Quality of Government and the Returns of Investment: Examining the Impact of Cohesion Expenditure in European Regions

Rodriguez-Pose A. and Garcilazo E. Quality of government and the returns of investment: examining the impact of cohesion expenditure in European regions, Regional Studies. This paper sets out to examine the relationship between the quality of local and regional governments and regional economic performance, linking government quality to the returns of European Union Structural and Cohesion Funds. Using primary data on government quality collected by the Quality of Government Institute, combined with World Bank Global Governance Indicators data, a two-way fixed effect panel regression model is conducted for a total of 169 European regions during the period 1996-2007. The results of the analysis underline the importance of government quality both as a direct determinant of economic growth as well as a moderator of the efficiency of Structural and Cohesion Funds expenditure. The analysis finds that both European Union investments targeting regions and quality of government simultaneously make a difference for regional economic growth, but that above a threshold of cohesion expenditure - calculated at more than Euro120 of cohesion expenditure per capita per year - government quality improvements are a far more important and realistic option for regional development than additional public investment. In many of the regions receiving the bulk of Structural Funds, further improvements in economic growth would require massive amounts of additional investment, unless the quality of government is significantly enhanced.