Population dynamics in the largest FUA, other FUAs and outside FUAs in OECD countries, 2001-
21 25
Figure 2.3. Access to a higher education institution (20-24 year-olds) versus city-rural gap in the share of
tertiary educated (24-65 year-olds), 2012-20 26
Figure 2.4. Location gap in travel time to healthcare versus location gap on Internet speed, OECD countries,
2020 28
Figure 2.5. Medium- and long-term population projections, OECD countries, 2021-2100 29
Figure 2.6. Trends in GDP per capita inequality indicators, TL3 OECD regions, 2000-20 33
Figure 2.7. Country GDP per capita gap with respect to OECD mean, 2000 and 2020 35
Figure 2.8. Trends in total, within and between regional income inequality TL2 and TL3 OECD regions, 2000-
20 36
Figure 2.9. Trends in GDP per capita inequality indicators for selected countries, TL3 regions, 2000-20 38
Figure 2.10. Correlation between the Theil index of TL3 GDP per capita with top-to-mean and bottom-to-mean
ratios and mean GDP per capita, 2000-20 39
Figure 2.11. Relative vs. absolute changes in polarisation based on real GDP per capita, TL3 OECD regions,
2000-20 40
Figure 2.12. Changes in the contribution of region types to regional income inequality based on TL3 GDP per
capita, 2000-20 43
Figure 2.13. Share of top/bottom regions by region type, based on 2020 values for top/bottom regions 44
Figure 2.14. Spatial Gini index of GDP per capita at the TL3 level, OECD countries, 2021 45
Figure 2.15. Incidence of spatial clustering across OECD countries 46
Figure 2.16. Measuring the degree (dis)similarity among neighbouring regions: An example based on GDP per
capita in Spanish TL3 regions 47
Figure 3.1. Productivity disparities within countries are larger than between countries in 2019 65
Figure 3.2. Regional inequality in labour productivity declined more than regional income inequality 65
Figure 3.3. Catching up has stalled for remote regions after the global financial crisis 66
Figure 3.4. Reducing labour productivity inequality results in a sizeable reduction in regional income inequality 68
Figure 3.5. Many non-metropolitan regions experience employment decline as productivity grows 69
Figure 3.6. Overall productivity growth is higher in regions reallocating jobs towards tradeable sectors 71
Figure 3.7. Non-metropolitan regions added employment in the industrial sector in countries where labour
productivity inequality decreased 72
Figure 3.8. Firm creation has gone down in many countries 75
Figure 3.9. Regional disparities in investment growth are particularly large in East and Southern European
countries 76
Figure 3.10. Regions that grew less than the national average had larger trade deficits 77

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Figure 3.11. Highly polluting manufacturing sectors pay higher wages compared to the regional average in
vulnerable regions 79
Figure 4.1. Regions have to anticipate the overlapping effects of megatrends and specific long-term
transformations at the territorial level 98
Figure 5.1. Regional disparities in national government trust, 2021 123
Figure 5.2. Regional disparities in green-task jobs within countries 125
Figure 5.3. A policy roadmap to address regional inequalities 127
Figure 5.4. Linkages between the policy roadmap and the Recommendation on Regional Development Policy 144

Annex Figure 2.A.1. Number of TL2 and TL3 regions per million inhabitants, 2021 48
Annex Figure 2.A.2. The cumulative share of population by TL3 regions, OECD countries, 2021 49
Annex Figure 2.A.3. Difference in Gini coefficient of population distribution between TL2 and TL3 levels, based
on 2021 population values 51
Annex Figure 3.A.1. 2001 employment shares and 2001-19 changes 82
Annex Figure 3.B.1. The global financial crisis has increased on average within-country disparities 84
Annex Figure 3.C.1. Employment shares in high-productivity sectors have become more dispersed 85

TABLES
Table 1. Acronyms 9
Table 2. Country abbreviations (ISO codes) 9
Table 2.1. Main demographic indicators by type of TL3 region 23
Table 2.2. Summary of main concepts related to regional income inequality 32
Table 2.3. A typology of regional income inequality trends based on GDP per capita at the TL3 level 37
Table 2.4. Contribution of TL3 region types to regional income inequality, based on 2010-20 averages 41
Table 3.1. Closing productivity gaps is important to reduce income inequality 68
Table 4.1. Key trends and projections related to megatrends and their impacts on regions 96
Table 4.2. Scenario overview 106
Table 5.1. Examples of complementarities across the policy roadmap 145

Annex Table 2.B.1. Summary GDP per capita regional (TL3) inequality measures by country, 2000-20 52
Annex Table 2.B.2. Summary table of the share of between-group inequality across TL3 region types, 2000-20 53
Annex Table 3.A.1. Country-level employment in different sectors, millions 80
Annex Table 3.A.2. Growth rate of regional inequality, selected indicators 81
Annex Table 3.B.1. Hysteresis has become more common across OECD countries over time 83

BOXES
Box 2.1. Demographic trends in functional urban areas 25
Box 2.2. Bottom-up versus top-down approaches to measuring regional income inequality 31
Box 2.3. Theil index of regional inequality and its decomposition 33
Box 2.4. A measure to compare the share of between-group inequality across countries 41
Box 2.5. Overlap between top/bottom and metropolitan/non-metropolitan regions 43
Box 2.6. Measuring the degree of (dis)similarity among neighbouring regions 46
Box 3.1. Making the link between GDP per capita and labour productivity 66
Box 4.1. Key concepts and benefits of strategic foresight 99
Box 4.2. Using foresight to develop future-oriented policy and programmes at the national level: Experiences
in Canada, France and Switzerland 100
Box 4.3. Experiences in territorial foresight across the OECD 102
Box 4.4. How to use territorial foresight: Different approaches for different purposes 103
Box 4.5. The Regional Outlook 2023 foresight exercise 105
Box 5.1. Rethinking regional attractiveness in the new global environment 130

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Abbreviations and acronyms

Table 1. Acronyms
AI Artificial Intelligence
CEPR Contrat de plan État-région
COVID-19 Coronavirus Disease 2019
EC European Commission
ERDF European Regional Development Fund
EU European Union
EUR Euro
FDI Foreign Direct Investment
FUA Functional Urban Area
GDP Gross Domestic Product
GFC Global Financial Crises
GHG Greenhous Gas
GVA Gross Value Added
GVC Global Value chain
HEI Higher Education Institutions
ICT Information and Communication Technologies
IFCMA Inclusive Forum on Carbon Mitigation Approaches
IPAC International Programme for Action on Climate
KAU Karlstad University
NEG New Economic Geography
R&D Research and Development
RDPC Regional Development Policy Committee
SME Small and Medium-sized Enterprise
TL2 Territorial Level 2
TL3 Territorial Level 3
USD United States dollar

Table 2. Country abbreviations (ISO codes)

AUS Australia
AUT Austria
BEL Belgium
CAN Canada
CHE Switzerland
CHL Chile
COL Colombia
CRI Costa Rica
CZE Czech Republic
DEU Germany
DNK Denmark
ESP Spain
EST Estonia

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EU European Union
FIN Finland
FRA France
GBR United Kingdom
GRC Greece
HUN Hungary
IRL Ireland
ISL Iceland
ISR Israel
ITA Italy
JPN Japan
KOR Korea
LTU Lithuania
LUX Luxembourg
LVA Latvia
MEX Mexico
NLD Netherlands
NOR Norway
NZL New Zealand
POL Poland
PRT Portugal
ROU Romania
SVK Slovak Republic
SVN Slovenia
SWE Sweden
TUR Turkey
USA United States

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Executive summary

Converging fortunes of countries and diverging fortunes of regions

Over the last two decades, levels of gross domestic product (GDP) per capita have converged across
OECD economies, driven in large part by higher growth in lower income economies. However, at the same
time, over half of 27 OECD countries with available data saw income inequalities between their regions
widen and in most other countries, including in those where regional income inequalities declined, they
remained significant. Overall, over the last two decades, four trajectories emerge:
• High income / rising inequality: Some countries with GDP per capita above the OECD average–
including Belgium, Denmark, France, Sweden, the United Kingdom, and the United States – saw
regional inequalities increase.
• Rising income / rising inequality: Many countries that have been catching up to the OECD GDP
per capita average have seen their regional inequalities increase, including many OECD countries
in Eastern Europe that grew quickly.
• High income / lower inequality: Other countries, including Finland, Norway, Germany, the
Netherlands, and New Zealand, demonstrated that it is possible to sustain high GDP per capita
while narrowing gaps between places.
• Low growth / lower inequality: Southern European countries like Greece, Spain and Portugal
saw regional inequalities fall but in a context of weak overall economic performance.
These different paths across countries show that, increasing regional inequalities are not inevitable and
that, with the right policy environment, it is possible to tackle the longstanding geography of inequalities.

In many countries, metropolitan regions continue to surge ahead

Most metropolitan regions, both large and mid-sized, continue to benefit from agglomeration economies –
advantages in productivity linked to size and proximity, including shared infrastructure, higher quality public
services and better matching of workers with jobs and knowledge spillovers – driving new opportunities
and growth. On average, metropolitan regions across the OECD had around 32% higher GDP per capita
than other regions and the gap between large metropolitan regions and other regions accounts for the
largest share of regional income inequality in most countries with large metropolitan regions.
Yet while the largest metropolitan regions have benefited from stronger growth than other regions, they
are facing major challenges linked to their success – including in housing affordability, congestion, and,
indeed, in inequality inside the regions. This emphasises the need to not only narrow gaps between the
most and least successful regions but also for targeted spatial policies inside large metropolitan areas to
overcome diseconomies of agglomeration, which can undermine performance.
As successful cities continue to grow and attract skilled workers, other areas are grappling with an ageing
and shrinking population. Nearly 40% of remote regions and 22% of functional urban areas in the OECD

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shrank between 2001 and 2021, undermining local public revenues while pushing up the costs of
maintaining public services and infrastructure, and creating additional challenges such as dereliction and
blight, which can be costly to fix.

Service gaps are undermining productivity, creating vicious cycles of stagnation

and decline

Many areas are falling behind not just in income, but in broader dimensions that impact on well-being.
Significant regional differences also exist for example in access to, and quality of public services and
infrastructure. Whilst these impact directly on well-being, they also make it harder for lagging regions to
attract and retain the people, skills and investment needed to break a vicious cycle of stagnation and
decline, weighing down further on well-being and, indeed, productivity and income.
In many rural areas, residents struggle to access good education and training. Students in city schools
obtained higher scores in reading than their peers in schools located elsewhere in all but two OECD
countries with available data. Investing in quality transport infrastructure, especially public transport, is an
important lever to improve access to education in rural communities, but the quality of schools also needs
to improve in many such areas to provide a platform for future growth.
Travel times to healthcare facilities are obviously much larger – five times larger – in remote rural areas
than in cities. This contributes to the fact that close to a third of rural residents in OECD countries reported
health problems that prevented them from doing things people their age normally do compared to only a
quarter of city residents.
Data from regulators in 26 OECD countries show a persistent rural-urban divide in digital infrastructure.
On average a third of households in rural areas do not have access to high-speed broadband and only 7
out of 26 OECD countries have secured access to a high-speed connection for at least 80% of rural
households. In Mexico and Canada, people in rural areas have connection speeds 40 percentage points
slower than the national average. These gaps in digital access mean these areas will struggle to benefit
from new remote working and telemedicine opportunities that could help them compensate for a lack of
physical connectivity to jobs and services.

Boosting productivity will be key to reviving the fortunes of lagging regions

Efforts to raise productivity in lagging regions will be critical to tackle the longstanding geography of
inequalities. Whilst different sector specialisms explain some of the productivity differences between
regions, three quarters of the gap reflects differences in the productivity of firms within the same sector.
Regional differences in the quality of infrastructure, access to skills, innovation spillovers, finance and
markets and investment all play a role here. This implies that place-based policies that address these
inequalities can also play a significant role in driving productivity growth in existing industries and sector
specialisms.
Yet higher productivity does not automatically translate into better employment outcomes. While in urban
areas productivity and job growth have typically gone hand-in-hand, in non-metropolitan regions a
combination of automation and competitive pressures from lower-income economies, have resulted in a
lower share of regions generating jobs growth as productivity has grown. At the same time, these areas
have struggled to attract and retain the higher-skilled workers needed to develop new opportunities for
growth, including in new industrial activities.
Place-based policies must be broad based to ensure that they support both productivity and jobs growth.
Investment in skills, digital, infrastructure and communication gaps, as well as in access to finance,
knowledge and innovation networks, and the quality of public services and local government can improve

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the attractiveness of all regions, and encourage inward FDI, and support businesses to invest, export,
innovate or adopt innovations and scale-up. In addition, the net zero transition can offer new opportunities
for regions to boost productivity, while remote working also provides potential to entice high skilled workers
away from metropolitan regions to mid-sized cities.

Persistent regional inequalities raise costs that are becoming too high to ignore

Some level of regional inequalities is inherent and unavoidable. However, the longstanding geography of
inequalities is becoming deeply entrenched, with a scale and costs that are becoming increasingly difficult
to ignore, including:
• Economic costs. Lagging regions and/or those trapped in vicious cycles of long-term stagnation
account for a considerable proportion of economic activity in all countries and reflect untapped
potential to drive growth. Their underperformance also comes with a fiscal cost – in terms of high
levels of welfare support.
• Social costs. Persistent inequalities, also challenge the fiscal and administrative capacities of
subnational governments to provide adequate access to key public services and infrastructure.
These social costs are apparent both in economically dynamic regions that struggle with high
house prices and congestion as well as in lagging regions where public services become stretched,
reduced in quality or increasingly more difficult to access.
• Political costs. Regional inequalities can undermine trust in government across OECD countries,
where the difference between a country’s most and least trusting region can be as high as 30
percentage points. Low levels of trust are a signal of growing discontent and disengagement, and
low social cohesion and can undermine democracy over time.

Building the resilience of all regions to face shocks and adapt to megatrends

Recent global crises and the urgency of adapting to megatrends have heightened the need for more agile
and flexible policy frameworks. The three forward-looking scenarios for 2045 presented in Chapter 4
explore different futures for regions and their policy. The chapter also sets out ways to future-proof regional
development policy, by adapting fiscal systems and governance structures and developing foresight
capacity at the national and subnational levels to better prepare regions for the future.

A policy roadmap to address regional inequalities now and in the future

This report proposes a policy roadmap to support catching up in lagging and stagnant regions while
sustaining prosperity in the most dynamic regions. To do so will require coordinated action across five
complementary priorities:
• Ensuring access to key public services and infrastructure, e.g. by improving access to services
close to where people live, including through digitalised services, and attracting and retaining
skilled public service professionals.
• Boosting productivity and competitiveness, e.g. by supporting regions’ integration in global value
chains, investing in transport and digital infrastructure and supporting small and medium-sized
towns.
• Providing the right skills and job opportunities in regional labour markets, e.g. by providing flexible
training, education and employment services, building regional entrepreneurial ecosystems and
building up the social economy.

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• Improving the quality of multi-level governance systems, e.g. by clarifying the responsibilities
assigned to subnational governments and delivering policies and services at the “right” scales.
• Strengthening capacity at the national and subnational levels, e.g. by investing in subnational fiscal
capacity and building strategic and administrative capacity.
These actions build on and complement the 2023 OECD Recommendation on Regional Development
Policy, which will serve as a compass to help governments implement effective place-based regional
development policy.

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1 The global economic outlook could

heighten regional inequalities in
OECD countries

The global economy is facing mounting challenges. Growth has lost

momentum, core inflation is persistent and confidence has weakened.
Russia’s war of aggression against Ukraine pushed up prices substantially,
adding to inflationary pressures at a time when the cost of living was
already rapidly rising around the world. While the global economy seems to
be turning a corner, uncertainty is high. This global outlook is translating
into different outcomes across places and risks exacerbating already high
and persistent regional inequalities in many OECD countries.

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The repercussions of Russia’s war of aggression against Ukraine are not felt
equally across OECD countries

Over a year on from Russia’s war in Ukraine, economic and social repercussions have been profound and
are likely to be long-lasting. Managing the humanitarian crisis remains an immediate priority. While some
key risks, such as persistent large-scale energy and food market disruptions have been mitigated for now,
governments at all levels are still grappling with the implications of persistent core inflation, high debt levels
and low potential output – jeopardising efforts to rebuild their economies post COVID-19 and to deliver
stronger and more sustainable growth. The OECD’s latest Economic Outlook (2023[1]) highlights how the
war continues to overshadow the world economy and how, despite signs of improvement, recovery over
the next two years will be weak by past standards. The report projects that growth will remain at below-
trend rates in 2023 and 2024, at 2.6% and 2.9% respectively (OECD, 2023[1]).
While headline inflation has declined, it remains elevated and could persist longer across OECD countries.
The unexpected persistence of these pressures in 2022 owed largely to the outbreak of the war, which
resulted in an immediate spike in a number of key commodity prices: oil, gas and coal, a range of metals,
wheat and corn and some edible oils, as well as fertilisers. Inflation is projected to moderate gradually over
2023 and 2024 but remains above central bank objectives until the latter half of 2024 in most countries
(OECD, 2023[1]). Even prior to the war, inflation pressures had begun to rise, with both demand- and
supply-side factors contributing to price increases in OECD economies. Some of these factors have
subsided or begun to reverse over 2022. Uncertainty about the course of the war in Ukraine and its broader
consequences is a key concern. Pressures in global energy markets could also reappear, leading to
renewed price spikes and higher inflationary pressures.
The ripple effects of the war have not been felt equally across countries over the past months and have
important implications for regions and regional development policy, not least in the wake of the spatial
challenges caused by the COVID-19 crisis. Russia’s invasion has added new layers of complexity to an
already rapidly changing and highly unpredictable world and has served to highlight and sometimes
compound already wide and persistent regional inequalities in many OECD countries (OECD, 2022[2]).

The energy crisis is taking a particularly heavy toll on some predominantly rural
regions

The energy crisis sparked by the war is delivering a shock of unprecedented breadth and complexity. The
biggest tremors have been felt in the markets for natural gas, coal and electricity – with significant turmoil
in oil markets as well, necessitating two oil stock releases of unparalleled scale by countries to avoid even
more severe disruptions. With unrelenting geopolitical and economic concerns, energy markets remain
extremely vulnerable, according to the latest World Energy Outlook (IEA, 2022[3]).
The global energy crisis is having far-reaching implications for people, places and firms, prompting
short-term responses from governments as well as a deeper debate about the ways to reduce the risk of
future disruptions and promote energy security. Net energy export positions and exposure to Russian oil
and gas disruptions in particular have shaped the consequences of the turmoil in energy markets for
individual countries.
Regions in OECD countries have very heterogeneous energy supply mixes. In 2019, over 50 OECD
European regions relied on gas – in large part imported – for more than 50% of their electricity generation.
Another 20 regions – including Budapest in Hungary, Groningen in the Netherlands and Lazio in Italy –
relied on gas for more than 60% of electricity generation (OECD, 2022[2]). Regions specialised in industries
and products more dependent either directly or indirectly on energy, and gas in particular, are exposed to
the largest declines in output, employment and the stock of firms, through either reduced firm birth or higher

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firm exit. Twenty-five percent of regions with the highest employment shares in gas-intensive sectors are
particularly concentrated in Central European countries, notably Austria, the Czech Republic, Poland,
the Slovak Republic and Slovenia, as well as in Finland, Northern Italy and Sweden (OECD, 2022[2]). The
potential closing of firms or industries due to high production costs might spur further the decline of
manufacturing and de-industrialisation that was already underway in several OECD regions long before
the crisis, with permanent negative effects on labour capacity utilisation.
Because of their less diversified energy mixes and higher incidence of low-income households, rural
regions face the highest energy poverty risk. Analysis of 91 regions from the Czech Republic, Portugal and
Spain confirms higher energy poverty in rural regions (OECD, 2022[2]). Estimates of energy poverty show
that 38% of non-metropolitan regions are energy poor, with an additional 27% of regions being at risk. In
general, living in a non-metropolitan region itself increases the chance of energy poverty by 35%. Additional
factors that increase energy poverty include the share of elderly people in a region, low average income
and high energy expenditures. Some of these elements being prevalent in non-metropolitan regions means
that energy poverty imparts an uneven impact across geographies, particularly on regions outside of small
and medium-sized cities.

Overall, subnational government finances are in relatively good shape but could
deteriorate going forward

Despite the effects of the COVID-19 pandemic on growth, subnational government revenues have already
returned to pre-crisis levels (in real terms) or exceeded growth in expenditures in most OECD countries
(OECD, 2023[4]). However, despite the overall good health of subnational governments’ finances, their debt
levels are at historical highs, which can raise substantial risks. On the one hand, subnational governments
in many countries do not issue debt but rather obtain loans which may have floating rates. This means that
debt costs can react immediately to interest rate hikes, rapidly increasing the historically low interest paid-
to-revenues ratio. On the other hand, the costs of other forms of subnational government funding, such as
arrears, are likely to decrease with inflation as they are generally not indexed. In addition, this exposure
may vary substantially across jurisdictions – meaning that some individual local/state governments could
be exposed to such risks while others not. Another important factor to alleviate these risks is the extent of
subnational cash balances that can serve as a valuable cushion for shocks.
Looking forward, subnational government finances could deteriorate, and, in some countries, the updated
projection indicates a loss in revenues in the same order of magnitude experienced at the peak of the
2008-09 global financial crisis (OECD, 2023[4]). Although subnational government revenues tend to be
more stable than those from the central government, their short-term buoyancy (i.e. the sensitivity of
government revenues to economic activity in the short term) is still close to unity, meaning that a reduction
in gross domestic product (GDP) growth will almost proportionally affect their revenues. However, there
are substantial asymmetries across countries, driven mostly by differences in their tax mixes, with the
impact being more substantial for subnational governments relying on corporate income tax revenues and
less substantial for those that rely mostly on property taxes (OECD, 2023[4]). According to the OECD’s latest
estimates, revenue collection is expected to deteriorate at the subnational level in member countries.
Subnational government revenues are projected to grow by 1.1% to 10.2%, with an average of 4.5%, which
represents an average decrease of 2.4 percentage points (OECD, 2023[4]).
The delicate financial situation central governments find themselves in will likely hinder substantial central
support to subnational governments in the future. Not only have national governments absorbed most of
the COVID-19 shock (de Biase and Dougherty, 2022[5]) but they are also absorbing the fiscal costs of
cushioning household living standards at a time of high inflation. There are also limits to the extent to which
national fiscal policy can be stretched, as such policy might also put pressure on prices, prompting
reactions from central banks to further raise policy interest rates and, thus, affect debt servicing costs.

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References

de Biase, P. and S. Dougherty (2022), “The past and future of subnational fiscal rules: An [5]
analysis of fiscal rules over time”, OECD Working Papers on Fiscal Federalism, No. 41,
OECD Publishing, Paris, https://doi.org/10.1787/d2798c9e-en.

IEA (2022), World Energy Outlook 2022, IEA, Paris, https://www.iea.org/reports/world-energy- [3]
outlook-2022.

OECD (2023), OECD Economic Outlook, Volume 2023 Issue 1, OECD Publishing, Paris, [1]
https://doi.org/10.1787/ce188438-en.

OECD (2023), “The intergovernmental fiscal outlook and the implications of Russia’s war against [4]
Ukraine, high energy prices and inflation”, OECD Working Papers on Fiscal Federalism,
No. 42, OECD Publishing, Paris, https://doi.org/10.1787/3623ab61-en.

OECD (2022), “The implications for OECD regions of the war in Ukraine: An initial analysis”, [2]
OECD Regional Development Papers, No. 34, OECD Publishing, Paris,
https://doi.org/10.1787/8e0fcb83-en.

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2 Twenty years of regional

inequalities: Trends in OECD
countries

The chapter explores the evolution of regional inequalities in OECD

countries over the past two decades. It connects trends in where people
and economic activity are located to the evolution of inequalities between
regions. The first section explores the (re)allocation of people across
regions. The following section looks more specifically at trends in regional
income inequalities, identifying growth-inequality paths in OECD countries
and assessing how differences between metropolitan versus
non-metropolitan regions have driven regional inequalities.

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In Brief
• People mobility is a powerful mechanism to bridge disparities within countries but it can also
exacerbate regional and inter-personal inequalities as economic opportunities concentrate in a
few places and inter-personal gaps widen. Throughout the course of their lives, people typically
move from one region to another in search, in turn, of job opportunities, higher incomes, lower
housing prices and well-being from amenities. These mobility dynamics have led to geographic
imbalances within OECD countries and today, metropolitan regions, especially large ones, grow
faster than non-metropolitan regions as a result.
• While OECD economies have grown closer together over the past 20 years, many of their small
(TL3) regions have not. After several decades of convergence between and within countries, the
deepening of globalisation in the early 2000s did not create equal opportunities for all regions
and triggered a change of regime, which was made even more evident after the 2008 global
financial crisis (GFC). Since then, gross domestic product (GDP) per capita has continued to
increase and converge across the OECD but small regions at the top and bottom of the income
distribution within countries followed different patterns.
• Today, 70% of the OECD population live in a country with regional divergence across small
regions. Yet, a closer look reveals that trends in regional inequalities paint a diverse picture and
there is no single story of how these inequalities have evolved across the OECD. Rather, the
panorama of regional income inequalities has become more fragmented and four main
trajectories emerge:
o Some countries with high levels of GDP per capita saw their regional inequalities
increase: Belgium, Denmark, France, Sweden, the United Kingdom and the United States,
for instance, have all seen the gap between their top- and bottom-performing regions widen
and the gap between their mean and median incomes increase.
o Many of the countries that have been converging towards the OECD GDP per capita
mean have seen their regional inequalities increase, such as in the case of
East European countries that grew quickly after their accession to the European Union and
whose pre-existing inequalities have further deepened.
o Other countries with relatively high levels of GDP per capita saw regional gaps
closing, including Finland, Germany, the Netherlands, New Zealand and Norway.
o Southern European countries like Greece, Portugal and Spain saw their regional
inequalities decrease but in the context of low growth performance, since the GFC.
• Persistent differences between metropolitan and non-metropolitan regions have been driving
regional income inequalities in most OECD countries. The difference between income per capita
in large metropolitan regions and other regions explains the largest share of regional income
inequality in nine countries with increasing inequality and large regions (Czech Republic,
Denmark, France, Hungary, Poland, Sweden, Türkiye, United Kingdom and United States).
Metropolitan versus non-metropolitan differences explain the largest share of regional inequality
in all (six) of the remaining countries with increasing inequalities, except in Italy where
differences between regions far from midsize/large functional urban areas (FUAs) matter the
most.

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Introduction

“Suppose that I drive through a two-lane tunnel, both lanes going in the same direction, and run into a serious
traffic jam. No car moves in either lane as far as I can see (which is not very far). I am in the left lane and feel
dejected. After a while the cars in the right lane begin to move. Naturally, my spirits lift considerably, for I know
that the jam has been broken and that my lane’s turn to move will surely come any moment now. Even though
I still sit still, I feel much better off than before because of the expectation that I shall soon be on the move. But
suppose that the expectation is disappointed and only the right lane keeps moving: in that case I, along with
my left lane co-sufferers, shall suspect foul play, and many of us will at some point become quite furious and
ready to correct manifest injustice by taking direct action (such as illegally crossing the double line separating
the two lanes).” (Hirschman and Rothschild, 1973, p. 545[1])

Economic development is uneven. Places have different levels of growth potential reflecting differences in
endowments. These typically result in shifts of people and capital to those places driving growth, which
can, in turn, increase regional disparities (Kuznets, 1955[2]; Glaeser and Gottlieb, 2009[3]; Combes et al.,
2011[4]; Puga, 1999[5]). Regional development policies, along with redistribution policies (e.g. fiscal or social
policies), play an important role in ensuring that all members of society are able to benefit. Whilst regional
development has increasingly oriented around mechanisms that can increase the potential of all regions
to contribute to growth, there is an increasing tension in designing them based on models that are
optimised for national income growth, which has often resulted in tensions between economic policies that
prioritise the allocation of labour and capital to places where they are most productive in contrast to models
based on reducing territorial disparities.
Whilst the two are not necessarily contradictory, the evidence from many OECD countries suggests that
there can be trade-offs in practice and that solely focusing on growth and factor allocation at the national
level can perpetuate often entrenched territorial disparities, including in many other dimensions of
inequality beyond economic growth.
In many large cities, there is a concentration of top jobs and learning opportunities, in part because of
agglomeration effects but also because of attractive amenities and diverse social networks, among other
factors that serve as magnets for the higher educated (Moretti, 2012[6]; Südekum, 2021[7]). At the same
time, residents of places with more limited access to opportunities often experience lower well-being, worse
lifetime achievement and, indeed, partly because of the more limited opportunities, less geographic
mobility, hampering their ability to move to places with higher well-being potential (Kemeny and Storper,
2020[8]). These effects not only persist in certain places but also persist over time, as they transmit across
generations (Manduca, 2019[9]; Hanushek and Woessmann, 2020[10]; OECD, 2021[11]).
Whilst the costs of these more limited opportunities impact directly on the individuals themselves, there
are broader costs to society, through disrupted social cohesion and political instability (Hirschman and
Rothschild, 1973[1]; Dijkstra, Poelman and Rodríguez-Pose, 2019[12]), but also to the economy, through the
potential costs needed to manage lower resilience to shocks (OECD, 2020[13]; 2022[14]). Indeed, even at
the national level, the costs of these “remedial” measures may actually outweigh any potential benefits of
place-blind “growth first” policies, which often have relatively short time horizons and, so, may not even be
optimal from a longer-term growth perspective.
Bridging differences in access to opportunities is indeed an important part of the solution to reducing
regional inequalities. These efforts should go hand in hand with promoting economic dynamism through
productivity gains (EC, 2022[15]; OECD, 2020[16]). However, whilst gaps in GDP per capita have narrowed
across OECD countries over the past two decades, gaps between regions within many countries have
been persistent, with many regions in countries experiencing both growth and stagnation remaining very
much in the “rear-view mirror” (OECD, 2020[16]; Diemer et al., 2022[17]; EC, 2022[15]). Indeed, some of the
most advanced OECD economies have some of the highest regional disparities.

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Whilst there are many factors that can explain the relatively poor performance of some regions, the
asymmetric impacts of the knowledge economy and globalisation have certainly contributed, generating a
much more complex landscape of sectoral specialisation, firm location and knowledge diffusion (Autor,
Dorn and Hanson, 2013[18]; Navaretti and Markovic, 2021[19]; Kemeny and Storper, 2020[8]; OECD,
2021[20]).
In most OECD economies, these gaps have been in large part driven by the performance and
agglomeration effects of large metropolitan regions. But relying solely on top-performing regions to boost
aggregate productivity is not enough. Even setting aside the costs associated with weaker social cohesion
that may arise through significant and persistent spatial inequalities, externalities such as rising congestion
may also begin to limit the attractiveness of large cities (Navaretti and Markovic, 2021[19]; Dijkstra,
Garcilazo and McCann, 2013[21]). Moreover, the dynamic gains from density, while powerful drivers of
growth (Ahlfeldt and Pietrostefani, 2019[22]), do not extend to all cities (Venables, 2018[23]) nor, indeed,
benefit all social groups.
In this context, the scope and ambition of regional development policies have evolved too, moving from
subsidies to compensate economically weaker regions to an investment agenda aimed at unlocking
competitiveness and growth potential in all places and, more recently, growth with an increased emphasis
on living standards and well-being (OECD, 2009[24]; 2011[25]; 2012[26]; 2014[27]; 2019[28]). Indeed, several
OECD countries including Italy, Korea, Poland and the United Kingdom have shifted their attention and
put in place dedicated policies to narrow spatial inequalities and promote more balanced development
(OECD, 2022[29]; 2018[30]; UK Government, 2022[31]). That being said, many more countries still do not
have dedicated policy frameworks for reducing regional disparities.
This chapter looks back in time to explore the evolution of regional inequalities in OECD countries over the
last two decades. The first section looks at the (re)allocation of people across regions, while the second
examines trends in regional income inequalities, identifying growth-inequality paths in OECD countries and
the role of differences between metropolitan and non-metropolitan regions in driving regional inequality.
Chapter 3 then takes a closer look at the nexus between regional income disparities and labour productivity
across regions.

People’s well-being at the centre of regional inequalities

Many OECD countries have reached a plateau in their population growth and, in some populations, are
declining. At the same time, populations are ageing. However, while these trends are generally true at the
national level, they are often more profound or indeed very different within countries, reinforcing the
importance of a place-based approach to tackling inequalities and driving inclusive growth.
This section takes a closer look at those demographic challenges, including the role of migration within
countries and the impact they have on regional inequalities, and access to key infrastructure and services
across regions.

The share of people living in large metropolitan regions is growing

Across OECD countries, metropolitan regions concentrate 70% of the population. The proportion of people
living in rural areas within each region type increases from 9% in large metropolitan regions to 52% in
remote regions. People living in towns and semi-dense areas (or suburbs) as defined by the degree of
urbanisation (OECD et al., 2021[32]) are most common in regions near a metropolitan area (Table 2.1).

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Table 2.1. Main demographic indicators by type of TL3 region

Near a
Metropolitan Metropolitan Near a small
Small region type/Indicator midsize/large Remote
large midsize FUA
FUA
Share of population, 2021 (%) 42.2 28.1 12.3 7.8 9.5
Share of foreigners (%) 52.8 27.5 6.3 10.4 2.9
Population in cities, 2020 (%) 71.9 44.5 25.0 22.0 12.7
Population in rural areas, 2020 (%) 9.0 23.9 33.9 42.9 51.9
Population in FUAs, 2020 (%) 92.5 76.4 37.9 41.8 1.5
Old-age dependency ratio, 2021 (%) 24.8 29.2 30.7 29.9 27.0
(average across regions in parenthesis) (24.5) (29.1) (32.4) (30.6) (30.4)
Change in the share of population, 2001-21 (%) 1.6 -0.2 -0.6 -0.5 -0.4
Annual population growth 2001-21 (%) 0.9 0.5 0.3 (0.4) 0.3 0.4
(average across regions in parenthesis) (0.9) (0.6) (0.3) (0.03)
Share of shrinking regions, 2001-21 (%) 10.0 21.1 31.5 36.6 38.3

Note: Results for 36 OECD countries (data not available for Costa Rica and Israel). Old-age dependency ratio is defined as the ratio of population
over 65 years old over population 15-64 years old. Employment is measured at place of work. Share of population in FUAs, cities and rural
areas based on 2023 Global Human Settlement Layer (GHSL) grids. See Annex 2.A for a definition of region types and OECD (2021[32]) for a
definition of the degree of urbanisation. Shrinking regions are regions with an annual population growth of at least -1% over 2001-21.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/; Schiavina et al., (2023[34])
GHSL data package 2023, https://publications.jrc.ec.europa.eu/repository/bitstream/JRC133256/JRC133256_01.pdf; Souder, A. et al. (2021[35]),
“Going granular - A new database on migration in municipalities across the OECD”, OECD Regional Development Working Papers, OECD,
Paris.

Metropolitan regions host a larger proportion of people today compared to two decades ago in all OECD
countries except Greece. A key driver behind this change has been the increasing concentration of
population in large metropolitan regions, which increased their population share from around 40% in 2001
to 42% in 2021 (across 24 OECD countries with at least 1 large metropolitan region). Meanwhile, the share
of metropolitan midsize regions and remote regions decreased slightly (by 0.3 percentage points), while
the share of regions near midsize/large FUAs showed the largest decrease (0.7 percentage points)
followed by regions near a small FUA (0.5 percentage points). Within regions, from 2000 to 2015, the share
of population living in cities (as defined by the degree of urbanisation) increased by around 3 percentage
points across the OECD while the share of population in rural areas decreased.
About half of the countries where the share of population in large metropolitan regions increased saw a
decrease in the share of people living in midsize metropolitan regions in 2001-21 (Figure 2.1). Population
growth has concentrated in the largest FUAs while about one-quarter of all FUAs in OECD countries are
shrinking (see Box 2.1). The increase in the contribution of metropolitan regions is especially large, for
example, in small countries with one to three midsize metropolitan regions and no large metropolitan
regions (Estonia, Finland, Latvia, Lithuania, the Slovak Republic and Slovenia).
The increasing importance of metropolitan regions results from the compounded effect of internal and
international migration and natural growth rates (the difference between births and deaths). Across
28 OECD countries with available data, 29 million people (about 3% of the OECD population) changed
their region of residence every, year on average in 2016-19. In that period, metropolitan regions and
regions close to them gained respectively 10.5 and 7 persons per every 10 000, while regions far from
midsize/large FUAs lost 10 persons for every 10 000 (OECD, 2022[36]). The foreign-born population living
in OECD countries reached 138 million in 2021 (10.6% of the total population of OECD countries) (OECD,
2022[37]). Both nationals (and especially youth) and international migrants settle disproportionally in
metropolitan areas, especially large ones: 8 in 10 migrants live in metropolitan areas compared to 7 in

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24 

10 natives (OECD, 2022[36]) (Table 2.1). Migration, therefore, has made metropolitan regions not only
larger but also more diverse and younger (OECD, 2022[38]).

Figure 2.1. Change in share of population in metropolitan TL3 regions, 2001-21

Metropolitan large Metropolitan midsize

8%
Difference in share of population in type

5%

2%

0%
Ne Po y
ite ze a

d S in

Tür en
vak erm ile
Ire m

ep an

Fin a
ce

Ne eala d
Fra ia

nia

Es ia
ia
No a
Sw ay
nce

Au o

Lith land
d

Au ia
De al
pu y

Slo ark

Me ry

Ca e

ia
Be tes
ing d

Ital
Co om

ds
Un Swit Kore

w Z lan
the nd

nad
ite pa

Re an
lan

stri
xic
Po lic

Hu ic

ton
u

kiy

v
a
b

Slo G Ch

rtug
d K rlan

uan
l

rw
h R Jap
ee

stra

ed

Lat
ve
lgi

nm
lom

ng
rlan

l
ta

ub
Un S
d
Gr

ec
Cz

Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/xkqyaz

Regions that do not manage to attract working-age migrants eventually see their working-age population
shrink and their elderly dependency ratios increase. On average, old-age dependency ratios are higher in
non-metropolitan regions (Table 2.1), while remote regions represent the highest share of regions with
old-age dependency ratios above 50% (6.3%, or 46 in 733) compared to other types of regions (5.4% of
regions near a midsize/large FUA, 3.5% of regions near a small FUA, 3.4% of metropolitan midsize regions
and 1.4% of metropolitan large regions). Furthermore, a larger proportion of non-metropolitan regions is
shrinking compared to metropolitan regions: for instance, the proportion of regions that showed shrinking
in 2001-21 was 28 percentage points higher in remote regions compared to large metropolitan regions
(Table 2.1). Indeed, most regions with the lowest share of working-age population (and high elderly
dependency ratios) shrank at a rate of 1% annually or more in the last 2 decades. In Lithuania, Latvia and
Portugal, the top three countries facing the largest population decline, regions with a negative annual
population growth of at least 1% represented respectively 80%, 67% and 12% of all regions.

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Box 2.1. Demographic trends in functional urban areas

FUAs hosted more than 931 million inhabitants in OECD countries in 2021 (69% of the total population) in
10% of the OECD surface area. Over the last 20 years, the population in FUAs grew on average by 0.7%
a year but by only 0.5% in areas outside FUA populations. FUAs’ populations grew in all OECD countries
except for Greece, Hungary and Latvia, while the population outside FUAs shrank in ten countries. The
largest FUA grew in nearly all OECD countries, except Greece and Latvia (Figure 2.2).

Figure 2.2. Population dynamics in the largest FUA, other FUAs and outside FUAs in OECD
countries, 2001-21
Weighted average annual growth rates
Largest FUA Other FUAs Outside FUAs
Latvia
Greece
Germany
Lithuania
Korea
United States
Hungary
Portugal
France
Italy
Poland
Slovak Republic
Japan
Estonia
Netherlands
Mexico
Slovenia
Denmark
Belgium
Austria
Czech Republic
United Kingdom
Switzerland
Finland
Spain
Chile
Sweden
Australia
Ireland
Colombia
Norway
Canada
Iceland
Türkiye
New Zealand

-1% 0% 1% 2% -1% 0% 1% 2% -1% 0% 1% 2%

Average annual population growth rate

Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/co9grs

Population trends varied with the size of FUAs. FUAs with at least half a million inhabitants had on average
the highest annual growth rates (0.71% between 2001 and 2021). FUAs between 250 000 and 500 000
inhabitants had lower growth rates (0.57%) but also lower than FUAs with less than 250 000 inhabitants
(0.65%). Furthermore, between 2001 and 2021, 22% of FUAs in OECD countries saw populations shrink.
In 11 countries, the share of shrinking FUAs is above 40%.

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The tertiary-educated population increasingly concentrates in cities

The tertiary educated, i.e. those with a higher education degree, are increasingly concentrated in cities. In
2020, the share of adults with tertiary education was larger in cities than in rural areas in all OECD countries
with available data except the United Kingdom (25 out of 26 countries) (Figure 2.3). The gap ranged from
30 percentage points in Hungary to 2 percentage points in Belgium. Compared to 2012, this city-rural gap
increased in 19 out of 25 countries with available data, with Poland, Portugal and the Slovak Republic
registering the largest increases (about 7 percentage points). However, the share of the tertiary educated
increased in all countries during the period and, in all countries except for Hungary, the increase in the
city-rural gap was smaller than the increase in the share of the tertiary educated.

Figure 2.3. Access to a higher education institution (20-24 year-olds) versus city-rural gap in the
share of tertiary educated (24-65 year-olds), 2012-20
City-rural gap measured as the difference in the share of adults (24-65 year-olds) with tertiary education

Change in city-rural gap 2012-2020 [-5% - 0) [0, 2.4%) [2.4% - 4%) [4% - 11%]

HUN
30%
POL
City-rural gap in share of adults with tertiary education, 2020

LTU

DNK
GRC CZE
PRT
SWE
20% LVA FRA SVN
EST

ESP FIN CHE

NLD
IRL AUT
ITA

DEU
10%

BEL
GBR
0%
70% 80% 90% 100%
Share of 20-24 year-olds with access to a HEI (45-min drive)
Note: HEI: Higher education institution.
Data only include European OECD countries and the United Kingdom. Tertiary educated status is based on the highest education level attained
(ISCED 5-8). Data for main campuses only for Denmark. HEI data for 2020 or the latest year available.
Source: Eurostat (2022[39]), European Union Labour Force Survey, https://ec.europa.eu/eurostat/web/microdata/european-union-labour-force-
survey; OECD (2022[40]), “ADHEP database”, Unpublished, OECD, Paris; Mapbox (2022[41]), Navigation, https://docs.mapbox.com/api/navigation/.

StatLink 2 https://stat.link/js1ot7

People with tertiary education are disproportionally represented in capital city regions in most OECD
countries: large capital regions have the highest share of 24-65 year-olds who completed tertiary education
in 28 out of 34 OECD countries and accession candidates (i.e. Brazil, Bulgaria, Croatia, Peru and Romania)
with available data in 2021 (OECD, 2022[42]). Capital regions can be particularly attractive for the highly
educated when they concentrate most of the quality higher education opportunities and a large public

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sector. However, as discussed in more detail below, they also exhibited the highest income inequalities in
half of the 26 OECD countries with available data based on the S80/S20 ratio 1 for the disposable income
indicator (OECD, 2022[36]).
Rural-urban differences in the share of people with tertiary education may be related to gaps in access to
higher education. In 31 OECD countries with available data, 66% of people living in remote regions can
access a higher education institution within a 45-minute car trip, compared to 98% for those living in a
large metropolitan region. This metric however does not consider the availability and reliability of other
means of transportation such as public transport which, when insufficient, can drastically worsen matters,
especially for low-income vocational students (OECD, 2022[43]).
Smaller gaps in enrolment in higher education compared to gaps in the share of residents with a higher
education degree may point to higher “brain circulation” (i.e. the movement of people for educational
purposes). People may get their education outside cities but move to cities in search of quality jobs for
professionals. Large city-rural gaps in countries with low access to higher education establishments like
Hungary may be related to both poorer access to higher education and lower matching opportunities for
professionals outside cities. In contrast, in countries with high access like Portugal, gaps may be mostly
related to the concentration of job opportunities in cities (Figure 2.3). Large gaps in the quality of
educational offers may not only make the educational offer outside cities less attractive but also lead to
worse entrepreneurial or job market outcomes for graduates in rural areas (OECD, 2022[44]; 2022[45]). This
may in turn hamper the movement of the tertiary educated to rural areas in search of natural amenities,
social and family connections and better housing options.
Establishing evidence of “brain drain” – the increasing flows of educated people from rural areas to cities
– nevertheless requires following people over the course of their lives. One of the few studies using cohort
data on place of residency versus place of origin of graduates shows that major cities gain and rural areas
lose graduates in the United Kingdom, with London consolidated as the main magnet for graduates
(Institute for Fiscal Studies, 2021[46]).

Persistent subnational gaps in access to services perpetuate territorial differences in

well-being

Available evidence points to substantial subnational gaps in access to services. In OECD countries, travel
time, using motorised vehicles, for people living in remote rural areas to reach a healthcare facility is
five times longer than those in metropolitan regions. In Europe, students in remote rural areas have to
travel on average five additional kilometres to reach a school compared to students in other areas (JRC,
2022[47]).
These gaps may translate into unequal outcomes. Results from PISA2 show that students in city schools
obtained higher scores in reading than their peers in schools located elsewhere in all but two OECD
countries with available data (OECD, 2022[14]). Moreover, the importance of enhanced access to rural
residents may also be greater. For instance, close to one in three rural residents reported suffering from
health problems that prevent them from doing things people their age normally do compared to only one in
four city residents (OECD/EC, 2020[48]).
Rural facilities are often required to centralise services and keep minimum quality requirements. In
healthcare, for instance, rural facilities often face higher relative costs, lower volumes, poorer overall quality
and workforce shortages. Across OECD countries, the number of hospital beds per capita in remote
regions fell at an average rate of -0.7% per year since the 2008 GFC, while they slightly increased in
metropolitan regions (OECD, 2021[11]). The gap in hospital bed rates between metropolitan regions
compared to regions far from metropolitan areas – which stood at 50% in 2020 – increased by 5 percentage
points with respect to the pre-pandemic period, because hospital bed rates increased faster in metropolitan
regions than in regions far from metropolitan areas (18% vs. 14%) (OECD, 2022[36]). The negative impacts

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28 

on the distance to care (Hsia et al., 2012[49]) and treatment delays for patients due to hospital closures in
rural areas can offset any cost gains, especially in the face of sudden increases in demand for care, like
during the COVID-19 pandemic (OECD, 2021[11]; 2020[50]).
While digital provision offers a way to overcome long travel times, lower economies of scale, longer
ambulance transportation times and fewer healthcare workers, rural areas that stand the most to benefit
from telemedicine often have poor Internet connectivity levels (OECD, 2021[51]; 2021[11]). Data from
regulators in 26 OECD countries indicate a persistent rural-urban divide in connectivity speeds: 1 in
3 households in rural areas do not have access to high-speed broadband on average and, in only 7 out of
26 OECD countries, more than 80% of households in rural regions have access to a high-speed connection
(OECD, 2020[52]). Across OECD countries, rural areas facing long travel times to healthcare facilities also
face below-average access to high-speed broadband: for instance, in Canada and Mexico, people in rural
areas face about 200 percentage points longer travel times and about 40 percentage points fewer Internet
speeds than the national average.

Figure 2.4. Location gap in travel time to healthcare versus location gap on Internet speed, OECD
countries, 2020

% population 20 40 60 Cities Towns and semi-dense areas Rural areas

JPN
KOR
Travel time to healthcare - Dev. from nat. average (p.p.)

CAN

200% MEX
TUR
GBR AUS

ESP USA
LVA GRC EST
LTU SWE
PRT NLD
100% DEU HUN DNK
ITA POL
FRA IRL FIN
AUT LUX
CZE BEL
SVK SVN

0%
GBR JPN NLD BEL
ITA KOR
AUS GBR
MEX SVN IRL
TUR ITA
POL LTU AUT
LVA
GRC POL CZE
FRA IRL
-100% EST SVK

-40% 0% 40%
Fixed broadband speed - Dev. from nat. average (p.p.)

Note: Travel time to healthcare is calculated using driving as a transport mode. Deviation from the national average is calculated from median
values by the degree of urbanisation weighted by population levels in each 1 km2 grid cell.
Speedtest data correspond to 2020Q4. The data for average fixed and mobile broadband download Speedtests reported by Ookla measure the
sustained peak throughput achieved by users of the network. Measurements are based on self-administered tests by users, carried over iOS
and mobile devices. Aggregation according to the degree of urbanisation was based on Global Human Settlement Model (GHS-SMOD) layer
grids. The figure presents average peak speed tests, weighted by the number of tests.
Source: For travel time to healthcare: Calculations based on Weiss, D. et al. (2020[53]), “Global maps of travel time to healthcare facilities”,
https://doi.org/10.1038/s41591-020-1059-1. For fixed broadband speed: Calculations based on Speedtest® by Ookla® Global Fixed and Mobile
Network Performance Maps. Based on analysis by Ookla of Speedtest Intelligence® data for 2020Q4. Provided by Ookla and accessed
2021-01-27 (see OECD (2021[51]) for details). Ookla trademarks are used under license and reprinted with permission.
StatLink 2 https://stat.link/qnas15

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Regional inequalities will evolve in a context of a shrinking population in half of OECD

countries

In the medium and long terms, changes in the distribution of people within countries will happen in the
context of stable or decreasing population stocks in half of OECD countries. Populations are expected to
decline in 14 OECD countries by 2040 and 18 by 2100, with the largest decreases in East and Southern
European countries, Japan and Korea (Vollset et al., 2020[54]). Besides differences in fertility rates – which
were already below replacement levels in all OECD countries except Israel in 2021 – differences in
international migration and life expectancy drive differences in projected population changes.
The future also holds fundamental changes in age structures across OECD countries: the number of
children under 5 years of age could decline from 63.5 million in 2021 to about 59.2 million in 2040 whilst
the number of elderly (older than 80 years) is expected to nearly double, from 66.5 million to 114.7 million
(Vollset et al., 2020[54]). These population projections have stark implications for elderly dependency ratios
in OECD countries: while in 2021, there are about 13 working-age people (15-64 years old) for every
elderly person, in 2040, there will be only 7 (Rouzet et al., 2019[55]; OECD, 2019[56]; 2022[14]).

Figure 2.5. Medium- and long-term population projections, OECD countries, 2021-2100
2021-40 2021-2100
Israel
Australia
Türkiye
Mexico
Luxembourg
Norway
New Zealand
Colombia
Canada
Costa Rica
Iceland
Ireland
Sweden
Belgium
Switzerland
Chile
United States
United Kingdom
Denmark
France
Finland
Austria
Germany
Netherlands
Spain
Slovenia
Portugal
Poland
Lithuania
Latvia
Korea
Japan
Italy
Hungary
Greece
Estonia
Czech Republic
0%

0%
%

50%

50%
%

%
-50

-50
100

150

100

150

Projected change in population

Note: Change is calculated as the difference between years over the initial value.
Source: Based on data from Vollset, S. et al. (2020[54]), “Fertility, mortality, migration, and population scenarios for 195 countries and territories
from 2017 to 2100: A forecasting analysis for the Global Burden of Disease Study”, https://doi.org/10.1016/s0140-6736(20)30677-2.

StatLink 2 https://stat.link/yfsjpe

Against this backdrop, metropolitan regions are expected to slightly increase their population share by
2040. In absolute terms, the number of people living in metropolitan regions is expected to remain constant

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30 

by 2040, while the number of people in non-metropolitan regions is expected to shrink (by 2.8% and 2.3%
in regions near and far from a midsize/large FUA) (OECD, 2022[36]).
Within regions, the population living in FUAs in OECD countries is expected to increase from 950 million
to 1 billion. Most of this increase will concentrate in large FUAs, which are expected to grow by 5% by
2030 while small and medium-sized FUAs are expected to shrink by 4% and 3% over the same period
(OECD, 2022[36]). Areas outside cities are also projected to increase in absolute terms but at a slower pace
than cities. By 2050, the population in towns and semi-dense areas is projected to increase from 2.1 billion
to 2.3 billion worldwide, while the population in rural areas is expected to expand from 1.7 billion to
1.9 billion (OECD/EC, 2020[48]).

Regional income inequality: Past, present and future outlook

The evolution of regional income inequalities3 hinges upon both the relative evolution of national income
per capita levels (linked to national GDP per capita growth) and the redistribution of income within
countries. Major economic shocks have an effect not only on national growth rates but also on gaps in
income per capita across regions. This is because regions differ in their degree of resilience to shifts and
shocks (Rice and Venables, 2020[57]). Structural factors then – and in particular the resilience of those
factors to shocks – rather than shocks per se are key drivers of regional inequalities (Garcilazo, Moreno-
Monroy and Oliveira Martins, 2021[58]; OECD, 2022[59]).
The 2008 GFC put a halt to regional convergence in many OECD countries (OECD, 2022[36]; 2020[16];
Faggian and Ascani, 2021[60]). In this context, the income gaps between metropolitan and non-metropolitan
regions have not closed since then, in part because metropolitan regions have proven to be more resilient
to crises than non-metropolitan regions (OECD, 2020[16]). In the past two decades, the gap between GDP
per capita in non-metropolitan versus metropolitan regions – of around 68% – did not close across the
OECD (OECD, 2022[36]).
This section presents evidence of regional income inequality trends. It focuses mostly on small (TL3)
regions in 2000-20, which offer a more granular territorial analysis and allows for classifications based on
access to cities (see Annex 2.A). This section does not attempt to draw inferences regarding the effect of
the COVID-19 pandemic as current data available (2019-20) are not sufficient to evaluate the impact of
and recovery from this shock on regional income inequalities. The section starts by proposing a
classification of OECD countries according to their regional income inequality trends. It then identifies
distinct growth inequality paths. The section then assesses the importance of metropolitan versus
non-metropolitan gaps in driving regional income inequalities across countries. Finally, it explores the role
of proximity between regions in driving regional income inequality.
The data used in the analysis have several limitations (see also Annex 2.A). This section assesses
differences in income inequalities across regions and FUAs, which reflect underlying structural, including
geographical, factors as well as demographic differences (e.g. higher elderly dependency ratios). Whilst
there is also interest in identifying spatial differences in income inequalities for similar demographic cohorts
(e.g. gender, age, race and sexual orientation), data to assess these are unfortunately unavailable (see
Box 2.2).4 As data on disposable income are unfortunately not available for small regions, the section uses
regional GDP per capita as a proxy for the typical income of a representative individual in a region (this
interpretation applies to the unweighted version of the Theil index, see Gluschenko (2017[61])). This means
that the regional inequality measures used in this section are not indicative of the evolution of inter-personal
inequalities or the situation of any given income-group (Rey, Arribas-Bel and Wolf, 2020[62]).

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Box 2.2. Bottom-up versus top-down approaches to measuring regional income inequality
A top-down approach allows for high frequency and large country coverage but has several
shortcomings
International comparative measures of spatial income inequality aim at capturing to what extent people
of different incomes live in different locations. Locations can vary in levels of spatial aggregation, from
large areas such as countries to small areas such as neighbourhoods. A “top-down” approach to
measuring regional income inequality over time, which this chapter uses, is to combine GDP (“income”)
with population counts series.
Aggregated series allow for the identification of trends across many countries because they are
available in most OECD countries, are comparable across countries and are available yearly. However,
they have several shortcomings: i) GDP and population may not be recorded in the same place,
requiring further aggregation (e.g. of all small regions that are part of the same FUA, see Annex 2.A);
ii) in countries with significant shares of capital-intensive industries (e.g. mining), GDP per capita levels
likely do not reflect the income levels of the average resident; iii) aggregate series do not provide
insights on the full income distribution within regions (see Annex 2.A for further explanation);
iv) residents in one region may work in another region, thus contributing to the GDP per capita of that
region but contributing directly to their own income, which means that translating differences in GDP
per capita levels across regions (that provide important insights on broader economic growth, including
on fiscal potential of regions) to assess differences in the disposable income of residents should be
done with care.

A bottom-up approach is preferable for understanding household personal incomes and allows to look at
different parts of the income distribution but is not available for a wide number of countries and years
A “bottom-up” approach uses declared incomes and location information available from administrative
sources, primarily tax records. This approach allows for measuring income disparities across regions
as well as income inequality within regions.
The main advantages of this approach compared to a “top-down” one includes: the availability of
information on the full income distribution, as opposed to mean levels only; high geographical
granularity (going even below the small region level); and more accuracy in definitions to capture more
precisely the disposable income of households. However, the main drawbacks of this approach are in
turn its relative infrequency (e.g. by census rounds, every 5 or 10 years) and more difficulties in
establishing international comparability, as reported taxable units (e.g. households or individuals) and
types of income (e.g. gross or disposable) vary across countries.
Recent OECD work (Königs et al., forthcoming[63]) uses administrative records to analyse income levels
and distributions for small regions (TL3) and smaller units (e.g. municipalities) in half of OECD countries.
However, these data are only available for a relatively short time span – in most cases starting in the
mid-2000s – which limited the study of regional income inequality to current trends rather than to
long-term dynamics. The main findings align with those of this chapter:
• Trends in regional income disparities are not uniform across countries, but regional median
incomes have converged over the last decade in most of the countries with available data.
• Income disparities between regions account for a very small fraction of overall income
inequality. Instead, disparities within the same region account for at least 95% of the overall
inequality.

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32 

• Regional income disparities are high in some countries. Across small (TL3) regions, median
household incomes for the highest- and lowest-income regions differ by a factor of only 1.2 to
1.3 in some of the Nordic countries, but by 1.7 and 1.6 in Japan and Latvia.
• Metropolitan regions concentrate on high median incomes and high inequalities. Across
17 countries with available data, over 75% of large metropolitan regions are in the top quartile
of regions by median income and by the level of inequality.
Source: Königs, S. et al. (forthcoming[63]), “The geography of income inequalities in OECD countries: Evidence from national register data”,
OECD Publishing, Paris.

Income per capita gaps have narrowed between OECD countries but gaps within
countries remain large

Over the last two decades, most OECD regions have seen improvements in their GDP per capita ratios
but with significant divergences between small regions at the top and bottom of the income distribution.
Top concentration and divergence of bottom regions persisted during the period, except in 2020 for the
first year of the COVID-19 pandemic, leading in turn to an increase in the mean-to-median ratio5
(Figure 2.6, Panel B; see Table 2.2).
The structural effects of COVID-19 on regional inequalities will take time to materialise and, as such, it is
not yet possible to interpret the impact of the pandemic on bottom convergence and top deconcentration
observed in 2019-20 as a new trend of declining inequalities or a temporary consequence of the fall in
economic activity during that period.

Table 2.2. Summary of main concepts related to regional income inequality

Concept Definition Measurement

Increase/decrease in income per Increase/decrease in the Theil index or mean-to- Unweighted Theil index of TL2/TL3 GDP per capita;
capita regional inequality median ratio mean TL2/TL3 GDP per capita over median
TL2/TL3 GDP per capita
Top concentration/deconcentration Increase/decrease in the top 20% to mean ratio Mean GDP per capita in top 20% regions over
mean TL3 GDP per capita in a given year
Bottom regions Increase/decrease in the bottom 20% to mean ratio Mean TL3 GDP per capita in bottom 20% regions
convergence/divergence over mean TL3 GDP per capita in a given year
Polarisation/depolarisation Increase/decrease in the top 20% to bottom 20% Mean TL3 GDP per capita in the bottom 20% of
ratio regions over mean TL3 GDP per capita in the top
20% of regions
Between (group) inequality Variability across the group (i.e. country) means Theil index between/within decomposition based on
with respect to the overall (OECD) income per TL2/TL3 GDP per capita (see Annex C in OECD
capita mean (2020[52]))

Within (group) inequality Variability in regional income per capita with respect
to their group mean

Note: Top/bottom calculated as population equivalent (top/bottom regions with at least 20% of the population). The interpretation of top/bottom
20% GDP per capita is that 20% of the population in the country holds 20% of the value.
Source: Based on multiple sources.

The Theil index offers a way to observe the variability of regional incomes per capita in OECD countries in
a single measure. The index compares the income per capita in each region to the mean of all regions
across OECD countries. The index partly captures differences in GDP per capita levels across countries:

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  33

for instance, if a country experienced faster growth than the OECD average each year while everything
else remained the same, the Theil index would decrease, even though the variation in regional incomes
stayed the same. The index decomposition into a “between” and a “within” component is useful to assess
the changes in the variability of regional income per capita, controlling for the effect of changes in national
income per capita (see Box 2.3 and Table 2.2) (OECD, 2020[52]; Elbers et al., 2008[64]).

Figure 2.6. Trends in GDP per capita inequality indicators, TL3 OECD regions, 2000-20

A. Density GDP per capita (TL3) B. Top concentration/inequality/bottom divergence (TL3)

2000 2020 Top/mean Mean/median Bottom/mean

0.05

Ratios based on TL3 GPD per capita (2000=100)

0.04 1.08

0.03
1.05
Count

0.02

1.02
Bottom Top
0.01
20% 20%

0.00 0.99
30 000 60 000 90 000 2000 2005 2010 2015 2020
GDP per capita (TL3, PPP)

Note: Vertical lines in Panel B represent group mean values.

The density GDP per capita plot does not include 4 TL3 regions with GDP per capita over EUR 150 000. Based on 26 OECD countries with
available GDP per capita data for 2000-20 and more than 1 TL3 region.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/qe859l

Box 2.3. Theil index of regional inequality and its decomposition

Decomposition of the Theil index
The Theil index of regional income inequality measures the spread (variance) in GDP per capita levels
across regions. It is the sum of the (log) ratio of GDP per capita in region 𝑖 and the mean GDP per
capita over all regions, weighted by the share of region 𝑖 in the total GDP per capita:
𝐺𝐷𝑃𝑝𝑐𝑖 𝐺𝐷𝑃𝑝𝑐𝑖
𝑇ℎ𝑒𝑖𝑙 = ∑𝑅𝑖=1 𝑙𝑛 ( ) 𝑤𝑒𝑖𝑔ℎ𝑡𝑖 , with 𝑤𝑒𝑖𝑔ℎ𝑡𝑖 = ∑𝑅
𝐺𝐷𝑃𝑝𝑐 𝑖=1 𝐺𝐷𝑃𝑝𝑐𝑖

The assumption when applying the Theil index to regional inequality is that each region is composed of
a representative individual with an income approximated by the average GDP per capita of their region

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34 

and, therefore, the index is invariant to how many people live in each region but not to the number of
regions there are in the country.

Standard between/within decomposition of the Theil index

The Theil index for regional inequality can be further refined to capture the contribution within specific
groups (e.g. countries) and between those groups. To determine the “between” contribution, we take
the sum of the (log) ratio of the average GDP per capita in each group 𝑗 and the mean GDP per capital
over all regions, weighted by the share of GDP per capita of group 𝑗 in total GDP per capita:
𝐺𝐷𝑃𝑝𝑐𝑗 ∑𝑁
𝑖=1 𝐺𝐷𝑃𝑝𝑐𝑖𝑗
𝑇ℎ𝑒𝑖𝑙𝑏𝑒𝑡𝑤𝑒𝑒𝑛 = ∑𝑀
𝑗=1 𝑙𝑛 ( ) 𝑤𝑒𝑖𝑔ℎ𝑡𝑗 , with 𝑤𝑒𝑖𝑔ℎ𝑡𝑗 = ∑𝑅
𝐺𝐷𝑃𝑝𝑐 𝑖=1 𝐺𝐷𝑃𝑝𝑐𝑖

To determine the “within” contribution, we calculate the inequality in regional incomes with respect to
their group means, weighted by the share in their group and the share of their group in the total (equal
to the share of GDP per capita of the region in the sum of total GDP per capita):
𝑀 𝑅 𝐺𝐷𝑃𝑝𝑐𝑖𝑗
𝑇ℎ𝑒𝑖𝑙𝑤𝑖𝑡ℎ𝑖𝑛 = ∑ ∑ 𝑙𝑛 ( ) 𝑤𝑒𝑖𝑔ℎ𝑡𝑖
𝑗=1 𝑖=1 𝐺𝐷𝑃𝑝𝑐𝑗

Separating country-level convergence (between) from region-level convergence (within) is of particular

relevance, not least because the evidence does point to a “catching-up” effect in many countries,
particularly former industrial transition economies in the European Union, Korea and Türkiye. Ten out of
13 countries with GDP per capita below OECD averages in 2000 saw the gaps narrow in the last 2 decades
(Figure 2.7). On the other hand, some countries, notably Greece, Italy, Portugal and Spain saw gaps grow
relative to the OECD average. Overall, 19% of the OECD population lived in regions within countries
experiencing upwards convergence and 12% lived in countries experiencing divergence.

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Figure 2.7. Country GDP per capita gap with respect to OECD mean, 2000 and 2020
2020 2000
1.5
Country GDP per capita/OECD GDP per capita

1.0
M ean gap 2000

M ean gap 2020

0.5

0.0

Be y
ep a

ain

en

Ge um
ing n
Lith ia

Re and

Hu ia

nia

P e

De a
y
nce

Sw d
w Z al
ary

any

the k
ia

s
Ital
m

ite ds
d K pa
h R re

rwa
c

lan

Ne nmar
stri
c

lic
ton
v

kiy

Ne ortug

tate
uan

lan
ee

ed
Sp
bli
Lat

ec Ko

ve

do

lgi
ng

Un rlan
ite Ja

Fra
vak Pol

rm
ub

Au
Fin
Tür

No
Es
pu

ea
Gr
Slo

dS
Slo

Un
Cz

Note: Based on country aggregates from TL3-level data. The gap is defined as each country’s GDP per capita with respect to OECD GDP per
capita. The mean gap is the mean value of gaps across OECD countries. Converging countries had a 2000 GDP per capita gap below the mean
gap across OECD countries and a smaller gap in 2020 (i.e. a larger country GDP per capita to OECD GDP per capita ratio): the Czech Republic,
Estonia, Hungary, Korea, Latvia, Lithuania, New Zealand, Poland, the Slovak Republic, Slovenia and Türkiye. Diverging countries had a 2000
GDP per capita gap in below the mean gap across countries and a larger gap in 2020 (i.e. a smaller country GDP per capita to OECD GDP per
capita ratio): Greece, Italy, Portugal and Spain. Countries above OECD levels had gaps above the mean gap across OECD countries in 2000
and 2020: Austria, Belgium, Denmark, France, Finland, Germany, Japan, the Netherlands, Norway, Sweden, the United Kingdom and the
United States.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/s8kwcb

The broad convergence in overall between-country inequalities capture in Figure 2.7 is also reflected in
the Theil “between” measure (see also Box 2.3) in Figure 2.8. However, whilst inequalities between
countries have, on the whole, declined over the last two decades, this has not been mirrored with similar
progress on within-country inequalities. At the large region (TL2) level for example, within-country
inequalities increased from 2000 to 2015 before decreasing, while at the small region (TL3) level, within-
country income inequalities slightly increased over the period, with marginal improvements often occurring
during severe economic shocks. The absolute levels of within-country inequality stayed in a narrow range
compared to changes in between-country inequality, so decreasing between-country inequality drove
decreases in overall inequality across large and small regions. In both cases, the decrease in between-
country inequality compensated for the rise in within-country inequality.6

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36 

Figure 2.8. Trends in total, within and between regional income inequality TL2 and TL3 OECD
regions, 2000-20

A. Total/within/between Theil (TL2) B. Total/within/between Theil (TL3)

Theil Within Between Theil Within Between

(TL2) (TL2) (TL2) (TL3) (TL3) (TL3)

1.25 1.25
Theil decomposition (TL2, 2000=1)

Theil decomposition (TL3, 2000=1)

1.00 1.00

0.75 0.75

0.50 0.50
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020

Note: Panel A is based on 385 TL2 regions in 28 OECD countries with available data (no TL2 data [continuous time series for more than 1 region]
available for Chile, Costa Rica, Estonia, Iceland, Israel, Ireland, Latvia, Lithuania, Luxembourg and Switzerland). Panel B is based on 1 586 TL3
regions in 27 countries with available data (no TL3 data [continuous time series for more than 1 region] for Australia, Canada, Chile, Colombia,
Costa Rica, Iceland, Ireland, Israel, Luxembourg, Mexico and Switzerland). Between Theil measures the dissimilarity of the national GDP per
capita means with respect to the OECD average. Within Theil measures the dissimilarity between regional and national GDP per capita. See
Box 2.3 more for details.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/91f60k

Over half of OECD countries saw regional income inequalities increase in the last
two decades

Looking only at regional inequalities among small regions (TL3), 15 out of 27 countries with available data
since 2000 saw regional income inequalities increase over the last 2 decades (Table 2.3) (see Annex
Table 2.B.1 for the full set of results). This means that 70% of the OECD population live in countries (with
available data) that experienced increases in regional income inequality. Table 2.3 also differentiates
countries on whether they were converging to or diverging from the OECD average (see also Figure 2.7)
and further classifies countries on the basis of weather their Theil index followed a mostly linear
(increasing/decreasing) or a non-linear trend (e.g. u-shape or inverted u-shape).

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Table 2.3. A typology of regional income inequality trends based on GDP per capita at the TL3 level

At/above mean OECD GDP per Converging to OECD GDP per Diverging from OECD GDP per
Detailed
Broad type capita gap capita capita
type
(period max; period min) (period max; period min) (period max; period min)
Income Linear Belgium (2003-05; 2000-02), Estonia (2015-17; 2006-08) Italy (2018-20; 2006-08)
inequalities Denmark (2015-18; 2000-02),
mostly France (2018-20; 2003-05),
increasing over Sweden (2018-20; 2003-05),
the period United Kingdom (2018-20;
2003-05)
Non-linear Japan (2006-08; 2000-02), Czech Republic (2018-20; 2000-
United States (2012-14; 2000-02) 02),
Hungary (2009-11; 2000-02),
Lithuania (2006-08; 2000-02),
Poland (2015-17; 2000-02),
Slovak Republic (2009-12;
2000-02),
Slovenia (2009-11; 2000-02),
Income Linear Finland (2000-02; 2018-20), Latvia (2003-05; 2009-11), Greece (2006-08; 2015-17),
inequalities Norway (2000-02; 2018-20) Türkiye (2006-08; 2015-17) Portugal (2000-02; 2018-20)
mostly
Non-linear Austria (2006-08; 2018-20), Korea (2009-12; 2018-20), Spain (2000-02; 2009-11)
decreasing over
Germany (2000-02; 2018-20), New Zealand (2009-11; 2018-20)
the period
Netherlands (2000-02; 2018-20)

Note: See Annex 2.B for details. Linear/non-linear trend determined based on the sign and statistical significance (95% confidence level) of the
coefficients of a regression of the second-degree polynomial of the Theil index against time. Decreasing/increasing determined according to the
sign of the compounded growth rate of the Theil index between 2000-02 and 2018-20. Converging countries had a 2000 GDP per capita gap
below the mean gap across OECD countries and a smaller gap in 2020 (i.e. a larger country GDP per capita to OECD GDP per capita ratio).
Diverging countries had a 2000 GDP per capita gap below the mean gap across countries and a larger gap in 2020 (i.e. a smaller country GDP
per capita to OECD GDP per capita ratio). The gap is defined as each country’s GDP per capita with respect to OECD GDP per capita. The
mean gap is the mean value of gaps across OECD countries.
Source: Based on data from OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

Table 2.3 reveals that beyond the general picture, there are different growth-inequality trajectories across
OECD countries, confirming there is no single narrative on regional income inequalities (McCann, 2022[65])
(Figure 2.9). Rather, while most OECD countries that showed increasing inequality in the last two decades
reached their minimum values of regional GDP per capita inequality before the GFC, they were then set
on different trajectories.
• On the one hand, among OECD countries with income per capita above OECD levels, some such
as France and the United Kingdom, experienced a sustained increase in regional inequality since
the mid-2000s, while others, such as Germany and Portugal, saw sustained falls.
• On the other hand, virtually all countries converging towards OECD GDP per capita levels saw
within-country inequalities rise over the period as a whole but in a non-linear fashion (mostly as an
inverse U). In Poland for instance, inequality started picking up in 2004 and continued increasing
until 2020. In Hungary and the Slovak Republic, inequalities also increased rapidly, albeit from
relatively low levels, between 2003/04 and 2009, but unlike Poland, fell between 2010 and 2020.
In the Czech Republic, Estonia and Lithuania, inequalities plateaued at relatively high levels after
decreasing slightly from their peaks in the aftermath of the GFC in 2010.

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In most countries, increasing regional inequality went hand in hand with bottom divergence and top
concentration (and vice versa, decreasing inequality went hand in hand with bottom convergence and top
deconcentration). The correlation between changes in the Theil index and the top-to-mean (bottom-to-
mean) was above (below) 0.7 in 21 (22) countries out of 27 with available data. Exceptions include the
Czech Republic, Norway and the United Kingdom, which all showed a weak correlation between inequality
and bottom region trends but a strong correlation with respect to top concentration.

Figure 2.9. Trends in GDP per capita inequality indicators for selected countries, TL3 regions,
2000-20
Indexed to 2000 (2000=1)

Theil index Top 20%/Mean Bottom 20%/Mean Mean GDP per capita

United Kingdom France United States

1.20 1.10 1.8
1.15 1.05 1.6
1.10 1.4
1.00
1.05 1.2
0.95
1.00 1.0
0.90

Slovak Republic Poland Czech Republic

Statistic (2000=1)

1.8 1.8 1.5

1.5 1.5 1.3
1.2 1.2 1.1
0.9 0.9

Greece Italy Spain

1.2 1.05 1.1

1.1 1.00 1.0
0.95 0.9
1.0
0.90 0.8
0.9
0.7
0

0
200

200

201

201

202

200

200

201

201

202

200

200

201

201

202

Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/60i258

Growth-inequality paths were counter-cyclical in most countries with declining regional inequality, and
pro-cyclical in most countries with increasing regional inequality (Figure 2.10, Panel C). In some cases,
including France, Italy and Spain, the pattern switched from counter-cyclical to pro-cyclical after the GFC,
in line with findings that the GFC put a stop to regional convergence in these countries (Diemer et al.,
2022[17]; OECD, 2020[16]). Greece is the only country with a pro-cyclical growth-inequality trend, as the
Theil index closely followed the decreasing trend in GDP per capita in the last two decades.

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Figure 2.10. Correlation between the Theil index of TL3 GDP per capita with top-to-mean and
bottom-to-mean ratios and mean GDP per capita, 2000-20

Trend decreasing increasing

A. Top 20%/Mean B. Bottom 20%/Mean C. Mean GDP per capita

Estonia
Lithuania
Norway
Denmark
Czech Republic
Poland
Germany
France
Portugal
Slovenia
Latvia
Slovak Republic
Türkiye
Austria
United Kingdom
Finland
Sweden
Korea
Hungary
Japan
Italy
New Zealand
United States
Spain
Netherlands
Greece
Belgium
-1.0 -0.5 0.0 0.5 1.0 -1.0 -0.5 0.0 0.5 1.0 -1.0 -0.5 0.0 0.5 1.0
Correlation between Theil index and statistic

Note: Increasing/decreasing trends follow classification in Table 2.3.

Top/bottom calculated as population equivalent (top/bottom regions with at least 20% of the population). The interpretation of top/bottom 20%
GDP per capita is that 20% of the population in the country holds 20% of the value.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/pji2gq

Gaps between top and bottom regions did not narrow in most OECD countries over the
last two decades

Polarisation increased in 14 out of 27 OECD countries with available data. Despite decreases in the last
two decades, the ratio of top to bottom region in 2020 was still the highest in Türkiye (3.2), followed by the
Slovak Republic (2.9) and Poland (2.8). 7 Absolute gaps in top versus bottom region incomes however
increased in the majority (21 out of 27) of OECD countries with available data in 2010-20 compared to
2000-09 (OECD, 2022[59]) (Figure 2.11, Panel B), including in countries such as Germany, Hungary, Latvia
and Türkiye where the relative gaps decreased. Reducing polarisation in both relative and absolute terms
requires necessarily that bottom regions grow faster than top regions. In the case of Latvia, for instance,
bottom regions would have needed to grow twice as fast as they did between 2000 and 2020, just to
maintain the same absolute gap over time.
The evidence on increasing polarisation at the small region level is consistent with findings for disposable
income at the large region level. Disposable income and poverty rates differ substantially across OECD
countries and within their large regions. In 2020, 11 out of 26 OECD countries with available data had
regions with S80/S20 ratios above the OECD average, including most regions in Chile, Colombia, Mexico
and the United States. Moreover, the average gap in poverty rates between the worst- and best-performing

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40 

regions in the same country was 18 percentage points, reaching 50 percentage points in Colombia and
Mexico (OECD, 2022[36]).

Figure 2.11. Relative vs. absolute changes in polarisation based on real GDP per capita, TL3 OECD
regions, 2000-20

A. Top/bottom B. Top minus bottom

2010-20 vs 2000-09 2010-20 vs 2000-09
Poland Poland
France France
United States United States
Estonia Estonia
Denmark Denmark
Italy Italy
United Kingdom United Kingdom
Slovak Republic Slovak Republic
Lithuania Lithuania
Spain Spain
Sweden Sweden
Greece Greece
Czech Republic Czech Republic
Korea Korea
Belgium Belgium
Slovenia Slovenia
Netherlands Netherlands
Norway Norway
New Zealand New Zealand
Japan Japan
Hungary Hungary
Finland Finland
Austria Austria
Latvia Latvia
Germany Germany
Türkiye Türkiye
Portugal Portugal 0
0.0

0.2
-0.2

00

00

000
00

40

80
-4 0

12
USD (PPP)

Note: Top/bottom calculated as population equivalent (top/bottom regions with at least 20% of the population). The interpretation of top/bottom
20% GDP per capita is that 20% of the population in the country holds 20% of the value.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/qgrmf1

Differences in income per capita between metropolitan/top and other regions drive
regional income inequalities in most OECD countries

Regional income inequalities have increased because metropolitan regions have continued to pull apart
from other regions in a majority of countries. A decomposition of the Theil index of inequality can shed light
on whether differences between metropolitan and other regions matter the most for regional income
inequality and whether distance to cities has a role in explaining regional income inequalities (see Box 2.4,
(Elbers et al., 2008[64]; Boulant, Brezzi and Veneri, 2016[66]). At the same time, polarisation and bottom
divergence are linked to metropolitan versus non-metropolitan gaps because a significant share of top
(bottom) regions are metropolitan (non-metropolitan). Proximity to large FUAs is also an important factor:
for instance, in some countries all top regions are metropolitan large and in others all bottom regions are
far from midsize/large cities (see Box 2.5 for more information on the overlap between top/bottom and
metropolitan/non-metropolitan regions).

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Box 2.4. A measure to compare the share of between-group inequality across countries
Evaluating observed between-group inequality against a benchmark of maximum between-group
inequality
The standard Theil decomposition is sensitive to the number of groups considered. For instance, if one
were to consider a split between two categories (e.g. metropolitan versus non-metropolitan), the share
of between-group inequality would be very small. As this result is an artefact of the standard Theil
decomposition, concluding from this that metropolitan/non-metropolitan differences matter little for
regional inequality would be misleading.
Elbers et al. (2008[64]) have proposed a decomposition that normalises the Theil index by the observed
number and relative size of observed groups. This decomposition is better suited for comparisons that
involve different numbers of group and/or different group shares, so that:
𝐵𝐺𝐼 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑒𝑞𝑢𝑎𝑙𝑖𝑡𝑦
𝑅𝑏 ′ = = 𝑅𝑏
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝐵𝐺𝐼 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐵𝐺𝐼
where BGI is Between-Group Inequality. This measure “replaces total inequality in the denominator of
the conventional ratio with the maximum between-group inequality that could be obtained if the number
of groups and their sizes were restricted to be the same as for the numerator”.
Notes: In the calculations, Rb’ is obtained using the decompGEI function of the R package IC2, available at:
https://www.rdocumentation.org/packages/IC2/versions/1.0-1/topics/decompGEI.

The decomposition measures the share of inequality explained by differences between groups of regions.
As these shares are sensitive to the number of regions in each country, country values are expressed as
a ratio of OECD-wide shares. Table 2.4 classifies countries according to the maximum relative share
among three possible groupings (see Annex Table 2.B.2 for full results): i) large metropolitan regions
versus other regions; ii) metropolitan versus non-metropolitan regions; and iii) regions far from a
midsize/large FUA versus other regions. The table also distinguishes between countries where all (large)
metropolitan regions are top regions.

Table 2.4. Contribution of TL3 region types to regional income inequality, based on 2010-20
averages
Large metropolitan/top Large metropolitan Metropolitan/top Far from a FUA>250K
Metropolitan vs. the rest
vs. the rest vs. the rest vs. the rest vs. the rest
Czech Republic Korea Belgium Germany Austria
Denmark Poland Estonia Japan Greece
France Türkiye Finland New Zealand Italy
Hungary United Kingdom Latvia Slovenia
Portugal United States Lithuania
Sweden Netherlands
Norway
Slovak Republic
Spain

Note: Countries with increasing inequality are listed in bold.

Countries selected based on the largest 2010-20 average share of between-group inequality relative to OECD values. See Annex Table 2.B.1
for full results. Far from an FUA>250K includes regions near/with a small FUA and remote regions. Top/bottom calculated as population
equivalent (top/bottom regions with at least 20% of the population). The interpretation of top/bottom 20% GDP per capita is that 20% of the
population in the country holds 20% of the value.
Source: Based on OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

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Concerning metropolitan versus non-metropolitan differences, the size of cities and distance to a city
matter to different degrees across countries, leading to different patterns:
• The relative differences in the income per capita group of large metropolitan regions and others
with respect to OECD levels explain the largest share of regional income inequality in 11 out of
19 countries with large metropolitan regions (8 of which have increasing inequality). In six of these
countries, all top regions are also large metropolitan regions.
• The relative differences in income per capita in the broader group of metropolitan versus
non-metropolitan regions mattered the most in 13 out of 27 countries with available data. This
included five countries with large metropolitan regions (two of which had increasing inequality) and
all eight countries with no large metropolitan regions.
• Finally, relative differences between regions far from a midsize/large FUA and other regions
mattered the most in the three countries (with Italy being the only country in the group with
increasing inequality).
Furthermore, comparing changes between 2000-09 and 2010-20 reveals that:
• The share of inequality explained by differences between metropolitan and non-metropolitan
regions increased in 13 out of 27 OECD countries with available data, 7 of which had increasing
inequality (the Czech Republic, France, Hungary, Japan, Latvia, Poland, the Slovak Republic and
Sweden) (Figure 2.12). This share did not necessarily increase in all countries where income
inequality increased: in 8 countries with increasing inequality, including the United Kingdom and
the United States, this share was smaller in 2010-20 compared to 2000-09.
• The share of inequality explained by differences between large metropolitan and other regions
increased in 8 out of 19 OECD countries with large metropolitan regions. This included
three countries with increasing inequality where the other shares considered did not increase
(Denmark, Italy and the United Kingdom).
• The importance of differences between regions far from cities and others increased in ten OECD
countries, six of which had increasing inequalities.

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Figure 2.12. Changes in the contribution of region types to regional income inequality based on
TL3 GDP per capita, 2000-20
A. Metropolitan vs. Non-metropolitan B. Large metropolitan vs. Non-large C. Far from a FUA > 250K vs. Close

Netherlands
Korea
New Zealand
Slovenia
United States
Austria
Germany
Türkiye
United Kingdom
Portugal
Estonia
Italy
Belgium
Hungary
Spain
Denmark
Finland
Greece
Slovak Republic
Poland
Japan
Lithuania
Norway
France
Latvia
Czech Republic
Sweden

-20% -10% 0% 10% -20% -10% 0% 10% -20% -10% 0% 10%

Change in the share of between inequality, 2010-20 vs 2000-09

Source: Based on OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/utvgco

Box 2.5. Overlap between top/bottom and metropolitan/non-metropolitan regions

Regions can be classified according to the Access to Cities typology (see Annex 2.A) or as top or bottom
regions. In seven countries (Estonia, Finland, Latvia, Lithuania, Norway, Portugal and Sweden), all top
regions are metropolitan and all bottom regions are non-metropolitan. In all of these countries except for
Portugal, all bottom regions are far from a midsize/large FUA. 8 In four countries, all bottom regions are
non-metropolitan (Austria, Greece, New Zealand and the Slovak Republic). In New Zealand and the
Slovak Republic, all bottom regions are far from a midsize/large FUA.
The match between metropolitan and top regions on the one hand and non-metropolitan and bottom
regions on the other is substantial but not perfect. In nine countries (Belgium, the Czech Republic,
Denmark, France, Hungary, Japan, the Netherlands, Slovenia and Spain), all top regions are metropolitan
but not all bottom regions are non-metropolitan. In six of these countries (Belgium, the Czech Republic,
Denmark, France, Hungary and Japan), all top regions are large metropolitan. Finally, in 5 countries, the
overlap between non-metropolitan and bottom regions is larger than the overlap between metropolitan top
and top regions: Germany (38% vs. 89%), United Kingdom (80% vs. 50%), Italy (81% vs. 57%), Poland
(95% vs. 71%) and Türkiye (92% vs. 50%). In two countries, the opposite is true (United States [78% vs.
63%] and Korea [66% vs. 0%]).

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44 

Figure 2.13. Share of top/bottom regions by region type, based on 2020 values for top/bottom regions
Metropolitan & Top Metropolitan large & Top
Slovenia
Slovak Republic
Norway
New Zealand
Netherlands
Lithuania
Latvia
Korea
Finland
Estonia
Sweden
Spain
Portugal
Japan
Hungary
France
Denmark
Czech Republic
Belgium
United States
Poland
Italy
United Kingdom
Türkiye
Greece
Austria
Germany
Non-metropolitan & Bottom Far from a FUA>250K & Bottom
Slovenia
Slovak Republic
Norway
New Zealand
Netherlands
Lithuania
Latvia
Korea
Finland
Estonia
Sweden
Spain
Portugal
Japan
Hungary
France
Denmark
Czech Republic
Belgium
United States
Poland
Italy
United Kingdom
Türkiye
Greece
Austria
Germany

0% 25% 50% 75% 100% 0% 25% 50% 75% 100%

Share of type in top or bottom regions

Note: Top/bottom calculated as population equivalent (top/bottom regions with at least 20% of the population). The interpretation of top/bottom
20% GDP per capita is that 20% of the population in the country holds 20% of the value.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/3cxbvy

Differences between clusters of high- and low-income regions drive regional inequalities
in many countries

The measures of regional inequality used thus far do not consider the geographical aspect of regions, that
is, the fact that regions with similar characteristics may be close or distant to each other (Rey, Arribas-Bel
and Wolf, 2020[62]). The spatial Gini index disentangles the effect of proximate versus distant regions in
the Gini index (Rey and Smith, 2012[67]). When spatial dependence is high and positive (similar regions
show a strong tendency to cluster), differences with distant regions drive inequality, as values are similar
among neighbours.
The spatial Gini index for GDP per capita shows that differences across distant regions drive virtually all
the variation in regional inequality in large OECD countries including France, Germany and the
United States and in countries with high regional divides such as Italy (Figure 2.14). In contrast, in small
countries where a large share of inequality is due to concentration in the capital city, there is no evident
clustering of regions with high or low income per capita but rather an “oasis” of prosperity.

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  45

Figure 2.14. Spatial Gini index of GDP per capita at the TL3 level, OECD countries, 2021
Spatial Gini index (GDP per capita), 2020 Spatial Gini index (GDP per capita), 2001
1.00
Spatial Gini index (GDP per capita, TL3 regions)

0.75

0.50

0.25

0.00

ing ly
rea

Hu n

ain
um
an
via

Re nia

Lith ia

ce

d
Be ia
D y

Sw d

nce
the al
Cz w Ze rk

ary

any
ia

ite iye

Ge m
ds
e
rwa

lan
h R nd

d K Ita
lan
Slo c

lic
n

str
Ne enma

Ne ortug

tate
uan

Jap
ed

ee
Sp
bli
Lat
vak Esto

ve

Ko

do
lgi
ng
ec ala

rlan

Un Türk
Fra

rm
ub

Au
Fin

Po
No
pu

Gr

dS
ep

ite
Slo

Un
Note: The index measures the share of inequality due to differences between proximate and distant regions.
GDP per capita data are not aggregated by metropolitan regions sharing the same FUA (see Annex 2.A for details). The spatial Gini is equal to
the neighbour composition of the Gini coefficient times one over the Gini coefficient (Parry, 2022[68]). The spatial Gini considers the role of
proximity in the concentration of a given variable. It decomposes the Gini index into two components: one among neighbours (i.e. nearby
observations) and another among non-neighbours (i.e. distant observations). 2018 population for Japan.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/i4v3s7

The existence of localised productivity spillovers tends to translate into a certain degree of similarity in
terms of income and prosperity between neighbouring regions. Spatial clustering by income can result in
persistent regional income dynamics and the emergence of a two-tier system of regions, with rich regions
clustered with other rich regions (“high-high” clustering) and poor ones clustered with other poor ones
(“low-low” clustering), unable to learn from “productive neighbours” and stuck into regional development
traps (Iammarino, Rodríguez-Pose and Storper, 2019[69]).
“Low-low” clustering appears to be more widespread than “high-high” clustering, except for Southern
European countries, where more than half of high-income regions appear to be spatially clustered among
regions with a similar level of income (Figure 2.15) (see Box 2.6 for a description of how spatial clustering
is measured).9 Furthermore, Italy and Spain also record the highest degree of “low-low” income clustering
among the countries considered, with three in every four low-income regions spatially clustered around
regions with a similar level of income.

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Figure 2.15. Incidence of spatial clustering across OECD countries

Low-low clustering High-high clustering

Share of regions (%)
100

75

50

25

Note: The incidence of low-low spatial clustering is equal to the share of the bottom 20% of regions featuring statistically significant positive
spatial clustering (i.e. spatially clustered among other low GDP per capita regions); the incidence of high-high spatial clustering is equal to the
share of top 20% regions featuring statistically significant positive spatial clustering (i.e. spatially clustered among other high GDP per capita
regions). Data refer to 2019. Only countries with at least 15 TL3 regions are represented.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/716zna

Box 2.6. Measuring the degree of (dis)similarity among neighbouring regions

The degree of similarity of a given region with its neighbours can be measured by the Local Moran’s 𝐼:

𝐿𝑜𝑐𝑎𝑙 𝑀𝑜𝑟𝑎𝑛′ 𝑠 𝐼 = (𝑦𝑖 − 𝑦̅) ∑(𝑦𝑗 − 𝑦̿)

𝑗

where 𝑦𝑖 is a socio-economic indicator for region 𝑖, for instance, regional GDP per capita. The Local
Moran’s 𝐼 can take positive, negative or zero values: positive values indicate that a given region is similar
in terms of a pre-specified economic indicator to its neighbours; negative values indicate that it tends to be
different from its neighbours; while a zero value means that there is no correlation with neighbours’
socio-economic conditions. The Local Moran’s 𝐼 might not be sufficiently precisely estimated, in which case
the data are said to rule against the existence of spatial similarity/dissimilarity among contiguous regions.
If the Local Moran’s 𝐼 is sufficiently precisely estimated and takes on a positive value, the region is said to
be clustered around regions with a similar level of income.

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Figure 2.16. Measuring the degree (dis)similarity among neighbouring regions: An example based
on GDP per capita in Spanish TL3 regions
A. GDP per capita in 2019 B. Local Moran's I of GDP per capita in 2019

Note: The Local Moran’s 𝐼 is considered statistically significant when its p-values are below 20%.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

Figure 2.16 provides a working example of how the measurement of spatial clustering works in practice
based on the level of GDP per capita registered in Spanish TL3 regions in 2019. The left panel shows GDP
per capita levels, while the right panel shows the value for the estimated Local Moran’s 𝐼, whenever
statistically significant. A few things merit attention. First, the Local Moran’s 𝐼 is not always statistically
significant. Second, when a given region is surrounded by a set of regions with a level of GDP per capita
very different from its own, the Local Moran’s 𝐼 takes on negative values (e.g. the Comunidad de Madrid
or the region of Guadalajara in the central part of Spain). This is a situation opposite to the one of spatial
clustering, also labelled a “checkerboard pattern”. Third, the vast majority of regions such that the Local
Moran’s 𝐼 is sufficiently precisely estimated feature spatial clustering. Fourth, in the case of Spain, the
degree of spatial clustering among regions with low GDP per capita (i.e. in the south of Spain) is higher
than among regions with high GDP per capita (i.e. the northwest part of the country).

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Annex 2.A. OECD regional data and

methodological notes

OECD territorial definitions and administrative fragmentation

Regions are subnational units below national boundaries. OECD countries have two regional levels: large
(TL2) regions and small (TL3) regions. Regional boundaries correspond to administrative divisions defined
autonomously by countries using different criteria. Except for the United States, small regions are nested
within large regions. However, in Estonia, Latvia and Luxembourg, TL2 borders correspond to national
borders, and in Israel and New Zealand, TL2 and TL3 borders are the same. Below small regions, countries
define local units such as municipalities, which are usually nested within small regional boundaries.
Regional boundaries, especially those at lower scales, may be subject to changes across time as regions
merge and split following demographic and political changes.
The comparison of inequality levels and rankings between territorial levels is not meaningful because the
way information is scaled down varies across countries.10 The level of administrative fragmentation – that
is, how national territories are split by administrative units – varies across OECD countries, especially at
the TL3 level. At the TL2 level, the number of TL2 regions per 1 million inhabitants varies from 0.08 in
Japan to 5.4 in Iceland. At the TL3 level, it varies from 0.33 in Korea to almost 8 regions per
1 million inhabitants in Canada (that is, 293 regions in approximately 38 million people).

Annex Figure 2.A.1. Number of TL2 and TL3 regions per million inhabitants, 2021
TL3 TL2

Iceland
Canada
Slovenia
Greece
Estonia
Lithuania
Finland
Austria
Germany
Colombia
Belgium
Switzerland
Latvia
Chile
Portugal
New Zealand
Norway
Sweden
Hungary
Australia
Italy
Netherlands
Poland
Luxembourg
United Kingdom
Mexico
Slovak Republic
Ireland
France
Denmark
Spain
Czech Republic
Türkiye
Israel
United States
Japan
Korea
Costa Rica
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Number of regions per million inhabitants

Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/o3ts0v

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  49

The distribution of population across regions in OECD countries is uneven. Highly urbanised countries
such as the United States and sparsely populated countries such as Australia and Spain show more
disparity in the distribution of population across regions. Australia has the most unequal distribution of
population across small regions, as just 5 of its 51 regions account for 60% of the national population). In
contrast, the populations of East European countries, Israel and the United Kingdom are more evenly
distributed.
Population concentration is not always associated with large population sizes. Large and highly urbanised
countries such as Japan and the United States have numerous regions with at least 1 million inhabitants
and many metropolitan (large) regions (Annex Figure 2.A.2). Furthermore, countries may have similar
population levels but different concentration levels. For instance, France and the United Kingdom have
similar population levels but population and employment in the United Kingdom are less concentrated. The
United Kingdom also has only a few small regions with over 1 million inhabitants while France has many.
Though surprising when considering both countries have similar sizes, the United Kingdom has higher
administrative fragmentation (see Annex Figure 2.A.1). For instance, 21 different small regions make up
Greater London while only 8 make up Île-de-France. For this reason, the data in this chapter aggregate
values for TL3 regions that are part of the same FUA (i.e. where 50% of the regional population lives in a
FUA).

Annex Figure 2.A.2. The cumulative share of population by TL3 regions, OECD countries, 2021
Countries ranked by Gini index of inequality in population distribution

10K-250K 250K-1M >1M Metropolitan Near a FUA>250K Far from a FUA>250K

100%
Cumulative share of population (Gini index at bottom)

75%

50%

25%

0%
0.1 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.7 0.7 0.8
Ne Finl y

Sw Fran n

rea

ite G ain

Ca ile
Tür m

Un Ice an

a
ep and

Es via
Ire ia

ea ia

ing ce
a

bia
ec P ay

the and

itze ce

d S nd

Au xico
De land

Co tralia
Ko l
Hu ark
Lith gary

Jap y
Ne Slov ia

Ge kiye
a

Me s
Po nd
Ital

Be m
Sw ds
e
d

nad
an
stri
No ic

lic

ton

w Z en

u
rtug

Ch
tate
uan

lan
rw

ed

d K ree

ite la
Sp
Lat

do
rla

lgi
nm

lom
rlan
bl

h R ol

rm
ub

Au
n

s
pu
Re
vak
Slo

Un
Cz

Note: Excludes countries with no more than one region (Luxembourg).

Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

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50 

The concentration of population in some countries depends on the territorial scale used. This is due to a
combination of larger sparsity and the relative level of administrative fragmentation). For instance, the Gini
index for the population in Denmark and Finland, 2 countries with similar population sizes, is 0.2 and 0.3
for large regions. For small regions, the Gini index is still 0.2 for Denmark (1 out of the 11 regions
concentrates 15% of the population) but raises to 0.5 in Finland (1 out of the 19 regions concentrates 30%
of the population) (Annex Figure 2.A.2). Higher sparsity in Finland, as well as different levels of
administrative fragmentation, explain these differences. As disentangling these effects is not possible, this
chapter does not make direct comparisons of inequality indicators between small and large regions.

The Access to City typology

Traditional measures of inequality such as the Theil and Gini indices do not consider the location of regions
and fail to acknowledge that economic activity and people tend to cluster in space (Rey, Arribas-Bel and
Wolf, 2020[62]). The OECD has developed the concept of functional urban areas – composed of urban
centres and their commuting areas – to overcome these limitations. At the regional level, the OECD Access
to Cities typology offers a way to overcome the issue of administrative fragmentation and lack of
consideration for proximity (Fadic et al., 2019[70]).
The typology classifies small (TL3) regions into metropolitan and non-metropolitan regions according to
the following criteria:
• Metropolitan regions, if more than half of the population live in a FUA. Metropolitan regions are
further classified into: metropolitan large, if more than half of the population live in a (large) FUA
of at least 1.5 million inhabitants; and metropolitan midsize, if more than half of the population
live in a (midsize) FUA of at 250 000 to 1.5 million inhabitants.
• Non-metropolitan regions, if less than half of the population live in a midsize/large FUA. These
regions are further classified according to their level of access to FUAs of different sizes: near a
midsize/large FUA if more than half of the population live within a 60-minute drive from a
midsize/large FUA (of more than 250 000 inhabitants) or if the TL3 region contains more than 80%
of the area of a midsize/large FUA; near a small FUA if the region does not have access to a
midsize/large FUA and at least half of its population have access to a small FUA (i.e. between
50 000 and 250 000 inhabitants) within a 60-minute drive, or contains 80% of the area of a small
FUA; and remote, otherwise.

How territorial units affect the measuring of inequality

Inequality measures are sensitive to the grouping of observations in bins. For instance, measures of inter-
personal inequality use income-range bins, which vary in the number of income groups available and
censoring of the highest categories. The spatial counterpart of income bins are spatial units, implying that
inequality indices will depend on the geographical scale of analysis. The implicit assumption, in this case,
is that income in a region is equally distributed across the population in that region (Rey, Arribas-Bel and
Wolf, 2020[62]).
The direction of the change in inequality when switching from a larger (TL2) to a smaller scale depends
not only on the relative fragmentation at lower levels but also on the distribution of the population. For
instance, consider a country with 2 TL2 regions, one with 125 people, 100 of which live in a city and another
one with 42 people, 40 of which live in a city. Splitting both TL2 regions into 4 TL3 regions, 2 of them
containing the 2 cities, leads to smaller inequality levels at the TL3 level, as the largest region contribution
to population goes down from 75% (125/167) to 60% (100/167). Across OECD countries, switching from
the TL2 to the TL3 level leads to higher, similar and lower levels of inequality in the distribution of the
population (Annex Figure 2.A.3).

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  51

Annex Figure 2.A.3. Difference in Gini coefficient of population distribution between TL2 and TL3
levels, based on 2021 population values
0.2

Higher inequality at TL2 level

Difference in Gini coefficient (population) TL2 versus TL3

0.0

Higher inequality at TL3 level

-0.2

-0.4

pu ly
De den

ain
Co Chile

Po rea
ep m

Fin an

dS a
in ia

the ce

d
a

Ge bia

y
Un S land

Tür o

Lith and

nce
Ire a
d

al
Cz B ary

Au ark

Un Can y
e

Sw ia

s
Hu nd
Sw gdom

ds
lan

Re Ita

rwa
ite ad
an
lan
stri
xic
lic

c
d K en

h R giu

li
kiy

rtug
tate
uan
Jap

stra

Ne Gree

Sp

bli
Ko
rla

nm

lom
ng

rlan

Fra
rm
ub

Au

e
l

Po
ite lov
Ice

Me

No
ec el
itze

vak
Slo
Note: Estonia, Israel, Latvia, Luxembourg and New Zealand are not included as TL2 and TL3 levels coincide. No TL3 data are available for
Costa Rica.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/u2904s

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52 

Annex 2.B. Summary tables

Annex Table 2.B.1. Summary GDP per capita regional (TL3) inequality measures by country,
2000-20

Theil index Top/bottom Top/mean Bottom/mean

2000-09 2010-20 2000-09 2010-20 2000-09 2010-20 2000-09 2010-20
Mostly increasing inequality (linear)
Belgium 0.03 0.03 2.03 2.03 1.58 1.56 0.78 0.77
Denmark 0.01 0.02 1.56 1.68 1.32 1.39 0.85 0.82
Estonia 0.07 0.08 2.36 2.48 1.78 1.83 0.76 0.74
France 0.02 0.02 2.27 2.46 1.93 2.08 0.85 0.84
United Kingdom 0.03 0.03 2.14 2.23 1.71 1.78 0.80 0.80
Sweden 0.01 0.01 1.73 1.79 1.58 1.60 0.91 0.90
Mostly increasing inequality (non-linear)
Czech Republic 0.02 0.02 2.05 2.10 1.77 1.79 0.86 0.85
Hungary 0.04 0.05 2.72 2.66 1.99 1.96 0.73 0.74
Italy 0.03 0.04 2.32 2.43 1.56 1.62 0.67 0.67
Japan 0.01 0.01 1.53 1.47 1.36 1.30 0.89 0.89
Lithuania 0.04 0.05 2.25 2.32 1.71 1.77 0.76 0.76
Poland 0.04 0.05 2.50 2.72 1.89 1.98 0.76 0.73
Slovak Republic 0.11 0.11 2.90 3.01 1.75 1.83 0.61 0.61
Slovenia 0.02 0.03 1.98 1.97 1.62 1.63 0.82 0.83
United States 0.02 0.03 1.76 1.90 1.50 1.56 0.85 0.82
Mostly decreasing inequality (linear)
Finland 0.02 0.01 1.83 1.67 1.53 1.47 0.84 0.88
Greece 0.03 0.03 1.99 2.04 1.56 1.65 0.79 0.81
Latvia 0.07 0.06 2.64 2.44 1.74 1.72 0.66 0.71
Norway 0.04 0.03 1.94 1.90 1.59 1.54 0.82 0.81
Portugal 0.03 0.02 2.24 1.88 1.70 1.54 0.76 0.82
Türkiye 0.07 0.06 3.68 3.36 2.26 2.16 0.61 0.64
Mostly decreasing inequality (non-linear)
Austria 0.02 0.02 1.74 1.57 1.36 1.26 0.78 0.80
Germany 0.04 0.04 2.25 2.05 1.67 1.57 0.74 0.77
Spain 0.02 0.02 1.79 1.84 1.41 1.45 0.79 0.79
Korea 0.06 0.05 1.81 1.85 1.29 1.30 0.71 0.70
Netherlands 0.02 0.02 1.72 1.68 1.43 1.43 0.83 0.85
New Zealand 0.02 0.02 1.58 1.52 1.29 1.24 0.82 0.82

Note: Countries with GDP per capita above OECD levels in 2000 and 2020 are listed in bold.
Top/bottom calculated as population equivalent (top/bottom regions with at least 20% of the population). The interpretation of top/bottom 20%
GDP per capita is that 20% of the population in the country holds 20% of the value.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

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Annex Table 2.B.2. Summary table of the share of between-group inequality across TL3 region
types, 2000-20

Large metropolitan vs. the rest Metropolitan vs. the rest Far from a FUA>250K vs. the rest
2000-09 2010-20 2000-09 2010-20 2000-09 2010-20
Large metropolitan/Top vs. the rest
Czech Republic 3.64 2.75 0.80 0.80 0.69 0.75
Denmark 2.01 1.85 1.26 1.14 1.10 1.00
France 1.04 1.04 0.87 0.90 0.73 0.74
Hungary 1.94 1.45 1.31 1.21 1.10 1.06
Korea 1.67 1.49 1.20 1.14
Poland 1.63 1.25 1.14 1.08 0.83 0.86
Portugal 1.24 1.01 0.94 0.92 0.96 0.94
Sweden 3.06 2.15 1.01 1.04 0.87 0.97
Türkiye 1.46 1.19 1.04 0.91 1.08 1.01
United Kingdom 1.79 1.52 1.27 1.13 0.55 0.52
United States 2.18 1.71 1.20 0.99 0.95 0.86
Metropolitan/Top vs. the rest
Belgium 0.59 0.40 0.99 0.88 0.31 0.33
Estonia 1.90 1.71 1.64 1.60
Finland 1.19 1.11 1.03 1.03
Latvia 1.60 1.59 1.39 1.48
Lithuania 1.24 1.21 1.07 1.13
Norway 0.94 0.93 0.82 0.87
Slovak Republic 1.26 1.20 0.80 0.79
Spain 1.18 1.11 1.41 1.29 1.20 1.16
Netherlands 1.33 1.06 1.19 1.07
Metropolitan vs. the rest
Germany 0.99 0.93 1.22 1.11 0.63 0.55
Japan 1.54 1.10 1.21 1.18 0.38 0.34
New Zealand 1.46 1.13 1.26 1.05
Slovenia 1.21 0.96 0.99 0.85
Far from a FUA>250K vs. the rest
Austria 0.49 0.43 0.77 0.62 1.37 1.27
Greece 1.11 0.61 0.79 0.58 1.04 1.11
Italy 0.65 0.63 0.88 0.81 1.15 1.12

Note: Values relative to the OECD mean. Countries with increasing inequalities are listed in bold. Regions with null values do not have regions
of the corresponding type.
Source: OECD (2022[33]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

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54 

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OECD (2020), “A systemic resilience approach to dealing with Covid-19 and future shocks”, [13]
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Notes

1
These is the ratio between the 20% richest and 20% poorest population’s disposable income.

2
The OECD Programme for International Student Assessment (PISA) is an international assessment that
measures 15-year-old students’ reading, mathematics and science literacy every 3 years.

3
The rest of the document uses the terms GDP per capita and income per capita interchangeably.

4
Additionally: GDP and population may not be recorded at the same place (place of residency versus
place of work); national deflators do not consider higher living costs in cities and GDP value in some
services such as financial services and real state may be distorted by where transactions are recorded.
5
Values above 1 of this ratio indicate the presence of regions with very high or very low values relative to
the mean. This indicator has been used to analyse inter-personal inequalities in OECD countries (Balestra
and Tonkin, 2018[71]).

6
The absolute value differs because each measure uses all the countries with available data (26 OECD
at the TL3 and 29 OECD countries at the TL2 level. The trends are identical when using the same group
of 23 OECD countries at both levels.

7
The absolute gap in income per head between top and bottom regions can increase even when
polarisation measured with the ratio of GDP per capita in top versus bottom regions decreases. Given
higher GDP per capita income in top than in bottom regions (e.g. EUR 50 000 vs EUR 10 000), when top
and bottom regions grow at exactly the same rate (e.g. 10%) the absolute gap between top and bottom
increases (by EUR 400, i.e. EUR 50 500 minus EUR 10 100) and the relative gap stays the same (5 in
both cases).

8
The reminding countries in this group do not have non-metropolitan regions near a metropolitan area.

9
The geography of spatial clustering presented here tends to diverge from that described in Rosés and
Wolf (2018[72]), who report the emergence during the twentieth century of so-called “islands of prosperity”
in Europe, i.e. clusters of increasingly rich regions located typically around the largest European
metropolitan areas. The main reason behind this divergence has to do with the different geographical units
employed in the analysis, TL2 regions in Rosés and Wolf (2018[72]) and TL3 regions (bundling together
those belonging to the same metropolitan regions) in the present analysis.

10
The technical reason is that no conclusive ranking between distributions can be drawn when Lorenz
curves cross (Trapeznikova, 2019[73]).

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3 Productivity and regional income

inequality

This chapter explores how regional productivity contributes to income

inequality between regions. It is articulated in four sections. The first section
describes the nexus between economic activity in tradeable sectors and
productivity inequalities. The second highlights the importance of lifting
productivity growth in all sectors, focusing on the role of technological
change, business dynamism and innovation as drivers. The third shows
how managing the potential gains and risks from trade contributes to
regional development. The fourth section outlines the case for a transition
towards both productive and green sectors.

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In Brief
• There are large productivity differences within OECD countries. Throughout the 2010s, labour
productivity in the most productive region was about twice as high as in the least productive
region on average across OECD countries.
• Reducing productivity disparities is an important vehicle for reducing income inequality between
regions. Between 2001 and 2019, productivity inequality declined in nearly all countries where
gross domestic product (GDP) per capita inequality decreased. Productivity growth potential
exists and can be exploited in all regions. Fully closing all productivity gaps across regions is,
however, unrealistic as the growth potential of a region depends, among other aspects, on
geographic conditions and agglomeration economies provided by (larger) cities, which are, if at
all, very slow to change.
• Higher shares of economic activity in tradeable sectors go hand-in-hand with higher productivity.
Between 2001 and 2019, an annual average increase of 0.1 percentage points in the share of
regional employment in the tradeable goods (services) sector was associated with a nearly 0.2
(0.06) percentage point higher annual productivity growth rate for tradeable goods (services).
Strengthening tradeable activities in low-productivity regions can therefore reduce productivity
disparities within countries. In non-metropolitan regions, tradeable goods sectors in particular
provide opportunities as the share of employment and the gross value added (GVA) they
contribute to the regional economy is, on average, nearly 50% higher than in metropolitan
regions. Tradeable sectors are, however, also more exposed to international competition and
global shocks, which can stimulate innovation and investment to raise productivity but also make
a region more vulnerable.
• Sectoral productivity gaps across regions point to untapped potential in lagging regions.
Regional differences in total productivity partly reflect differences in sectoral compositions but
also productivity differences within the same sectors. This implies scope to boost productivity
growth through active innovation, innovation diffusion and scale-up policies and investments in
infrastructure (e.g. digital technologies).
• Regional disparities in technological progress and innovation have contributed to widening
productivity disparities. Technological progress, especially in tradeable services, raises
productivity for all firms but more so for firms with workers with higher levels of education and
skills. These workers tend to live and have jobs in larger cities or metropolitan regions that are
already among the more productive regions within their country. Similarly, innovation that leads
to patents is highly concentrated, with only 10% of regions accounting for more than 60% of
international patents.
• The necessary transition toward climate-neutral economies may further exacerbate disparities
across space. Industries that are among the most difficult to align with climate neutrality goals
tend to be concentrated in specific regions that are often socio-economically weaker. The
associated jobs are among the most productive and high-paying in those regions. Therefore,
unless adequate policies support regions to weather these changes, the transition to climate
neutrality is likely to drive up economic disparities within OECD countries.

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Introduction

Productivity is widely recognised as a key driver of economic growth and higher levels of income. Higher
levels of employment, in part driven by population growth, are also important drivers of higher levels of
income. But with 14 OECD countries facing population decline by 2040 (see Chapter 2), including 40% of
OECD regions (with many also ageing), the emphasis on productivity to address regional disparities in
income cannot be overstated.
Unsurprisingly, given the strong relationship between productivity and income, differences in productivity
between regions tend to translate into differences in income. These, in part, reflect spatial factors and in
particular specialisation in activities that relate to the comparative advantage in regions, including for
example access to natural assets, markets, infrastructure and increasingly skills and knowledge. However,
productivity differences also relate to challenges associated with scale, and, in particular, economies of
scale. These are increasingly important drivers of productivity growth, especially in knowledge-intensive
service activities. Metropolitan regions have in this respect a distinct comparative advantage through
agglomeration effects. Productivity is indeed between 2-5% higher for each doubling in size of a city
(OECD, 2015[1]).
Given these, largely structural differences in regions, it is unrealistic to fully eradicate all inequality in
productivity. But a better understanding of the drivers of inequality does provide scope to narrow the gaps,
in particular in the context of rapid advancements made through digitalisation, the need to accelerate the
green transition and shifting patterns of trade, including through the greater emphasis being placed on
resilience, all of which are beginning to shift notions of regional comparative advantages, presenting
challenges but also opportunities.
Non-metropolitan regions for example tend to be in a less favourable position as they often have worse
access to infrastructure or the intensity of innovation and innovation uptake are lower than in other regions,
both of which are important drivers of regional productivity, but there is significant scope to address this
(OECD, 2022[2]). Inadequate transport connections, for example, can limit the productivity growth potential
of non-metropolitan regions where natural resources are important assets (OECD, 2020[3]). Lower levels
or quality of digital infrastructure can also reduce the productivity level that regions can attain. But again,
these structural differences are not irresolvable and addressing them can also deliver gains beyond
productivity growth alone (OECD, 2020[3]).
Productivity gains come through different channels, including deeper labour markets that allow for better
matching of the skills of workers with jobs, greater specialisation by suppliers and greater ease of formal
and informal knowledge exchange and learning. These channels are particularly important for high-value-
added – tradeable – activities that require specific skills and constant learning and innovation. Bigger cities
leverage these channels by bringing firms close to each other and close to a large pool of workers,
suppliers, customers or clients. In short, they provide “agglomeration economies”. Smaller cities can
achieve some of the benefits that agglomeration benefits provide by increasing the concentration of
activities or by strengthening links across and within regions to create local critical mass (OECD, 2016[4]).
As resilience has gained importance in economic policy making, there is also a greater appreciation of the
costs that may be associated with higher productivity, including economic as well as social costs. For
example, the potential gains from agglomeration economies also elicit higher costs, including those that
impact the bottom line of firms, such as higher rental costs, and those that impact society as a whole, such
as greater congestion or higher levels of air pollution in bigger cities. The historical growth of cities itself
can become a challenge as fragmented governance arrangements can be a drag on productivity in large
cities. In the absence of effective multi-level governance mechanisms, such as metropolitan governance
bodies, the more municipalities that are part of a metropolitan area, the lower its agglomeration benefits
and the higher the productivity penalty of administrative fragmentation (Ahrend et al., 2017[5]).

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Most non-metropolitan regions have greater specialisation in primary economic activities and, often,
labour-intensive, manufacturing of tradeable goods, which have been exposed to high levels of
international competition and the offshoring of activities to lower-income economies in recent decades.
This trend has been slowing in recent years, though, and may even be beginning to reverse as firms
increasingly look to reshore strategic activities.
The insights presented in this chapter complement and expand the analysis contained in the second edition
of the Regional Outlook (OECD, 2016[4]). They reinforce the view that closing productivity gaps through
growth in low-productivity regions can reduce income inequality and that tradeable sectors play an
instrumental role in this effort (OECD, 2018[6]).1
The discussion is articulated along five main messages. First, albeit somewhat stating the obvious,
productivity growth matters to close GDP per capita gaps between regions. Second, structural changes in
specialisation, including those being driven by the green and digital transitions, especially towards higher
productivity – tradeable – sectors, can help low-productivity regions catch up. Third, significant productivity
gaps in the same activity across regions within the same country demonstrate the untapped potential to
boost productivity in all sectors. Fourth, for trade to benefit regional development, it is essential to manage
the risks posed by international competition and global shocks. Fifth, an excessive emphasis on
high-productivity sectors should not come at the expense of investment in green sectors. The analysis
presented in this chapter focuses on long-run trends in small (TL3) regions. It covers the period between
2001 and 2019 to exclude the economic disruptions that OECD economies have faced since 2020 due to
the COVID-19 pandemic and Russia’s war of aggression against Ukraine.

Disparities in labour productivity within countries are large

Disparities in labour productivity, the measure of productivity used in this chapter, within OECD countries
are large.2 The most productive small (TL3) regions in countries with, on average, low productivity are
often as productive as the middle- or even high- productivity countries (Figure 3.1). Labour productivity in
Poland’s capital city Warsaw and its surrounding regions, for example, is around the same level as average
productivity in Belgium, the second most productive among the 23 OECD countries included in the analysis
in this chapter. Generally, labour productivity is highest in metropolitan regions. In 2019, labour productivity
in metropolitan regions was, on average, about USD 115 000 compared to about USD 106 000 in
non-metropolitan regions.3
Overall, labour productivity disparities declined across OECD regions between 2001 and 2019 (Figure 3.2).
The trend was purely driven by relatively faster aggregate productivity growth in less productive countries,
evident in a continuous decline in between-country inequality. In contrast, productivity gaps within countries
rose and fell in the runup to and recovery from the global financial crisis (GFC), with regional productivity
inequality remaining above the levels of the early 2000s ever since. In particular, non-metropolitan regions
have struggled to close productivity gaps since then. Non-metropolitan regions close to metropolitan areas
have grown slower than metropolitan regions before the GFC, during the crisis and since 2013, when most
countries had weathered the shock of 2008. Non-metropolitan regions far from metropolitan areas went
from catching up in the runup to the GFC to falling behind since 2013 as productivity growth slowed from
1.8% before the crisis to 0.7% between 2013 and 2019 (Figure 3.3).

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Figure 3.1. Productivity disparities within countries are larger than between countries in 2019
Labour productivity (GVA per employee) in TL3 regions

Range Average
USD (constant prices and PPPs, base year 2015)
300 000

250 000

200 000

150 000

100 000

50 000

Notes: Average labour productivity is the national average calculated by weighting regions according to employment.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/y02k6x

Figure 3.2. Regional inequality in labour productivity declined more than regional income
inequality
Theil Within Between

Labour productivity (TL3, 2001=1) GDP per capita (TL3, 2001=1)

1.2 1.2

1 1

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

0 0

Note: The Theil index measures the spread (variance) in labour productivity and GDP per capita levels across regions (see Chapter 2). Countries
included are AUT, BEL, CZE, DEU, DNK, ESP, EST, FIN, FRA, GBR, GRC, HUN, ITA, LTU, LVA, NLD, NZL, POL, PRT, SVK, SVN, SWE and
USA. Between inequality refers to variability across country means with respect to the overall (OECD) mean. Within inequality refers to variability
in regional values with respect to the country mean.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/20dlmi

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66 

Figure 3.3. Catching up has stalled for remote regions after the global financial crisis
Annual average growth rate of labour productivity across types of TL3 regions, 2001-19 (%)

Metropolitan regions Regions near a metropolitan area Regions far from a metropolitan area
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2001-19 2001-07 2007-13 2013-19
Note: Labour productivity is GVA per employee in USD at constant 2015 prices and purchasing power parity (PPP). Countries included are AUT,
BEL, CZE, DEU, DNK, ESP, EST, FIN, FRA, GBR, GRC, HUN, ITA, LTU, LVA, NLD, NZL, POL, PRT, SVK, SVN, SWE and USA.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.
StatLink 2 https://stat.link/g4s2ij

Leveraging labour productivity to reduce GDP per capita inequality

Differences in productivity between regions are large. On average, within countries, labour productivity in
the most productive region is nearly twice as high as the productivity of the least productive region. Labour
productivity growth is equally unevenly distributed. More than half of OECD countries had at least
one region where productivity declined over the past two decades despite generally positive average
labour productivity growth at the national level (OECD, 2022[8]).4 Such differences in productivity and its
growth matter also for regional GDP per capita or income inequality. GDP per capita can be broken down
into a demographic component (the share of the working-age population among the overall population),
the employment rate, i.e. the share of workers in the working-age population, and (labour) productivity (see
Box 3.1). It follows that, with demographic pressures mounting for many regions (see Chapter 2) and
employment rates naturally limited, productivity will need to take a central role in curbing income inequality
across regions.

Box 3.1. Making the link between GDP per capita and labour productivity
GDP per capita and labour productivity are tightly linked economic concepts. GDP per capita can be
decomposed as follows:
𝐺𝐷𝑃 𝑊𝑜𝑟𝑘𝑖𝑛𝑔𝐴𝑔𝑒𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝐺𝐷𝑃
= × ×
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑊𝑜𝑟𝑘𝑖𝑛𝑔𝐴𝑔𝑒𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
The first term, the working-age population ratio, reacts primarily to shifts in the demographic structure
of the population. The second term, the employment rate, depends in turn both on labour force
participation and the unemployment rate. The third, i.e. the ratio between GDP and employment, is
tightly linked to labour productivity, namely GVA divided by total employment (by place of work), where
GVA adjusts GDP by the value of subsidies and taxes on products:
𝐺𝑉𝐴 = 𝐺𝐷𝑃 + 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 − 𝑇𝑎𝑥𝑒𝑠 𝑜𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠

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  67

GDP per capita inequality can increase because of diverging trends between regions in the working-
age population ratio, in the employment rate or in labour productivity.
Figure 3.4 considers a hypothetical scenario in which productivity growth
𝐺𝑉𝐴𝑟,2019 𝐺𝑉𝐴𝑟,2001
( − )
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡𝑟,2019 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡𝑟,2001
𝐺𝑉𝐴𝑟,2001
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡𝑟,2001
is constant across regions and equal to productivity growth at the national level
𝐺𝑉𝐴2019 𝐺𝑉𝐴2001
( − )
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡2019 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡2001
𝐺𝑉𝐴2001
𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡2001
In countries that featured regional productivity catching up during 2001-19, the hypothetical scenario of
equal productivity growth – by construction – will lead to greater GDP per capita inequality. Comparing
the actual change in income inequality with the hypothetical scenario shows how much the “catching
up” of less productive regions contributed to reducing income inequality. Conversely, in countries that
featured regional productivity divergence, the scenario will show a decline in GDP per capita inequality.
The difference between the actual change in inequality and the level of inequality under the hypothetical
scenario allows to quantify by how much income inequality would have improved if the productivity
differences had remained stable.

Between 2001 and 2019, within-country productivity inequality increased in 10 of the 14 countries
considered for this chapter that experienced a rise in GDP per capita inequality. In the remaining four
countries, Estonia, Lithuania, Poland and Slovenia, demographic shifts, differences in labour force
participation and unemployment rates drove the rise in GDP per capita inequality, more than offsetting the
catching-up by low-productivity regions. The link between productivity and income inequality is even more
evident in countries with falling GDP per capita inequality, with productivity inequality falling in eight out of
nine countries (Table 3.1).5
The GFC was the starting point for rising productivity disparities in 4 out of 11 countries where disparities
went up during 2001-19 (Denmark, France, Italy, Spain). For instance, in France, productivity disparities
remained constant until the GFC but rose markedly thereafter. In Italy, productivity inequality had even
been declining before a reversal in the trend in 2008. Conversely, the rise in productivity disparities appears
to have been the result of longer-term drivers in 5 out of 11 countries (Belgium, Hungary,
the Slovak Republic, the United Kingdom).
To what extent can productivity growth be leveraged to address income inequalities? A hypothetical
scenario can help answer this question (see Box 3.1).6 The scenario assumes that, between 2001 and
2019, productivity grew at the same – national average – rate across regions, thus holding productivity
gaps between regions constant. This scenario highlights the benefit of the actual “catching up” of less
productive regions that occurred in the 12 countries where labour productivity inequality decreased and
the potential gains for the remaining 11 countries where inequality increased.
In the 12 countries where labour productivity inequality decreased, income inequality would have grown,
on average, by 1.7 percentage points more if labour productivity growth had been the same across regions
instead of the actual “catching up” that occurred (Figure 3.4). For the 11 countries where labour productivity
inequality increased, the gains from the hypothetical scenario would have been sizeable, with 1 percentage
point lower growth in income inequality. Given the actual annual average increase of income inequality by
1.4% in these countries, equal productivity growth across all regions would have reduced the actual change
by more than two-thirds.7

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Table 3.1. Closing productivity gaps is important to reduce income inequality

Changes in labour productivity and income (GDP per capita) within-country inequality, 2001-19

GDP per capita inequality decreasing GDP per capita inequality increasing
Labour productivity inequality Labour productivity inequality Labour productivity inequality Labour productivity inequality
decreasing increasing decreasing increasing
Austria Spain Estonia Belgium
Finland Lithuania Czech Republic
Germany Poland Denmark
Greece Slovenia France
Latvia Hungary
Netherlands Italy
New Zealand Slovak Republic
Portugal Sweden
United Kingdom
United States

Note: Based on the growth rate of the average in the cross-TL3 regions Theil index in 2001/02 and 2018/19 for GDP per capita and labour
productivity, where the latter is measured as GVA divided by employment. Japan, Korea, Norway and Türkiye are excluded from the analysis in
this chapter. Türkiye regional data on labour productivity are missing and Japanese, Korean and Norwegian regional data on labour productivity
start only in 2009 (Japan) and 2008 (Korea and Norway) respectively. Data for the United Kingdom start in 2004 (Northern Ireland missing due
to boundary changes).
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

Figure 3.4. Reducing labour productivity inequality results in a sizeable reduction in regional
income inequality
Annual average change in cross-TL3 income inequality between 2001 and 2019 (%) compared to a hypothetical
“equal labour productivity growth” scenario

Actual income inequality Equal labour productivity growth

Percentage points
6

4 Countries with decreasing labour productivity inequality Countries with increasing labour productivity inequality

-2

-4

-6

Note: According to the equal labour productivity growth scenario, regional labour productivity is assumed to grow at the same rate as the national
one in each region between 2001 and 2019. Income inequality is measured by the Theil index of GVA per capita both for the actual change and
under the hypothetical scenario. Inequality as measured by the Theil index in 2001 is obtained as the average of the values in 2001 and 2002;
inequality in 2019 is obtained as the average of the values for 2018 and 2019. Data for the United Kingdom start in 2004 (Northern Ireland
missing due to boundary changes). Countries are sorted in ascending order of their change in income inequality between 2001 and 2019. Labour
productivity is calculated as gross value added/employment, where employment corresponds to employment by place of work.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/2ru6k5

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Raising productivity alone is insufficient to fully address all regional challenges. If productivity growth
comes through, for example, capital investment, overall employment may decline as labour is substituted
with capital, creating additional socio-economic challenges in regions. Similarly, productivity growth and
higher productivity can also emerge as an outcome of less productive firms exiting the market at the cost
of overall lower output, as well as less employment. Hence, some care is needed in ensuring that
productivity growth is seen as a means to an end, with higher income and more jobs of better quality being
the end.
That being said, employment grew in nearly 90% of metropolitan regions alongside growth in productivity
between 2001 and 2019 (Figure 3.5). However, for regions near metropolitan areas, employment declined
in more than 22% of regions with productivity growth, a share that increased to nearly 37% for regions
located far from metropolitan areas. Productivity is also not the only metric of regions’ success, as they
increasingly need to support the transition towards climate neutrality and the development of green but not
necessarily productive (yet) industries and firms.

Figure 3.5. Many non-metropolitan regions experience employment decline as productivity grows
Share of TL3 regions by growth or decline in labour productivity and employment, type, 2001-19

Employment growth Employment decline

Share of regions (%)

100

90

80

70

60

50

40

30

20

10

0
Productivity growth Productivity decline Productivity growth Productivity decline Productivity growth Productivity decline
Metropolitan regions Regions near a metropolitan area Regions far from a metropolitan area

Note: Labour productivity is GVA per employee in USD at constant 2015 prices and PPP. Countries included are AUT, BEL, CZE, DEU, DNK,
ESP, EST, FIN, FRA, GBR, GRC, HUN, ITA, LTU, LVA, NLD, NZL, POL, PRT, SVK, SVN, SWE and USA. Growth rates for GBR are for the
2004-19 period.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/y8jsdk

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Productivity growth through reallocation towards high-productivity sectors

Reallocating economic activity towards high-productivity – tradeable – sectors is a source of productivity

growth (Baumol, 1967[9]). Trade integration and the greater degree of competition it entails favour
technology upgrading and productivity, among all firms and not just those engaged in exporting.
Consequently, tradeable sectors tend to feature higher productivity on average, at least in developed
countries (Mano and Castillo, 2015[10]).8
This section discusses the nexus between labour productivity and the shift of employment towards
tradeable sectors. It discusses cross-and within-country sectoral reallocation trends. Finally, it shows that
the shift of employment towards the tradeable goods sector in non-metropolitan regions has reduced
productivity inequality.

The shift towards tradeable sectors is boosting regional labour productivity growth

During 2001-19, labour productivity growth was higher in regions where employment grew in tradeable
sectors. Reallocation towards (away from) tradeable sectors in a region is captured by an increase
(decrease) in the share of regional employment in these sectors. Using information on 973 TL3 regions,
an annual average increase of 0.1 percentage points in the employment share in the tradeable goods
sector over the 2001-19 period is associated with 0.17 percentage points higher annual average
productivity growth in the region. The correlation is weaker for the tradeable services sector but still positive
and statistically significant, and equal to 0.07 (Figure 3.6).
The two macro sectors differ also in terms of average expansion or contraction of employment. The change
in the share of regional employment was negative in 80% of regions for the tradeable goods sector (used
interchangeably in this chapter for the industrial sector), while positive in nearly 90% of regions for
tradeable services. Harnessing the productivity growth potential from these two sectors requires different
approaches that can be mixed and tailored to the region with the aim of preventing employment in the
industrial sector from further declining or favouring an expansion of employment in tradeable services.

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Figure 3.6. Overall productivity growth is higher in regions reallocating jobs towards tradeable
sectors
TL3-level yearly change in the employment share of tradeable sectors and overall productivity growth between 2001
and 2019

Labour productivity growth (% ) Labour productivity growth (% )

6 6

5 5

4 4

3 3

2 2

1 1

0 0

-1 -1

-2 -2

-3 -3
Beta coefficient = 1.7*** Beta coefficient = .7***

-4 -4
-1.5 -1 -0.5 0 0.5 1 1.5 -1.5 -1 -0.5 0 0.5 1 1.5
Reallocation towards tradeable goods sectors (percentage points) Reallocation towards tradeable services sectors (percentage points)

Note: The 2001 values are obtained as an average between 2001 and 2002; the 2019 values are obtained as an average between 2018 and
2019. The industrial sector includes NACE group B-E, while tradeable services include NACE groups J, K, L, M-N. For Austria, Germany, Poland,
Spain and the United Kingdom, tradeable services include G-J, K, L, M-N. Data for the United Kingdom start in 2004 (Northern Ireland missing
due to boundary changes). Data from the United States are not included in the analysis due to the low quality of employment data by sector/TL3
region.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.
StatLink 2 https://stat.link/1jfhw0

Employment in high-productivity sectors rose at different speeds

During 2001-19, employment in OECD countries shifted from the industrial (tradeable goods) sector
towards tradeable services. As a result, the employment share of the industrial sector shrank from 14% to
12%.9 The GFC was an important contributor to this shift, with nearly 5 million industrial jobs lost during
2008-10 (see Annex 3.B for the longer-lasting consequences of the GFC).10 To compensate for the decline
of the industrial sector, OECD countries have witnessed robust growth in tradeable services, with the
employment share rising from 17% to 19% on average across countries and a total of 16 million jobs added
in less than 20 years (from 54 million workers in 2001 up to 70 in 2019) (see Annex 3.A for country-specific
figures).
Between 2011 and 2019, the share of employment in tradeable sectors diverged across OECD regions.
This trend is likely to have increased productivity inequality. 11 In Spain, for instance, the employment share
in the industrial sector declined faster in regions where this share was already low (12% decline as opposed
to 5% in other regions), resulting in an increase in productivity inequality between 2011 and 2019.
Conversely, productivity inequality decreased in some countries that managed to close gaps in the
employment share. In Poland, the employment share in tradeable services rose by 9% during 2011-19 in

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regions with an initially lower share, while it stayed approximately constant in other regions and overall
productivity inequality decreased.
The evolution of employment shares in the industrial sector in non-metropolitan regions has been a driver
of convergence in OECD countries. Countries where the industrial sector in non-metropolitan regions
performed better than in metropolitan ones, saw, on average, a decrease in productivity inequality
(Figure 3.7).

Figure 3.7. Non-metropolitan regions added employment in the industrial sector in countries where
labour productivity inequality decreased
TL3-level change in the employment share in high-productivity sectors between 2011 and 2019, averages by
metropolitan/non-metropolitan status and country groups (percentage points)

Industrial sector Tradeable services

A. Labour productivity inequality decreased B. Labour productivity inequality increased

1.5 1.5

1 1

0.5 0.5

0 0

-0.5 -0.5

-1 -1
Non-metropolitan regions Metropolitan regions Non-metropolitan regions Metropolitan regions

Note: The 2011 values are obtained as an average between 2011 and 2012; the 2019 values are obtained as an average between 2018 and
2019. The industrial sector includes NACE group B-E, while tradeable services include NACE groups J, K, L, M-N. For Austria, Germany, Poland,
Spain and the United Kingdom, tradeable services include G-J, K, L, M-N. Data for the United Kingdom start in 2004 (Northern Ireland missing
due to boundary changes). Data for the agricultural sector missing for the United Kingdom. Countries where labour productivity inequality
increased are Belgium, the Czech Republic, Denmark, France, Hungary, Italy, the Slovak Republic, Spain, Sweden and the United Kingdom;
countries where it decreased are all the remaining others. Data from the United States are not included in the analysis due to the low quality of
employment data by sector/TL3 region.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.
StatLink 2 https://stat.link/as0btm

Increasing productivity in all economic sectors and regions

There is significant potential for low-productivity regions to boost productivity growth in all economic
sectors. In 2019, close to 25% of productivity differences between regions within OECD countries were
due to differences in productivity within the same macro sectors (tradeable services, tradeable goods,
non-tradeable services and primary). Empirical evidence based on firm-level data also highlights the
importance of “within-sector” differences. About 75% of productivity differences between firms occur within
the same industry (Criscuolo et al., 2021[11]). Indeed, productivity gaps within sectors are often growing.
For example, in the metropolitan region of Paris, productivity in the tradeable services sector in 2001 was
9% higher than in the other French regions combined and the gap widened between 2001 and 2019 as
productivity in Paris grew by 30%, while it declined on average by 1.6% across all other French regions.
Similarly, the increase in wage inequality among United States’ commuting zones between 1980 and 2015
can be attributed to differential growth in business services-related industries (Eckert, Ganapati and Walsh,
2022[12]).

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In 2004, the average productivity difference in the tradeable services sector between the top- and bottom-
50% of productive regions in Germany and the United Kingdom was quite similar and equal to, respectively,
31 and 39 percentage points. However, between 2004 and 2019, productivity in tradeable services grew
by 11% in the bottom 50% of regions in Germany compared to 5% in the top 50% of regions. Conversely,
productivity in tradeable services grew by 12% in the top 50% of United Kingdom (UK) regions, compared
to 9% in the bottom 50% of regions. Over the same period, total productivity inequality declined in
Germany, while it increased in the United Kingdom.12
This section considers a set of drivers of within-sector labour productivity growth, namely technological
change, business dynamism and innovation and their connection with productivity inequality.

The impact of technological change is neither skill- nor place-neutral

Starting in the 1980s, technological change in areas such as information and communication technology
(ICT), artificial intelligence and robotics has neither been skill- nor place-neutral. There is evidence that
automation, which enables capital to replace labour, and computerisation, which replaces repetitive tasks
has caused a shift in labour demand away from low- and middle-skill occupations to high-paying
professional segments of the labour force (OECD, 2019[13]). The trend continues as the OECD estimates
the share of jobs at risk of automation ranging from 4% to 40% across TL2 regions (OECD, 2020[14]). At
the same time, technological change has contributed to the creation of new types of jobs and created an
increase in demand for others – often those requiring high levels of skill. The “skill-biased” increase in
employment has mitigated the negative impact of technological progress on aggregate employment but at
the cost of increased interpersonal inequality (OECD, 2020[14]; 2019[13]).13
Technological change has also contributed to worsening productivity inequality (Moretti, 2012[15]; Eckert,
Ganapati and Walsh, 2022[12]). Using data on US regions, Giannone (2021[16]) estimates that 50% of the
decline in regional catching-up observed in the United States since the 1980s can be attributed to skill-
biased technological change. Using data on French local labour markets, Davis et al. (2022[17]) highlight
that the disappearance of middle-skilled jobs has triggered the creation of low-skilled jobs in smaller cities
and high-skilled jobs in larger ones. Agglomeration forces disproportionately benefitting high-skilled
individuals are likely to reinforce their choice to find jobs in already highly productive “skill-rich” regions,
thus widening productivity inequality (Moretti, 2012[15]).

The rise of remote work can become an opportunity for low-productivity regions

The COVID-19 pandemic has provided an unprecedented stimulus towards the digitalisation of the
economy and society. Regional differences in terms of access to digital infrastructure have been narrowing
since the pandemic under the impulse of increased demand by firms and households. However, gaps
remain large in certain countries. For example, the gap in the share of households with access to
broadband Internet between better-off and worse-off regions was around 10 percentage points in 2021
across OECD countries. However, it reached as much as 20 percentage points in countries such as Chile,
Israel, Japan and Mexico (OECD, 2022[8]).
The stimulus induced by the pandemic has both reinforced the ongoing labour market structural
transformation and introduced some new powerful diversification drivers, such as the rise in remote work,
primarily among service sector jobs. During the first wave of the pandemic, the share of workers
teleworking at least once per week went up from 31% to 58% across OECD countries. In surveys,
managers and workers tend to provide a positive assessment of remote work in terms of both productivity
and well-being. Furthermore, two years after the COVID-19 outbreak, the share of remote workers has not
gone back to pre-pandemic levels. This trend seems to suggest that, overall, remote work is likely to
become a permanent feature of the labour market (Luca, Özgüzel and Wei, forthcoming[18]).

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The implications of the rise in remote work for the spatial organisation of economic activity are profound.
The uptake of remote work and the ensuing decline in commuting translated into a shift in residential
preferences. The subsequent move of housing demand away from core cities towards suburban regions
(Ramani and Bloom, 2021[19]; Ahrend et al., 2022[20]) has also helped to reduce regional differences in the
cost of living. On a more macrogeographical scale, remote work can also benefit regions located further
away from core cities. However, the scale needed for this phenomenon to have a measurable positive
impact on productivity and economic development restricts the set of regions in a position to benefit from
it (Baldwin and Dingel, 2021[21]). An example of regions that can benefit are those with intermediate cities
known as “university towns” that featured a concentration of ICT activities already before the pandemic
(Florida, Storper and Rodríguez-Pose, 2021[22]).

Uneven business dynamism is linked to productivity disparities

Business dynamism, and in particular the firm creation rate, has been weak across several OECD
countries, affecting both productivity and employment growth, as younger firms are more likely to grow
both in productivity and employment terms (OECD, 2021[23]), and lower levels of entry weaken competition
and induce greater concentration (Autor et al., 2020[24]). Finally, it reduces the scope for workers in
low-paying and low-productivity firms to change jobs and thereby improve both their productivity and pay
(Criscuolo et al., 2021[11]). Recent OECD work analysing the impact of the GFC has shown that declines
in entry rates have persistent negative effects on employment. A 20% drop in the number of entrants in a
single year induced a loss of about 0.7% of aggregate employment 3 years after the GFC and 0.5%
14 years later (OECD, 2020[25]).
Regional disparities in the evolution of business dynamism might amplify differences in productivity growth
between regions. Data at the TL2 level from the OECD Regional Business Demography database available
for a subset of 13 OECD countries indicate that the firm creation rate declined during 2012-18 for the
median region (Figure 3.8). Variation within countries has been significant. For instance, in the
autonomous community of the Basque Country, Spain, the firm creation rate has declined on average by
0.5 percentage points on an annual basis during 2012-18, dropping from 10 new firms every 100 firms to
7.5 in 2018, while it increased in the Canary Islands. Similarly, the firm creation rate declined everywhere
in Italy (from 9.7% firm creation rate at the start of the period down to 8.8%in 2018) except for the
Autonomous Province of Bozen-Bolzano. Population ageing (Karahan et al., 2021[26]), negative net inflow
rates of young people and weak ICT adoption are likely to expose less populated and remote regions to
more severe declines in business dynamism. For example, in the United States, smaller cities experienced
the largest declines in firm entry rates during 1982-2018 (Rubinton, 2020[27]).

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Figure 3.8. Firm creation has gone down in many countries

Within-country variation at the TL2 level in 2012-18 firm creation rate changes

Range Average

Percentage points
1

0.5

-0.5

-1

-1.5
Slovak Denmark Norway Austria Italy Spain Finland Czech France Latvia Netherlands Lithuania Portugal
Republic Republic

Note: The 2012-18 firm creation rate difference is defined as the ratio between the annualised difference between the number of new firms in
2018 and the number of new firms in the first available year (at the numerator) and the average number of existing firms between 2018 and the
first available year (at the denominator). Only countries with at least four observations per region during 2012-18 are considered.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

Sluggish innovation may hinder growth in regions

Innovation is a fundamental driver of productivity growth and its role is likely to be strengthened as
production becomes increasingly digitalised (Brynjolfsson and McAfee, 2011[28]).14 Innovation tends to be
highly spatially concentrated. The high degree of spatial concentration is the result of the strong
agglomeration externalities involved in the production of ideas and knowledge. Based on data from the
European Patent Office during 1995-2014 for 30 OECD countries, 10% of cities accounted for 64% of
patent applications (Paunov et al., 2019[29]). The advent of digitalisation and ICT have reinforced the
incentives for innovative activity to concentrate spatially. For instance, in the United States, the share of
patent applications accounted for by the top 10% of cities rose by 10 percentage points between 1995 and
2014 (Paunov et al., 2019[29]).
Incremental innovation or technology adoption complements frontier innovation by favouring its diffusion
to other parts of the economy (OECD, 2020[30]). Firms do not in fact just develop knowledge; they also use
the knowledge and technology developed by others, such as by adopting a customer relationship
management software or building upon it to introduce further innovations. Regional differences are large
when it comes to the diffusion of innovation. In 2021, nearly all businesses in Finland adopted cloud
computing as opposed to an OECD average of approximately 70%. Large within-country differences exist
also with respect to the competencies necessary to adopt new technologies. In countries such as Belgium
or Hungary, the share of vacancies requiring digital skills in 2019 was 5% for the average region but as
high as 15% in capital regions (OECD, forthcoming[31]).
Access to finance is a critical enabler of innovation. Barriers to access to finance are stronger for small
and medium-sized enterprises (SMEs) and younger firms. SMEs usually have fewer assets to pledge as
collateral. Furthermore, they tend to be less well-known by banks and investors, thus ending up suffering
more heavily from negative informational asymmetries (OECD, 2022[32]). Differences in the level of capital
stock between regions do not thus just translate into different levels of productive capacity. They are also
reflected in different levels of assets that can be pledged as collateral to finance innovative activity,

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potentially exacerbating gaps in innovation potential between regions. The sluggishness of investment
recovery in the aftermath of the GFC may have exacerbated these differences. During 2012-19, gross
fixed capital formation declined in 13% of large European TL2 regions. 15 Within-countries disparities are
particularly high in East and Southern European countries. For instance, in the Italian region of Calabria,
investment growth during 2012-19 has been -4.8%, while it has been positive and equal to 3.6% for the
Autonomous Province of Bozen-Bolzano. Similarly, in the Hungarian region of Western Transdanubia, it
has been 1.5%, compared to nearly 13% in the capital city TL2 region of Budapest (Figure 3.9).

Figure 3.9. Regional disparities in investment growth are particularly large in East and Southern
European countries
Within-country differences at the TL2 level in investment growth during 2012-19

Range Average

%
15

10

-5

-10

Note: Investment is measured by gross fixed capital formation. The cumulative growth rate in investment is calculated between 2012 and 2019,
and next annualised.
Source: Knowledge Centre for Territorial Policies (2022[33]), ARDECO Database, https://knowledge4policy.ec.europa.eu/territorial/ardeco-
database_en.

Managing the gains and risks of trade integration

The specialisation of countries and regions prior to greater trade integration shapes the gains and losses
associated with it. For example, there is some evidence that United States (US) and German regions
specialised in industries exposed to import competition lost jobs during the process of trade integration
with the People’s Republic of China and East European countries. Production of apparel and leather goods
in the United States, for example, was less than one-sixth in volume terms in 2022 than it was in 2000. 16
In contrast, regions specialised in export-exposed industries, such as car manufacturing or chemical
production in Germany for example, on average, gained jobs and grew in productivity (Dauth, Findeisen
and Suedekum, 2014[34]; Autor, Dorn and Hanson, 2013[35]).17
Customs data on goods trade collected by the OECD at the TL2 level available for a subset of 15 OECD
countries allow measuring the level of regional trade openness and whether regions feature a trade deficit,
i.e. the value of regional imports exceeds the value of regional exports, or vice versa a trade surplus. 18
About 52% of included regions feature a trade deficit, with the highest incidence in Latvia and Lithuania
(100%), followed by the United States (73%) and the United Kingdom (67%). According to these data,
export orientation is especially important among regions growing more slowly. During 2001-19, GDP per

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capita grew on average 13 percentage points in the bottom 10% growing regions with a trade deficit, less
than the country average. However, the GDP per capita growth gap with the national average was only
9 percentage points in the bottom 10% growing regions featuring a trade surplus (Figure 3.10).

Figure 3.10. Regions that grew less than the national average had larger trade deficits
Percentiles of the difference between TL2 and country-level GDP per capita growth during 2001-19 by regional trade
surplus/deficit status

Trade surplus Trade deficit

Percentage points
15

10

-5

-10

-15
Bottom 10% Bottom 25% Median Top 75% Top 90%

Note: Export/import data on goods trade are averaged at the TL2 level during 2010-19. Regions with a trade surplus are those regions where
average exports during 2010-19 exceed average imports during 2010-19; regions with a trade deficit are those regions where the opposite is
true. A unique value for regional imports and exports was obtained by estimating a regression of region/year imports or exports on time dummies.
Different percentiles of the distribution of the difference between TL2 and country-level growth in GDP per capita during 2001-19 by trade surplus
or trade deficit status are reported on the vertical axis. Countries included: Austria, Belgium, Germany, Greece, Spain, France, Italy, Korea,
Latvia, Lithuania, Portugal, Slovenia, Sweden, the United Kingdom and the United States.
Source: Based on data from OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/ and OECD
customs data.

StatLink 2 https://stat.link/d6ify8

Excessive sectoral specialisation can exacerbate the impact of global shocks on trade-open countries and
regions (Di Giovanni and Levchenko, 2009[36]). On the one hand, sectoral specialisation gives rise to
localisation economies, i.e. productivity gains from bringing more firms in the same or similar sectors
together, thus boosting a region’s competitiveness in the global economy. On the other hand, it can
increase regions’ exposure to global shocks (Carvalho and Gabaix, 2013[37]).
Rural regions often struggle more than other regions to seize the gains from trade integration in more
complex value chains. First, rural regions suffer from greater remoteness and are thus less well-positioned
to integrate (Krawchenko, 2018[38]). Second, rural regions are more exposed to import competition as they
feature on average a greater incidence of low-skilled jobs that tend to have a higher degree of
substitutability with jobs in countries with lower labour costs.
The increasing fragmentation of production into global value chains (GVCs) has added new opportunities
and challenges to trade integration. Lead countries in GVCs such as Germany and the United States
concentrate knowledge activities in some of their large metropolitan regions next to legacy industries in
their non-metropolitan regions (Kemeny and Storper, 2020[39]). Other countries with cost or location
advantages integrated into GVCs, such as East European countries, rapidly expanded their manufacturing

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base and eventually started their own transition towards knowledge activities (Navaretti and Markovic,
2021[40]). Data from before the COVID-19 pandemic show that regions characterised by faster growth in
exports with higher domestic value-added content – a key metric of participation in GVCs – also managed
to stay at the forefront of the productivity frontier or to reduce their gap with more productive regions
(OECD, 2018[6]), whilst firms in regions that were neither resource- nor skill-rich in advanced economies
were less able to capitalise on the benefits of GVC integration (Iammarino, Rodríguez-Pose and Storper,
2019[41]).
The challenges posed by sectoral specialisation and global shocks are amplified by the greater degree of
specialisation induced by GVCs. The disruptions of GVCs experienced during the COVID-19 pandemic
and the volatility triggered by the recent turmoil in global energy markets have led to increased calls for
reshoring or nearshoring of value chains. However, the debate on the benefits and costs of trade
integration of GVC participation requires a balanced approach: according to recent quantitative evidence
based on OECD countries, at the national level, re- or nearshoring to reduce volatility can induce higher
overall production costs and lower international competitiveness, outweighing the benefits from reduced
volatility (OECD, 2021[42]).
Participation in global trade via foreign direct investment (FDI) must also find its balance. Regions typically
gain from FDI (Lembcke and Wildnerova, 2020[43]). However, increasing economic integration and the rise
in global financial flows have not always generated equal opportunities across regions, potentially
exacerbating regional disparities. Regions equipped with more favourable “locational factors”, such as the
availability of suitable infrastructure, the proximity to a local university ecosystem (OECD, 2021[44]) or the
presence of institutional bridges favouring the formation of supplier links with local firms (Crescenzi,
Harman and Arnold, 2018[45]) manage to attract larger volumes (and better quality) of FDI than others.
Furthermore, the receipt of FDI entails risks related to reversals of investors’ intentions and sudden stops.
For instance, cross-country evidence shows that an increase in climate-related risks can lead to a reduction
in FDI inflows (Gu and Hale, 2022[46]). The same conclusion might hold with respect to regions, given that
they are not identically exposed to climate-related risks (OECD, 2022[8]).

Towards productive and green regions

Climate change has the potential to widen income inequality through different channels. More frequent
extreme events will have a stronger impact on some regions and their economies than others. Furthermore,
policy action encouraging fossil fuels phasing out and the transition to green technologies can result in job
losses concentrated in a few, especially vulnerable, regions.
Extreme weather events do not affect all regions in the same way. For instance, in Australia, the number
of additional days of strong heat stress in 2017-21 compared to 1981-2010 ranges from 0 to over 60 days
in the Northern Territory TL2 region. Similarly, the share of the population exposed to river floods is 60%
in the Mexican region of Tabasco, against less than 30% for the rest of the country (OECD, 2022[8]). The
damage due to coastal flooding is estimated to be vastly heterogeneous, with coastal areas, particularly in
Southeast Asia, experiencing losses as high as 10% of real GDP by 2200 (Desmet et al., 2021[47]). Rural
regions face larger potential losses compared to urban ones, due to the higher incidence of the agricultural
sector and its greater vulnerability to extreme weather events.
Rural regions play an important role in the transition towards climate neutrality. Per capita greenhouse gas
(GHG) emissions declined more slowly during 1990-2018 in rural compared to urban regions, especially
in those located far away from metropolitan regions or specialised in natural resource extraction (OECD,
2020[48]; 2021[49]). Rural regions also tend to be more dependent on cars. However, they also feature
greener electricity production. In 2019, more than 50% of electricity generation in non-metropolitan remote
regions came from renewables, compared to less than 20% in large metropolitan regions (OECD, 2022[8]).

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Climate mitigation policy can contribute to the widening of income inequality if not accompanied by policies
effectively supporting vulnerable regions (OECD, 2023[50]).19 Regions featuring high per capita emissions
combined with a high employment share in highly polluting manufacturing sectors are more vulnerable to
the risks posed by climate mitigation policies. While being concentrated in Central Europe, most European
countries feature one or more vulnerable regions. Climate-induced vulnerability often overlaps with other
types of socio-economic weaknesses, such as a lower-than-average GDP per capita or tertiary education
share. Climate mitigation policies threaten some of the best available jobs in these regions, where highly
polluting manufacturing industries on average provide for better-productive and better-paid jobs compared
to other sectors (Figure 3.11).

Figure 3.11. Highly polluting manufacturing sectors pay higher wages compared to the regional
average in vulnerable regions
Wage difference in selected sectors compared to the regional average by vulnerability status of regions, 2018

Non-vulnerable Vulnerable

%
120

100

80

60

40

20

-20

-40
Manufacture of paper Manufacture of coke Manufacture of Manufacture of other Manufacture of basic Manufacture of motor
and paper products and refined petroleum chemicals and chemical non-metallic mineral metals vehicles, trailers and
products products products semi-trailers

Note: Data refer to NUTS 2 regions. Vulnerable regions are defined using employment shares and per capita emissions in each of the
corresponding key polluting manufacturing sectors. See OECD (2023[50]) for a more detailed explanation of how vulnerable regions are defined.
Source: Eurostat Structural Earnings Survey.
StatLink 2 https://stat.link/oa5l0y

Adapting to climate mitigation regulations will have asymmetric impacts on firms too. Firms with a more
solid financial situation are better able to cope with the introduction of economic and regulatory costs
seeking to correct the negative externalities associated with polluting technologies. Smaller firms with
fewer resources to make the investments necessary to “green” their production face a higher risk of losing
competitiveness. These firms tend to be concentrated in vulnerable regions (OECD, 2023[50]). Productivity
growth in green technologies can help as it makes technologies more effective and reduces the cost of
entry for firms.
Finally, place-based climate mitigation policy must consider that jobs at risk of disappearing or expected
to see a substantial revision of their task content in favour of green tasks are not evenly distributed across
regions. Whilst, policies undertaken to mitigate the negative impact of climate change will induce job
reallocation in the order of magnitude of 1.5% of aggregate employment (OECD, 2017[51]), this figure
understates the real impact on labour markets as it does not account for those jobs that will also need at
least some retraining and reskilling efforts. Metropolitan regions seem to be further ahead in the green
transition as they already feature a high and increasing share of green jobs and a low share of polluting
jobs (at risk of disappearing) (OECD, 2023[52]).

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Annex 3.A. Supplementary figures and tables

Annex Table 3.A.1. Country-level employment in different sectors, millions

Agriculture Industry Tradeable services Non-tradeable services

2001 2019 2001 2019 2001 2019 2001 2019
Austria 0.23 0.15 0.70 0.72 0.59 0.87 2.26 2.77
Belgium 0.08 0.06 0.69 0.56 0.83 1.25 2.57 2.99
Czech Republic 0.21 0.16 1.48 1.57 0.60 0.83 2.58 2.86
Denmark 0.09 0.07 0.42 0.32 0.43 0.56 1.84 2.03
Estonia 0.04 0.02 0.15 0.14 0.06 0.11 0.34 0.39
Finland 0.13 0.09 0.47 0.38 0.34 0.53 1.41 1.65
France 0.91 0.75 3.72 2.92 5.17 6.51 16.23 18.14
Germany 0.72 0.60 8.38 8.34 6.82 9.16 23.84 26.96
Greece 0.64 0.50 0.54 0.43 0.45 0.61 2.75 3.13
Hungary 0.27 0.19 1.13 0.98 0.44 0.84 2.28 2.68
Italy 1.06 0.93 4.88 4.28 3.58 4.63 14.17 15.60
Latvia 0.14 0.07 0.18 0.14 0.10 0.15 0.53 0.54
Lithuania 0.24 0.09 0.27 0.25 0.09 0.18 0.77 0.86
Netherlands 0.24 0.20 1.00 0.86 2.18 2.67 4.98 5.77
New Zealand 0.13 0.16 0.48 0.29 0.26 0.51 0.99 1.66
Poland 2.69 1.53 3.23 3.96 1.17 2.07 6.88 8.84
Portugal 0.64 0.40 1.07 0.84 0.55 0.81 2.88 2.88
Slovak Republic 0.11 0.07 0.57 0.59 0.23 0.40 1.12 1.37
Slovenia 0.10 0.07 0.27 0.24 0.13 0.19 0.43 0.53
Spain 0.98 0.79 3.03 2.26 2.23 3.63 11.22 13.41
Sweden 0.11 0.10 0.79 0.64 0.74 1.04 2.75 3.33
United Kingdom 0.36 0.40 3.90 3.04 6.40 8.74 18.32 21.57
United States 1.38 1.42 8.81 10.57 20.05 23.46 90.72 107.27

Source: OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

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Annex Table 3.A.2. Growth rate of regional inequality, selected indicators

2001-19 yearly change in Theil index according to different metrics (%)

GVA per capita with equal labour

Country GVA per capita Labour productivity
productivity growth
Austria -1.34 -0.95 -0.69
Belgium 1.51 0.31 2.11
Czech Republic 1.75 -0.19 2.85
Denmark 2.06 1.05 2.54
Estonia 0.64 0.98 -0.45
Finland -4.95 -1.88 -3.83
France 0.70 0.17 0.55
Germany -0.87 -0.35 -1.55
Greece -0.12 2.74 -2.09
Hungary 0.65 0.43 1.68
Italy 0.73 0.59 0.21
Latvia -0.39 2.00 -3.27
Lithuania 2.11 4.32 -0.93
Netherlands -0.89 -0.66 -1.01
New Zealand -2.38 -0.09 -3.24
Poland 1.75 4.05 -3.10
Portugal -2.95 0.44 -4.10
Slovak Republic 0.54 -0.40 2.27
Slovenia 1.78 3.21 -3.71
Spain -1.15 -1.89 1.04
Sweden 1.34 -0.02 1.73
United Kingdom 0.79 0.50 2.54
United States 2.94 0.47 2.59

Note: Data for the United Kingdom start in 2004 (Northern Ireland missing due to boundary changes). According to the equal labour productivity
growth scenario, regional labour productivity is assumed to grow at the same rate as the national one in each region. Inequality as measured
by the Theil index in 2001 is obtained as the average of the values in 2001 and 2002; inequality in 2019 is obtained as the average of the values
for 2018 and 2019. Countries are sorted in ascending order of GVA per capita disparities 2001-19 percentage change. Labour productivity is
calculated as GVA/employment, where employment corresponds to employment by place of work.
Source: OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

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Annex Figure 3.A.1. 2001 employment shares and 2001-19 changes

Industry Tradeable services Non-tradeable services Agriculture

2001 employment shares

%
100
90
80
70
60
50
40
30
20
10
0

2001-19 changes
Percentage points
20

15

10

-5

-10

-15

-20

Note: Shares in 2001 are obtained by averaging the values for 2001 and 2002; shares for 2019 are obtained by averaging values for 2018 and
2019. The industrial sector includes NACE group B-E, while tradeable services include NACE groups J, K, L, M-N. The category “Non-tradeable
services” comprises the remaining sectors.
Source: OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/5dpj3u

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Annex 3.B. Hysteresis and the effect of the global

financial crisis

Adverse economic shocks can have permanent negative impacts on regions and countries. For instance,
in 2018, about half of TL2 regions still had higher unemployment rates than in 2008 (OECD, 2020[14]).
“Hysteresis” refers to a situation where an adverse economic shock to a country or region permanently
and negatively affects the path of the economy. Martin (2012[53]) distinguishes three types of hysteresis:
economic shocks followed by a permanent decline in the level of economic activity; economic shocks
followed by a permanent decline in the growth rate; and economic shocks followed by a permanent decline
in the level and growth rate.
Based on GDP per capita data, a substantial number of countries have displayed hysteresis in the
aftermath of the 1991-92 and 2008-12 (double) recessions.1 Post 2008-12 recession, several countries,
such as France, Greece and Italy, have featured hysteresis in the level of GDP per capita, in contrast with
zero countries after the 1991-92 recession. Further, less than half of the countries – among those with data
available for both expansion periods – have managed to recoup the growth rate of GDP per capita after
both recessions (Annex Table 3.B.1).

Annex Table 3.B.1. Hysteresis has become more common across OECD countries over time

Hysteresis – both level Hysteresis – only growth

Hysteresis – only level No hysteresis
and growth rate rate
1991-92 recession CZE, FIN, POL, SWE AUT, BEL, DEU, DNK,
ESP, FRA, ITA, NLD, NOR,
PRT
2008-12 recession FRA, GRC, ITA CZE, HUN, JPN, NOR, AUT, BEL, DEU, DNK,
PRT EST, ESP, FIN, GBR,
KOR, LTU, LVA, NLD,
NZL, POL, SWE, SVN,
SVK, TUR, USA

Note: Countries displaying growth rate hysteresis are those countries that during the expansion phase following a given recession featured an
average growth rate lower than the one featured during the previous expansion. Countries displaying hysteresis in the level are those countries
for which the maximum level attained during the expansion phase following a given recession was lower than the one attained during the
previous expansion. Following Tsvetkova (forthcoming[54]), 1983-91, 1994-2007, 2010-11, 2013-19 are defined as expansion phases, 1992--93,
2008-09, 2011-12 are defined as recession periods. For the purpose of this analysis, the 2007-09 and 2011-12 recessions have been bundled
together. The growth rate in the employment rate corresponds to the annualised absolute change, rather than the relative one.
Source: Based on Knowledge Centre for Territorial Policies (2022[33]), ARDECO Database, https://knowledge4policy.ec.europa.eu/territorial/ar
deco-database_en.

Unlike the 1991-92 recession, a relatively larger share of non-metropolitan regions struggled to recover
from the GFC compared to metropolitan regions, driving hysteresis at the country level. During the 1991-92
recession, the share of the population living in TL3 regions experiencing sluggishness in GDP per capita
growth in countries featuring hysteresis was approximately 90% for both metropolitan and
non-metropolitan regions (Annex Figure 3.B.1, Panel A). In contrast, during the GFC, the share for
non-metropolitan regions stayed about the same, while the one for metropolitan regions dropped to 20%
(Annex Figure 3.B.1, Panel B).

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Annex Figure 3.B.1. The global financial crisis has increased on average within-country disparities
Population in non-metropolitan and metropolitan TL3 regions experiencing post-recession hysteresis in the growth
rate of GDP per capita by recession and whether the country experienced hysteresis as a whole

Non-metropolitan Metropolitan

A. 1991-92 recession B. 2008-12 recession

% %
100 100
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Hysteresis at the country level No hysteresis at the country level Hysteresis at the country level No hysteresis at the country level

Note: For each recession, the share of the population living in TL3 regions that experienced hysteresis in the growth rate of GDP per capita
during the corresponding recovery period is shown. Regions are grouped by type of TL3 regions and whether the country as a whole also has
experienced hysteresis in the aggregate GDP per capita growth rate. A country or a region experiences hysteresis in the growth rate of GDP
per capita after a given period of recession if it does not manage to attain, not even once during the ensuing recovery period, the highest growth
rate experienced during the previous expansionary phase.
Source: Based on Knowledge Centre for Territorial Policies (2022[33]), ARDECO Database, https://knowledge4policy.ec.europa.eu/territorial/ar
deco-database_en.

StatLink 2 https://stat.link/cg7ba3

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Annex 3.C. Rising dissimilarities in the local

importance of tradeable sectors

Reallocation of employment towards high-productivity sectors has proceeded at different speeds across
regions. The coefficient of variation of tradeable sectors’ employment shares, 𝑠ℎ𝑎𝑟𝑒𝑖 , calculated across
regions 𝑖 within a certain country measures how strong differences in the importance of these sectors are
at the regional level:
𝜎(𝑠ℎ𝑎𝑟𝑒𝑖 )
𝐶𝑉 =
𝜇(𝑠ℎ𝑎𝑟𝑒𝑖 )
where 𝜎 is the standard deviation and 𝜇 corresponds to the mean of employment shares.
This coefficient is typically higher in tradeable sectors since firms operating in these sectors can pursue
more freely location advantages compared to firms operating in non-tradeable industries given the
tradeable nature of goods and services produced. In 2019, the coefficient of variation in tradeable sectors
was nearly three times as high as in the non-tradeable sector across OECD countries (Annex
Figure 3.C.1). To give a measure of this difference, in 2019, only 5% of employees in the Portuguese
region of the Algarve worked in the tradeable goods sector, as opposed to 44% in the manufacturing-
dense Ave region in northern Portugal – a ninefold difference. In contrast, the employment share in the
non-tradeable sector ranged from 65% to 37% across regions, less than a twofold difference.

Annex Figure 3.C.1. Employment shares in high-productivity sectors have become more dispersed
Country-specific coefficient of variation of TL3-level employment shares by sector, average across OECD countries

Industry Tradeable services Non-tradeable services

0.4

0.35 0.34
0.31 0.32
0.33
0.3 0.32
0.29

0.25

0.2

0.15
0.15
0.11
0.1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: The industrial sector includes NACE group B-E, while tradeable services include NACE groups J, K, L, M-N. For Austria, Germany, Poland,
Spain and the United Kingdom, tradeable services include G-J, K, L, M-N. Data for the United Kingdom start in 2004 (Northern Ireland missing
due to boundary changes). Data for the agricultural sector are missing for the United Kingdom. Data from the United States are not included in
the analysis due to the low quality of employment data by sector/TL3 region.
Source: OECD (2022[7]), OECD Regional Statistics (database), https://www.oecd.org/regional/regional-statistics/.

StatLink 2 https://stat.link/m6r1q8

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Especially between 2011 and 2019, OECD regions have become more dissimilar in terms of the
importance that tradeable sectors play at the local level. The incentives for regions and firms to specialise
in response to the mounting competition induced by rising global economic integration have likely
concurred with shaping this trend for the industrial sector. On the other hand, differences between regions
in terms of the local importance of tradeable services first declined, thanks to the maturing of ICT and their
spatial diffusion. The decline was driven to a halt and reverted by the GFC, owing also to the inability of
certain regions to recoup their pre-crisis employment levels.

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OECD (2015), The Metropolitan Century: Understanding Urbanisation and its Consequences, [1]
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Publishing, Paris.

Notes

1
In this chapter, the expression “high- (low-) productivity” is used to refer to regions with productivity above
(below) the country average.

2
Labour productivity is measured in terms of regional GVA per worker, expressed in USD at constant
prices and constant PPP (2015 base year).

3
Data based on 23 OECD countries: AUT, BEL, CZE, DEU, DNK, ESP, EST, FIN, FRA, GBR, GRC, HUN,
ITA, LTU, LVA, NLD, NZL, POL, PRT, SVK, SVN, SWE and USA.

4
Greece and Italy are the only two OECD countries where productivity growth at the national level was
negative.

5
See Annex Table 3.A.2 for figures on the evolution of labour productivity inequality.

6
For the analysis in this chapter, TL3 regions belonging to the same metropolitan area have been
combined to avoid having changes in inequalities reflecting variation in commuting patterns between core
and peripheral TL3 regions.

7
See Annex Table 3.A.2 for figures on the evolution of GVA per capita inequality under different
assumptions.

8
Tradeable sectors include: the tradeable goods sector, or industrial sector, and the tradeable services
sector. Industry includes: Mining and quarrying (B), Manufacturing (C), Electricity, gas, steam and air
conditioning supply (D) and Water supply; sewerage; waste management and remediation activities (E)
NACE macro sectors. Tradeable services include: Information and communication (J), Financial and

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insurance activities (K), Real estate activities (L), Professional, scientific and technical activities (M),
Administrative and support service activities (N). Non-tradeable services include: Wholesale and retail
trade; repair of motor vehicles and motorcycles (G), Transporting and storage (H), Accommodation and
food service activities (I), Public administration and defence; compulsory social security (O), Education (P)
and Human health and social work activities (Q), Arts, entertainment and recreation (R), Other services
activities (S), Activities of households as employers; undifferentiated goods - and services - producing
activities of households for own use (T) and Activities of extraterritorial organisations and bodies (U).

9
The decline in relative terms was mirrored by a decline in absolute terms, with a total loss of about
3.5 million jobs across OECD countries, and Southern European countries (Greece, Italy, Portugal and
Spain) suffering the largest employment losses in relative terms (20% cumulated employment decline
during 2001-19 against an OECD average of 9%). The decline partly reflects outsourcing of ancillary
activities (e.g. cleaning, security, accountancy, etc).

10
See Annex Table 3.A.1 for figures on country-level employment in the different sectors.

11
See Annex 3.C for a more in-detail discussion of the evolution of regional shares in tradeable sectors in
OECD countries.

12
For the sake of this exercise, a region is classified as top 50% if it belongs to the top half productive
regions within the country for at least three years between 2004 and 2007. Conversely, it is classified as
bottom 50%.

13
Using data on US local labour markets, Acemoglu and Restrepo (2020[55]), for example, find that 1 more
robot per 1 000 workers reduced the employment-to-population ratio by 0.2 percentage points and wages
by 0.42%.

14
The rise of intangibles in production presents also some challenges. For instance, industries
characterised since the early 2000s by the strongest increase in intangible capital accumulation are also
those where differences in firm productivity went up faster (Corrado et al., 2021[57]).

15
Gross fixed capital formation comprises fixed asset acquisitions minus disposals by resident producers.

16
Based on Industrial Production: Manufacturing: Non-Durable Goods: Apparel and Leather Goods
(NAICS = 315.6) (IPG315A6A), FRED, St. Louis FED (accessed 06 June 2023).

17
Differences in sectoral specialisation matter also for the impact of domestic – not just global – trade
integration on within-country disparities. For intermediate levels of transport costs, the development of a
new transport infrastructure spurring domestic trade integration can trigger concentration of economic
activity in regions already specialised in manufacturing due to economies of scale experienced by firms
when locating close to larger markets. Estimates of the impact of road network expansion in European
regions during 1990-2012, for instance, highlight large differences in the amount of investment that would
have been required to obtain similar gains across regions (Adler et al., 2020[56]).

18
Trade openness is defined as the ratio between the sum of imports and exports divided by regional
GDP. These data refer to 182 TL2 regions located in 15 OECD countries and span the period between
2010 and 2019.

19
Traditionally considered highly polluting sectors are coke and oil refining, chemicals, basic metals, in
particular steel and aluminium, non-metallic minerals, in particular cement, paper and pulp, motor vehicles
(OECD, 2023[50]).

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4 The future(s) of OECD regions:

Scenarios 2045

The chapter discusses how readiness to respond to change is critical to

secure prosperity and social cohesion in the next 20 years. The first section
focuses on the value of leveraging strategic foresight to manage
transnational and intergenerational risks related to megatrends and shocks
and to future-proof regional development policy. The second proposes
three scenarios for OECD countries and regions in 2045 and what these
different pathways could imply for regional inequalities and policies. A final
section sets out ways forward to future-proof regional development.

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In Brief
• Around the world, megatrends – including climate, demographic and technological change –
have emerged with the potential to profoundly transform societies in the coming decades. These
megatrends will result in widely different trajectories across regions, creating, in turn, different
public investment needs, challenges and opportunities and reinforcing the importance of place-
based foresight and responses.
• Recent crises – from the COVID-19 pandemic to Russia’s war of aggression against Ukraine –
have increased awareness of vulnerabilities to shocks and the need for preparedness and
resilience. The significant costs of managing the consequences of increasingly regular crises
have reinforced the need to better anticipate, understand and price risks within global, national
and regional systems, including those from ongoing megatrends and potential new ones such
as artificial intelligence (AI).
• Strategic foresight is a critical tool to explore possible future changes and their implications for
decision making today. Territorial foresight in particular is needed to address asymmetric risks
of shocks and megatrends and to future-proof regional development policy.
• Building on a participative foresight exercise, this chapter proposes three scenarios for 2045.
“The foregone region” scenario imagines the emergence of fully centralised power and top-down
decision making in OECD countries, combined with less citizen engagement and growing
distrust. The “hyper-connected region” scenario sees regional and national authorities
collaborating actively together and with citizens to elaborate effective solutions to pressing
challenges. “The region-state” scenario explores a power shift whereby regions form into
separate, almost independent entities, each operating within their own ecosystem and
competing for wealth and resources.
• Two priority avenues emerge to futureproof regional development policy and build up resilience
in the next 20 years: i) building systemic and strategic approaches to fiscal systems and
governance structures; and ii) developing the strategic foresight capacity of policy makers at the
national and subnational levels. In addition, the scenarios reveal some strategic considerations
for how the core purpose of regional development policy may need to adapt in the future.

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Introduction

OECD countries and their regions are in the midst of rapid changes that are influencing how people live,
work, communicate, create, produce, consume, exchange, think and decide. These social, technological,
economic, environmental, political and geopolitical forces are occurring arguably faster than ever before
and are profoundly reshaping human relations within societies, between places and with the natural
environment. Awareness of such forces and their impacts on societies and economies is critical.
Whilst there are inevitably many uncertainties on what these widespread and long-term changes will mean
for regions and regional inequalities, and how policy makers can begin to contemplate potential challenges
and opportunities that may result, it is already clear that they are not on a distant horizon but already
underway and reshaping the geography of opportunities today. The impact of these megatrends will differ
from region to region, exacerbating risks of increasing the already large and persistent regional disparities
evidenced in Chapters 2 and 3. Faced with this reality, societies and their governments cannot afford to
remain passive or complacent. Adequate policy responses need to factor in this geographic diversity and
act on these risks now.
COVID-19 and Russia’s war of aggression against Ukraine have demonstrated that our societies can be
disrupted virtually from one day to the next (as discussed in Chapter 1). The uptake of remote working and
the development of e-commerce and a wide array of digital tools, though already underway, was drastically
accelerated during the first few weeks of COVID-19. Disruptions to global supply chains from COVID-19
and then exacerbated by the war in Ukraine have re-opened the question of reshoring/nearshoring as a
means of making economies more resilient through shorter supply chains. Yet, even before the pandemic,
broader transitions – e.g. urbanisation, technological change, population ageing – were happening at a
rapid pace.
As major uncertainty becomes the “new normal”, regions in OECD countries are facing a renewed need to
learn to better anticipate, prepare for and rebound from different crises. Addressing the challenges
stemming from recent shocks, in conjunction with challenges that preceded them, such as persistent
inequalities and environmental degradation, will be central to building more resilient regional economies.
A key lesson from the past is that any short-term savings from not acting in anticipation can be significantly
outweighed by the costs of remedial actions.
While the importance of including future thinking into policy is increasingly acknowledged, more can be
done to support policy makers, especially at the regional and local levels, to think more long-term and be
proactive. Actively thinking about different futures is a means to identify and learn from new threats and
opportunities coming from even unthought-of impacts in order to agree upon actions today. This is
particularly relevant at the regional level where actions require interaction and co-ordination across
different levels of government to be successful. To support policy makers in this endeavour, this chapter
recalls the global and territorial changes shaping the future. It discusses why territorial foresight is essential
to future-proof decision making on regional development. It also explores three scenarios for 2045 and
their implications for regional development policy, including the steps to take today to be more resilient and
adaptative to whatever the future may entail.

Why think of the future(s)?

Regions in times of global changes

Around the world, several trends have emerged that have the potential to transform society in unpredictable
yet profound, ways in the coming decades. Evidence of this can be found in the most significant, so-called
“megatrends”, a term used to refer to transformations that are unfolding across the globe in a number of
countries and that can drive the global economy and society in specific directions over the coming years.

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Megatrends are likely to result in meaningful, long-term changes impacting social, economic, political,
environmental and technological issues. Despite their potential for high impact, they often unfold slowly
and follow relatively stable trajectories over several decades.
Megatrends that are likely to impact countries around the world include demographic change (including
migration), economic interconnectedness, climate change, digitalisation and urbanisation, among others.
In addition to megatrends, “weak” signals of other changes and developments are emerging and could
grow over time, including the role of states vs. markets or the influence of non-state actors (OECD, 2021[1]).
These, on top of potentially unpredictable events and shocks, could similarly have a significant impact on
the future of societies and the world order.
Megatrends create different public investment needs, challenges and opportunities across regions within
countries. Reaching the objectives of the Paris Agreement on climate change will require scaling up and
tailoring actions and investments to the needs and realities of different localities and regions as mitigation
and adaptation challenges and opportunities differ widely across places (OECD, 2017[2]). Demographic
change, particularly population ageing and shrinking, will especially affect remote and rural regions across
the OECD. Digital divides are emerging across regions, limiting access to the advantages of the digital
transition, establishing and intensifying divides as the pace of digitalisation accelerates. Finally, regions
differ in the degree they are embedded in global value chains and migration patterns, leaving some
territories more prone to the impact of global shocks (e.g. COVID supply chain bottlenecks) than others,
which may demand a rethink of their regional strategies. Table 4.1 recalls some key projections related to
these megatrends and their impact on regions.

Table 4.1. Key trends and projections related to megatrends and their impacts on regions

Megatrends Key trends and projections worldwide Impact on regions

Climate change, • More than a century of burning fossil fuels as well as • In metropolitan areas, climate change will increase
resource management unequal and unsustainable energy and land use has local urban heat island effects, which, in addition to
and availability led to global warming of 1.1°C above pre-industrial increasing local temperatures, alter small-scale
levels. This has resulted in more frequent and more meteorological processes (e.g. land-sea breeze
intense extreme weather events that have caused effect) thereby increasing the risk of heat-related
increasingly dangerous impacts on nature and people morbidity and mortality (IPCC, 2018[4]).
in every region of the world. (IPCC, 2023[3]). • CO2 emissions from urban mobility are expected to
• Almost half of the world’s population lives in regions increase by 26% by 2050, while demand for urban
that are highly vulnerable to climate change. In the passenger transport could grow by 60-70% in the
last decade, deaths from floods, droughts and storms same period if cities go back to the pre-COVID urban
were 15 times higher in highly vulnerable regions transport demand levels (OECD, 2020[5]).
(IPCC, 2023[3]). • Average wages in the key manufacturing sectors most
• Greenhouse gas emissions will need to be cut by likely to be impacted by the green transition are often
almost half by 2030, if warming is to be limited to higher than average wages in the economy as a
1.5°C (IPCC, 2023[3]). whole, meaning that job loss or job transformations
pose risks for wealth in the regions hosting them
(OECD, 2022[6]).
• In the European Union, the largest share of regions
most vulnerable to the industrial transition to climate
neutrality lag on several socio-economic indicators,
especially gross domestic product (GDP) per capita
and average regional wages (OECD, 2023[7]).
Demographic shifts and • Since 1970, life expectancy in OECD countries has • An increasing share of the OECD population will move
urbanisation increased on average by more than ten years (OECD, into large cities and their commuting zones (functional
2017[8]). Life expectancy at age 65 is higher, implying urban areas, FUAs). Between 2020 and 2030, the
that a large part of the population in OECD countries OECD population living in FUAs will increase from
can expect to live for more than 20 years after retiring 950 million to 1 billion inhabitants. The population is
(OECD, 2019[9]). expected to increase in larger FUAs with more than
1 million inhabitants, while the population in smaller
FUAs is expected to shrink (OECD, 2022[14]).

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Megatrends Key trends and projections worldwide Impact on regions

• At current rates, there will be almost global parity • Across the OECD, non-metropolitan regions will
between the number of over-60s and the number of experience population ageing the most. Across the
children by 2050. The old-age dependency ratio (the OECD, elderly dependency rates remain significantly
ratio of older people to the working-age population) is lower in metropolitan regions compared to other
expected to increase significantly by 2050 in most regions. As the population ages, the elderly share of
OECD member countries, shifting the composition of the population (i.e. those above 65 years old) will
the workforce from young to older workers (OECD, increase in all regions but the increase will be largest
2022[6]). in regions far from a metropolitan region (OECD,
• Health spending as a share of GDP is projected to 2022[14]).
increase on average from 8.8% in 2015 to 10.2% by
2030 for OECD countries, with demographic changes
accounting for about one-fourth of the overall
projected change (OECD/EC-JRC, 2021[10]).
• Public expenditure on pensions is expected to
increase in 21 OECD countries with an overall
increase to 9.4% of GDP in 2050 (OECD, 2022[6]).
• In 2019, 5 million new permanent migrants settled in
OECD countries, an increase of around a quarter
since 2010 (OECD, 2022[11]); 3.7 million arrived in
2020. New migrants include highly qualified foreign
doctors, nurses and scientists, as well as individuals
that work in low-skilled but important jobs.
• An annual average of 21.5 million people have been
forcibly displaced by weather-related events since
2008 (UNHCR, 2016[12]). Available estimates suggest
that up to 1.2 billion people could be displaced
globally by 2050 due to climate change and natural
disasters (IEP, 2020[13]).
Digitalisation and • Across the OECD, 14% of all jobs are estimated to • In some OECD regions, the share of jobs at high risk
automation consist of more than 70% of tasks that are likely to be of automation is as low as 4% whereas in others, it is
automated, whereas another 32% of all jobs consist of close to 40% (OECD, 2018[17]).
50-70% of tasks that are likely to be automated • In the first quarter of 2022, people living in
(Nedelkoska and Quintini, 2018[15]). metropolitan areas experienced, on average, 40%
• Average mobile data usage per subscription in OECD faster fixed Internet connections than those in regions
countries quadrupled between 2015 and 2019, and far from metropolitan areas (OECD, 2022[14]).
prices for high-usage mobile broadband fell by 59% • Throughout 2020, across European countries, the
over 2013-19. As of June 2020, 5G (fifth-generation average gap between the large regions (TL2) with the
technology standard for broadband cellular networks) highest and lowest shares of individuals working
commercial services were available in 22 OECD remotely was close to 10 percentage points. On
countries (OECD, 2020[16]). average, 20% of workers in capital regions worked
• OECD economies counted 113 high-speed mobile remotely most of the time in 2020 compared to only
Internet subscriptions per 100 inhabitants as of 10% in all European regions. (OECD, 2022[14]).
June 2019, up from 32 per 100 a decade earlier, while • In OECD countries, teleworking grew from around
non-OECD countries counted 60 such subscriptions 16% of employees before the crisis to around 37%
per 100 people (OECD, 2020[16]). during the first wave of the COVID-19 pandemic in
April 2020.

Specific trends are shaping the future of regions

As Table 4.1 exemplifies, megatrends are not impacting regions within countries equally, while at the same
time, they overlap with specific trends that are playing out at the regional level (illustrated in Figure 4.1).
These latter trends are characterised by strong place-based effects that will result in widely different
trajectories and responses at the regional level, i.e. not all regions and places are and will be impacted in
the same way, and their capacities to engineer collective solutions will be asymmetric as well:
• New forms of mobility: With fossil fuels becoming scarcer and green subsidies scaling up, daily
mobility costs will continue to increase. While regions have been deeply shaped by easy access to
inexpensive modes of individual transport, new forms of mobility will decisively impact regions in

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the short term as people adapt their daily life and, in the long term, with the emergence of new
functional approaches based on shorter distances.
• The transformation of productive systems: Three major trends are expected to transform
productive sectors, i.e. i) the emergence of Industry 5.0 and large-scale digital and technical
transformations in production processes (automation, robotisation, etc.); ii) the development of
more circular and low-carbon production and consumption cycles; and iii) a declining and ageing
labour force, whose relation to work will evolve (e.g. remote working, search for meaning, etc.).
• The advent of place-based carbon-free energy and food networks: This transition, which is
already on the way in many regions, is likely to accelerate as energy and food strategies become
increasingly localised. The development of local energy and food networks will translate into very
different dynamics across places, depending on their strategic choices and their capacity for action.
• The shift in land use balance and people’s relationship to nature: Land use will change
significantly in the coming decades and trade-offs will be required between different needs, such
as preserving farmland for food production while developing renewable energy, raising the value
of wood resources while strengthening the carbon storage capacity of forests, supporting
re-industrialisation strategies and preventing further land loss (e.g. related to urban sprawl or
commercial uses). At the same time, people’s relationship with nature and space will continue to
change as they search for a better quality of life, access to nature and more proximity in their
everyday lives.
• Poverty and new solidarity models: Repeated crises will have a significant impact on disposable
income, leading to more and more people living in precarious conditions. At the same time, in a
context of increasingly constrained public budgets, it is likely that new models, mechanisms and
networks of solidarity will emerge at the regional and local levels.

Figure 4.1. Regions have to anticipate the overlapping effects of megatrends and specific
long-term transformations at the territorial level
DIGITALISATION

CLIMATE CHANGE
DEMOGRAPHIC CHANGE

ENERGY & FOOD

PRODUCTIVE NETWORKS LAND USE
SYSTEMS

SOLIDARITY
MOBILITY

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Making sense of these trends at the regional level will be critical to prepare and adapt regions. Such
transitions are likely to require structural transformations in how regions grow, supply energy, provide
essential services, do business and use land. To continue to thrive, regions will also need to develop
technical know-how and human and social skills. It is equally important to raise awareness and buy-in from
those who will be most impacted by these policy choices. The following section discusses how strategic
territorial foresight can be leveraged to help prioritise challenges, mobilise governmental and
non-governmental actors, and identify a collective path forward to take an active rather than passive role
in shaping the future of regions.

Territorial foresight to futureproof regional policy making

Strategic foresight to better prepare for an uncertain future

Strategic foresight is a structured approach to exploring possible future changes and their implications for
decision making today. Foresight is based on the premise that one cannot predict the future but one can
prepare for it. It entails scanning the horizon for new developments and emerging trends, constructing
alternative scenarios about what future changes could occur and designing forward-looking strategies for
advancing values and objectives under a wide range of possible circumstances (OECD, 2021[1]). Foresight
helps to prevent poor decisions based on unquestioned assumptions about the future. Practising foresight
allows for spotting new challenges sooner, so as not to be caught by surprise, and perceiving a broader
universe of opportunities. Box 4.1 presents some of the main concepts and benefits of strategic foresight.

Box 4.1. Key concepts and benefits of strategic foresight

The OECD defines strategic foresight as a structured and systematic way of exploring different plausible
futures that could arise, the opportunities and challenges they could present and using those ideas to
make better decisions and act now. Foresight can support government policy making in the following
main ways:
• Better anticipation: to better anticipate changes that could emerge in the future.
• Policy innovation: to reveal options for experimentation with innovative approaches.
• Futureproofing: to stress test existing or proposed strategies and policies.
Strategic foresight is not forecasting. It does not attempt to offer definitive answers about what the future
will hold. Foresight understands the future as an emerging entity that is only partially visible in the
present, not a predetermined destiny that can be fully known in advance (predicted). There are no hard
facts about the future and the evidence base is always incomplete. The objective is not to “get the future
right” but to expand and reframe the range of plausible developments that need to be taken into
consideration. One of the main contributions of foresight is to give meaning to the future and help actors
better understand its complexity.
Strategic foresight is not strategic planning. Doing strategic foresight alone will not produce a strategy
or plan. The task of developing strategies and plans is enhanced and supported but not replaced by the
process of considering multiple alternative futures and their implications. Strategic foresight instead
aims to pose key questions that might have gone unasked in developing a strategy and to reveal and
challenge potentially fatal assumptions and expectations built into current policies and plans.
Source: OECD (n.d.[18]), Strategic Foresight, https://www.oecd.org/strategic-foresight/ourwork/.

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Over the last decade, foresight has become a highly visible and widespread way of informing decision-
making and policy-planning processes. It is used to more systematically debate future prospects and
desires, with a view to influencing present-day decisions and actions. It is particularly useful to leverage
the knowledge of a wide range of stakeholders on new developments as well as on societal and business
needs. The tacit and tangible “results” of foresight are recognised as valuable inputs to the setting of
priorities for public and/or private initiatives, vision building, network formation, education and knowledge
dissemination among relevant actors, especially among policy decision makers.
Across the OECD, more and more governments use forecasting and strategic foresight instruments to
future-proof regional policy. Responses to an OECD survey conducted in 2018 showed that more than
two-thirds of countries in the sample had a national long-term planning or strategic foresight unit at the
centre of government, and nearly two-thirds of the countries used both forecasting and strategic foresight
in regional planning processes (OECD, 2019[9]). Examples from Canada, France and Switzerland of using
strategic foresight in policy making and strategic planning are provided in Box 4.2.
Sceptics may argue that adequate strategy and policy-planning methods and processes are already well-
established at all levels of policy making. But the rules of the game are changing rapidly and radically,
eroding the value of more rational planning and linear methods of policy development, and accentuating
the need for more real-time interactive approaches that characterise foresight. The value of traditional
planning approaches depends largely on long periods of relative stability and these approaches are
currently challenged by the acceleration of environmental and technological changes, among others. The
prevalence of interactive and participative methods of exploratory analysis and study is what could be
termed a new paradigm. The methods are not “new” in the strictest sense, as they have been practised
and developed over several decades. Nor do they replace more traditional forms of planning or rigorous
academic research. However, their value is becoming more and more extensive, and they increasingly
constitute a decisive element within a planning exercise. What foresight methods impart is a much more
“emergent”, real-time planning approach.

Box 4.2. Using foresight to develop future-oriented policy and programmes at the national level:
Experiences in Canada, France and Switzerland
Canada
Policy Horizons Canada is a federal government organisation that conducts foresight to help the
government of Canada develop future-oriented policies and programmes that are more robust and
resilient in the face of disruptive change on the horizon. To fulfil this mandate, Policy Horizon Canada
analyses the emerging policy landscape, the challenges that lie ahead and the opportunities opening
up, engages in conversations with public servants and citizens about forward-looking research to inform
their understanding and decision making, and builds foresight literacy and capacity across the public
service.
In 2017-18, Policy Horizons Canada, with the support of the Privy Council Office, ran the Canada
Beyond 150 programme with the goal to: develop leadership for a diverse cohort of public servants;
experiment with new methods in open policy, to build the required skills and encourage a culture shift
to a more open, innovative, collaborative public service; and engage external partners in the
development of longer-term analyses and innovative ideas to inform future policy making. The
programme gathered a Canada-wide group of federal public servants who learned skills in foresight
analysis, design thinking and engagement, and explored five themes: reconciliation, feminist
government, sustainable development goals, open and transparent government and socio-economic
inclusion, which includes the future of work, capital and debt, and future of well-being. The programme

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delivered seven thematic reports exploring key opportunities, challenges and policy issues across the
different themes, as well as possible solutions and strategies.

France
In line with its commitments under the Paris Agreement, France launched two initial national low-carbon
strategies. These strategies will imply important systemic transformations that will mobilise all
stakeholders and require major technical, institutional and social innovations. In 2022, to inform the
French government’s decisions in this regard, the French Agency for Ecological Transition (Agence de
la transition écologique, ADEME) produced four scenarios that propose very different economic,
technical and social options for achieving carbon neutrality. The report Transition(s) 2050 presents the
scenarios in detail, provides a cross-scenario comparison according to energy, climate, and resources
considerations and proposes some lessons across several sectors such as territorial planning, housing,
mobility, agriculture, waste management and industrial production.

Switzerland
For more than ten years, the Territorial Concept Switzerland has provided the joint strategy of the
Confederation, the cantons and the municipalities for the future regional development of the country. It
outlines a vision of Switzerland for the future and, since its first publication in 2012, has become an
important planning tool for decision makers. In 2023, the three levels of government decided to update
it as new challenges have gained importance, notably climate change, energy production and
digitalisation, which should be integrated into the Territorial Concept. The process will include a
multi-level, government-wide reflection on what Switzerland could look like in 2050, with all major
institutional partners involved. Workshops will be organised with foresight experts on themes such as
climate, economy, energy and cohesion and a youth conference will be organised, all with a view to
producing an updated Territorial Concept by 2025.
Source: Government of Canada (n.d.[19]), Policy Horizons Canada, https://horizons.gc.ca/en/home/ (accessed on 3 February 2023);
Government of Canada (n.d.[20]), Canada Beyond 150, http://canadabeyond150.ca/ (accessed on 3 February 2023); ADEME (2022[21]),
Transition(s) 2050. Choisir maintenant. Agir pour le climat, https://transitions2050.ademe.fr/; Projet de territoire Suisse (n.d.[22]), Homepage,
https://projet-de-territoire-suisse.ch/ (accessed on 12 April 2023).

The rationale for foresight applies in equal measure at any territorial level. However, issues and priorities
for a region can be very different from that of an entire country given the immediacy of their various
socio-economic constituencies and highly variable (from region to region) situations, including the different
responsibilities of subnational governments across and within countries. This means that territorial
foresight is different in many ways from national foresight, though there are important similarities and
synergies. The following section delves into the specificities of territorial foresight and how it can contribute
to futureproofing regional development policy in particular.

Territorial foresight: Objectives and approaches

Territorial foresight has specific characteristics. First, territorial foresight approaches are inherently
multi-faceted and consider the economic, social, environmental and political dimensions that make up
regional economies and ecosystems. Second, the scope of territorial foresight exercises looks beyond
administrative boundaries to consider the multiple connections a region shares with neighbouring regions
and other parts of the world. Third, territorial foresight serves as a tool to reconcile different perspectives
and priorities among actors of the same region by providing a platform for dialogue (e.g. workshops,
reflection groups, fora, etc.) where these actors can confront different views of what is possible and
desirable in the future, and the risks and opportunities they need to anticipate, which in turn fosters
collective learning and strategic planning.

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In a territorial foresight exercise, regional actors ponder key questions that imply different assumptions,
biases and trade-offs, e.g. should a region prioritise technological or behavioural changes to address
climate change? Should a region specialise or diversify its economy? Should a region focus on developing
its endogenous resources and skills or building linkages and partnerships with neighbouring regions?
Answers to these questions can set a region on different paths. Box 4.3 presents some experiences across
OECD countries of using territorial foresight.

Box 4.3. Experiences in territorial foresight across the OECD

In Australia, the government agencies of New South Wales set up a foresight and futures team to
equip decision makers across the sector with an ability to navigate future uncertainty and anticipate
challenges and opportunities on the horizon. The team developed a digital platform – the Trend Atlas
– accessible to all New South Wales government agencies that provides a test bed for building
collaborative intelligence into government systems. The Trend Atlas provides information on over
275 local and global trends, including a detailed analysis highlighting the drivers, impacts and possible
developments of each trend. Multiple foresight and risk management taxonomies are also applied to
the trends to enable effective user navigation and sense making. A horizon-scanning database of over
3 500 articles gives users indications of weak signals of change. The platform makes future analysis
easier to integrate into government decision making, strategic planning, policy development and service
redesign.
In Finland, given the increasing polarisation of the regional structure and as part of future planning
efforts, the Ministry of Economic Affairs and Employment commissioned a study on regional
development scenarios for 2040. The scenarios are intended to enable discussions on possible options
for the future of regions. Fifty key issues to be addressed by the scenarios relate to ensuring world-
leading knowledge concentrations and finding the most suitable role for each region, as well as ensuring
smart adaptation and good living conditions including in areas that fall outside the top-performing
regions.
In France, the Brière regional park launched a territorial foresight process in 2019 on the impact of
climate change, population growth and tourism on its future. Over the course of 3 forward-looking
workshops, more than 100 stakeholders explored different possible futures over a 40-year period, to
outline a desirable future for the park. The process revealed that the park was not yet equipped to meet
upcoming challenges and risks, and called for rethinking spatial planning, environmental management
and tourism strategies. The foresight process led to the creation of three “transition labs” tasked with
inventing new ways for local actors to work together and seek collective solutions. One of the innovation
labs focused on the future of urban planning and looked at how to rethink a “net zero artificialisation”
planning approach in an area highly exposed to floods while preserving ecosystems. The lab brought
together urban planners, citizens and land use developers to design a new charter for future urban
planning in the park.
The Government Office for Science in the United Kingdom conducted a plausible scenario-led
foresight assessment (Futures of Cities) to develop an evidence base on the future of United Kingdom
(UK) cities (challenges and opportunities towards 2065), to inform national- and city-level policy makers.
The study was conducted through the commissioning of working papers and essays, and interactive
workshops, with over 25 UK cities participating. By combining megatrends analysis and scenario
planning, for instance, the study “produced” a plausible future consisting of considerable climate shocks
presenting key urban challenges by 2065, e.g. drier summers and heatwaves affecting the
United Kingdom’s southern cities, and high levels of precipitations affecting western cities during the
winter.

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The state of Kansas in the United States piloted a novel framework, Our Tomorrows, to ensure that
policies and practices meet the needs of families. The framework set out to achieve three goals:
i) gather stories about thriving and surviving from families across Kansas utilising a complexity-informed
narrative research approach called SenseMaker; ii) make sense of patterns that emerged from the
stories through community SenseMaking workshops with stakeholders at various levels of the system;
and iii) take action and enable bottom-up change through community action labs. Our Tomorrows laid
groundwork to introduce anticipatory innovation to state decision makers while providing avenues at
the community level for immediate participation and is being scaled statewide.
Source: NSW Government (n.d.[23]), Case Study: New South Wales (NSW) Trend Atlas, https://data.nsw.gov.au/nsw-government-data-
strategy/case-studies/case-study-new-south-wales-nsw-trend-atlas; Futuribles (n.d.[24]), Prospective Parc naturel régional de Brière 2060,
https://www.futuribles.com/la-prospective/etapes-de-la-demarche/exemples-de-demarches/prospective-parc-naturel-regional-de-briere-
2060/; UK Government (2016[25]), Future of Cities: Foresight for Cities, https://www.gov.uk/government/collections/future-of-cities.

Territorial foresight can take many forms and seek different goals, from one-off workshops to a multi-year
process, and involve a few or many stakeholders (see Box 4.4). In addition, different methods can be used
to explore the future, notably:
• Prospective backdrop: This method consists in summarising the major changes and uncertainties
at global, national and regional levels. Actors of a region are invited to select and prioritise the
changes that seem to have the greatest impact and then reflect on their possible implications for
the region. This method enriches strategic reflection, in particular on the vulnerability of the region
and the resilience measures to be taken as a result.
• Normative foresight: This approach is based on a common objective for the future of the region.
This objective can be represented by a story or images, in order to represent as concretely as
possible what would constitute a desirable and unifying horizon. Generally, this common objective
is defined by one or more key players in the region (elected representatives, entrepreneurs,
citizens) and finds consensus. The goal of the foresight exercise is then to determine the most
appropriate trajectory to achieve it.
• Exploratory scenarios: In this method, the aim is to construct a simplified representation of the
possible futures of a region. To this end, a rigorous method makes it possible to identify the main
components (or variables) of the region, study their dynamics and formulate hypotheses on their
possible future evolution. Finally, these hypotheses are combined to build scenarios. This method
is an opportunity to get stakeholders to work together and to build a common understanding of the
region and of priorities for the future.

Box 4.4. How to use territorial foresight: Different approaches for different purposes
Regions and places are diverse in their characteristics, challenges and strategic contexts. As a result,
territorial foresight approaches adapt to this diversity and can have different forms and goals, as
illustrated below.

Territorial foresight to challenge preconceived ideas of the future

A foresight approach can be brief and made of short sequences, for example, interviews with
regional/local actors, a foresight pre-diagnosis and a few workshops. This approach provides an
opportunity to discuss with regional/local actors their views and representations of the future and to
have them sketch the outline of foresight thinking. This type of approach is useful to challenge
preconceived notions, uncover new issues or challenges and raise interest to go further. This type of

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brief approach still requires careful preparation to frame the issues for discussion in the specific context
of the region. It typically proves useful as a first step or prelude in a more structured and long-term
foresight process.

Territorial foresight to manage uncertainty and build resilience

At a time of rapid and unpredictable changes, regional and local actors need to map and anticipate
these changes to be prepared. Territorial foresight can be used to better understand ongoing and
upcoming changes, to clarify the possible implications for a region or place in terms of exposure and
vulnerability, and to design a resilience strategy. Such a strategy can be designed to manage risks and
adapt to a changing environment. This type of foresight approach makes an important contribution to
regional resilience strategies, which are often based only on an understanding of past and present
risks.

Territorial foresight to set a course for transformational change

Territorial foresight can be used to prepare for major transformations in a region, such as industrial
transition. These are more complex strategic approaches, where foresight brings meaning and
coherence as well as an exploration of the future that enriches collective thinking and strategic planning.
Generally, these approaches are structured in three main stages: i) a diagnostic of how the main
strengths and challenges of the region and its environment; ii) the development of exploratory scenarios
to identify possible futures and lay the foundations for a vision of the region’s future; and iii) the design
of the vision and future trajectory of the region.
Source: Information provided by Futuribles.

Scenarios for OECD regions in 2045

To better understand the challenges regions in OECD countries may face in the coming decades, this
section explores several plausible alternative futures using scenario planning. This approach challenges
current assumptions about where regions may be headed. These scenarios are intended as an initial
contribution to further reflection and decision making on regional development in the years ahead.
The scenarios are not prescriptive or predictive, nor are they exhaustive or mutually exclusive. They are
imagined future contexts, crafted to stretch plausibility about what the future may hold. The scenarios
represent possible future disruptions that could create significant strategic considerations for territorial
disparities and regional development policy. They do not aim to fully reflect the diverse realities across all
OECD regions but instead seek a common denominator by describing possible developments in a
generalised way, with a focus on issues of mutual interest with an OECD-wide perspective.

Scenario building process and overview

The scenarios are informed by emergent OECD findings on the impact of megatrends and transitions on
regions and were developed in collaboration with the delegates of the OECD Regional Development Policy
Committee (RDPC) during a series of participatory workshops organised in 2022-23 to scan the horizon
for important drivers of change in regions, think of different possible futures and explore what these futures
mean for regional development policy (Box 4.5).

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Box 4.5. The Regional Outlook 2023 foresight exercise

The scenarios described in this chapter were developed in close collaboration with the delegates of the
RDPC. The foresight process consisted of two participatory workshops organised between November
2022 and March 2023 with the participation of 30 to 40 representatives of different member and
non-member countries.
The first workshop, “A Day in 2045: What’s driving the future(s) of OECD regions?”, engaged RDPC
delegates in discussions and ideation about the main drivers of change for OECD regions in the future.
In break-out groups, participants first imagined what a typical day in the lives of people living in different
types of OECD regions in the year 2045 could possibly look like. Each group pictured the day of different
people living in a region of an OECD country, considering his/her job/education, mobility, connectivity,
food, environment, social life, culture, etc. and discussed the main factors of change shaping the
person’s future. These people were a 19-year-old migrant, at university, living in a dense metropolitan
region, a 55-year-old small and medium-sized enterprise (SME) owner with 3 children, living in a
semi-dense region, and a 30-year-old doctor, living in a sparsely populated region. Participants then
reflected on the factors influencing or changing the way these people live, work, consume and interact
in the future, considering in particular:
• What do they notice about the person’s life in the future and what stands out?
• What are the assumptions they are making about the future?
• What have they found out about the future they are imagining?
The second workshop, “Building forward-looking scenarios for OECD regions”, had participants engage
in exercises designed to help them imagine different paths OECD regions could take over the coming
20 years as they are influenced by major transformations and what policy choices and interventions are
needed to prepare for and adapt to these possible futures. Participants were first presented with and
further elaborated on three sketch scenario narratives, including to ensure their consistency, plausibility
and clarity. They then imagined these sketch scenarios happening today to consider:
• What needs to be done to adapt to these new realities? What policy actions can be carried out
today?
• What policies/solutions need to be invented to improve the lives of people in the future?
• What could happen to change that reality from coming true, for better/worse?

Among the drivers of change identified as part of the foresight workshops, which included societal,
economic, technological or environmental factors, the state of multi-level governance was selected as the
most impactful and uncertain in shaping regional realities across the OECD in the future. Multi-level
governance generally refers to the interactions among and across levels of government, which are mutually
dependent, and with a broad range of non-governmental stakeholders, including private actors and
citizens, when designing and implementing public policies with subnational impact (OECD, 2023[26]).
Discussions in the foresight workshops highlighted how multi-level governance systems will be
instrumental to shape the responses to many challenges and transitions different regions will face and how
their evolution in the years ahead can be decisive for regions’ future development.
Using multi-level governance as the main driver of change, three scenarios emerge, set in 2045. They are
summarised in Table 4.2 and elaborated in the following sections. The scenarios consider the different
degrees of either co-operation or autonomy at the national and regional levels across OECD countries,
from highly centralised policy making to effective and balanced co-operation among levels of government
to high levels of autonomy at the regional level. Each of the three scenarios also considers developments
of other drivers of change identified during the workshops (climate change, natural resources availability,

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technology, infrastructure, etc.). To illustrate different possible futures, contrasts between scenarios may
appear exaggerated.
The “foregone region” scenario explores the emergence of fully centralised power and top-down decision
making in OECD countries, combined with less citizen engagement and growing distrust. The
“interconnected region” sees regional and national authorities collaborating actively together and with
citizens to elaborate effective solutions to pressing challenges. The “region-state” explores a power shift
whereby regions form into separate, almost independent entities, each operating within its own ecosystem
and competing for wealth and resources.

Table 4.2. Scenario overview

“Foregone region” “Hyper-connected region” “Region-state”

scenario scenario scenario
Description Regional authorities have all but There is strong co-ordination and OECD countries are fragmented as
disappeared as national governments collaboration across national and regions have become (more)
(re)centralised all decision- and regional governments, including across autonomous and embraced widely
policy-making powers. The absence of borders. Transitions are managed in a different economic models and ideas of
a multi-level approach to managing networked and integrated way. social value, with territorial inequalities
transitions led to even-deeper Communities and citizens play an running wild as a result. There is a lack
asymmetric impacts of megatrends active role and engage almost of co-ordination on global challenges
within countries and untenable exclusively in the metaverse. While such as climate change. National
territorial disparities between those inequalities within countries are governments are relegated to the role
most and least affected regions. subsiding, inequalities between of regulator and must mediate rising
countries are widening. competition and tensions between
regions.
How it happened After the COVID-19 pandemic, As citizens fear further pandemics and The proactive role played by
disasters and crises continued and led increasingly large-scale and frequent subnational governments during and in
OECD countries to centralise and natural disasters, they demanded the aftermath of the COVID-19
consolidate decision making in order to greater collaboration between national pandemic strengthened public support
tackle climate change and regulate and regional governments to lead the for more regional autonomy, leading to
sustainability, mostly with green transition. regions-states with their own authority.
techno-solutions.
Assumptions That the regional development That effective co-ordination between That the nation-state and national
challenged paradigm was widely adopted and national and subnational governments sovereignty would remain the dominant
supported, and countries rely on would be difficult to achieve, and that model in the world order.
multi-level governance and there is no value-added in collaborating
decentralisation to build resilience in with the central level.
the face of megatrends.

The “foregone region” scenario

Scenario highlights
In 2045, OECD countries believe that fighting climate change is best done at the national level and
centres of government now concentrate all decision-making powers. Regions and regional governments
have all but disappeared as a result. For several years now, national governments have taken a
top-down, mission-oriented innovation approach to manage the green transition, betting everything on
new green technologies, such as sustainable green power and biotechnology. Environmental protection
is seen as necessary to maintain growth, not as an end in itself. The dominant development model still
depends on resource exploitation despite an increased focus on sustainability. National governments
control essential infrastructures and collaborate closely with big technology companies. Citizens worry
about the limited channels through which they can influence the new centralised politics and trust in
government has plummeted, resulting in anti-democratic movements.

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How we got here

After the COVID-19 pandemic, crises and disasters continued. Dramatic sea level rises in the 2020s and
2030s have caused people to abandon coastal communities across OECD countries. Climate change also
resulted in the re-emergence of ancient pathogens. To avoid a full-blown climate catastrophe, national
governments in OECD countries take charge of the sustainability agenda. Multi-level governance,
decentralisation and stakeholder engagement are seen as hindrances, time-consuming and distracting
from coherent and decisive top-down action to combat the climate crisis. Progressively, national
governments (re)centralise policy-making powers and take over key competencies in major infrastructure
(energy, water, transport) to be “more effective”, while dismissing the role of regions and subnational
authorities. At the same time, national governments favoured technology development over changing
consumption patterns to address environmental challenges and have implemented strong policies to
promote the decarbonisation of economies, in a context of international competition and globalisation of
trade. The place-blind, top-down policy model has led to the promotion of agglomeration and density in big
dynamic cities in the 2020s and 2030s.

By 2045…

Regions and regional governments have all but disappeared. National governments have fully embraced
a top-down and uniform approach to policy making and sustainability. The dominating policy strand is
advocated on the belief that central decision making is more efficient while regional and place-based
considerations are secondary and ineffective. These national strategies consider that good
macroeconomic management and nationwide policies are what matter most to fighting climate change and
maintaining growth levels.
Nature is seen as a set of resources to be exploited for the benefit of humans, in a relationship of mutual
growth between natural ecosystems and intense human activity in all economic areas. Technologies are
means of understanding, monitoring and regulating the impacts of climate change. Technological solutions
also provide new flexibilities and capacities for adapting (e.g. precision agriculture, development of
seawater desalination, home automation, etc.). Hence, lifestyles, travel and work are very similar to those
of the 2020s and 2030s, but with some differences. For instance, food diets contain less meat and
individual mobility is still prevalent but with lighter, electrified vehicles. By focusing on green or
decarbonised technologies, energy and material consumption risks are insufficiently controlled. Green
energy is big business, including for SMEs.
The best technologies are widely deployed and widely available to those who can afford them, notably big
cities and rural areas that have specialised, e.g. in green technologies or resource extraction that contribute
to strategic autonomy. Centralised transport systems focus on connecting cities and facilities. Meanwhile,
poor regions are getting poorer and risk not having access to basic needs (hospitals, public transport, etc.)
and losing their young and skilled. Inequalities within countries are at an all-time high.
Apart from isolated initiatives, citizens are less involved in political decisions. As people feel disconnected
from government and elected officials, life is inwardly focused and more individualistic. Concentrations of
power are weakening the foundations of democracy. Trust in government and social cohesion are
dramatically eroded, leaving behind a vacuum that is increasingly filled by major technology companies.
The line between government and business is blurry. Lower social trust also coincides with a withdrawal
into virtual forms of engagement and misinformation is rampant.

Considerations raised by this scenario for the future of regional development policy

• How could regional development policy manage the tensions between achieving sustainability
objectives and leveraging technological innovation across places?

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• How could regional development policy further contribute to establishing frameworks and
standards for regional well-being and quality of life in a far more centralised environment?

The “hyper-connected region” scenario

Scenario highlights
It is 2045 and the green transition is the thread that connects all regions together and with their national
governments. OECD countries are on their way to climate neutrality by 2050. Fuelled by the success of
the International Programme for Action on Climate (IPAC) and the Inclusive Forum on Carbon Mitigation
Approaches (IFCMA) to help reach the targets of the Paris Agreement in the early 2030s, member
countries have invested massively in green and digital transition technologies and paved the way to
support governance structures that are more networked and co-operative. Regions are instrumental
cogs in this new system and work together with national governments to achieve societal goals.
All decisions are based on consensus and through compromise solutions. To facilitate this
hyper-connectedness, most interactions, whether across levels of government or with citizens, now take
place in the metaverse. The main channels to interact with the government are targeted applications
and social media using a new generation of wearable technology. Diplomacy is more complex than ever
before as relationships between national governments, subnational authorities, platform companies and
citizens need to be delicately managed.

How we got here

As environmental degradation reached dangerous levels in the late 2020s, global initiatives like the
OECD-led IPAC and IFCMA enabled dramatic reductions in greenhouse gas emissions in the early 2030s
and convinced countries that co-operative and co-ordinated efforts are fundamental to safeguard humanity
and should be mainstreamed across all policy issues and levels of government. The steady growth of
deliberative democracy, citizen engagement and co-creation, reinforced by trends towards more
transparency and accountability, have transformed society. With a framework of shared governance and
regional co-operation, public institutions, the private sector, non-governmental organisations and civil
society have found pragmatic ways to co-operate and maintain the social fabric while protecting the planet.

By 2045…

To achieve carbon neutrality, society relies on a progressive but steady change of the economic system
towards a sustainable path combining sufficiency and efficiency. Consumption of goods becomes
measured and responsible, and sharing becomes widespread. Transformation in housing
(e.g. shared/community living, a ban on vacant housing), work habits, diet and travel change. Nature and
biodiversity are appreciated for their intrinsic values. Changes in society’s values provide for massive
investment in efficiency and renewable energy, and in renewing and retrofitting infrastructure.
Reindustrialisation policies are implemented in targeted industrial sectors. These investments are
encouraged by financial incentives, defined by policies and regulations based on social and environmental
criteria. The impacts are felt across all OECD countries as a global certification system on green
infrastructure and products, and strict rules on imports of carbon-intensive goods are established, and
international trade slows down to reduce carbon emissions.
Regions and regional governments are essential actors in the green transition alongside national
governments and civil society. The co-ordination of the green transition across levels of government is
essential for governance systems, and all policy decisions are made based on compromise among all

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stakeholders, enabled by higher degrees of trust. Integrated, multi-level policy making means that
environmental sustainability strategies are foregrounded across all areas of government.
However, as national and subnational governments strive to make progress on many policy fronts at the
same time, seeking consensus from all stakeholders is time-consuming and slows down the transformation
of production systems and lifestyles. Other by-products of the significant increase in co-ordination are now
becoming more challenging, including the difficulty to agree on major policy reforms, decision paralysis,
an expansion of the public sector including new co-ordination bodies, more bureaucracy around decisions
and less agility and responsiveness in times of crisis.
Massive breakthroughs in digital technologies, such as blockchain, telepresence and augmented reality,
allow immediate and constant access to relevant information and facilitate participation in decision making
at all levels and tailored local implementation. The Internet of Things and AI systems provide evidence for
policy making. Algorithms also drive day-to-day political life. They are used to customise messages
addressed to different groups, assess the chances of success of proposed legislation and both contain
and spread fake news. Much of people’s everyday and civic life now takes place in the metaverse. Digital
space is prioritised over the physical, including limiting carbon emissions, most public services are digitally
based and economic life takes new forms on line. These technologies also contribute to more demographic
spread and less stark urban-rural differences, as they open more places to live a quality life.
As states and regions increasingly co-operate, decisions are locally scaled and sensitive to spatial issues,
and regional disparities have subsided. However, whilst inequalities within countries have declined,
inequalities between countries are widening. The metaverse is where most economic and social activity is
taking place and a small group of technology giants provide the hardware needed to access it. Digital
infrastructure, therefore, dictates inequality between countries as they differ in their ability to leverage
access for their population. Some countries with a large share of youth are experiencing massive growth,
while others are ageing rapidly, and their older populations struggle to adjust to cutting-edge technologies
and the new socio-economic realities. The convergence process in the OECD during the 2000-20s is being
reversed by an ever-growing digital divide, accompanied by rising social tensions. Cybersecurity is a major
concern for governments at all levels. Interconnectedness means vulnerabilities can affect many actors.
The elevated costs of cybersecurity are a barrier to many countries trying to bridge the digital divide.

Considerations raised by this scenario for the future of regional development policy

• What new relationships/connections may regional development policy makers need to broker in a
more inter-connected world (e.g. global technology companies, local community movements)?
• How can regional development policy develop the necessary incentives to ensure hyper-connected
regions continue to work together rather than consolidate their power and influence?

The “region-state” scenario

Scenario highlights
In 2045, OECD countries have become patchworks of regions. In this scenario, region-states have
increased authority and operate as individual entities with different economic and social value models
and standards. Prosperous regions negotiate directly with corporations around the world. In this setting,
there is more of an inclination to hold on to the wealth they generate and compete for national and
international legitimacy. National governments’ limited strength resides in their ability to regulate and
mediate rising competition and tensions between regions. The ability to pursue a co-ordinated
sustainability agenda is diminished due to fragmented and disconnected agendas. Regional inequalities
intensify as the gap between poor and rich regions increases.

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How we got here

Public perception that regional governments were on the frontlines of the COVID-19 pandemic and handled
the recovery better than national governments strengthened calls for greater autonomy and prompted the
rise of independence movements and radical decentralisation across OECD countries. At the same time,
the 2020s and 2030s were marked by increasing dissatisfaction with the redistributive model of most OECD
countries. Leading regions grew tired of supporting lagging regions and precipitated a general collapse of
public trust in national institutions. In the wake of this collapse, regions started to break away and pursue
widely different economic models and arrangements within the same country.

By 2045…

OECD countries are fragmented as many regions have become independent or increased self-
determination. Regions use their autonomy to move in different directions reflecting their self-interest.
Different levels of government compete for legitimacy and social cohesion is low. Accountability is diluted
and makes it easy to shift the blame on others. Meanwhile, national governments use the little power they
have left to mediate internal conflicts between regions.
Some regions sustain themselves through rewarding relationships with international “patrons” and base
their economies on strong external affiliations with global economic actors, while less successful regions
struggle with public debt and have to be more frugal. As stronger regions share fewer budget resources
with poorer performing regions, fiscal equalisation breaks down. As a result, successful regions become
more appealing but less open to migration from poorer regions, which causes territorial disputes. Extreme
regional inequalities and structural unemployment are growing in many countries.
Some regions lead the green transition and try to control their local environment to ensure their citizens’
well-being, while others have limited connections to nature and disregard such concerns. The
fragmentation of climate efforts and funding creates incoherencies, tensions and divisions. Some regional
renewal superpowers emerge but it is based on economic not environmental benefits and there is no
consistent policy or facility to redistribute renewal energy. Regional energy systems have proliferated
piecemeal and are hard to integrate. The failure to co-ordinate climate action has compromised critical
ecosystem services, such as the provision of drinking water.
Some autonomous regions choose to bet everything on their comparative strengths and have
over-specialised: many rural regions hold on to their natural resources and intensify the automation of
farming (e.g. farm factories), forestry (bioengineered trees) and renewable energy production. Most
automated farms are owned and managed by corporations with integrated processing of food and
bio-based products. People living in these rural regions are forced to sell their land and move to cities.
Large metropolitan regions are getting bigger and have become high-technology hubs but suffer from
worsening air quality, congestion and insecurity. Higher-income groups have moved to the suburbs for
better living conditions while low-income groups stay in city centres, creating new urban ghettos.

Considerations raised by this scenario for the future of regional development policy

• What new system of collaboration may regional development policy require to achieve effective
co-ordination among regions-states and address global challenges?
• How can regional development policy support regional diversity while ensuring a minimum level of
social cohesion?

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Strategic considerations to future-proof regional development policy

The scenarios illustrate some of the ways in which the world could be substantially different in 2045. In this
respect, they serve to broaden the perspectives about what the future may require in terms of regional
development and what it could mean for regional development policy. How can regional development
policy and policy makers begin to prepare for challenges and opportunities posed by these plausible –
although by definition uncertain – futures and by global challenges that will continue to unfold over the next
decades?

How can regional development policy prepare for the future

The scenarios serve to highlight how political, social and technological developments can challenge
institutional and fiscal systems that operate on the basis of inflexible assumptions. But the coming decades
could be highly unpredictable, marked by complex and non-linear systemic change and bringing an
acceleration of significant challenges. Two priorities, in particular, emerge to prepare and adapt regional
development policy and build up resilience in the next 20 years: building systemic and strategic approaches
to fiscal systems, public investment strategies and governance structures to withstand unknown shocks
and respond to emerging circumstances and developing strategic foresight capacity at the national and
subnational levels.

Building resilient and adaptable fiscal systems, public investment strategies and
governance structures

Strengthening subnational fiscal robustness, notably ensuring debt sustainability and bolstering
subnational revenues, is the first important avenue to build more resilience in regional development policy.
Many trends discussed in this chapter will affect subnational fiscal systems. The tax base of some regions
and cities might fundamentally change due to demographic shifts, changes in the labour market and
business income, as well as changes in land values and housing prices. This could lead to increasing
disparities in fiscal capacity among regions.
A particular challenge for governments is to reconcile on the one hand the objective of ensuring that public
debt remains at levels that are sustainable under scenarios that account for the longer-term fiscal impact
of megatrends, such as population ageing and shorter-term effects on the public finances of global risks,
and, on the other hand, the objective of accommodating public investment in priority areas, such as
mitigation and adaptation to climate change, needed improvements in digital and other essential
infrastructure, reducing the risk of future shocks like pandemics and dealing more effectively with their
consequences when they materialise (de Mello and Ter-Minassian, 2022[27]).
Across the OECD, national governments in federal countries can foster subnational fiscal sustainability for
instance through agreements with regional governments or by creating incentives for those governments
to adopt and implement appropriate fiscal responsibility frameworks/fiscal rules. Meanwhile, in most unitary
countries, national governments are able to regulate the access of regional or local governments to
borrowing and may choose to do so in different ways, ranging from administrative controls to standing
fiscal rules or periodic agreements. Furthermore, in view of the increased incidence of unforeseen
exogenous shocks, such as natural disasters, national and regional governments may need to take
preventive actions, such as purchases of insurance and the maintenance (or increase) of their contingency
reserves, including rainy-day funds.
To expand the fiscal space to attend to new spending needs in the future while respecting the requirements
of sound fiscal responsibility frameworks, most subnational governments in OECD countries will need to
both increase their revenues in an efficiency and equity-friendly way and rationalise their existing spending
(de Mello and Ter-Minassian, 2022[27]):

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• National governments can support subnational own-revenue mobilisation efforts in a number of

ways, including by helping subnational tax administrations through systematic exchanges of
information, joint audits, technical assistance and financial support to their modernisation and
digitalisation efforts or by providing appropriate incentives for subnational government to more fully
exploit their revenue-raising potential.
• Subnational governments have a number of options to increase their own revenues, such as:
broadening the base of existing own taxes, by reducing or eliminating existing exemptions and
other preferential treatments and mitigating the impact of the changes on lower-income groups
through targeted transfers, if needed; strengthening and modernising the administration of own
taxes, e.g. property tax; or adopting or progressively raising “green” taxes and levies, among other
possible reforms.
Futureproofing public investment strategies is a second important avenue to build more resilience in
regional development. Infrastructure investments will need to be made that anticipate shocks all while
avoiding the “green gentrification” of cities and regions, which can make life less affordable for vulnerable
populations in the name of sustainable development (OECD, 2022[6]). Optimising existing infrastructure
assets and making them more resilient also needs to be part of long-term infrastructure investment
strategies. Upgrading existing infrastructure assets provides a solution for existing asset stock making it
more effective, long-lasting and better value for money (OECD, 2021[28]).
The investment mix should also be balanced and differentiated across places to properly address
megatrends and reduce regional inequalities. The investment mix inevitably varies strongly from urban to
rural regions, reflecting the specificities and assets of different territories. In addition, megatrends will
impact regions differently and thus shape their investment needs. Challenges linked to megatrends, such
as localised flooding or urban heating, are also profoundly local and place-specific. This means not only a
need to target the investment mix to each place but also a need to balance investment in hard infrastructure
with investment in human capital to maximise the potential for long-term growth and sustain a continuing
improvement in living standards, environmental quality and well-being (OECD, 2022[6]).
Making a multi-level governance structure more adaptable is a third important avenue for resilient regional
development policy. To manage differences in terms of subnational autonomy, responsibilities or
capacities, experimental governance that embeds learning-by-doing and trial-and-error processes into
policy design can help governments to develop better approaches to address different local needs. A
willingness and capacity to experiment with policy approaches – testing, adjusting and retesting – is
particularly relevant when confronted with uncertainty, as megatrends can dramatically shift and shocks
can occur, catching policy makers off guard and requiring a rapid policy response.
Such approaches can be combined with asymmetric decentralisation, which many OECD countries have
moved towards in recent years. Asymmetric decentralisation arrangements can help regions, cities and
rural areas that are particularly affected by global changes to better respond to opportunities and
challenges. These types of arrangements allow subnational governments to adopt institutional and fiscal
frameworks that are better targeted to local capacities and may allow them to better respond to local needs.
This trend is likely to continue and can help to adapt governance to differences in regional, metropolitan
and local conditions and capacities (OECD, 2019[9]).

Developing the strategic foresight capacity of policy makers at the national and subnational
levels

Developing the foresight capacity of policy makers is critical to constantly perceive, make sense and act
upon ideas about future change emerging in the present. Building such capacity can help policy makers to
envisage new solutions, stress test plans to make them more robust, develop early warning systems for
threats and opportunities, and advance regional development policy objectives under conditions of
continuous change.

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Governments face barriers to the effective development and use of strategic foresight in the context of a
still-dominant culture of forecast-based policy planning. As a result, high-quality policy-driven foresight is
underused. Investing in foresight capacity for regional development policy making also requires
overcoming day-to-day challenges (e.g. under-funded mandates) and taking a long-term view.
At the national level, avenues to develop and strengthen strategic foresight capacity for regional
development policy include:
• Leveraging territorial data to inform foresight: Moving towards more proactive policy making
requires mainstreaming strategic foresight and planning across sectors and jurisdictions. At a time
when territorial data and indicators are increasingly driving regional development policy decisions,
the ability to harness and make sense of that data as part of territorial foresight approaches
becomes even more important. Policy makers must ensure that they either have the capacity to
make data-driven decisions in the future or that other departments with that capacity are fully
briefed on key trends and issues impacting regions to play a supportive role.
• Promoting a culture of innovation and change management: Governments can be challenged by
the pace at which change and shifts occur. Promoting a culture of innovation within government
will be critical to ensuring that megatrends are given due consideration withing the decision-making
process. The use of futures labs and scenario planning exercises, which tackle forward-looking
issues through creative multi-stakeholder engagement, is one potential mechanism to promote a
culture of adaptation, continuous improvement and future thinking. The focus on participatory
forward thinking involving people with a common issue can strengthen the ownership of the
foresight topic, possible territorial consequences and pointers for policy making.
• Scanning the horizon over the long term: Maintaining a system to identify weak signals of change
is a useful approach to anticipating possibilities for the future and designing forward-looking
scenarios. Such long-term planning approaches should bring together experts from different fields
related to regional development. Strategies and decision-making processes should also be
informed by actors on the ground, i.e. subnational authorities, private actors and citizens.
At the subnational level, avenues to develop and strengthen strategic foresight capacity include:
• Optimising existing foresight work: More and more regions and cities are using foresight to inform
their policy making but these initiatives are often scattered. The sharing of existing foresight work,
whether applied to specific sectors (e.g. climate change, future mobility) or to specific places, would
provide regional actors with a considerable bank of knowledge and experiences. Similarly, the
pooling of foresight methods and tools would equip these actors and ensure the foresight
approaches they use have been stress tested.
• Relying on networks of foresight practitioners: Developing a community of practice on foresight at
the subnational level would facilitate the dissemination of good practices and help policy makers
to strengthen capacities and skills at the subnational level. These networks could support peer
learning (e.g. between elected officials, between foresight officers, etc.), which is critical to ensure
know-how and skills transfer. Bringing together the insights and knowledge of a wide range of
different practitioners allows for approaching complexities and uncertainties where no quantitative
information about the future is available.
• Training subnational public officials to become more future-literate: Raising awareness and
building knowledge on cross-cutting disciplines can enable regional and local civil servants to better
understand major systemic transformations at work, notably the green, digital and energy
transitions. The ability to work as a team and in project mode should be part of such training.
Stepping up regional and local engineering capacities is a necessity to enable subnational actors
to prepare for, rather than react to, future challenges. This includes strengthening technical teams
within regional and local administrations, notably their capacity to design and implement collective

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strategies. Finally, foresight training should also target elected officials so they can better articulate
their political vision with effective action on the ground.

Where should regional development policy be headed next?

Taken together, the three scenarios presented in the chapter reveal several strategic considerations for
the future of regional development policy. These considerations are the result of brainstorming exercises
during the foresight process. These are not exhaustive but aim to stimulate reflections and may serve as
a stepping stone for future foresight reflections on regional development.

How would the core purpose of regional development policy need to adapt in the future?

The scenarios shed light on how the world could evolve in any number of directions over the coming
two decades, each raising new implications for regional development policy. For instance, the digital
transition could divide regions between those that stand to win or lose from it and could force regional
development policy to focus investments only on a subset of regions at risk of staying digitally behind. As
the territorial impacts of megatrends continue to evolve, what new purposes should regional development
policy be ready to achieve in the future? These might include:
• Building foresight capacity at the subnational level (e.g. establishing regional/local foresight
competency centres).
• Setting sustainable and digital requirements at the subnational level (e.g. regional sustainability
and cybersecurity standards).
• Expanding inter-regional, inter-municipal and cross-border co-operation and optimising peer-to-
peer learning opportunities to better understand and address global changes.
• Supporting more localised and clean production systems and manufacturing.

What mission would remain central to regional development policy?

The scenarios illustrate how the values and priorities of central and subnational governments could evolve.
Different economic and social models and standards could proliferate within countries and polarisation
may grow. Long-held values of regional development policy (e.g. spatial differentiation, multi-level
governance, place-based approach) could be increasingly contested. In this context, what should remain
the central mission of regional development policy?
This might include:
• Safeguarding regional well-being in an increasingly virtual world.
• Providing targeted, place-based support to address increasing territorial green and digital divides.
• Placing local knowledge at the centre of adaptation strategies to global changes.
• Ensuring continued connections and communication channels across levels of government and
among regions.

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5 A policy roadmap to address

regional inequalities now and in the
future

The chapter discusses the consequences of leaving persistent regional

inequalities unchecked. The first section describes how, when left
unaddressed, these disparities can threaten economic growth, the provision
of public services, trust, political stability and a just transition. Governments
in OECD countries need to act now to ward off persistent divides between
regions. The second section of the chapter presents a policy roadmap
along five key priorities to guide these efforts.

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In Brief
• While economic development is inherently uneven within countries due to differences in factors
of production across places, wide and sustained regional inequalities can no longer be
considered necessary or a “fact of life”. At a time when megatrends and shocks such as the
COVID-19 pandemic and Russia’s war of aggression against Ukraine are impacting regions
differently, they serve to highlight and sometimes compound existing weaknesses in national
economies. As regional inequalities grow and persist over time in many OECD countries, they
are raising costs that are becoming too economically, socially and politically high to ignore.
• Inaction on regional inequalities raises different costs:
o Economic costs, as the aggregate contribution of lagging regions and/or those trapped in
a vicious cycle of long-term stagnation or decline (so-called “development traps”) to national
growth is substantial, which means that leaving these regions with levels of economic activity
below their potential is an important missed opportunity.
o Social costs, as persistent inequalities challenge the capacity of subnational governments
to provide adequate access to key public services and infrastructure, both in economically
dynamic regions that may struggle to cater to the large numbers of people they attract and
in lagging regions and/or those in a development trap where public services become
stretched, of low quality or difficult to access.
o Political costs, as regional inequalities, are a factor behind large regional variations in trust
in government in OECD countries, with variations between countries’ most and least trusting
regions, ranging from below 10% to over 30% difference. These variations have given rise
to growing discontent and disengagement, strain social cohesion and undermine democracy
over time.
• This geography of discontent is unfolding at a time when countries need to accelerate the green
transition and manage demographic changes. As megatrends are not impacting regions in the
same way and lagging regions are often most likely to be adversely affected, persistent regional
inequalities further hinder these regions’ capacity to respond and adapt to change and, in turn,
jeopardise governments’ ability to make the green and digital transitions equitable and just.
• To effectively reduce regional inequalities, policy responses are warranted at the national and
subnational levels of government and in a shared responsibly so as to address the concerns of
and improve prospects for those regions that have been left behind, while sustaining the
prosperity of the most dynamic regions. It requires taking co-ordinated and sequenced actions
at different government levels across five policy priorities:
o Ensuring equitable access to quality public services and infrastructure in all regions.
o Boosting productivity and competitiveness.
o Providing the right skills and quality job opportunities in regional labour markets.
o Improving the quality of multi-level governance systems.
o Strengthening capacity at the national and subnational levels of government.

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Introduction

Chapters 2 and 3 of this report undertake a thorough analysis of regional inequality trends and drivers
across OECD regions and within countries over the past two decades and conclude that these trends are
heterogenous. The analysis shows a diversity of situations across OECD countries, each of which requires
a diverse set of context-specific policy responses to address regional inequalities more effectively. This
diversity reflects disparities in productivity resulting from differences in economic structure, the supply of
skilled labour, physical capital and natural resources, and public infrastructure and strong path dependency
in these spatial distributions. Such diversity may also relate to the local availability of certain amenities and
is affected by labour market institutions and redistribution through taxes and benefits.
Not addressing wide and sustained regional inequalities has led to negative by-products and future
remedial costs, often outweighing the costs of directly addressing those inequalities, that has become
increasingly difficult, whether politically or socially, to ignore. To effectively reduce regional inequalities,
policy responses are warranted to address the concerns of and improve prospects for those places that
have been left behind, while sustaining the prosperity of the most dynamic regions and helping regions
navigate the green and digital transitions. The chapter starts by discussing how inaction on regional
inequalities can have adverse consequences on economic performance, service provision, social and
political stability and the just transition in OECD countries. To encourage and guide public action, the
chapter then proposes a comprehensive policy roadmap to support policy makers at different levels in their
efforts to effectively address regional inequalities now and in the future.

Leaving regional inequalities unchecked: The consequences of inaction

Economic development is spatially uneven due to the differences in factors of production across regions.
While cities enjoy agglomeration benefits, rural regions tend to depend highly on primary and tradeable
activities. As discussed in earlier chapters of this report, pockets of economic activity and clusters tend to
concentrate on space and natural resources are localised in specific geographies. Differences in factors
of production translate into differences in productivity and growth potential, giving rise to unequal
development patterns. Inequality in development patterns is often considered necessary or a “fact of life”
of economic development. But there are important downsides to spatial inequality, especially when gaps
become too high and persist over time.
This section looks at three negative by-products of regional inequalities: i) missed economic opportunities
and a loss of growth potential; ii) cost implications for delivering high-quality services across the entire
territory; and iii) risks of discontent and instability when they pass a certain threshold and some territories
are left behind. It also examines the importance of anticipating and mitigating the potential increases of
regional inequalities to deliver a just green and digital transition.
Across OECD regions, weak and strong signals of these by-products have been emerging in recent years
and it has become clear that the consequences of inaction will eventually lead to even higher future
remedial costs. Hence, regional policies must mitigate spatial inequality in new and better ways, moving
away from quick fixes that have created dependency relationships in the past, towards a mix of muti-level,
multi-sectoral policies and sound institutional and fiscal frameworks, tailored to the prospects of different
kinds of OECD regions.

Spatial inequality and economic development: What does the theory tell us?

Some level of regional inequalities is inherent to and unavoidable in any country as the cycle of economic
development and place-specific endowments of people and skills, firms and industries have led to the
concentration of high-technology and knowledge-intensive sectors in some, predominantly urban, regions.

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According to the economic literature, several studies provide some theoretical foundations for the rise of
spatial inequality:
• Models of the New Economic Geography (NEG), the urban agenda and the new trade theory, have
given important insights into explaining why economic activity and settlement patterns tend to
concentrate in certain locations, which generates core-periphery spatial patterns. The model is
based on a spatial equilibrium between the benefits and costs of agglomeration. Estimates predict
that when city size doubles, productivity increases between 2-5% on average (OECD, 2015[1]).
• The cumulative dynamics also apply to superstar firms and industry clusters (Alfaro, Chen and
Fadinger, n.d.[2]), showing a clear hub-and-spoke structure in the geographic distribution of
agglomeration patterns of industries and plants in Europe related to superstar firms, suggesting
that regional policies could have a role in building superstar-centred industry clusters.
• Studies based on endogenous growth theory and institutional economics may also reinforce these
spatial outcomes. Acemoglu and Dell (2010[3]) document that about half of the between-country
and between-municipality differences can be accounted for by differences in human capital and
productive efficiency is determined by national factors and local institutions, such as the availability
of local public goods and the security of property rights giving rise to inequality. Frick and
Rodríguez-Pose (2018[4]) also find a relation between governance factors and infrastructure factors
and divergence in regional growth rates. Their analysis examines the relation between city size
and economic growth and finds that growth is highly dependent on adequate infrastructure and
governance conditions.
• There are also studies that show the resilience of regions and cities to economic shocks and
national economic recovery also differ such as the shocks of the global financial crisis, or more
recently the COVID-19 pandemic and Russia’s war against Ukraine. Duranton (2007[5]) showed
that small, innovation-driven shocks lead to the churning of industries across cities. This may then
lead to slower growth or decline in cities, following net gains or losses of industries.
When looking at time dynamics and the evolution of regional inequality over time, there are different
scenarios:
• The standard neo-classical growth models using capital accumulation, labour and savings (Solow,
1956[6]), Swan (1956[7]) predicts convergence to a steady state over the long run. This means that
poorer regions further away from their steady-state level will tend to grow faster and thus converge,
and inequalities would then eventually decline from the bottom of the distribution.
• Williamson’s curve predicts a rise in inequality and a decline over time. It suggests that in a
catching-up country, a few growth poles concentrate in regions which attract the bulk of capital,
knowledge and skilled workers. As productivity rises in these regions, it will lead to faster growth
and increasing disparities among regions. At later stages, as higher factor costs or diseconomies
of agglomeration emerge in these regions, capital is likely to move to other regions with lower
capital per worker. In addition, knowledge spillover effects may enhance the reallocation of
productive factors across sectors and regions, which leads to convergence in income levels
(OECD, 2012[8]).
• Economic models of the NEG predict a core-periphery equilibrium but do not provide a clear
prediction of the links between economic concentration and growth. These models explain why
economic activities concentrate in specific geographies and sometimes benefits of agglomeration
are offset by costs that arise on the concentration. The forces enhancing agglomeration typically
include migration of labour, forward and backward linkages and elasticity of labour supply.
Several studies have investigated how agglomerations can benefit adjacent regions, also called “borrowed”
agglomeration effects from neighbouring cities. Estimates of the benefits predict that for a doubling of the
population living – at a given distance – in urban areas within a 300 km radius, the productivity of the city
in the centre increases by between 1% and 1.5% (OECD, 2015[1]). Thus, evidence has shown that, more

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often than not, these spillover mechanisms to less-favoured regions have a more limited effect than
expected. The increasing importance of knowledge-based services has also reinforced the existing
advantages of large metropolitan regions over low-density and less urbanised regions (Oliveira Martins,
2021[9]).
While spatially uneven development is regarded as the price to pay for economy-wide productivity
maximisation – the overarching goal being to make the “economic cake” bigger first and then distribute it
–, experience over the past decades has shown that this model has in many instances exacerbated
inter-personal and regional inequalities and, in fact, failed to deliver and activate development opportunities
in lagging regions. Today, inaction on regional inequalities is raising different types of costs, which are
discussed in the following sections.

Regional inequalities can lead to missed economic opportunities

Many lagging, lower-income regions and regions in a “middle-income trap” have levels of economic activity
that are well below their potential, both in terms of employment and productivity (EC, 2022[10]; Diemer et al.,
2022[11]) and are often seen as a drag on national performance, rather than as potential assets to be
exploited. Yet, the OECD has evidenced that, while there will always be inter-regional gaps, those lagging
regions have opportunities to “catch up” in terms of social and economic development (OECD, 2016[12]).
Leaving lagging or stagnating regions behind can not only affect the regions themselves but has important
consequences for national aggregates. Indeed, while individually, the impact of these regions on national
growth can be relatively small, in aggregate, the contribution to national growth of all regions with
catching-up potential is substantial, even at these lower levels (OECD, 2012[8]).
An exclusive focus on the leading regions is not sufficient to drive average productivity. While the
productivity frontier is mostly urban, many regions with large rural populations also do well and have been
catching up to the national frontier. At the same time, those regions falling behind national frontiers include
many urban regions (OECD, 2016[12]). As discussed in Chapter 3, only by generating stronger growth,
fuelling the catching-up machine in all types of regions in a synchronised manner and supporting the
performance of the system of regions as a whole, can national economies increase aggregate productivity
and reach their total output frontier.

Regional inequalities challenge the capacity of subnational governments to provide

quality public services

Differences in quality and access to public services are key determinants of inequalities between regions
in OECD countries, as discussed in Chapter 2. In turn, when left unaddressed, high and persistent regional
inequalities challenge the capacity of subnational governments to provide people with adequate access to
public services and infrastructure.
On the one hand, economically dynamic regions and notably urban areas may have difficulties maintaining
infrastructure capacity and/or keeping pace with infrastructure expansion needed to cater for the large
numbers of people they attract. The consequence may be shortages in affordable quality housing and
congestion problems (OECD, 2015[1]). This creates a challenge, particularly for cities’ lower-skilled workers
who may work in more precarious jobs and struggle with high urban costs of living, long commutes and air
pollution problems.
On the other hand, lagging regions typically get trapped in a vicious cycle of decline that affects the quality
of local public service provision, which becomes increasingly expensive. Regions that have suffered from
long-term industrial decline have seen their unemployment rise and labour force participation decline and,
in many cases, they have lost competitiveness and have not successfully transitioned into other areas of
competitive advantage. As a result, public services in these regions have become stretched, are of low
quality or are difficult to access, which may then be a catalyst for further outmigration of higher-skilled

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workers and their families. Furthermore, many of these regions are also often facing accelerated
demographic changes, including population decline and ageing, pushing up the demand for health and
other social services (OECD, 2022[13]).
The physical infrastructure needed to provide good quality public services can be more complex and
expensive in lagging regions and attracting highly skilled people poses an additional challenge. Many rural
schools, for instance, are facing or will soon face declining student numbers, generating smaller schools,
class sizes and student-teacher ratios (OECD, 2021[14]). While smaller sizes can present some
opportunities such as more teaching time per student, many small rural schools operate in isolation and
under capacity with a limited educational offer and their principals and teachers struggle with multiple roles.
The challenges are even larger in remote rural regions with low population densities. With fewer people
spread over a wider area, economies of scale are difficult to achieve.
In principle, differences in relevant aspects such as population density and demographic structure translate
into unavoidable higher costs of service provision in certain local units and regions within countries. These
higher per-unit costs translate into lower quality services, which in turn could lower the attractiveness of
the regions and incentive further drops in population and tax revenue of these places leading to negative
downward spiral dynamics. Given that, across many OECD countries, national constitutions recognise
health and education provision as core rights, maintaining services in these places represents a high cost
and often leads to the transfer of resources across places and dependency dynamics.
Regional disparities in access to quality services, especially essential ones, can lead to increased spending
on social support services and more complex healthcare issues for instance and, in turn, lower tax
revenues (related to lower employment outcomes from inactivity) (OECD, 2022[15]). In education, a lack of
access to quality opportunities can lead not only to lower lifelong employment opportunities, incomes and
well-being but also to higher intergenerational inequalities (Hanushek and Woessmann, 2020[16]). In
healthcare, a lack of access to quality care can translate into worse health outcomes, higher incidence of
chronic disease, increased mortality and ultimately to a lower quality of life (OECD, 2021[14]). Migration
induced by inadequate access to services can lead to brain-drain and exacerbate existing gaps in the
availability of educated workers such as doctors and teachers in rural areas. Against this backdrop,
ensuring the vitality of lagging places by investing in framework conditions for development or making use
of technological solutions and network effects to deliver services can act as effective measures to avoid
future, and potentially considerable, remedial costs.

Regional inequalities threaten social and political stability, giving rise to the geography
of discontent

Regional inequalities are a factor behind large regional variations in trust in government in OECD countries.
Data from the 21 countries included in the OECD Trust Survey reflect variations between each country’s
most and least trusting region, ranging from under 10% in Australia to a more than 30% difference in Korea
(Figure 5.1). This suggests government trust deficits in many OECD countries have a territorial cleavage
(OECD, forthcoming[17]; 2022[18]). Levels of trust in OECD territories have also been in flux in recent years,
having declined in certain regions and risen in others.
There are a number of ways in which regional inequalities can contribute to trust deficits in certain places.
Empirical evidence from OECD countries suggests that places with higher levels of government distrust
are primarily: i) comparatively wealthy areas that have been in long-term economic decline (e.g. certain
parts of northern Italy); and ii) middle-income areas that have been unable to sustain economic growth
because they are not sufficiently innovative to compete with more productive regions (this primarily
includes rural areas and small or medium-sized cities) (Dijkstra, Poelman and Rodríguez-Pose, 2020[19]).
These findings reflect the growing divides between places that feel left behind by globalisation and
technological change, and those that may benefit from the opportunities offered by megatrends, and even
more so since the global financial crisis.

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Regional disparities in trust in government reflect the differing levels of success that national and
subnational governments have had in dealing with their citizens’ challenges and needs. Furthermore,
citizens tend to trust subnational governments more than national ones. In 2020, for example, trust in
regional and local authorities across European Union (EU) member states was nearly 10% higher than
trust in national governments (OECD, forthcoming[17]).

Figure 5.1. Regional disparities in national government trust, 2021

Share of respondents that trust the national government in OECD regions with the highest and lowest level of trust
by country

Region with lowest level of trust in government in country Region with highest level of trust in government in country

AUS Tasmania Western Australia

AUT Upper Austria Salzburg
BEL Wallonia Brussels
CAN Canadian Prairies Quebec
DNK Northern Jutland Southern Denmark
EST North-Eastern Estonia Western Estonia
FIN North & East Helsinki-Uusimaa
FRA North-East Greater Paris
GBR Yorkshire and The Humber East Midlands
IRL North & West East & Midland
ISL North South
JPN Tohoku region Kansai region
KOR Gyeongsang Province Chungcheong Province
LVA West Latvia (Kurzeme) South Latvia (Zemgale)
NLD North East
NOR Trondelag & North Oslo & Oslo region
NZL Manawatu-Whanganui Waikato
PRT Madeira Alentejo
SWE South Sweden (Skane, Halland & Blekinge) Middle South Sweden

0 10 20 30 40 50 60 70 80 90 100
Trust in government (%)

Note: Proportion of respondents that “trust” the national government based on an aggregation of responses from 6-10 on the scale, based on
responses to the question: “On a scale of 0 to 10, where 0 is not at all and 10 is complete, how much do you trust each of the following? The
national government”. “OECD” presents the unweighted average across countries. Finland’s scale ranges from 1-10 and the higher trust/ neutral/
lower trust groupings are 1-4/ 5-6/ 7-10. New Zealand shows trust in civil service as respondents were not asked about trust in the national
government (note that trust in civil service on average tends to be higher than trust in national government). Colombia, Luxembourg and Mexico
are not shown due to data unavailability.
Source: OECD (2022[18]), Building Trust to Reinforce Democracy: Main Findings from the 2021 - OECD Survey on Drivers of Trust in Public
Institutions, https://doi.org/10.1787/b407f99c-en.

StatLink 2 https://stat.link/ig316r

In addition to long-term economic outcomes, there is also evidence to suggest that trust in government
can be undermined by more short-term shocks to regional and local economies, such as increases in
unemployment. In the United States, for instance, voters in local communities experiencing significant job
losses in the manufacturing sector have shifted strongly towards anti-establishment candidates in recent
years (Guriev and Papaioannou, 2020[20]). In the European Union, changes in regional unemployment
rates between 2008 and 2014 were found to have a causal effect on decreasing trust in national
parliaments and increasing votes for anti-system parties. An unemployment increase of 5 percentage

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points was associated with a drop of 3.65 percentage points in trust towards a country’s national parliament
(Algan et al., 2018[21]).
While short- and long-term socio-economic outcomes are important determinants of trust, they often fail to
fully explain its territorial variations. An additional factor that is thought to contribute to territorial divides in
trust in government is the quality of local public service delivery. In Europe for instance, residents in a rural
area or town were found to have a lower average level of trust in government compared to those living in
cities, even after controlling for demographic, economic and cultural differences among cities and rural
areas (EC, 2022[10]). Researchers found that a key factor behind this was dissatisfaction with local public
services (notably education and healthcare) (Mitsch, Lee and Ralph-Morrow, 2021[22]). This finding is also
reflected in recent OECD work in countries like Finland and Norway, where responsiveness in delivering
public services has been identified as one of the most important determinants of citizen trust in national
and local governments (OECD, 2022[23]; 2021[24]).
Persistent regional inequalities raise the risk that territorial divides in trust experienced by OECD countries
will continue to grow and with them the risk of making the economic, social and political costs of inaction
even higher:
• Lower levels of trust have been shown to have a negative impact on long-term regional economic
performance (Algan and Cahuc, 2014[25]). This is because trust deficits can limit productivity
through various channels, including trade, financial intermediation, the organisation of firms and
labour markets. For example, a lack of trust may inhibit a country’s performance by increasing
transaction costs for businesses.
• Lower levels of government trust may affect the willingness of citizens to accept government
policies, including in a crisis situation. Evidence collected in the early part of the COVID-19
pandemic provides a stark illustration of this effect. In the European Union and the United States,
for example, mobility data show that, on average, people complied with COVID-19 health
restrictions on movement less consistently when they did not trust their governments (Bargain and
Aminjonov, 2020[26]; OECD, 2021[27]). At the regional level, low trust in institutions was also
associated with higher excess mortality in EU and OECD countries during the first year of the
pandemic (after controlling for economic and demographic differences), which may reflect, at least
in part, lower overall compliance with health measures in these areas (Diaz-Ramirez, Veneri and
Lembcke, 2022[28]).
Persistent economic stagnation or decline in many regions of OECD countries has given rise to growing
discontent and resentment of the political and economic status quo. This trend has become apparent
across the OECD, as indicated by growing political polarisation, growing political fragmentation, as well as
the collapse of established political parties, record-low voter turnout and the surge of new or newly
reconfigured parties from across the political spectrum.

Persistent regional inequalities can jeopardise a just green and digital transition

As earlier chapters discuss, megatrends such as climate and technological change are not impacting
regions the same and lagging regions are often the one standing to be most affected. Persistent regional
inequalities further hinder these regions’ capacity to respond and adapt to change and, in turn, jeopardise
governments’ ability to make this transition equitable and just.
In the green transition, climate adaptation challenges and opportunities differ sharply across regions as
some concentrate on employment and carbon emission-intensive activities. Furthermore, average wages
in the key manufacturing sectors most likely to be impacted by the green transition are often higher than
average wages in the economy as a whole, meaning that job loss or job transformations pose risks for
wealth in regions hosting them (OECD, 2022[13]). These regions are often already lagging, implying they
may have fewer economic resources to absorb shocks and take advantage of opportunities. In the

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European Union, for instance, the largest share of regions most vulnerable to the industrial transition to
climate neutrality lag on several socio-economic characteristics, especially gross domestic product (GDP)
per capita and average regional wages (OECD, 2023[29]).
The OECD finds that the share of green-tasks jobs differs on average by 9 percentage points between the
regions with the lowest and highest share (Figure 5.2). In some of these regions, workers are also exposed
to poverty risk or are vulnerable on account of narrow, limited skills (OECD, 2023[30]). Regions also differ
in their access to key infrastructure some of these industries will require, notably for hydrogen, carbon
capture and storage and zero-emission freight transport, which is key to value chains. Addressing
inequalities between regions can therefore strengthen their capacity to weather these changes and take
the actions needed to ensure the success of the green transition.

Figure 5.2. Regional disparities in green-task jobs within countries

Share of green-task jobs across and within countries, OECD regions, 2021 or last available year

Lowest National average Highest

Canada Newfoundland and Labrador Alberta

United States South Dakota Utah
Greece Western Greece Attica
Australia Tasmania Victoria
Italy Province of Bolzano-Bozen Emilia-Romagna
Poland Lublin Province Warsaw
Spain La Rioja Madrid
Slovak Republic West Slovakia Bratislava Region
Hungary Southern Great Plain Budapest
Germany Saxony-Anhalt Hamburg
Austria West Austria East Austria
Autonomous Region of the
Portugal North (PT)
Azores
Belgium Flemish Region Brussels Capital Region
Ireland Northern and Western Eastern and Midland
Czech Republic Northwest Prague
Netherlands
Iceland
Slovenia Mura Central Slovenia
France Normandy Île-de-France
Finland Eastern and Northern Finland Helsinki-Uusimaa
Denmark Southern Denmark Copenhagen region
United Kingdom Northern Ireland Greater London
New Zealand Southland Auckland
Switzerland Espace Mittelland Zurich
Norway Northern Norway Oslo and Viken
Sweden Småland with Islands Stockholm
Latvia
Estonia
Lithuania Central and Western Lithuania Vilnius Region
Luxembourg
-10 -5 0 5 10 15 20 25 30 35 40 45 50
%

Note: Last available year. 2019 for the UK. 2020 for Iceland. 2021 for Australia, Canada, EU countries, Norway, New Zealand, Switzerland and
the United States. According to the OECD, green-task jobs are defined and analysed at the occupation level based on the greenness of their
related task content.
Source: OECD (2023[30]), Job Creation and Local Economic Development 2023: Bridging the Great Green Divide, https://doi.org/10.1787/21db
61c1-en.

StatLink 2 https://stat.link/it4csf

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Similar to the green transition, the challenges and opportunities emerging from the digital transition are
uneven across regions. The opportunities being created by digitalisation differ largely due to differences in
connectivity, the share of occupations amenable to remote work and the digital skills required to succeed
in this new economy (OECD, 2021[31]). The rise of remote working, increasing automation and the
digitalisation of services are improving productivity and well-being for many people (see Chapter 3).
Remote working, for example, is redefining how and where people choose to work, proving an important
opportunity to improve the work-life balance by reducing commuting times and encouraging more flexible
working arrangements. At the same time, it is redefining where higher-income higher-skilled workers
choose to live, which will impact the future development of regions and transportation systems, and impact
carbon emission patterns.
Adapting to the digital transition requires that people and firms in regions have the right digital skills but
large gaps remain. The share of people using the Internet in regions with the highest use is 10 percentage
points higher than in the region with the lowest use, while, despite an acceleration since COVID-19, small
and medium-sized enterprises (SMEs) trail large firms in the adoption of digital tools such as cloud
computing and big data for instance (OECD, 2023[32]). This can lead to significant differences in the ability
of people and firms to position themselves for the new digital environment.
The challenges posed by the green and digital transition can be turned into opportunities to boost
development in lagging regions and reduce regional inequalities. Climate mitigation policies for instance
can support prosperity and well-being in rural regions. This can be realised through more sustainable land
management, higher valorisation of ecosystem services, making use of innovative production processes
around agriculture, mining and renewable energies and new modes of transportation. Similarly, remote
working can bring new growth opportunities for rural economies. Remote working holds the potential to
create new job opportunities outside large cities because of more affordable and suitable housing and
office spaces with better access to environmental amenities (OECD, 2022[33]).

A policy roadmap to address regional inequalities effectively

For a long time, most policies to address regional inequalities aimed at compensating lagging regions and
consisted of top-down, often short-term, subsidy interventions (e.g. for infrastructure and setting up public
services) to the poorest regions. They mostly resulted in distorted markets and harmed the development
chances of these regions in the medium and long terms. Such policies also often focused on keeping
declining industrial sectors alive so as to protect local jobs, even when these sectors were condemned in
the long term. Overall, these government responses failed to reduce inequality, generate new jobs in
lagging regions or trigger a culture of economic dynamism (OECD, 2012[8]). Moreover, these actions had
unintended consequences, creating a culture of dependency on the part of recipient regions, many of which
are now trapped in a vicious circle of under development.
Effectively addressing and mitigating regional inequalities is no small task. These inequalities are not
marginal but touch on fundamental issues in people’s lives, from access to healthcare to employment.
Regions – especially lagging regions – often struggle, not just on one front but on many. This means that
mitigating regional inequalities effectively cannot be done with siloed policy responses but requires taking
on multiple systemic and interrelated challenges at the same time.
To guide policy efforts to address regional disparities in a way that both stimulates catching up in
lagging/stagnant regions and sustains prosperity in the most dynamic regions, this section presents a
policy roadmap structured around five priorities. These priorities, presented in Figure 5.3, should not be
considered in isolation. Rather, policy makers should take co-ordinated and sequenced steps across all
five to create equal opportunities across regions.
• Ensuring equitable access to quality public services and infrastructure in all regions.

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• Boosting productivity and competitiveness.

• Providing the right skills and quality job opportunities in regional labour markets.
• Improving the quality of multi-level governance systems.
• Strengthening capacity at the national and subnational levels.
How to address regional inequalities depends largely on local economic, socio-demographic and
geographic circumstances and differs from place to place. It means that delivering on the policy roadmap
requires galvanising action across a wide range of governmental and non-governmental actors at different
levels. This is best done through a place-based approach, one that recognises the heterogeneity
characterising OECD regional economies, in terms of place (i.e. there is a continuum of places with
different characteristics and different economic specialisations), activities (i.e. manufacturing, tradeable
and non-tradeable services) and firms (i.e. in terms of productivity levels and growth) (OECD, 2019[34];
2016[12]; Barba Navaretti, 2021[35]; Iammarino, Rodríguez-Pose and Storper, 2018[36]). The following
sections discuss each of the five policy priorities in detail and present concrete policy measures and
experiences across OECD countries.

Figure 5.3. A policy roadmap to address regional inequalities

>Supporting regions’
>Supporting services
integration in global
provided at close ENSURE value chains
proximity
>A t t ra c t i n g a n d E Q U I TA B L E >Investing in
ACCESS TO transport
retaining skilled
infrastructure
public service QUALITY PUBLIC >Diversifying
professionals SERVICES AND regional economies
INFRASTRUCTURE and unlocking
innovation
BOOST >Supporting small
PRODUCTIVITY and medium-sized
towns
AND
COMPETITIVENESS

STRENGTHEN
C A PA C I T Y AT
T H E N AT I O N A L
AND >Providing flexible
training, education and
S U B N AT I O N A L employment services
LEVELS IMPROVE THE >Gathering quality
information on regional
QUALITY OF skill needs
M U LT I - L E V E L >Investing in skills
GOVERNANCE development and
SYSTEMS retraining
PROVIDE THE >Building regional
RIGHT SKILLS entrepreneurial
AND QUALITY JOB ecosystems
>Building up the social
>Investing in subnational fiscal
OPPORTUNITIES economy
capacity IN REGIONAL
>Building strategic and LABOUR MARKETS
administrative capacity

>Clarifying the responsibilities

assigned to regional and local
governments
>Designing and delivering policies and
services at the “right” scale

Ensuring equitable access to quality public services and infrastructure in all regions

Why it matters

Improving access to quality public services can offer high social returns to investment including not only
through better education and healthcare outcomes but also improved lifelong and intergenerational income
and well-being outcomes. Indeed, bridging access gaps can generate higher tax revenues and decreased
spending on social support services and more complex and costly health services. As the COVID-19

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pandemic demonstrated, investing in reducing inequalities in service provision can also improve the
resilience of systems to respond to unexpected shocks (OECD, 2022[15]).

Policy measures

Supporting services provided at close proximity and through flexible and/or digital models

The provision of basic services such as primary care remains essential in keeping the need for more
specialised services at bay. OECD countries have striven to bridge access gaps in places lacking other
options, including through innovative and digital solutions, such as expanding telemedicine and developing
digitally based sharing mobility services. These strategies however often need to be accompanied by
substantial transversal investments to tackle rural-urban gaps in (digital) skills and connectivity (OECD,
2022[15]).
The costs of service delivery not only depend on density or absolute or relative distances but also a wide
range of other factors including economies of scale and scope. Policy efforts have focused on pursuing
integrated and flexible approaches to the provision of services, notably by offering different types of related
services in a single location, in order to broaden access, reduce costs and improve outcomes, especially
for underserved communities in rural or remote regions.

Country examples

• In Finland, municipalities have streamlined service delivery to immigrants in communities with

a high share of foreign-born population in multi-service centres. In these centres, public
employment services collaborate with municipal services to help foreign-born jobseekers find
employment or help them enrol in education (OECD, 2020[37]).
• In France, a network of over 1 000 Public Service Houses (Maisons de service au public)
delivers public services in low-density or isolated territories through one-stop-shops, thus
lowering fixed costs and staff needs for the different services. They offer a range of services,
from postal services, public transport ticketing and energy utilities, to unemployment insurance
and welfare services. Furthermore, the Ministry of Social Affairs and Health launched the Health
Territory Pact (Pacte territoire santé) to promote the recruitment and retention of doctors in
underserved areas. This pact includes a mix of measures including financial incentives, the
creation of new multidisciplinary medical homes allowing physicians and other health
professionals to work in the same location and the promotion of telemedicine (OECD, 2021[14]).
• In Japan, the Small Stations initiative creates basic service hubs to help sustain rural
communities around small, multi-functional cores. Their offer includes administrative services,
healthcare and shopping opportunities; transport networks are arranged to facilitate access to
the population of the surrounding rural areas (OECD, 2016[38]).

Attracting and retaining skilled public service professionals

This is especially important at a time of high labour demand and staff shortages, especially in the care
sector. Policy measures to address this challenge typically focus first on improving the attractiveness and
working conditions in these professions, including working hours, pay, job security and access to training.
Specific support for workers interested in moving into the care sector can also be part of the solution, for
example in the form of career guidance and training. Additional incentives – financial or otherwise – can
then help encourage professionals to take up work in underserved locations (OECD, 2016[39]). This can
take the form of special scholarships to obtain certain qualifications and could be combined with return-of-

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service obligations, one-off payments for those moving to underserved areas and to support their
installation, or recurrent bonuses (OECD, forthcoming[40]).

Country examples

• In Australia, the Workforce Incentive Program, implemented in early 2020, provides targeted
financial incentives to doctors and general practitioners to encourage service delivery in rural
and remote areas. Financial incentives are linked to both the level of remoteness and the years
of service provided. In the most remote areas, doctors are eligible for an annual payment of up
to AUD 60 000, about EUR 40 000. But relocation packages can go beyond direct financial
incentives and include rewards through better career prospects and skill development (OECD,
2021[14]).
• To encourage and support workers interested in moving into the care sector and make up for
staff shortages in these professions in some regions, regional agencies in the Netherlands run
campaigns to improve the public image of long-term care, providing students with short lectures
and training sessions on regional labour market needs (Georgieva, Downes and Bachtler,
2021[41]).

Boosting productivity and competitiveness

Why it matters

Stagnating productivity growth and its consequences for well-being contribute to social and political
polarisation (see discussion earlier in the chapter). Inversely, more productive regions tend to offer better
jobs that translate into better wages and incomes for households, and more balanced development within
countries. These places are also more likely to generate the tax revenues necessary to finance public
services and infrastructure, such as health, education, transport and social support (OECD, 2020[42];
Tsvetkova et al., 2020[43]).

Policy measures

Supporting regions’ integration in global value chains (GVCs)

As discussed in Chapter 3, operating in global markets exposes regions to practices of the global
productivity frontier and makes them less constrained by country-specific limitations (e.g. technological,
financial and related to market size) or equilibria (e.g. when frontier regions already dominate the local
markets) (OECD, forthcoming[40]). An advantage of healthy tradeable sectors – especially tradeable
services and manufacturing – is that they can enhance productivity in all types of regions –
i.e. predominantly urban or rural – although tradeable subsectors and mechanisms in place might vary
depending on the type of area (OECD, 2016[12]).
The impact of the war in Ukraine on GVCs has created a renewed focus on reshoring and nearshoring
critical industries in regions. This is part and parcel of a broader trend of the macro-regionalisation of supply
chains since the global financial crisis, which has been further accelerated by the COVID-19 crisis, albeit
recognising that diversified supply chains can also be a source of resilience (see discussion on sectoral
specialisation and diversification in Chapter 3). Regions must navigate and make the most of this new
global environment and the OECD Programme on Regions in Globalisation provides an analytical
framework to help examine and understand subnational drivers of attractiveness to key international target
groups (Box 5.1).

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Box 5.1. Rethinking regional attractiveness in the new global environment

Recent crises have prompted regions in OECD countries to rethink their participation in globalisation,
as well as their relative attractiveness to investors, talent and visitors. As a result, regions need to better
understand the structural challenges emerging or reinforced by these crises (i.e. COVID-19 pandemic,
Russia’s war of aggression against Ukraine) and existing megatrends (e.g. digitalisation and
demographic change) and how their international profiles may have changed, while maintaining a focus
on providing benefits to local residents and businesses and preserving environmental resources.
To help regions better understand their position in the new global environment and rethink their
attractiveness strategies, the OECD has designed an innovative and multidimensional methodological
framework that first considers and maps a region’s international connections across four families of
connections: business (e.g. foreign direct investment [FDI] projects, trade, employment in foreign-
controlled businesses, etc.), human (employment, migration and visitors), knowledge (international
students, research and development [R&D], patents) and infrastructure (broadband, ports, airports,
stations). However, simply understanding a region’s position in the world is not sufficient – other tools
need to be identified to help strengthen that position.
Identifying available policy levers to enhance international connections and more effectively attract
specific target groups (e.g. investors, talent and visitors), for example, requires a closer examination
and understanding of subnational drivers of regional attractiveness. To do this, the OECD regional
attractiveness framework considers global engagement beyond international connections and
economic factors alone. In total, the methodology considers a dashboard of over 50 indicators to
develop regional attractiveness profiles, covering 14 dimensions of attractiveness, across 6 domains,
at the level of large regions:
• Economic attractiveness (e.g. innovation, entrepreneurship and labour market).
• Connectedness (e.g. transportation, logistics and digitalisation).
• Resident well-being (e.g. health, education and social cohesion).
• Natural environment (e.g. environment and natural capital).
• Visitor appeal (e.g. tourism and cultural capital).
• Land use and housing (e.g. usage and affordability).
The OECD approach provides regions with a graphical representation in the form of an “attractiveness
compass” that highlights the strengths and weaknesses of regions across the six domains. It enables
regions to compare their attractiveness relative to regional performance in their country, the
European Union and the OECD. As a diagnostic tool, regional profiles can highlight to policy makers
those areas where attractiveness can be strengthened. Furthermore, they can provide useful evidence
to inform decisions concerning the various levers at their disposal to enhance regional attractiveness
to key target groups, within the context of a region’s development priorities, trends and ambitions.
Source: OECD (2023[44]), “Rethinking regional attractiveness in the new global environment”, OECD, Paris.

Investing in transport infrastructure

Transport infrastructure can contribute to leveraging agglomeration economies of metropolitan regions and
expand the benefits of well-functioning cities to other lower-density regions, including in terms of
knowledge and innovation diffusion and links to financial institutions, which are crucial to entrepreneurship,
firm growth and public infrastructure investment. To help create new economic activity in lagging regions,

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transport infrastructure investments call for complementary policies supporting the (re)activation of
unutilised resources, such as coupling FDI attraction policies with investment in major international
transport hubs (OECD, 2020[45]).
Developing transport infrastructure that maximises the accessibility of opportunities for people and firms
requires accounting for functional relationships across space that often go beyond administrative
boundaries. A functional approach to transport infrastructure accounts for the diversity of scales and can
thus help fit transport infrastructure to the needs of people and workers living in a place (Dijkstra, Poelman
and Veneri, 2019[46]). This approach has important governance implications and requires incentives to
work (see the following section on multi-level governance).
A functional approach is especially important to leverage rural-urban interlinkages through inter-regional
transport infrastructure, inter-municipal co-operation, urban-rural partnerships, etc. Accessibility to
metropolitan areas (through distances or driving times) is a powerful determinant of the “agglomeration
economies” that rural areas can borrow from urban areas (Fadic et al., 2019[47]) and thus of the productivity
growth potential that governments can leverage through better transport infrastructure. The functional
approach is also behind the OECD definition of functional urban areas (FUAs) for instance, which delineate
metropolitan areas’ boundaries through labour market interactions between cities and their surroundings
(OECD, forthcoming[40]).

Country example

• In Germany, the Branderburg Land implemented the Connecting Strengths strategy based on
the promotion of core regional growth areas and clusters. The strategy capitalises on regional
“strengths” including new forms of work and technologies, renewable energy, mobility, organic
farming and tourism while leveraging on vertical and horizontal co-ordination between actors
across themes, sectors and ministries. In the future, the strategy will evolve with an approach
based on growth corridors to strategically connect people, businesses, governments and R&D
along existing railway lines to better connect metropolitan and rural areas (Land Branderburg
State Chancellery, 2021[48]).

Diversifying regional economies beyond their traditional strengths and unlocking

innovation

Economic diversification is important to boost productivity and competitiveness, especially in lagging

regions where innovation creation and uptake often lag behind metropolitan regions, weighing down on
aggregate productivity, income levels and overall well-being (OECD, 2022[49]). Focusing on labour-
augmenting innovation that improves job opportunities and wages can contribute to dynamically stimulating
lagging regions and bend the trend of high-paying jobs concentrating in certain, often metropolitan, regions
(Storper, 2023[50]).
A broad approach to innovation consists in promoting technology and non-technology-driven innovation,
building innovation competencies of SMEs, better connecting regional innovation actors and stronger
engagement with regional innovation cluster organisations, creating a stronger regional innovation
ecosystem and linking innovation with broader regional development goals. It also means supporting
innovative entrepreneurship to generate economic and industrial diversification and, through this, diversify
innovation potential (OECD, 2021[51]). The OECD has developed a self-assessment toolkit for regions that
allows national and regional policy makers to implement up-to-date assessments of bottlenecks for
innovation diffusion in different regions. The toolkit provides a regional innovation profile (relative to other

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OECD and EU-27 regions), quantifies the strength of different innovation diffusion channels in the region
and allows policy makers to engage local stakeholders to gather their views on actions for improvement.

Country example

• In Italy, Piedmont’s regional innovation policy aims to strengthen regional innovation capacities
in order to boost regional competitiveness and foster innovative and dynamic enterprises. Since
its inception, the policy has supported collaborative R&D, including through innovation clusters
and the promotion of partnerships in important areas such as the smart factory, Industry 4.0, life
sciences and the bioeconomy. Yet, Piedmont’s strong concentration in manufacturing and
sophisticated and specific innovation activities in local core industries are at risk of decline due
to ongoing industrial transitions. Moreover, where innovation does occur, it tends to be created
by larger firms, with only limited innovation by SMEs that dominate Piedmont’s industrial system.
In recognition of these challenges, the Piedmont Regional Government is taking a fresh look at
its innovation policy design, implementation, monitoring and evaluation to prepare its smart
specialisation strategy and revisit the current innovation cluster model that supports innovation
in the region (OECD, 2021[51]).

Supporting small and medium-sized towns

Smaller urban areas are increasingly being seen as potential motors of regional development and catching
up, although they are extremely heterogeneous in terms of development trajectories and underlying driving
factors. They hold great potential to enable more polycentric development and greater territorial cohesion
through a more balanced diffusion of activities and opportunities across space while helping boost broader
territorial development by providing services and amenities to surrounding territories.
In this respect, intermediary cities can offer an attractive alternative to large metropolitan areas, especially
to people looking for more affordable housing and better environmental quality and, in turn, boost
well-being and reduce many of the negative externalities often presented by larger metropolitan areas,
including urban sprawl and pollution, whilst also helping to preserve natural resources and landscapes.
In some OECD countries, urban strategies and programmes are no longer limited to addressing urban
challenges characteristic of large metropolitan areas but also encompass specific visions and measures
for smaller and medium-sized towns with the aim of increasing their innovation capacity and transition
potential and preventing them from losing their socio-economic function.

Country examples

• In Belgium (Flanders), a document outlining a new urban vision outlines a common agenda for
34 regional cities. Within this approach, the government earmarks 10% of the 2021-27 Flemish
European Regional Development Fund (ERDF) budget to 11 smaller, regional cities
(Centrumsteden). Thematic interests are aligned with Flanders’ long-term policy framework,
Vision for 2050, whereas multi-level governance and horizontal co-operation are the strategic
objectives in order to bridge the gap between these cities and surrounding territory (Georgieva,
Downes and Bachtler, 2021[41]).

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• In France, the Small Towns of Tomorrow programme (Petites villes de demain) was launched
in 2020 and will mobilise EUR 6 million over 2020-26 with the objective to revitalise over
1 600 small towns and municipalities, especially in declining regions. The programme aims to
strengthen the capacity of elected officials and intercommunal bodies in these places to
implement projects that leverage opportunities arising from the green transition and make these
places more resilient (Agence de la Cohésion des Territoires, 2023 [52]).
• In Norway, the recent white paper Vibrant Communities for the Future focuses on districts and
the challenges they face (e.g. skills and labour shortages, high age dependency ratios, quality
of public services, challenges to business development). The white paper provided for two
commissions to report on aspects of district policy – one on the role of businesses and the other
on demographic challenges. In addition, a “youth panel” was set up to provide insights into what
makes, or would make, district life attractive to younger people. Under the white paper, a study
was commissioned by the Ministry of Local Government and Regional Development (KDD) to
explore the role of small towns in regional development. The study highlights the diversity of
Norwegian small towns and settlements outside major agglomerations and notes that, unlike
major urban centres, they have not been a focus of policy in spite of their potential for stimulating
regional development. A new strategy has focused on tapping the potential of small towns and
reinforcing their role as “specialised” centres for service provision and makes concrete
proposals to develop partnerships, digital technologies, greater collaboration and potential co-
location of government (Ministry of Local Government and Regional Development, 2020 [53]).

Providing the right skills and quality job opportunities in regional labour markets

Why it matters

Geographic inequalities in the number and quality of jobs available are large. Many policy responses to
regional inequalities have given priority to distributing job opportunities more equally across regions,
addressing regional skill imbalances, improving regional labour market outcomes and forecasting skill
needs at the regional level to alleviate risks associated with structural change, such as industrial transitions.

Policy measures

Providing flexible training, education and employment services

In the context of the knowledge economy and as skills become more important to innovation and growth,
the availability of a skilled workforce is increasingly important to firms’ decisions to locate, remain and/or
expand in a locality or region. In regions where quality job opportunities are rare, workers and young people
have lower incentives to invest in their human capital and to increase labour market participation (OECD,
2020[54]). Meanwhile, businesses that lack qualified staff are unlikely to innovate and create good-quality
employment. Wages and productivity are low and higher-skilled workers and innovative employers have
the incentive to move to economically more dynamic areas leaving behind a low-skilled workforce and high
unemployment (OECD, forthcoming[40]).
Flexible training, education and employment services are required to proactively respond to skills gaps
that may act as barriers and obstacles to business growth and expansion. Providing workers with training
in place-sensitive skills, which are relevant in the local context, can be one solution. For example, while
the demand for basic digital skills will likely grow in all places, demand for more specialised skills may be
more regionally concentrated. However, in addition to training workers, employers need to create the
corresponding job opportunities to make sure that qualified workers can be retained and that their skills

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are put to good use. It is also essential to increase the visibility of learning and training offers and raising
awareness among firms and potential learners to facilitate their participation.
In some cases, longer-term skills strategies are devised, such as for growing industrial sectors, which can
increase the relevance of the training offered. However, regions and localities need to be careful to avoid
overspecialisation and “lock in” to a limited rage of sectors. To ensure lifelong learning becomes a reality,
local education and training systems also need to better adjust to the needs of workers, for example by
offering flexible learning modules and after-hour classes (OECD, 2014[55]).

Country examples

• In Latvia, Public Employment Services offers support with taking up job offers, including
subsidised employment or attending training at distant locations. Jobseekers who receive a job
or training offer more than 15 kilometres away are eligible for temporary support of up to
EUR 150 per month to cover transport or accommodation costs. Between 2013 and 2017, more
than 9 000 workers benefitted from this support, a third of them under the youth guarantee.
Evaluations show good results: receiving mobility support had positive employment and
earnings effects including training participation. In practice, workers’ ability to take up a distant
job offer will of course also depend on factors such as their family situation or on whether they
own a private vehicle or depend on public transport (OECD, 2019[56]).
• In Sweden, employers can report their skill needs and work with education providers and public
authorities to adapt vocational education programmes on regional skills platforms. Regional
governments usually chair the platforms but all actors contribute to coming up with tools and
activities needed to improve local dialogue, co-ordination and knowledge accumulation.
Furthermore, the Swedish Job Security Councils provide workers at risk of collective dismissals
a dedicated coach and a range of personalised services, including guidance and advice,
training, financial support and business start-up support. Councils are financed through an
employer levy of 0.3% and are run by social partners based on sectoral or cross-sectoral
collective agreements (OECD, 2019[57]).
• The Rural Innovation Initiative in the United States seeks to assist rural regions interested in
building local workspaces for remote workers, as well as creating digital skills training
programmes to give residents the skills to take on remote jobs or start their own companies.

Gathering good-quality information on regional skill needs

Access to quality information on regional skill needs is the first step to steer investment towards in-demand
skills. Skill forecasting and intelligence at the regional level can be effective particularly if it brings together
local stakeholders such as industry organisations, and education and training providers, with national and
regional authorities. Skill anticipation, however, should also fit into a national framework to prevent
fragmentation.
Investment in the supply of skills alone will not be sufficient to improve job quality and the resilience of
regional economies. The degree to which employers are demanding and using skills also has to be taken
into account. There are considerable variations in the supply and demand for skills at the regional and
local levels (OECD, 2014[55]) and these may very well increase as megatrends accelerate. Some regions
can fall into a vicious circle known as “low skill equilibrium”, i.e. it does not pay for people to invest in skills
when skills are not valued by employers. At the same time, those who do not attain skills move away to
better-quality jobs elsewhere. In such regions, skills policies need to be embedded in a broader drive to

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support economic development. This can include helping existing firms to move towards more skills-
intensive, higher-value product market strategies.
Policy makers also need to pay attention to regions and places which are experiencing persistent problems
of unemployment, in particular youth unemployment and labour market exclusion. Immediate barriers to
work can include a lack of affordable childcare, poor transport links and complex welfare arrangements
that make reconciling work and benefits difficult (OECD, 2014[55]). In the longer term, living in areas which
are isolated from the labour market and ill health can become more persistent barriers to employment. As
the employment barriers experienced by individuals become more complex, a joint approach is often
needed to tackle them, involving employment service providers, vocational education and training
institutions, economic development agencies and social welfare organisations.

Investing in skills development and retraining

Skills development and retraining are vital to ensuring that workers have the right skills to prosper in a
changing world of work and are a prerequisite for making the green transition a “just transition”. New skills
will be needed throughout the economy, whether it is retraining construction workers on environmentally
friendly materials and techniques, or reskilling workers in automotive for electric vehicle production. The
jobs and skills needed will differ geographically: some regional and local labour markets will have people
with skills that can be easily redeployed and others not (OECD, 2023[30]).
In the context of rapidly transforming labour markets, workers with skills that are becoming outdated or
obsolete require early support. Demographic trends, coupled with industrial transitions, including through
digitalisation and automation, will likely bring about major changes in the skills supply and demand in local
labour markets. In the past, some regions that underwent such heavy structural change experienced high
numbers of layoffs with long-lasting negative consequences (OECD, 2018[58]). Helping workers affected
by structural transformation avoid unemployment is better for their employment prospects, earnings
trajectories and human capital development, and it is less costly for the public budget than providing
support after dismissal (OECD, 2013[59]). Still, across the OECD, at-risk workers are less likely to
participate in training or use guidance services than other workers (OECD, 2021[60]). One effective solution
for identifying workers with potentially outdated skills can be to target specific groups of workers, for
example at firms or in sectors facing declining demand or high risk of automation.
The extent to which employees and regional economies are capable of diversifying depends, to a large
extent, on the success of reskilling and re-education programmes. In the context of the green transition,
local, bottom-up organised training to leave high carbon emitting (“brown”) industries is necessary to help
the most affected workers transit into new career opportunities, make the human capital needed for the
green transition available and include more disadvantaged groups in new emerging sectors. Furthermore,
the transition to a low-carbon and resource-efficient economy as well as the effects brought by other
megatrends require a workforce capable of acquiring skills throughout their lives. Effective and inclusive
adult learning systems can help workers remain employable and productive throughout their life cycle,
despite changing skills needs. If such systems are in place, the green transition can be delivered effectively
and benefit most workers. Otherwise, skills shortages may hinder its implementation and inequality will
likely increase. In turn, effective adult learning systems can become a comparative advantage that regions
can leverage to attract investment from green businesses (OECD, 2023[30]).

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Country example

• Labour foundations (Arbeitsstiftung) in Austria are a mechanism used mainly to address mass
layoffs (outplacement foundation) and skills shortages (inplacement foundation) in a region. The
mechanism involves a wide variety of counselling and skills development opportunities. An
important component of labour foundations is collaboration between the company, regional
labour market actors and territorial authorities. In response to the impact of the green transition
on the labour market, an environmental inplacement foundation was started by the Austrian
Trade Union Federation, the Austrian Federal Economic Chamber and the Public
Employment Service. The foundation has a budget of EUR 10 000 000 and aims to support
1 000 unemployed individuals with no vocational training to acquire the qualifications required
in the environmental sector (Aufleb Environmental Foundation, 2023[61]).

Making the most of the social economy

Jobs are not just created in the private sector. The social economy and social entrepreneurship can also
play an important role in generating employment. In some regions, percentage growth in employment in
the social economy has usually outpaced that of the private sectors in recent years (OECD, 2013[62]). The
social economy also brings the added benefit of being embedded in communities and offering jobs to the
most excluded in the labour market, either by providing training and work experience opportunities or by
offering direct employment.

Country examples

• In Belgium, social economy organisations have been pioneers in developing the textile
recycling sector since the 1960s, combining the development of the green credentials of this
sector by selling the best pieces and utilising the worst pieces for other purposes such as
insulation, while also running a work integration programme that creates and maintains
employment for vulnerable groups. These organisations work together as a federation to
streamline textile collection and exchange best practices. The success of these actors in
developing this sector is demonstrated by new economic actors entering this field, including
private for-profit actors, strengthening the sector and intensifying competition (OECD, 2020[63]).
• SINGA is a social enterprise established in 2012 that facilitates refugee integration by identifying
job opportunities and social activities. Today, SINGA counts over 50 000 members and 90 full-
time employees across Belgium, Canada, France, Germany, Luxembourg, Spain and
Switzerland. At the core of SINGA’s mission is providing business incubation services to
refugees and migrants as well as individuals seeking to launch migration-related initiatives.
SINGA operates nine incubators and one accelerator in France, Germany, Italy and
Switzerland, each of which can support up to ten companies each year. Building on the success
of its incubator programme, SINGA expanded its services to support entrepreneurs from the
pre-incubation to the acceleration phase. To date, SINGA has helped to launch 337 companies,
62% of which created new jobs within 6 months of their creation. Businesses launched through
SINGA’s incubator programme currently operate in various sectors including the hospitality,
education, healthcare and technology sectors (OECD, 2022[64]).
• In Italy, the social enterprise Quid employs 140 staff members from diverse backgrounds, most
of whom with a history of social exclusion and marginalisation. Founded in 2013 in Verona, Italy,

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Quid recovers and transforms high-quality fabrics into fashion items for ethical fashion brands.
Over 80% of staff are women and close to 80% of managers are women. Their training activities
include tailoring workshops in nearby Montorio prison. During the COVID-19 crisis, Quid quickly
shifted production to contribute essential services by making face masks certified by the Italian
health service (OECD, 2022[64]).

Building regional entrepreneurial ecosystems

Net job creation is typically led by a small number of young firms. While much industry now operates
globally, new firms are strongly dependent on the local economic contexts in which they emerge, with most
high-growth firms developing in regions with high population density and high levels of tertiary education.
Despite their positive contribution to the local economy, high-growth firms are faced with barriers to
development, including a lack of access to investment. Governments can help by putting in place strategies
to build regional entrepreneurial ecosystems, where new firms can learn through knowledge-sharing
networks and through inputs from more experienced managers.
In some OECD countries, business accelerators have been developed to provide a variety of support.
OECD countries have also supported entrepreneurs build the skills required for their success. Common
approaches are to embed entrepreneurship training into the curriculum in schools, vocational training and
university-level courses and to develop stand-alone training for entrepreneurs and “would-be”
entrepreneurs (OECD, 2023[65]). Other approaches are to support coaching and mentoring relationships
and to develop peer learning programmes (OECD, 2014[55]).

Country example

• In Sweden, the Academy for Smart Specialisation is hosted by Karlstad University (KAU) and
co-managed by the latter and the region of Värmland. It has contributed to innovating such a
strategy, by identifying comparative advantages in new sectors and emerging skills needs and
by connecting these with teaching and research activities carried out at the KAU. The academy
has been playing a transformative role in the region of Värmland’s smart specialisation strategy
since its creation in 2015. It is the result of a longstanding partnership between the regional
government of Värmland and the University of Karlstad, with a dual objective: to generate
academic research and skills in areas relevant to regional competitiveness and to generate
advanced services that enhance the region’s capacity to identify emerging industries and key
local assets. Smart specialisation has been transformational in Värmland. It has contributed to
promoting new specialisations and skills in a variety of sectors and has helped the region
capitalise on its existing strengths and generate new knowledge networks. The academy has
supported this agenda by promoting and funding a range of innovative and entrepreneurial
activities with a strong connection to local businesses, notably in value-creating services, forest-
based bioeconomy, digitalisation of welfare services, advanced manufacturing and complex
systems, nature, culture and place-based digitalised experiences, and systems solutions with
photovoltaics (OECD, 2020[66]).

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Improving the quality of multi-level governance systems

Why it matters

Designing and implementing policies to address regional inequalities is a responsibility shared by national
and subnational levels of government and involves diverse policy sectors. A key issue for policy makers to
consider is how to manage this mutual dependence through effective multi-level governance
arrangements. It requires clarifying how responsibilities are assigned across levels of government,
ensuring efficient co-ordination across levels of government, sectors and jurisdictions as well as
strengthening administrative and fiscal capacities, especially at the subnational level (see following
section) (OECD, 2014[67]; 2019[68]).

Policy measures

Clarifying the responsibilities assigned to subnational governments

How effective policies are at reducing regional inequalities depends, in part, on how national and
subnational governments manage the functions they share. In practice, the question is not of a clear-cut
allocation of responsibilities but rather of how to manage these shared responsibilities. The challenge
comes from the fact that functional responsibilities – i.e. financing, regulating, monitoring – within each
policy area are often not clearly defined or inconsistent (OECD, 2019[68]). The lack of clarity in the
assignment of responsibilities is an important obstacle in ensuring overall institutional efficiency and local
political accountability, which in turn is also linked to lower levels of trust in government (OECD,
forthcoming[17]).
Over the past decades, an overall trend in the OECD has been in favour of decentralisation as a way to
manage mutual dependence between national and subnational levels of government to achieve common
objectives. Today, 40.4% of public expenditure in OECD countries is undertaken at a subnational level
(OECD, 2019[68]). The forms and extent of decentralisation vary greatly from one country to another – and
even within the same country. There are also varying degrees of upward and downward accountability and
central government control. The trend has also been towards more differentiated (or asymmetric)
governance systems at the subnational level in certain countries, with different responsibilities assigned to
regional and local governments – at the same level of government, depending on their capacity, population
(urban or metropolitan areas), and certain characteristics like geographic characteristics (e.g. islands)
(OECD, 2019[68]).

Country examples

• A new Act of Decentralisation was introduced in France in Spring 2021 (Le projet de loi 4D).
The act has four objectives: i) decentralisation, with a review of competencies between the
national and subnational levels; ii) differentiation, to allow flexibility in the way subnational
authorities organise themselves and implement public policies; iii) de-concentration, to enhance
decision-making and policy competencies of local state services (prefects); and
iv) de-complexification or simplifying local public action. Furthermore, the various forms of
contractual arrangements are being revised, with different contracts being combined to
streamline and achieve better coherence between the various actions of the government. In this
context, the new generation of State-Region Planning Contracts (2021-27) (contrats de plan
État-région, CPER) began preparation in 2020 and the new CPER arrangement reflects a
renewed framework for dialogue between the state and regions.

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• Within the wider objective of increasing local democracy, an ongoing process of decentralisation
in Portugal underpins the transfer of new additional state administration competencies to local
authorities and inter-municipal entities in a wide range of domains. This reform is expected to
enhance the efficiency and effectiveness of public service delivery and increase local
government participation in public revenue. Resources under the Decentralisation Financing
Fund, created by the revised Local Finance Law, have been included in state budgets to help
finance, on a transitional basis, the new competencies. By July 2021, 18 sectoral decrees
stipulating the transfer of competencies in different areas have been adopted. It is foreseen that
all local authorities and inter-municipal entities will eventually assume the new competencies
(the process not being optional), although at a varying speed, depending on the complexity of
the competencies to be transferred and the existing municipal capacity, among others.

Designing and delivering policies and services at the “right” scale

Scale matters and it is functional areas rather than administrative boundaries that are important to the
implementation of many policies for addressing regional inequalities. The OECD has empirically
documented the productivity penalty that results from administrative fragmentation in metropolitan areas
and has shown that strengthening urban-rural linkages can generate economic, social and environmental
dividends for both urban and rural residents alike and contribute to bridging urban-rural divides (OECD,
2015[69]).
Across the OECD, inter-municipal, inter-regional and cross-border co-operation, metropolitan governance
arrangements and “regionalisation”, i.e. the strengthening of regions (OECD, 2022[70]; 2019[68]) have been
leveraged for physical infrastructure provision where the efficient scale often exceeds the boundaries of
individual regions or localities, and for investments in human capital development and innovation where
administrative and functional boundaries may not coincide. Co-operation among subnational governments
is important also for subnational public service delivery, especially in the case of small or lagging regions
with limited resources. However, co-operation rarely occurs spontaneously, hence the need for national
governments to provide the right incentives for this co-operation to happen.

Country examples

• In Austria, a project implemented by the Department for Coordination, Regional Policy and
Spatial Planning in 2019-20 aimed to identify ways in which regions, understood as the territorial
level between municipality and Land, can be empowered to contribute to sustainable spatial
development. The project recognised that the challenges facing society are complex and
interrelated and that defined areas of administrative competency no longer always match the
spatial and functional areas in which these interactions take place and need to be managed. It
recognised that the “region” has become an important spatial level in Austria’s multi-level
system. The main reason for this is the effectiveness with which topics such as mobility, services
of general interest and digitisation, but also integration, employment and equal opportunities
can be dealt with at that spatial level. This is because the “region” has the appropriate framework
conditions in terms of functionality, context, resources, spatial proximity and living environment.
The results were published in October 2020 and fed into the programming process of the
2021-27 programme period of EU Cohesion Policy and Rural Development Policy.
• To address the fragmentation of inter-municipal and supra-local forms of collaboration, in
March 2021, the Flemish government (Belgium) approved the development of an intermediate
sub-regional level. Seventeen sub-regions, officially referred to as “reference regions”, have

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been created, with each Flemish province divided into 2-5 sub-regions. These will co-ordinate
different sectoral policies and new and existing collaborations will have to adhere to their
boundaries by 2024. The aim of the reference regions is to present an innovative consensus
model rather than create a new administrative layer. Within their boundaries, the formation of
new inter-municipal links is stimulated through a small subsidy provided by the Flemish regional
government.
• A new tier of organisation was introduced in Denmark in March 2021, when the government
announced the creation of seven Regional Growth Teams (Regionale Vækstteams), covering
part of or the entirety of the five Danish regions. The teams combine private sector partners,
local authorities, trade unions and higher education institutions, and are tasked with developing
strategies to address specific challenges, individually set by the government after consultation
with the local business development centres.
• A 2020 amended law in Lithuania reinforces the territorial concept of the functional area for the
implementation of regional policy. This was preceded by a 2017 white paper that includes the
concept of the functional area, or functional region, as a system of economic development,
worker migration and urban-rural partnerships using common infrastructure, transport and
service networks that go beyond administrative boundaries. Regional policy makers are now
required to consider functional areas, as opposed simply to municipal administrative
boundaries, when formulating regional development or multi-regional development plans.

Strengthening capacity at the national and subnational government levels

Why it matters

Poor government effectiveness at the subnational level severely limits the prospects of regions (OECD,
2019[68]). The capacity of subnational governments to design and implement policies and public
investments effectively and to fund and deliver the public goods and services for which they are
responsible, is crucial for them to be meaningful partners. Unfortunately, there is wide heterogeneity in the
level of capabilities of subnational governments in OECD countries and, often, subnational capacities
suffer from significant limitations, be they in investment financing, policy design and implementation, or
governance more broadly (OECD, 2019[71]).
Although measuring government quality is notoriously difficult, it has become increasingly clear that many
regions that are either lagging or declining have much weaker institutional systems than more developed
ones (Charron and Lapuente, 2013[72]). Some research has demonstrated that weak institutions, in general,
and poor-quality government in particular constitute a crucial obstacle to development (Rodríguez-Pose,
2013[73]). Poor institutions affect essential growth-promoting factors, such as the returns on European
Cohesion Policy (Rodríguez-Pose and Garcilazo, 2015[74]) and competitiveness (Annoni, 2017[75]). Poor-
quality institutions can also curtail the prospects of economic development progress because regions
cannot seize economic opportunities as they arise.

Policy measures

Investing in subnational fiscal capacity

Sustained investment in fiscal capacity at the subnational level is essential to strengthen incentives for
local policy makers to support a proactive approach to development while being accountable for the results
achieved. Fiscal autonomy and reliance on own source revenues appear to help the catching-up regions
more than those above the national average (Blöchliger, Bartolini and Stossberg, 2016[76]). This requires
limiting unfunded and/or under-funded mandates to ensure subnational governments have the requisite

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resources to invest, provide services or manage policies, and ensure they are properly staffed (Rodríguez-
Pose and Vidal-Bover, 2022[77]).
Most OECD countries have developed fiscal equalisation systems to mitigate regional differences in fiscal
capacity and expenditure needs, each of them with different specificities. With the overarching goal of
achieving fiscal equity among jurisdictions, fiscal equalisation aims to offset differences in revenue-raising
capacity and/or public service costs with the purpose of allowing subnational governments to provide
similar public services with a similar overall tax burden. However, evidence indicates that, while fiscal
equalisation can effectively create a level-playing field in the fiscal arena across subnational jurisdictions,
it is not typically designed to reduce regional income inequality, whether GDP per capita or adjusted
household income per capita. However, there is considerable scope to leverage complementarities
between fiscal equalisation policies and regional development policies to achieve better fiscal and
economic outcomes (OECD, 2022[78]).

Country examples

• Established in 2021, Colombia’s Decentralisation Mission works to evaluate the current

decentralisation model and propose constitutional and legislative initiatives to improve how
responsibilities are shared across levels of government. Over 2022, the Decentralisation
Mission met with stakeholders in 15 municipalities, from public administration, academia and
Indigenous communities to trade unions and the private sector, to gather contributions and
proposals across several priority topics, including: i) strengthening competencies across
government levels; ii) improving sources and uses of revenues for local development; and
iii) modernising the public administration (DNP, 2023[79]).
• In Costa Rica, the recently approved Regional Development Law No. 10.096 puts forward a
new development management approach emphasising the role of subnational units and
planning regions. The law reinforces the Regional Planning Subsystem and provides new tools
to strengthen the capacity of regions to play an active role in regional development, including
the creation of a Regional Development Fund, regional budgets and Regional Development
Agencies. The law also includes provisions to improve development planning and budgeting at
the regional level (Costa Rican System for Legal Information, 2023[80]).

Building strategic and administrative capacity

Building more qualitative strategic and administrative capacity is a fundamental dimension to improving
subnational government quality. This refers to skills and competencies in strategic planning, policy and
programme management, budgeting and finance, project appraisal, regulation, infrastructure investment,
procurement, data management, stakeholder engagement, partnership building and monitoring and
evaluation. Well-developed competencies in these areas allow regional and local authorities to design and
deliver public services and carry out administrative procedures effectively. Several OECD countries have
invested in dedicated strategic capacity-building initiatives to boost subnational capabilities.
Strengthening subnational capacities in the broad sense requires commitment from all levels of
government as well as from public sector staff to continually develop skills. It also requires fostering a
learning culture, including providing knowledge exchange opportunities and encouraging continuous
training, experience-sharing, learning-by-doing and innovation. Such efforts should be targeted and
incremental, including with pilots and experiments, so as to avoid burdening subnational authorities,
especially those with limited human and financial resources (JRC, 2022[81]).

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Country examples

• The Ministry of Regional Development of the Czech Republic created a web-based application
to support municipalities in designing their municipal development strategies and/or
programmes. The application users through the content and structure of an example strategy
and offers practical tools (e.g. statistical data, templates and samples of supporting documents
and studies, e-learning courses, handbooks for municipalities, etc.). The complete municipal
development strategies are published on the webpage, so municipalities can learn from one of
their peers. Using the digital platform and promoting peer learning can contribute to building
strategic planning capacity among municipalities (OECD, 2023[82]).
• In Germany, the initiative Small Towns in Germany is a package of programmes and activities
for small-town development, aiming to strengthen their functionality. It targets over 2 100 towns
across Germany, mostly in peripheral areas. As part of this initiative, in 2019, the Federal
Ministry for Housing, Urban Development and Building launched a pilot called Small Town
Academy, which offers a purpose-built platform for networking, exchange of experiences and
advanced training on urban development. The pilot phase between 2019 and 2022 was used to
define suitable content and formats, which led to the final launch of the platform in 2023. The
planned activities include advice from experts who come to the municipality and forge creative
strategies (mobile coaching teams) or tandems among mayors who exchange views on a
common topic in urban development over the long term. Both activities will generate model
projects that test different urban planning and project management methods and will lead to a
collection of learning and exchange modules (JRC, 2022[81]).
• To support the implementation of the National Strategy of Regional Development 2030 (NSRD
2030), the Ministry of Development Funds and Regional Policy of Poland launched a pilot
project to create the Centre for Advisory Support (Centrum Wsparcia Doradczego, CWD). The
centre focuses on strengthening the institutional capacity of local authorities to participate in
strategic development activities, including designing, planning and managing infrastructure
projects in 894 areas of strategic intervention (ASIs). By doing so, the CWD also helps build
capacity and strengthen the territorial approach to investment, i.e. by helping build cross-
jurisdiction partnerships with other ASI communes and with non-public socio-economic partners
such as civil society organisations in order to tackle local development challenges and advance
the competitive advantage of working in partnerships (Malik-Kapler, 2021[83]; JRC, 2022[81]).

Making the most of complementarities across the policy roadmap

Economic development policies, labour market policies, policies to support entrepreneurship and social
entrepreneurship, and education and training policies all have a role to play to reduce regional inequalities.
Integrated approaches can be built across these policy areas to help foster inclusive growth. Yet often this
does not happen and policies are delivered “in silos”.
In some cases, this is because of institutional inertia and the organisational challenges of working together.
However, there can also be trade-offs between meeting national policy objectives and fostering regional
development and resilience. The search for efficiency in the delivery of national policies and programmes
can sometimes lead to a lack of attention to the negative effects that a “one-size-fits-all” approach can
have in certain regions.
Furthermore, interaction effects across regions need to be accounted for. An intervention that addresses
a given challenge in one region – say expanding the affordable housing stock and improving transport
infrastructure in a rapidly growing metropolitan area – may have unintended consequences elsewhere,

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e.g. a further loss of skilled workers in less dynamic non-metropolitan regions nearby. And in some cases,
the investments required to stabilise relative incomes in economically lagging regions may be so large that
they may not represent a good use of the available resources (OECD, forthcoming[40]).
While there is no simple policy prescription to mitigate regional inequalities, the policy roadmap presented
in this chapter proposes five priorities for public action to help boost both balanced development and
inclusion. Importantly, advancing on all five priorities requires implementing complementary measures in
parallel that can reinforce each other and for which sequencing matters. For example, regions will only
manage to develop high-value-added industries if they can offer employers a skilled workforce. But good
job opportunities alone will not be enough to attract and retain skilled workers and their families: access to
good-quality and affordable public services, notably housing, childcare, schooling and healthcare, equally
matter.
Capitalising on the positive linkages presented in Table 5.1 that exist across the five priorities of the policy
roadmap can offer a double dividend in terms of socio-economic progress and individual well-being.
Furthermore, if smartly combined, actions across the five priorities can counteract a race to the bottom
among regions within a country. Rather than having regions trying to undercut each other, for example, at
the expense of tax revenues or environmental and labour standards, a combination of these priorities offers
regions a productive way to compete with each other and better function in a “system” of regions, while
lifting the economic performance of the entire country (OECD, 2019[34]).
Going forward, the OECD Recommendation on Regional Development Policy adopted by the OECD
Council at the Ministerial level on 8 June 2023 will serve as a compass to guide governments’ efforts at
different levels to promote and implement effective place-based regional development policy that improves
the contribution of all regions to national performance and reduces inequalities between places and
between people (OECD, 2023[84]).
The Recommendation is articulated around ten pillars that are well-aligned with and can serve to reinforce
the five priorities of the policy roadmap presented in this chapter, as illustrated in Figure 5.4. As such, the
Recommendation can further support efforts by OECD governments to ward off persistent divides between
regions.

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Figure 5.4. Linkages between the policy roadmap and the Recommendation on Regional
Development Policy
POLICY ROADMAP TO ADDRESS REGIONAL INEQUALITIES RECOMMENDATION ON REGIONAL DEVELOPMENT POLICY

Design and implement an integrated and balanced

regional development strategy tailored to different
places

Ta r g e t t h e a p p r o p r i a t e t e r r i t o r i a l s c a l e ( s ) f o r p o l i c y
action to account for all types of interdependencies
across and within regions, including through win -win
Ensure equitable access to quality public partnerships
services and infrastructure
Engage actively with regional and local communities
and stakeholders throughout the policy-making cycle to
gather and co-produce the knowledge needed to
identify regions’ needs and leverage their specific
assets
Boost productivity and competitiveness Leverage regional development policy to address the
asymmetric impact of global megatrends and shocks
and deliver on a sustainable and just green transition

Promote the availability and quality of internationally

comparable data and indicators at different territorial
scales to inform regional development policy and
Provide the right skills and quality job produce evidence for decision making
opportunities in regional labour markets

Establish sound multi-level arrangements to foster

coherent regional development policy

Strengthen administrative, strategic and technical

capacities for regional development policy design and
implementation at the national and subnational levels
Improve the quality of multi-level
governance systems
Mobilise diversified, balanced and sustainable
financial resources to adequately fund regional
development policy at the national and subnational
levels
P r o m o t e i n t e g r i t y, t r a n s p a r e n c y a n d a c c o u n t a b i l i t y i n
regional development policy to ensure the effective use
Strengthen capacity at the national and of public resources and strengthen trust in national and
subnational levels subnational governments

Foster robust performance management mechanisms

that promote evidence-based regional development
policy

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  145

Table 5.1. Examples of complementarities across the policy roadmap

Ensure equitable access to Provide the right skills and Improve the quality of Strengthen capacity at the
Boost productivity and
quality public services and quality job opportunities in multi-level governance national and subnational
competitiveness
infrastructure regional labour markets systems levels
Ensure equitable access to • Increasing tax autonomy • Providing skilled workers • Reducing inefficiencies and • Improving public service and
quality public services and • Increasing the potential for co-ordination failures infrastructure policy design
infrastructure economies of scale • Improving resource and implementation
allocation across different • Improving administrative
programmes and investment efficiency
• Strengthening social
services
Boost productivity and • Investing in human capital • Providing a skilled labour • Reducing inefficiencies and • Creating conducive policy
competitiveness (education, training, skill force co-ordination failures and institutional
development) • Improving/creating a good • Improving resource environments to attract
• Facilitating the assimilation business environment allocation across different private investment and
of knowledge and innovation • Supporting firm programmes and investment support firm development
• Connecting leading and development with training
lagging regions
• Supporting economic
integration
• Stimulating private sector
activity in less-connected
places
Provide the right skills and • Investing in human capital • Developing clusters and • Reducing inefficiencies and • Protecting workers’ rights
quality job opportunities in (education, training, skill agglomeration economies co-ordination failures
regional labour markets development) • Improving resource
• Facilitating the assimilation allocation across different
of knowledge and innovation programmes and investment
Improve the quality of multi-level • Facilitating the assimilation • Improving public service and
governance systems of knowledge and innovation infrastructure policy design
across levels of government and implementation
• Improving administrative
efficiency
Strengthen capacity at the • Facilitating the assimilation • Reducing inefficiencies and
national and subnational levels of knowledge and innovation co-ordination failures
across levels of government • Helping identify and build
local knowledge

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146 

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OECD Regional Outlook 2023
THE LONGSTANDING GEOGRAPHY OF INEQUALITIES
Over the last two decades, regional inequalities have remained significant, and have grown within many
OECD countries. Impacts of recent shocks, including the COVID‑19 pandemic and Russia’s war of aggression
against Ukraine, and megatrends, threaten to widen these gaps between regions, deepening the longstanding
geography of inequalities. This report, Regional Outlook 2023 – The Longstanding Geography of Inequalities,
provides novel evidence on the evolution of inequalities between OECD regions across several dimensions
(including income and access to services) over the past twenty years. It sheds light on the role of productivity
to address regional inequalities. It also looks at the costs of regional inequalities, which can weaken
the economic, social, and political fabric, and lead to a geography of discontent. Furthermore, the report
explores forward‑looking scenarios for regions as part of ongoing reflections to future‑proof regional
development policy and secure social cohesion. Finally, it provides a policy roadmap to guide governments’
efforts to reduce persistent regional inequalities now and in the future.

PRINT ISBN 978-92-64-81264-2

PDF ISBN 978-92-64-34116-6

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