Public investment in regional economic development

Government funded regional development programs have been criticised for being ineffective.

Growing regional areas so that they can accommodate larger populations is one possible solution to the ‘Big Australia’ debate. Making regional areas attractive places could help ease the burden on our major cities and offer a quality of life that can’t always be found in overcrowded metro centres.

But to be viable alternatives to major cities, regional areas need to offer residents social, health and community services as well as tangible economic opportunities, including access to employment. Regions with strong economies are generally better at offering these kinds of services and opportunities.

Boosting regional economies and helping them to pursue new economic opportunities is a priority for many governments. Governments at all levels commonly use regional economic development spending, sometimes in the form of competitive grants programs, to achieve this aim. These programs inject funding into places and businesses in the hope of catalysing opportunities and turning around poor growth trajectories.

These programs use funds that sit alongside other budget allocations that also contribute to improving regional social and economic infrastructure. They sit outside mainstream infrastructure programs that cover large scale transport, health or community infrastructure – and are a more agile policy tool. They enable governments to inject stimulus into specific places so that they can catalyse particular opportunities.

This is not to say that these programs are without their critics. Commonly censured for favouring projects in particular areas, especially during election cycles, these programs have also been criticised for doing little to measure or even create the ‘sustainable economic growth’ they were designed to stimulate. Their policy aims have been said to be too broad, so that they end up having had little or no economic impact at all.

But sometimes these criticisms go too far. At times, they have used the wrong measures to assess the impact of these programs. At others, they have confused a lack of evaluative evidence with evidence that these programs don’t work at all. Governments heeding calls to abandon these kinds of programs might then risk abandoning a policy tool that could be used, with a little more consideration, to bring real change to people living in our regional areas.

The baby and the bathwater

To better understand whether discretionary spending through these programs is catalysing regional economies, we need to better understand the way in which these program funds are allocated in the first instance. We need to look at what they funding and where the funding being directed. Are the projects they fund likely to stimulate a region’s economy, drive innovation and open new markets?

In 2017, the Regional Australia Institute (RAI) undertook this analysis. We looked at the kinds of projects that these discretionary programs funded. We analysed 866 projects across nine competitive grants-based programs from the Commonwealth and State governments between 2011 and 2016. All of these programs had regional economic development as a primary or lone objective.

We found that overall only about 23 percent of the $4.6 billion was directed to projects that had a direct purpose of stimulating economic or business growth in a region. The remaining funds were dispersed across diverse categories that included sports grounds, community halls, roads, health facilities, disaster or flood mitigation and water infrastructure. We called these programs ‘generalist’ programs. While they are designed as a catalyst for economic growth, they look to achieve this by spending on economic, social and community projects. In reality, we found that the overwhelming majority of funding is allocated to projects unlikely to achieve directly stimulate economic or business growth.

Specialist programs

But we did identify a kind of program design that was an exception to this pattern. We found that ‘specialist’ programs with a single, specific program objective and targeted to a specific area or type of activity allocated 96 percent of their funding to projects whose direct purpose was to stimulate economic or business growth in a region.

This is not to say that the kinds of social or community infrastructure generalist programs tend to fund are unworthy of funding or that they do not indirectly facilitate economic development. Investment in these projects may be sensible; however, economic development programs are the wrong mechanism to use to fund them.

Economic catalytic programs to cure all ills

Switching to specialist programs might help resolve the perceived confusion of objectives highlighted by the Productivity Commission in its recent review of regional development expenditure. It will also better enable the impacts of economic development investment to be measured.

Shifting to specialist programs would also avoid another potential problem wherein the use of generalist programs can mask underspends in other budgets.

Our analysis found that major health and social infrastructure projects were commonly funded out of generalist programs, as were other multi-stages projects. This leaves considered, long-term infrastructure planning (the kind we would need to accompany a Big Australia population policy) in regional areas incredibly difficult. Projects are subject to iterative funding for each stage, where the funding is contingent on the number and quality of competing applications. It also, leaves these projects vulnerable to decisions to close or refocus programs, which occurs regularly, particularly as a result of a change in government.

What can we do?

There are two clear, positive steps forward.

First, we need to understand the long-term impact of these programs as policy levers. Our analysis focused only on the allocation of funds to different types of programs. This is only part of the puzzle, but it did show that we need to adjust our expectations for program impact and that we need to find good ways to measure this. We need to better understand the circumstances in which these programs produce the best results.

We also need to look at the tools in our broader policy suite so that we don’t set these kinds of program as a default. This is a research priority for RAI in 2018. We are looking closely at regions in transition, identifying a variety of policy approaches and looking to understanding their effectiveness. We want to understand and assess these policy levers, rather than abandon them outright.

Second, we need governments to be very clear about their policy aims when they design and implement programs in regions. Our research has shown that these programs can target specific growth opportunities when they are used in a considered and targeted way. Setting clear objectives up front and then selecting the right level to meet these objectives will make programs much less vulnerable to criticism. They will be more likely to deliver for regions too.

Click here to read the full paper

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