AbstractCOVID-19 has governments at all levels operating in a context of radical uncertainty. The regional and local impact of the COVID-19 crisis is highly heterogeneous, with significant implications for crisis management and policy responses. This paper takes an in-depth look at the territorial impact of the COVID-19 crisis in its different dimensions: health, economic, social and fiscal. It provides examples of responses by national and subnational governments to help mitigate the territorial effects of the crisis, and offers ten takeaways on managing COVID-19’s territorial impact. Finally, the paper offers a forward looking perspective to discuss the crisis’ implications for multi-level governance as well as points for policy-makers to consider as they build more resilient regions. Show
In 2020 COVID-19 affected almost all countries and more than 50 million people around the world. It has governments operating in a context of radical uncertainty, and faced with difficult trade-offs given the health, economic and social challenges it raises. By spring 2020, more than half of the world’s population had experienced a lockdown with strong containment measures. Beyond the health and human tragedy of the coronavirus, it is now widely recognised that the pandemic triggered the most serious economic crisis since World War II. Many economies will not recover their 2019 output levels until 2022 at the earliest (OECD, 2020[1]). A rebound of the epidemic in autumn 2020 is increasing the uncertainty. The nature of the crisis is unprecedented: beyond the short-term repeated health and economic shocks, the long-term effects on human capital, productivity and behaviour may be long-lasting. The COVID crisis has massively accelerated some pre-existing trends, in particular digitalisation. It has shaken the world, setting in motion waves of change with a wide range of possible trajectories (OECD, 2020[2]). This paper highlights the strong territorial dimension of the COVID-19 crisis. Subnational governments – regions and municipalities – are at the frontline of the crisis management and recovery, and confronted by COVID-19’s asymmetric health, economic, social and fiscal impact – within countries but also among regions and local areas. For example, the health of populations in some regions is more affected than in others. Large urban areas have been hard hit, but within them deprived areas are more strongly affected than less deprived ones. Over the past few months, the health impact has spread towards less populated regions in some countries. In the United States for instance, the highest increase in the number of deaths occurring in October were in the rural counties not adjacent to a metropolitan areas. The various risks vary greatly depending on where one lives. This regionally differentiated impact calls for a territorial approach to policy responses on the health, economic, social, fiscal fronts, and for very strong inter-governmental coordination. Many governments at all levels have reacted quickly, applying a place-based approach to policy responses, and implementing national and subnational measures for in response to the COVID-19 crisis:
This paper provides good practice examples on policy responses to help mitigate the impact of the crisis on regions and municipalities in all OECD countries, and beyond. Below are ten early takeaways on managing COVID-19’s territorial impact, its implications for multi-level governance, subnational finance and public investment, as well as points for policy-makers to consider as they build more resilient regions.
IntroductionThe COVID-19 crisis has governments around the world operating in a context of radical uncertainty, and faced with difficult trade-offs given the health, economic and social challenges it raises. Within the first three months of 2020, the novel coronavirus developed into a global pandemic. Schools and universities were closed in spring 2020 for more than one billion students of all ages. By November 2020, COVID-19 spread to almost all countries and affected more than 50 million people around the world, resulting in more than 1.25 million deaths. More than half of the world’s population has experienced a lockdown with strong containment measures – the first time in history that such measures are applied on such a large scale. Beyond the health and human tragedy of COVID-19, it is now widely recognised that the pandemic triggered the most serious economic crisis since World War II. All economic sectors are affected by disrupted global supply chains, weaker demand for imported goods and services, a drop in international tourism (OECD, 2020[3]), a decline in business travel, and most often a combination of these. Measures to contain the virus’ spread have hit SMEs and entrepreneurs particularly hard (OECD, 2020[4]). Unemployment levels and the number of aid seekers have increased, sometimes dramatically. Many countries “exited” virus containment measures to mitigate the impact of the economic crisis only to face a rising wave of cases in autumn 2020, jeopardising recovery The exit strategy from the crisis is not linear, with possible “stop and go” strategies of lockdowns until a treatment or vaccine or cure is available. Estimates released by the OECD in September 2020 indicate that real global GDP is projected to decline by 4.5% in 2020 before picking up by 5% in 2021. OECD unemployment is projected to rise to 9.4% in Q4 2020 from 5.4% in 2019. The projections assume that sporadic local outbreaks of the virus will continue, with these being addressed by targeted local interventions rather than national lockdowns; wide availability of a vaccination is not expected until late in 2021. (OECD, 2020[1])
Figure 1. Global GDP projections Constant prices, Index 2019 Q4 = 100 Source: OECD (2020), OECD Economic Outlook, Interim Report September 2020 Given the multi-faceted nature and unprecedented scale of the COVID-19 crisis, comparisons with past crises, including the 2008-2009 financial crisis, have significant limitations. COVID-19 is proving unique in its generation of both a supply side and a demand side shock, and its impact on all sectors and regions of the world. The uncertainty is also much higher. Governments face a difficult trade off: managing the economic recovery and mitigating the impact of a second wave of the virus. The COVID-19 crisis has a strong territorial dimension with significant policy implications for managing its consequences. Two central considerations for policy makers are:
The COVID-19 pandemic will have short- medium- and long-term effects on territorial development and subnational government functioning and finance. One risk is that government responses focus only on the short term. Longer-term priorities must be included in the immediate response measures in order to boost the resilience of regional socio-economic systems. The territorial impact of the health crisisCOVID-19, like all pandemics, has a spatial dimension that needs to be managed (McCoy, 2020[5]). By November 2020, it is clear that the impact of the COVID-19 crisis differs markedly not only across countries, but also across regions and municipalities within countries, both in terms of declared cases and related deaths. In the People’s Republic of China (hereafter ‘China’), 83% of confirmed cases were concentrated in Hubei province. In Italy, the country’s north was hardest hit, and one of the wealthiest region in Europe, Lombardy, registered the highest number of cases (47% as of November) (Italian Government Covid-19 Data Platform, 2020[6]). In France, the regions of Île-de-France and Grand Est were the most affected with 34% and 15% of national cases respectively (French Government Covid-19 Data Platform, 2002[7]). In the United States, New York the largest share of federal cases (14.6%), followed by Texas (8%). In Canada, the provinces of Quebec and Ontario accounted for respectively 61% and 31% of total cases as of November (Canadian Government Covid-19 Data Platform, 2020[8]). In Chile, Metropolitan Santiago accounted for 70% of cases as of November (Chile Ministry of Health, 2020[9]). In Brazil, Sao Paulo registered 25% of cases as of November (Brazilian Government Covid-19 Data Platform, 2020[10]). In India, the State of Maharashtra registered 21% of confirmed cases in India and in Russia, Moscow represented 24% of total cases as of November. COVID-19-related mortality rates also exhibit a strong regional concentration (Figure 2). Within-country, COVID-19 deaths per 100 000 inhabitants can vary greatly, particularly in most hard hit countries. For example, in Italy, Calabria is the least affected region with 5.5 deaths per 100 000 inhabitants against 171 per 100 000 inhabitants in Lombardy, the most affected. Similarly in the United States, Vermont recorded 9.3 deaths per 100 000 inhabitants versus 184 in New Jersey. In Brazil, Minas Gerais recorded 41.8 deaths per 100 000 inhabitants while Distrito General death toll reached 120 per 100 000. Regions in South Korea and New Zealand were less affected overall. Sejong recorded 0 deaths per 100 000 while Daegu recorded 8.1 deaths per 100 000.
Figure 2. Within-country differences in COVID-19 fatalities COVID-19 fatalities per 100,000 inhabitants, NUTS-2 (TL2) regions as of November 2020 Note: The 24 countries are OECD countries plus Brazil. Among the 37 OECD countries, Estonia, Latvia and Luxembourg have no regions at NUTS 2 level; there are no data at NUTS 2 level for Iceland, Ireland, Israel, Finland, Greece, Hungary, Lithuania, Norway, Slovak Republic and Slovenia. For New Zealand, data is available by District Health Boards. For Canada and Japan, one province (Prince Edward Island) and one prefecture (Iwate) respectively are missing. For the United States, only the 50 States are considered. Data were retrieved between 24 October and 2 November. Source: (Australian Broadcasting Corporation, 2020[11]; Austria Federal Ministry of Social Affairs, Health, Care and Consumer Protection, 2020[12]; Belgium Infectious Diseases Data Exploration Platform, 2020[13]; Brazilian Government Covid-19 Data Platform, 2020[10]; Canadian Government Covid-19 Data Platform, 2020[8]; Chile Ministry of Health, 2020[9]; Colombia National Institute of Health, 2020[14]; Czech Republic Ministry of Healthcare, 2020[15]; Dutch Ministry of Health, Welfare and Sport, 2020[16]; French Government Covid-19 Data Platform, 2002[7]) (Italian Ministry of Health, 2020[17]; Japanese Covid-19 Data Platform, 2020[18]; John Hopkins University Centre for Systems Sciences and Engineering, 2020[19]; Mexican Government Covid-19 Platform, 2020[20]; New Zealand Ministry of Health, 2020[21]; Poland Ministry of Heath, 2020[22]; Robert Koch Institute, 2020[23]; South Korea Ministry of Health and Welfare, 2020[24]; Spanish Ministry of Health, 2020[25]; Statens Serum Institut, Denmark, 2020[26]) (Swedish Public Health Agency, 2020[27]; Swiss Government Covid-19 Data Platform, 2020[28]; United Kingdom Government Covid-19 Platform, 2020[29]) There are a number of factors that contribute to the differentiated impact of COVID-19, which also may explain the disparities observed in countries as diverse as Canada, Chile, Korea and the UK. One factor relates to how the first “clusters” of cases developed and highlights the difficulty in typifying or anticipating where the virus may start. In many instances, large cities, with their dense international links – including international markets, business travel, tourism, etc. – were often the entry points for the virus and were particularly affected. Contagion can spread more quickly in large urban areas, due to proximity, if preventive, protective or containment measures are not introduced early enough. However, it is not possible to establish a clear correlation between density and incidence of the disease. Some very densely populated Asian cities, such as Hong Kong (7.5 million), and Seoul (9.8 million) Singapore (5.6 million) and Tokyo (9.3 million) saw limited diffusion of COVID-19 thanks to early and very proactive measures, mask wearing and extensive testing (OECD, 2020[30]). It appears that the problem is more a combination of density plus other factors such as a lack of appropriate measures such as contact tracing, poor housing conditions, or limited access to health care. Rural areas also experienced “first clusters”, and regions with high numbers of elderly people were affected. Rural regions tend to be equipped with fewer hospital beds. Overall, metropolitan areas and their adjacent regions are better equipped in terms of hospital beds than regions far from metropolitan areas. In 2018, regions close to metropolitan areas had almost twice as many hospital beds per 1 000 inhabitants than remote regions. This gap has grown significantly since 2000 (OECD, Forthcoming[31]). While often the virus first took hold in urban areas, over the past few months some countries saw the health impact spread towards less populated regions. In the US for instance, the highest increase in the number of deaths (as a share of a county’s population) occurring in October 2020 were in rural counties not adjacent to a metropolitan areas. The latter are under strain as daily deaths have continued to increase, reaching 0.86 per 100 000 in October, compared to 0.11 in May 2020. Daily deaths rate in metro areas counties of above 1 million people peaked in May 2020 at 0.49 and have remained at or below 0.35 since then (Figure 3).
Figure 3. COVID-19 deaths per county group (rural-urban), United States COVID-19 daily deaths per 100,000 population, United States by county, 7-day rolling average Note: Counties are classified according to United States Rural-Urban Continuum Codes. Data on COVID-19 deaths span from January 22 to October 22, 2020. Source: Author’s elaboration based on data from: USDA, USA Facts Density per se is not the problem. The problem is density associated with poverty, poor housing conditions and limited access to health care (Basset, 2020[32]). Poverty and access to hospitals are more important indicators than density. Within cities, some neighbourhoods are also more affected. These are often areas with lower incomes, such as the Bronx in New York City, or Seine-Saint-Denis in the Paris region. New York City Health Department data indicate that Manhattan, the borough with the highest population density, was not the hardest hit. Deaths are concentrated in the less dense, more diverse boroughs. Factorsthat do seem to explain clusters of COVID-19 deaths in the US include household crowding, poverty, socio-economic segregation and participation in the work force (Basset, 2020[32]). Deprived areas are the most strongly affectedAccording to the United Kingdom (UK) Office for National Statistics (ONS), there is evidence that more deprived areas in England and Wales are experiencing a disproportionate rate of deaths due to COVID-19 compared to less deprived ones (Iacobucci, 2020[33]). The ONS study underlines that poverty and population density significantly increase the risk of death due to the coronavirus. For example, in Wales, the most disadvantaged areas had registered around 45 COVID-19 deaths per 100 000 people, while areas with less deprivation have experienced close to 23 COVID-19 deaths per 100 000 inhabitants (Iacobucci, 2020[33]) between January and April 2020. In France, mortality rates are twice as large in municipalities in the first quartile of the national income distribution than in municipalities in higher quartiles (Brandily, 2020[34]). This heterogeneity maybe explained by municipal differences in housing conditions and occupational exposure. In the US, lagging counties have recorded more deaths (60 COVID-19 deaths per 100 000 people) than wealthier ones (48 COVID-19 deaths per 100 0000). In the first income quintile of per capita GDP, new COVID-19 deaths were significantly higher than in other quintiles between August and October (Figure 4). While density associated with poor housing conditions plays a role in the spread of the virus, it is worth noting that mortality rates are also determined by the health system capacity, and pre-existing health conditions (e.g. high blood pressure, obesity, and diabetes), which themselves tend to be correlated to income and education.
Figure 4. COVID-19 deaths per county group (GDP per capita), United States COVID-19 daily deaths (7-day rolling average) per 100,000 population, United States, by counties according to county GDP per capita (2018) Note: United States counties are classified according to GDP per capita quintiles based on data from the BEA for 2018. Data on COVID-19 deaths span from January 22 to October 22, 2020. Source: Author’s elaboration based on data from: Bureau of Economic Analysis, Local Area Gross Domestic Product, 2018
Figure 5. The asymmetric impact of the health crisis Note: For United Kingdom, Isles of Scilly cases combined with Cornwall Source: (Italian Government Covid-19 Data Platform, 2020[6]); (Canadian Government Covid-19 Data Platform, 2020[8]); (BBC, 2020[35]) based on (United Kingdom Government Covid-19 Platform, 2020[29]); (Mexican Government Covid-19 Platform, 2020[20]); (BBC, 2020[35]) based on (United Kingdom Government Covid-19 Platform, 2020[29]); (New York Times, 2020[36]) based on (New York City Department of Health and Mental Hygiene, 2020[37]); Most regions were underprepared for a crisis of such magnitudeMost countries, regions and cities were not well prepared for this pandemic for several reasons: i) they underestimated the risk when the outbreak emerged; ii) many did not have crisis management plans for pandemics (with the exception of Asian countries that battled the SARs pandemic, and some others, such as the Nordic countries, where crisis management plans are required); iii) they lacked basic, essential equipment, such as masks; and iv) they absorbed reduced public expenditure and investment in health care/hospitals. Since the start of the “Great Recession” launched by the 2008 financial crisis up until 2018, the number of hospital beds per capita decreased in almost all OECD countries, declining 0.7% per year, on average. Not all regions are equally equipped to battle the crisis. Regional disparities in access to health care are quite high in some countries when measured by the number of hospital beds per 1 000 inhabitants (Figure 6). These disparities appear to be regardless of whether health care spending is decentralised. It should be noted, however, that the number of hospital beds alone is a limited measure for real health care capacity and quality. Much depends on health worker density and distribution, and the quality of hospital equipment. Some research suggests that regional disparities in health outcomes in Spain and Italy have not increased after the decentralisation of health care spending (Lopez-Casasnovasa, Costa-Font and Planas, 2005[38]; Bianco and Bripi, 2010[39]). Furthermore, a recent OECD Fiscal Federalism Network study showed that hospital costs are lower in countries with a higher degree of administrative decentralisation, even after controlling for particular treatments (Kalinina et al., 2019[40]). The decentralisation and concentration debates need to be distinguished for the different categories, notably basic health and intensive care. For the most advanced care, there are obvious quality arguments for concentrating (although not necessarily centralising) services. In such cases, however, there remains a need to ensure that travel times to care centres do not prevent service use.
Figure 6. Large regional disparities in access to health services Hospital beds per 1 000 inhabitants by region, 2018 Note: data for Iceland and Quebec are from OECD Health Statistics. Source: OECD Regional Database – oe.cd/2Wd Subnational governments at the frontline of crisis managementSince the outbreak of the pandemic in early 2020, regional and local governments have been at the forefront of managing the COVID-19 health crisis and its social and economic consequences. Together with central governments and social security bodies, they have significant responsibilities in the different areas affected by the COVID-19 crisis. In many countries, subnational governments are responsible for critical aspects of health care, from primary care to secondary care, including hospital management, accounting for 25% of total public health expenditure, on average (Figure 7).
Figure 7. The share of subnational government in public expenditure by sector in OECD countries, 2017 Note: The OECD average (unweighted) is calculated for 33 countries (no data for Canada, Chile, and Mexico). The functional areas correspond the Classification of the Functions of Government (COFOG), which distinguishes 10 areas. The total of general government spending is non-consolidated. Source: (OECD, 2018[41]) Since the beginning of the crisis, regions and cities are facing urgent social care demands from the elderly, children, disabled, homeless, migrants and other vulnerable populations – all of whom are directly and/or indirectly affected by the coronavirus. In many countries, subnational government are also responsible for welfare services and social transfers. In addition, subnational governments play a large role in delivering education, representing 50% of public education spending. Regional and local governments are managing the closing and re-opening of schools under very strict health measures. Subnational governments are also ensuring the continuity of public services in a crisis context, adapting these as necessary, and protecting their own staff. Citizens expect seamlessness in essential public services, such as water distribution and sanitation, waste collection and treatment, street cleaning and hygiene, public transport, public order and safety, and basic administrative services, and the proper delivery of many of these are fundamental in managing the pandemic. In some countries, emergency services and police are managed by state, regions and municipalities, and they have been called upon during confinement periods to ensure control, security and rescue. Regional and local governments are responding by maintaining essential services, if not at full service-levels then at adjusted ones, and by developing or providing better access to tele-services (tele-health consultations, tele-education). Finally, the emergency situation has led many subnational governments to take initiatives in areas outside the scope of their responsibilities, either upon request by the central government or because they decided to do so in response to emergencies that arose. The territorial impact of the economic crisis engendered by COVID-19Many comparisons have been made between the COVID-19 crisis and the 2008 global financial crisis, but they differ radically in scope, origin (endogenous in 2008 versus exogenous in 2020), and consequences. Both crises are also very different in their impact on territories, with the 2020 crisis having a more differentiated impact than that of 2008. The economic impact of the COVID-19 crisis differs across regions, depending on the region’s exposure to tradable sectors and global value chains. For example, regions with economies that are heavily dependent on tourism will be more affected by the coronavirus than other regions. Capital regions or other metropolitan regions show a relatively higher risk of job disruption than other regions (OECD, 2020[42]). In the US for example, analysis of county-level infection by Brookings and economic data shows that the nation’s COVID-19 case load not only remains heavily concentrated, but that the hardest-hit counties and metropolitan areas constitute the very core of the nation’s productive capacity.According to Brookings, the 50 hardest-hit US counties “support more than 60 million jobs and 36% of its GDP”(Muro, Whiton and Maxim, 2020[43]). The crisis’ impact on regional employment may also vary significantly across regions within countries. Regions with large shares of non-standard employment can help explain within-country differences arising from the COVID-19 crisis. Evaluating the share of jobs potentially at risk from a lockdown is one way to assess the territorial impact of the COVID-19 crisis. These shares can be estimated based on the specific sectors of activity considered to be at risk in a region, following an OECD note on the economic impact of containment measures (OECD, 2020[44]). Regional disparities in the share of jobs potentially at risk in the short term as a result of confinement measures are stark. In May 2020, the OECD estimated that these shares ranged from less than 15% to more than 35% across 314 regions in 30 OECD and 4 non-OECD European countries (Figure 8). In one out of five OECD/EU regions, more than 30% of jobs are potentially at risk during a lockdown (OECD, 2020[42]). In the short term, tourist destinations and large cities are suffering the most from COVID-19 containment measures. The importance of tourism and of local consumption – including large retailers, general-purpose stores, and businesses in the hospitality industry, such as coffee shops and restaurants – partially explains this. The extent to which activities have recovered during the high tourist season is an important factor to determine the actual economic decline in tourist destinations.
Figure 8. Share of jobs potentially at risk from COVID-19 containment measures Source: (OECD, 2020[42]) [calculations done in May 2020] The longer and more stringent the containment measures, the higher the risk for regional economies. In summer 2020, targeted (localised) lockdowns were adopted in a number of countries to minimise the costs of national lockdowns. In autumn 2020, some countries are going back to national confinement measures to mitigate the impact of a second wave of cases. Possible stop-and-go measures are expected in the coming months, until a vaccination is available. The full impact for 2020 is yet to be calculated. Previous OECD work shows that the recovery of OECD regions after the 2008 global financial crisis took years. In more than 40% of OECD and EU regions, even seven years after the start of the crisis, per capita GDP was still below pre-crisis levels. Mitigating the impact of confinement and facilitating social distancing: the impact of teleworkThe extent to which occupations can be performed remotely is an important mitigating factor with respect to economic impact and cost of COVID-19 containment measures. Occupations amenable to remote working depend strongly on the nature of the tasks carried out, which can differ significantly even within the same workplace. For example, academic researchers in universities can often continue working during a lockdown or under social distancing requirements, while canteen staff working in the same university may be forced to cease or strongly reduce their activities. The OECD recently estimated the share of occupations amenable to remote working in OECD regions based on the task performed by workers1. This work reveals that the potential for remote working is unevenly distributed within countries. Urban areas a nine percentage point higher share of occupations that can be performed remotely than rural areas (OECD, 2020[45]). In most cases large cities and capital regions offer highest potential for remote working within countries (Figure 9). Such a capacity might contribute to a territorial differentiation in resilience. On average, there is a 15 percentage point difference between the region with the highest and lowest potential for remote working in a given country. This difference reaches more than 20 percentage points in the Czech Republic, France, Hungary, and the U.S., driven by comparatively high levels of potential remote working in their capitals. It is important to note that these findings hold under the assumption that all workers – regardless of location – have access to an efficient internet connection and to the necessary equipment. As a consequence, differences across space arising from disparities connectivity and available equipment might determine the extent to which the potential to telework translates into an actual opportunity.
Figure 9. The possibility to work remotely differs among and within countries Share of jobs that can potentially be performed remotely (%), 2018, NUTS-1 or NUTS-2 (TL2) regions Note: The number of jobs in each country or region that can be carried out remotely as the percentage of total jobs. Countries are ranked in descending order by the share of jobs in total employment that can be done remotely at the national level. Regions correspond to NUTS-1 or NUTS-2 regions depending on data availability. Outside European countries, regions correspond to Territorial Level 2 regions (TL2), according to the OECD Territorial Grid. Source: (OECD, 2020[45]) A strong and asymmetric fiscal impact on subnational governmentsThe impact of the COVID-19 crisis and related policy responses (e.g. public health measures, lockdowns, emergency economic and social measures) on subnational government finance is significant. A June-July 2020, a survey jointly conducted by the OECD and the European Committee of the Regions (CoR) with 300 representatives of regional and local governments in 24 countries of the European Union (CoR-OECD, 2020[46])indicates that in the short and medium terms most subnational governments expect the socio-economic crisis linked to COVID-19 to have a negative impact on their finances, with a dangerous "scissors effect" of rising expenditure and falling revenues. Beyond the European Union, other surveys report the same negative effects of COVID19 on subnational finance. For example, the US National League reports a severe and long-lasting impact on US cities with a loss of own-source revenue reaching 21.6% in 2020 (US National League of Cities,, 2020[47]). The impact of COVID-19 on subnational finance is differentiated among countries, among levels of government, among regions and among municipalities.The varying effects on subnational finance depend on five main factors, all of which need to be taken into account to analyse and compare the fiscal impact of COVID-19 on regions and municipalities:
It is extremely difficult quantify the impact of the COVID-19 crisis on subnational finance as there are many uncertainties surrounding its severity, duration, variability across territories, and the effectiveness of the support mechanisms introduced by international, national and subnational public authorities. Moreover, the new waves of infections and new lockdowns may continue to strongly affect subnational government finances. With new waves of infection, the evolution of the crisis reveals itself to be non-linear. Countries must manage combined shocks and their cascading effects in parallel, as well as implement recovery plans. Many countries have introduced expansionary fiscal measures. Withdrawing them too quickly and introducing tight fiscal consolidation measures is risky as it could result in public investment becoming an adjustment variable. This happened after 2010, leading to a strong and persistent drop in public investment and hampering growth in many in many OECD countries. The effects of this “systemic” crisis on subnational finance occur at two levels: on subnational government “stocks” (assets and liabilities) and on “flows” i.e. on subnational government expenditure, revenues and access to new borrowing (Figure 10).
Figure 10. The cascading effects of the COVID-19 crisis on subnational government finance Source: Authors’ elaboration The impact on subnational government assets and liabilitiesThe effects on stocks are on the assets owned by subnational governments and on their liabilities. Physical or financial assets and liabilities will likely be affected but this will depend on a variety of factors, such as the evolution of real estate prices, insurance reserves, pension funds, local company values, etc. For example, in the US, the crisis and the stock market collapse have exposed the fragility of public pension systems, exacerbating the solvency crisis of many pension systems and jeopardising the future retirement benefits of state and local public-sector workers. Public pension plans closed in fiscal year 2020 with virtually no change in their average funded ratio despite the high volatility in asset prices in the first half of the year. However, decreasing state and local governments revenues will hamper their ability to make their required pension contributions in the near term (SLGE, 2020[48]). Local public companies are also exposed to the COVID-19 crisis. Some categories suffered from the cessation or slowdown of activity, particularly in the tourism, culture, leisure and transport sectors. Business failures and threats to capitalisation and equity affect subnational governments as shareholders (FEPL, 2020[49]). Subnational government budgets will continue to be strongly affectedSubnational governments face strong pressure on expenditure and reduced revenue, thus increasing deficits and debt. While the crisis has already put short-term pressure on health and social expenditures and on different categories of revenue, the strongest impact is expected in the medium term. National governments, associations of local governments, and individual entities have started estimating the short and medium term fiscal impact, in order to prepare and adjust budgets, and to design appropriate support measures (Box 1). As already underlined, these estimates are still tenuous and need to be regularly updated, given the context of uncertainty. COVID-19’s second wave adds to the uncertainty as new confinement measures will again negatively affect subnational government finance. This second shock may be stronger for those subnational governments that drained all their fiscal reserves to resist the first shock; while they may still be under the effects of the previous shock. Box 1. First insights into COVID-19’s fiscal impact on subnational government
All subnational government transactions are likely to be highly affected by the crisis in the short and medium terms. A detailed analysis of the expected impact on expenditure, revenue, debt management and access to new borrowing permits identifying their contribution to changes in subnational government finance (Figure 11). Overall, surveyed regions and municipalities in the European Union expect the crisis to have a slightly larger impact on revenue than on expenditure. Large municipalities expect a larger impact: about two third of respondents from cities of populations above 250 000 inhabitants forecast the impact to be highly negative, against 41% where the population is below 10 000 inhabitants ( (OECD-CoR, 2020[65]).
Figure 11. Impact on subnational finances, by transaction Source: (OECD-CoR, 2020[65]) The impact on subnational government expenditureThis crisis is calling on regions and cities to increase their expenditure in many areas. The impact of this, however, will vary according to their spending responsibilities. In many countries, subnational governments are responsible for critical aspects of health care systems, including emergency services and hospitals. In 2018, health expenditure accounted for 18% of subnational expenditure in the OECD, on weighted average. Additionally, subnational governments have expenditure responsibilities in social protection, which is particularly affected by the COVID-19 crisis, including social assistance and social benefits (14% of subnational expenditure). Beyond health and social responsibilities, subnational governments are involved in key areas impacted by the crisis, including education (the first spending item at 24%), public administration (15%), economic development and transport (13%), public order and safety (7%), utilities (waste, water, etc.), etc. In the context of the crisis, subnational governments are confronted with a number of complex and costly tasks. They have first managed the full or partial closure of certain services and facilities and then their reopening while having to ensure the continuity of essential public services, adapt services either physically (public transport, collection of waste, cleaning of public spaces) or virtually (tele-health consultations, remote education arrangement, local tax payments, access to government information, etc.) and enable officials and employees to work remotely. Finally, in many countries, subnational governments are involved in delivering support policies for SMEs and the self-employed, as well as infrastructure investment. Although some expenditure items are temporarily reduced (related to the slowdown of public services, the cancellation of events, and decrease in intermediate consumption, for example petrol) or deferred in time, most subnational spending items tend to increase in the short term (emergency expenditure), and also in the medium-term in response to exit strategies and recovery programmes. According to the OCDE-CoR survey, anticipate significant expenditure increases in social services and benefits, support to SMEs and the self-employed, and public health. More moderate expenditure increases are expected in education, information and communication technologies, adapting local public transport, adapting administrative services and public order and safety. Regions in the EU are more likely than municipalities to experience increased spending on health services, support to SMEs and the self-employed, and adaptation of public transport, likely reflecting their broader responsibilities in these areas (OECD-CoR, 2020[65]).
Figure 12. COVID-19 pressure on subnational expenditures, by area Source: (OECD-CoR, 2020[65]) The impact on health expenditure will be significantIn a number of OECD countries, states, regions, and municipalities are responsibility for public health services and hospital spending. Subnational governments account for about 24.5% of total public health expenditure in the OECD2 (Figure 7) and 12% of subnational government expenditure3. However, the degree of decentralisation in the health sector varies markedly. The OECD developed the typology to indicate the level of decentralisation in the health sector in OECD countries (Box 2) based on the combination of three subnational expenditure spending ratios: i) as a share of total public health expenditure (Figure 7); ii) as a share of total subnational expenditure; iii) as a share of GDP. Box 2. Decentralisation in the health sector in OECD countries Three groups of countries with high, medium and low levels of decentralisation in health provision are identified (Figure 13).Most federal countries (except Belgium and Germany) and some unitary countries (Italy and three Nordic countries) have highly decentralised health care sectors. At the opposite end, 15 unitary countries, plus Belgium and Germany, are in the group where health care is mainly managed by central/federal or social security funds. This interpretation can be nuanced, as health expenditure in unitary countries can be a delegated expenditure made on behalf of the central government, with little or no choice as to how expenses are allocated. In federal countries however, state governments can still have shared decision-making responsibilities with the federal government (OECD, 2019[66]; Beazley et al., 2019[67]; OECD, 2020[68]). The public part of health expenditure may also be funded by social insurance schemes, and not directly by the central or federal government. In Belgium, Luxembourg, Germany and France, social insurance accounted between 85-95% of public expenditure in 2017. It is also important to recognise that while health care provision is usually a public sector responsibility, the private sector often plays a large role in service production, side-by-side with public sector producers.
Figure 13. The level of decentralisation in health care in the OECD countries Note: No data for Canada, Chile and Mexico; * Switzerland: subnational government health expenditure accounts for less than 20% of subnational government expenditure and 4% of GDP; ** Latvia: subnational government expenditure is 8% of subnational government expenditure; *** Slovenia: subnational government expenditure is around 1% of GDP and 12.4% of subnational government expenditure. Source: OECD based on (OECD, Forthcoming[69]) Regional and local governments have differentiated responsibilities in health services.Therefore, this crisis will have differentiated impact within the subnational government sector. In most federal countries, health care is a major responsibility of state governments, which are responsible for secondary care, hospitals and specialised medical services. In unitary countries, where health care is almost exclusively a regional-level responsibility, the role of regional governments may be also significant (e.g. Denmark, Italy and Sweden). The role of municipalities in health care generally concentrates on primary care centres and prevention. However, in some countries, municipalities or inter-municipal cooperation bodies may have wide responsibilities in healthcare services and infrastructure. While it is too early to present fiscal data, this health crisis has led to significant increases in subnational government health expenditure. The pressure on public health expenditure is particularly high for regions (69% versus 44% for municipalities), most likely reflecting their broader responsibilities in this area in many EU countries (OECD-CoR, 2020[65]). This is linked to spending to acquire healthcare equipment and consumables (masks, ventilators, tests, protective equipment, etc.), cover staff costs (employment of temporary medical staff, overtime payments, bonuses), pay for additional tasks such as the cleaning and disinfection, construction and conversion of temporary emergency facilities, medical transport, etc. Local governments are also distributing masks and participating in testing and contact-tracing programmes in partnership with regional and national governments. The impact on social expenditure is significant and will be long-lastingThe COVID-19 crisis is placing significant pressure on social protection spending given its impact on population groups with diverse and frequently complex needs. These include elderly and dependant people, those with chronic or long-term illnesses, the poor and low-income families, the homeless, uninsured households, informal workers, migrants, youth, students and children at risk, people with disabilities, isolated people, and women and/or children at risk of domestic violence and indigenous population. Among OECD countries, social protection represents 14% of total public social expenditure (Figure 7), though this is much higher in countries where subnational governments have significant social protection responsibilities (e.g. Austria, Belgium, Germany, Japan, the Nordic countries, and the UK). There are large disparities in social protection spending among OECD countries. For example, social protection expenditure accounts for 56% of subnational expenditure around 35% in Ireland and the UK but less than 10% in 10 OECD countries. This indicates that subnational governments are not mobilised in the same way for social services, despite the fact that local governments are often the first resort for citizens in need. Even if social protection is not a subnational government’s responsibility, it often has to respond to social emergencies. During the emergency, subnational governments have undertaken proactive initiatives to provide social/community support to vulnerable populations (OECD, 2020[70]). In the longer term, social expenditure will certainly continue to increase as more welfare benefits are included due to the rise in unemployment and the number of aid seekers. Unemployment payments, guaranteed minimum revenue, family support, housing subsidies, emergency aid, ageing, etc. will add to the pressure on subnational government social expenditure. The impact on economic affairs expenditureEconomic affairs4 represents 13.6% of subnational spending in the OECD on average. Subnational governments in the OECD account for approximately 34% of total public spending in this area (Figure 7), although in some countries it is more than 50% (e.g. Australia, Belgium, Japan, and Spain), and in the US it has reached 69%. Some state and regional governments, as well as local governments took early action to support their local economies, focusing mainly on SMEs, the self-employed, and informal workers, as well as on sectors that were highly affected, such as tourism, trade, restaurants, etc. In the longer term, as major public investors, subnational governments may be further mobilised to participate in stimulus packages targeting public investment, in order to compensate for a decline in private investment (see Part 2). The impact on subnational government revenuesThe COVID-19 crisis will likely generate a large drop in subnational government revenue. This would arise from drops in tax revenue, user charges and fees and income from physical and financial assets. The impact on subnational governance finance, however, will depend on the mix of these revenue sources. In countries where subnational governments are largely funded by central governments transfers (e.g. Estonia, Lithuania, Mexico, the Slovak Republic), the negative impact may be small, especially if the central government decides to maintain their level, or even increase them in order to help subnational governments cope with the increased costs resulting from the crisis5. However, in some countries, especially federal countries where most of transfers to local governments come from the state governments, there is some concern about the ability of states to sustain their transfers. (Chernick, Copeland and Reschovsky, 2020[64]). In countries where subnational government revenue comes mainly from taxes, user charges, fees and income from assets, the impact may be larger (Figure 14), although this depends on their degree of sensitivity to economic fluctuations and policy decisions.
Figure 14. Sources of subnational government revenues vary across countries Breakdown of subnational government revenues by category (% of total revenue, 2018) Note: 1. Australia and Chile: estimates from IMF Government Finance Statistics; 2. 2017 data Source: (OECD, 2020[71]) Among subnational governments, tax revenue is anticipated to be the most affected revenue source, followed by user charges and fees (OECD-CoR, 2020[65]). Grants and subsidies, as well as revenue from assets are expected to decrease to a lesser extent. There is however, an expectation that grants and subsidies from higher levels of government will remain unchanged or increase (Figure 15) (OECD-CoR, 2020[65]).
Figure 15. Impact on subnational revenue, by revenue source Source: (OECD-CoR, 2020[65]) The impact on tax revenueThe COVID-19 pandemic is expected to result in a strong drop in both shared and own-source tax revenue. Declining economic activity, employment and consumption arising from COVID-19, and particularly containment measures, will automatically reduce receipts from personal income tax (PIT), corporate income tax (CIT) and value added tax (VAT). In addition, measures such as tax breaks, exemptions, deferrals and a drop in rates that were decided within the framework of recovery packages by national and subnational governments as counter-cyclical tax measures, could amplify the mechanical decline in tax receipts. Many regional governments and municipalities have adopted tax relief measures to support firms and households. A majority of these include a number of tax measures that will result in decreased tax receipts for subnational government budgets. Increased delinquencies could also contribute to tax revenue decline. As subnational government revenues are often based on the previous year’s activity (e.g. income taxes), most will see the situation worsen in 2021 and even 2022, regardless of the degree of national-level recovery. Beyond shared or own-source national taxes – many other subnational taxes may be affected by the economic decline and tax decisions as well. Among these are:
The recurrent property taxes on land and building should be less affected as they are a less volatile source of revenue. However, if the property tax is calculated on the basis of the market value of property, there may be a risk of decline, but the reduction in property values will be reflected in budgets later (2021 or 2022). In addition, there is likely to be a drop in business-property tax revenues as a result of business bankruptcies. A drop in revenue could also come from exemptions and write-offs for some categories of tax payers in financial distress, as well as from increased delinquencies. Subnational governments will need to cope with property tax-payment deferrals. Potential delays that extend through a new fiscal year could pressure budgets and stress liquidity in countries where the property tax is the main source of municipal tax revenue (e.g. Australia, Canada, Estonia, Ireland, Israel, Lithuania, the Netherlands, the US and the UK) (OECD, Forthcoming[72]). The impact on user charges and feesSubnational governments mayalso suffer from a large decrease in user charges and fees resulting from the closure of public facilities (e.g. cultural, recreational, educational and sport venues like swimming pools, golfs, etc.) and reduced demand for local public services, such as public transport, school meals, car parks, tolls, kindergarten fees, administrative fees, etc. Drops in such revenue could be compounded by a rise in delinquent or unpaid fees (e.g. garbage collection, sewage, water provision, etc.). For example, in the US, the public transport sector is experiencing dramatic revenue drops, while also seeing significantly increased costs as a result of COVID-19. According to a study prepared for the American Association of Public Transport, US transit agencies are facing an overall funding shortfall of USD 48.8 billion between Q2 2020 and the end of 2021. Nationally, transit ridership and fare revenues were down in April 2020 by 73% and 86% relative to April 2019, respectively (APTA/EBP, 2020[73]). 76% of municipalities and 63% of regions are forecasting lower revenues from user charges and fees. User charges and fees, resulting from the delivery of local public services, are a more important source of revenues for municipalities than for regions. The impact on assets-based revenueIncome from physical and financial assets could be also affected. This can include drops in rental revenues, lost dividends from local public companies, less revenues from sales of land, and lower royalty revenues resulting from the downturn (e.g. decreased prices for raw material, and lower production). Subnational governments dependent on revenue from oil producers may also experience a substantial revenue decline (e.g. in Australia, Canada, Mexico, Norway, and Russia) (S&P Global Ratings, 2020[74]). About two thirds of subnational governments are anticipating a decline in revenues from assets. The impact on subnational government budget balance and debtA strong decrease in revenues, combined with a continuous increase in expenditure (e.g. in social spending and investment) could result in a scissor effect, leading to subnational government deficits, as was the case in 2007-2008 (OECD, 2020[75]; OECD, 2013[76]). This situation could increase subnational government debt, while a crisis in debt capital markets could affect the current subnational debt stock. For example, in Norway, the coronavirus outbreak has led to turmoil in the capital markets, and some municipalities face difficulty refinancing their loans. The Government of Norway proposed to Norway’s Parliament to grant the Norwegian financial agency for Local Governments Kommunalbanken (KBN) an additional NOK 750 million of equity capital “to help the markets to function as well as possible and to prevent municipalities’ refinancing of short-maturity securities from contributing to further stress in the markets”. This capital increase would enable KBN to lend up to an extra NOK 25 billion to the local government sector (KBN, 2020[77]). Short-term borrowing to bridge delays in revenue and cover a lack of liquidity has already significantly increased in some countries. Many governments have facilitated the access to short-term borrowing and credit lines, including specific COVID-19 credit lines. Long-term borrowing is also expected to significantly increase, in particular as a result of subnational government activity recovery programmes and public investment stimulus plans. In addition, several governments have relaxed regulatory constraints on long-term borrowing and eased access to long-term borrowing, notably on capital markets (e.g. in China). Some estimates expect subnational borrowing to grow in 2020 and decline a bit in 2021, with annual borrowing increasing 10% on average to reach about USD 2.1 trillion worldwide. A significant increase in subnational debt is expected in Australia, Canada, China, Germany, and Japan because subnational governments, particularly regions and large cities, will likely apply a countercyclical fiscal policy to support local economies, maintain employment, and increase (or at least sustain) investment in infrastructure (S&P Global Ratings, 2020[78]). In China, local government debt issuance could reach a record of nearly CNY 3 trillion for the first five months of 2020, compared to CNY 1.9 trillion in 2019 (SCMP, 2020[79]). The recovery policies will spur annual average regional and local government borrowings by 6%-9% in Germany and Japan and by 20% in Canada in 2020-2021 (S&P Global Ratings, 2020[78]). The increased borrowing will lift global outstanding debt of local and regional governments to a new record high of about USD 14 trillion by the end of 2021. In this framework, a substantial increase in bond issuance is expected, especially in China and developed markets, with the exception of the US. Global issuance could reach USD 1.7 trillion in 2020-2021 (S&P Global Ratings, 2020[78]). Going forward, subnational government borrowing will depend on the depth and longevity of the crisis, the availability of additional transfers from the central government, and the appetite of subnational governments to pursue a counter-cyclical financial policy. It will also depend on the fiscal capacity of subnational government to access new borrowing. Many regions and municipalities are already weakened by lower fiscal performance and creditworthiness. In some cases, the capacity to borrow is limited by the current level of indebtedness of subnational governments. All other things held equal, the higher the debt of a subnational government, the higher the interest rate that it must pay to service the debt, which can further reduce their room to manoeuvre in critical situations, in particular more difficulty to roll out debt. (OECD, 2020[68]) Asymmetric and time-delayed effectsAsymmetric effects are observed at different scales: between countries, between levels of government within country and between individual entities. Between countries, the effects largely differ to depending on their multi-level governance framework, and particularly the importance of the economic and social role of subnational governments. In countries where the level of decentralisation is high, the impact on subnational government expenditure will be higher, particularly in spending areas most affected by the crisis (i.e. health, social protection, education, utility services, economic development, etc.). This is also true for revenue. This is confirmed by the OECD-CoR survey which shows that subnational governments in medium and highly decentralised countries are more likely to anticipate experiencing higher losses in revenue as a result of the COVID-19 crisis than in more centralised countries (OECD-CoR, 2020[65]) Moreover, extent of the impact also differs according to subnational fiscal health before the crisis. In a number of countries, the fiscal situation of subnational governments was relatively good before the COVID-19 crisis (e.g. the Czech Republic Denmark, and Switzerland). They enjoyed good fiscal health and had sufficient reserves and liquidity to face the crisis. In Switzerland most cantons and municipalities had balanced budgets before the crisis and are robust enough to absorb the higher 2020 deficits (S&P Global Ratings, 2020[60]). In multi-tiered countries, there are also an asymmetric impact between levels of governments (Box 3). Depending on their spending responsibilities and revenue structure, the regional level may be more affected than the local level, and vice-versa. In countries with three subnational government levels, the intermediate government level may be also affected depending on its responsibilities and resources (e.g. départements in France). There may be effects that are delayed over time depending on the level of government. For example, the immediate impact may be stronger for municipalities than for regions, but it may be greater in the medium term for regions than for municipalities. Again, these staggered effects depends on the structure of their expenses and their revenues. For example, in many countries it is estimated municipalities will feel the financial shock mostly in 2020, as the loss of revenue mainly comes from the decrease in tariffs and user charges and/or local taxes, but it may be temporary (tourist tax) or delayed (deferrals). Municipalities could be spared in the future compared to regions, whose revenues depend more on taxes sensitive to economic activity, consumption or personal income. The fiscal shock on many regions could be delayed to 2021, and even 2022. Finally, the impact may be differentiated at an individual level between regions or between local governments in the same country. There are different reasons for this, such as geographic localisation (e.g. located in an area particularly hit by the health or socio-economic crisis, in urban or more rural areas, in large metropolitan areas or smaller cities, isolated or close to borders of highly affected countries, etc.), its socio-demographic profile (importance of elderly or vulnerable groups, etc.) and its economic activities (tourism, manufacturing, mining, etc.). All these characteristics have implications for the nature of subnational expenditure and revenues, and then on the degree of fiscal exposure to the crisis. Some market sectors that are currently experiencing the shock will be able to count on carry-over effects for the rest of the year (consumer durables), or a possible rebound over time. In other sectors, for which there is no possible carry-over, the lockdown results in deadweight losses (services and consumer non-durables such as transports, air transport and arts and entertainment (McKinsey & Cie, 2020[80])). Some substitution effects are taking place at the moment (e-commerce, home delivery, online cultural products, etc.) but they will not compensate for non-recoverable losses. In the end, subnational governments will be more or less vulnerable to the crisis depending on their economic profile, the resilience of their local economies and the resilience of their tax base. For example, touristic regions and municipalities, be they urban or rural, are particularly affected by domestic and international travel restrictions, the closure of hotels, exhibition and congress centres, tourist sites (museums, natural parks, leisure establishments, etc.), restaurants and cafes, festivals and other cultural facilities. Additionally, since the deconfinement, the impact of hygiene and social distancing measures on touristic activities and attendance also have an incidence. Coastal regions and ski resorts in Austria, France, Italy, and Switzerland, as well as urban tourist destinations suffer from travel disruptions, closure of facilities and reduction in tourist attendance (Box 3 below). Port cities are particularly hit by the crisis, not only because of declining cruise activities, but also because of the strong slowdown in port activities as a whole (maritime transport, fishery, shipyards, etc.), despite the fact they kept terminals open to boats and ensured a minimum level of continuous activity. By contrast, regions and cities where non-market activities are significant as well as those depending on food industry have suffered less. The state of the local government fiscal health prior to the crisis also play a role on the differentiated degree of resilience to the crisis. Some subnational governments may have a low level of indebtedness and important cash reserve. In France, for example, the good financial health of large cities at the end of the 2019 fiscal year allows them to have, in the immediate future, sufficient cash to meet the commitment of exceptional expenses. On the other hand, the coming months could reveal difficulties for some due to the increase in expenses and lower revenue (France-Urbaine and INET-CNFPT, 2020[81]). In the US, the level of preparedness for a recession is mixed, with certain states possibly lacking sufficient reserves to absorb the fiscal stress beyond the immediate short term. Some states are most exposed to pressure derived from exogenous shocks given their comparatively weaker credit metrics, including lower reserve levels, cyclical revenue streams, and elevated fixed costs e.g. pensions, debt service, other postemployment benefits (Standard&Poors, 2020[82]). Finally, the existence of strong and efficient horizontal or vertical equalisation mechanisms may mitigate the differentiated impact of COVID-19 among subnational governments. For example, according to S&P, individual Swiss cantons and cities may see noticeable differences, depending on their economic structure and the resilience of their tax base to the economic shock. However, the Swiss national fiscal equalisation scheme will have difficulties to level differences within the year, as it is far less extensive than the German or Austrian schemes. The Swiss scheme employs a look-back period of four to six years to calculate relative equalisation entitlements. Meanwhile, Germany's system of interstate revenue equalisation transfers will ultimately spread the revenue shortfalls across all the states (S&P Global Ratings, 2020[60]). Although equalisation systems might help mitigate regional disparities, the effect could be limited and dependent on the equalisation system’s distribution formula. In addition, as many equalisation systems are funded either by appropriations from central government revenues or horizontal transfers among subnational governments, both of which may be susceptible to contractions in economic activity, there are some concerns about the sustainability of equalisation systems. According to a survey by OECD Network on Fiscal Relations, 8 out of 17 country respondents anticipate a fall in total equalising transfers, whereas only Canada anticipates an increase to one of its two equalising transfers (i.e. the Territorial Financing Formula). Overall, this suggests that equalisation systems may have a pro-cyclical impact on subnational finance (OECD, 2020[68]). Box 3. The differentiated impact of COVID-19 among subnational governments
Managing the territorial impact of the COVID-19 crisis and recoveryThe economic, fiscal and social impact of the COVID-19 crisis on territories is differentiated, and its diverse risks vary greatly depending on location. This regionally differentiated impact calls for a territorial approach to policy responses on the health, economic, social, fiscal fronts, and for very strong inter-governmental coordination. Many governments at all levels have reacted quickly. A combination of national and subnational measures contribute to an effective response to the COVID-19 public health and economic crisis. Leadership and coordination by national government is critical. Subnational governments – regions and cities – have also launched a wide range of actions to manage the public health and economic impact (OECD, 2020[70]). Effective coordination mechanisms among levels of government are essential. “Strong coordination between all actors in charge of the response at central and regional levels is the basis of an effective response” (WHO, 2020[88]). On the health front, many countries have adopted territorial approaches, for example on policies surrounding masks or lockdowns. On the economic front, governments have provided massive fiscal support to protect firms, households and vulnerable populations. They have spent more than USD 12 trillion globally since March 2020. Many countries, and the EU, have reallocated public funding to crisis priorities, supporting health care, SMEs, vulnerable populations and regions particularly hit by the crisis. In addition, more two thirds of OECD countries have introduced measures to support subnational finance – on the spending and revenue side – and have relaxed fiscal rules. While immediate fiscal responses concentrated on protecting workers, unemployed and vulnerable populations, many governments also announced large recovery packages – already much larger than those adopted in 2008 – focusing on public investment. These investment recovery packages prioritise 3 priority areas accelerated by the crisis: (i) strengthening health systems; (ii) digitalisation; (iii) accelerating the transition to a carbon neutral economy Given the territorial differentiation of COVID-19’s impact, it is crucial for recovery strategies to have an explicit territorial dimension. Although this seems to be more visible in some countries, it is still a challenge in many. It is also crucial to actively involve subnational governments in the implementation of these strategies early on, and not only municipalities, but regions as well. This section focuses on six categories of measures taken by national and subnational governments to offer territorial responses to the crisis and the recovery:
A territorial approach to the health crisisThe importance of a place-based approach in the response to the health crisis has consistently grown for over the past months. In many countries specific measures regarding masks, school and restaurant closures, and full lockdowns are adopted for specific localities or territories, rather than applied nationally in order to limit the economic impact. Testing and tracing are at the heart of all crisis management strategies, as recommended by the WHO. Effective testing strategies, combined with social distancing, are ways to limit the large costs of confinements Testing and tracingTesting is an essential component of exit strategies from containment. Since the pandemic’s early stages, the WHO recommends massive testing to fight the coronavirus (WHO, 2020[89]). Frequent virus testing helps identify and isolate people who are infectious before the symptoms develop and prevent the risk of second waves. To reduce the risk of new waves of COVID-19 outbreaks, the OECD highlighted that 70%-90% of all people who have been in contact with an infected person need to be traced, tested and isolated if infected (OECD, 2020[90]). This requires a massive increase in testing and can be costly. Yet, the challenges and costs associated with doing so pale in comparison to the costs lockdowns. (OECD, 2020[90]). The WHO recommends massive testing to fight the coronavirus (WHO, 2020[89]) by identifying infectious people and isolating contagious contact-cases before symptoms develop. Testing and contact tracing was at the core of Korea’s successful strategy in to manage the first wave of infections and prevent a second one, with local governments responsible for COVID-19 screening stations allowing for quick and safe testing and monitoring of those in self-quarantine. European countries have considerably increased their capacities and generalised testing for suspicious cases between April and October 2020 (Figure 16). In the EU27, official data shows that more than 6 million RT-PCR tests are taken every week in October compared to 1.5 million in April (ECDC, 2020[91]). Subnational governments play a leading role in implementing the “track, isolate, test and treat” strategy. In more decentralised contexts, while central governments need to ensure financial resources and coordination, the actual policy delivery will be the responsibility of regional and local governments. In countries with more centralised health service delivery, local and regional governments contribute to organising testing and isolation measures. In either context – decentralised or centralised – it is important to leave room for local initiatives and experimentation. Doing so contributes to managing the pandemic’s asymmetric impact, which often requires quick local-level reactivity to identify and control clusters.
Figure 16. European countries have increased testing capacity Average weekly number of tests per 100 000 inhabitants Note: ECDC publishes weekly RT-PCR testing rate based on several data sources. The main source is case-based data submitted by Member States to TESSy, however, when not available, ECDC compiles data from public online sources. Regional disparities in testing capacities could put the national testing strategy at risk if people that have potentially been exposed to the virus in some regions are not identified early enough to break the contamination chain. For an effective contact tracing strategy, tests results must be handed over as early as possible, which requires that test kits and reagents are available. Contact cases must be contacted as quickly as possible. The multiplication of cases prompts an increasing share of tests results to be handed over late, making it more difficult to timely trace and isolate potential contagious people. Social distancingSocial distancing is at the core of crisis management. National health authorities and the WHO set out detailed recommendations to limit contagion. Among these are the need to ensure minimum distances between people. Advice on physical distancing affects public transport, schools, and urban mobility. One of the biggest challenges for local governments has been to organise the return to school under the best possible conditions, respecting social distancing rules amid soaring cases. Also, the use of protective equipment to prevent the transmission of the virus has considerably increased. Many subnational and national governments are recommending the use of masks in public transport, shops, and other commercial or public spaces. The timing of restriction measures matters at least as much as their duration. During the first outbreak in March 2020, countries that acted early managed to limit COVID-19 fatalities. Large-gathering adjustments (WHO, 2020[92]) and mandatory face mask covering (WHO, 2020[93]) need to be in place where the level of transmissions increase and place additional strain on the healthcare system. This requires accurate data and efficient testing strategies at the local level. To limit the spread of the virus and restore economic activity, the WHO recommends radically increasing testing as a means to better target social distancing. Local and national lockdownsMany countries have adopted measures of localised lockdowns, to limit the huge costs of national confinements. This is true in Aberdeen (Scotland), Auckland (New Zealand), Barcelona (Spain), Melbourne (Australia), certain provinces in India, and some German districts, for example. Such a differentiated territorial approach can avoid the huge costs of a national confinement, while providing more targeted responses to the problems where they occur. In federal countries, policies are defined at the state level and thus are differentiated by definition. Effective coordination between local authorities, health agencies and the central government are essential to manage local outbreaks. Country Examples
Pointers for action
A territorial approach to the economic and social crisisSupport to SMEs and the self-employed at regional and local levelsAcross the OECD, small and medium-sized enterprises (SMEs) account for 99% of all businesses and between 50% and 60% of value added. SMEs are particularly vulnerable during the crisis (OECD, 2020[4]). In addition to SMEs, the self-employed represent a considerable share of total employment in a number of OECD countries. Amounting to slightly less than 15% on average, self-employment is particularly prevalent in Greece, Italy, and Turkey where it exceeds 20% (OECD, 2020[4]). The self-employed are often less protected by unemployment benefits compared with standard workers. The restrictions put in place to tackle the epidemic directly and indirectly affect local businesses and the self-employed. Some businesses, such as restaurants and cafes, close during lockdowns, while other small and medium sized businesses and self-employed can continue operating but with considerably reduced demand. Some have laid-off or even dismiss their personnel. In many countries, local businesses were able to restart in large scale in June 2020, however new lockdowns across Europe, and targeted lockdowns elsewhere, hamper the recovery, particularly in the service sector. To help avoid running into liquidity bottlenecks and bankruptcies among local business and self-employed workers, most national governments have taken strong actions to support SMEs and micro-businesses, self-employed, artisans, liberal professions, retailers. This is especially the case in highly affected regions, for example those where there is a predominance of SMEs, such as in Northern Italy (OECD Trento Centre for Local development, 2020[106]) or whose economies depend significantly on tourism, culture, leisure and recreation, transport, construction, wholesale and retail trade, accommodation and food services, real estate, professional services, and other personal services (e.g. hairdressing), etc. (OECD, 2020[107]) Many subnational governments also took early action to support their local economies by supporting SMEs, artisans, retailers and self-employed affected by the crisis. Emergency measures taken by regional and local government cover a wide range of areas, from financial support to more indirect support schemes, including:
In several countries, support packages for the self-employed has been delegated to subnational governments because they are best informed about local conditions and needs. Since such support is comparable to social welfare for families and individuals, for which subnational governments are responsible in normal times, subnational governments are appropriately organised to carry out these measures (OECD, 2020[109]). In the EU, based on the OECD-CoR survey, 30% of subnational government respondents indicated that they were providing large direct support to businesses and self-employed (e.g. subsidy schemes, regional funds for capital risks), in addition to coping with the health emergency. Moreover, 28% declared that they largely provided technical assistance and support services to local economic actors, 26% that they have already granted tax incentives and relief to businesses and self-employed (e.g. exemptions, reduced or deferred rent payments for the business premises owned by local governments) and finally 25% indicated that they supported them indirectly, by offering advantageous credit lines, guarantee schemes or repayable advances, for example (OECD-CoR, 2020[65]). In this area, regional governments and large municipalities (OECD, 2020[110]) were more active than smaller ones, reflecting their broad responsibilities in economic affairs, particularly in the most decentralised countries. Country examples
Pointers for action
Territorial approaches to support vulnerable populationsVulnerable populations are doubly affected by the crisis. First, because they are often more at risk with from a health standpoint. Second, because they are particularly hard hit by the economic crisis. Subnational governments have undertaken proactive initiatives to manage the emergency and support vulnerable groups, including elderly people, people with chronic or long-term illnesses, disabled, poor households, homeless, underprivileged children and students, migrants, and other vulnerable populations, etc. Households without health insurance are also particularly vulnerable as they may be unable to access medical treatment, and may not be included in the case count. Indigenous communities are also particular fragile. Given the conditions in which these communities live, the threat of COVID-19 is aggravated due to factors ranging from poor health conditions and overcrowding, to the lack of access to adequate sanitation facilities. Indigenous populations are often also the most vulnerable in terms of economic consequences (Lustig and Tommasi, 2020[122]). Social protection is a key responsibility of subnational governments (see section 1). In particular, municipalities, which are closer to the population, play a crucial role in social protection of the most fragile groups, which are physically and economically more exposed to the pandemic (OECD, 2020[110]). Support measures to vulnerable groups are very diverse and include food/nutrition programmes for children and the elderly, meal and pharmaceuticals delivery, special care for the elderly and disabled people, emergency shelters and housing, vouchers to purchase essential goods, installation of sanitary facilities, exemptions or deferrals from rental payments for residents of social housing, mortgage payment assistance, waiver or relief of utility payments e.g. energy or water bill, emergency phone lines, engaging unemployed people in socially useful work, direct subsidies to pay for social services (e.g. early childhood services for children), prohibition of housing eviction, distribution of masks, etc. Subnational government expenditures related to social services and social benefits in EU regions and municipalities is anticipated to be the number one expenditure most impacted by the crisis (OECD-CoR, 2020[65]). In some countries, local governments have worked with national government authorities, as well as with NGOs and community volunteers to meet the social challenges. In several countries, subnational governments also provide financial support to ensure the proper functioning of services provided by social economy organisations (EU Committee of the Regions, 2020[108]). These organisations have also been highly affected by the crisis, and they play a crucial role in in addressing and mitigating the impact of the COVID-19 crisis on vulnerable populations ( (OECD, 2020[123]). Country Examples
Pointers for action
Upscaling the use of digital tools in regions and citiesThe COVID-19 crisis has accelerated several mega-trends and transformations, such as digitalisation. Digital government policy response to COVID-19 crisis spans different time horizons: react in the short term, resolve in the medium term and reinvent in the long term (UN, 2020[130]). Information-sharing, e-participation and two-way communication through the use of digital platforms permitted accurate reactions to the crisis in the short term. Public services, such as education and health care, shifted to a digital mode within in a few weeks’ time. Meanwhile, remote working is proving effective to reinforce social distancing and mitigate the economic impact of the crisis. COVID-19 has accelerated the digitalisation of public administration and public services delivery in regions, cities, and rural areas. In the medium term, subnational governments should leverage this experience to upgrade government digital services and enhance digital partnerships with other levels of government and the private sector. Nevertheless, unprepared and incomplete digitalisation poses significant challenges for regional and local governments, and the capacity to deal these varies significantly. The current crisis may widen these disparities, as many subnational governments were not necessarily prepared to go digital. In more remote and rural regions, digitalisation is likely to be particularly challenging if adequate IT infrastructure is lacking. In the long-term, greater convergence in the access to digital infrastructure would help address the urban-rural divide and increase the resilience of healthcare and public service delivery (UN, 2020[130]). Subnational governments and the use of digital tools to track the pandemicRegional and local governments are increasingly mobilising digital tools to track and stop the spread of the coronavirus. Expanded use of digital tools for tracking and information purposes in the pandemic has served to: (i) inform decision-makers, helping them adopt appropriate measures and contain the pandemic; (ii) to communicate with citizens transparently, strengthening trust, which is key to ensure compliance with containment measures. Digital tools have been crucial for regions and cities to better manage their immediate response to the crisis. Some new applications helped reduce the spread of COVID-19, and supported the gradual lifting of confinement measures by informing citizens if they were in proximity of people infected by the virus, and if so, encouraging them to inform health authorities, isolate and request support. Data tracking, as well as accurate and timely reporting, are essential components of crisis management, and can help prevent – or at least minimise – additional waves. Strong network effect may be at play as digital tools efficiency is increasing with the number of users. The use of these tools has also raised challenging questions regarding data protection and confidentiality. While acknowledging the benefits that tracking apps may bring to crisis management, they also affect the privacy of information. While in many countries the legal framework does not permit this type of data use, in others the use has been easier to implement. In order to minimise the risks regarding privacy and data protection, the European Commission, for example, has developed guidelines and a toolbox for developing COVID-19 related apps aiming to guarantee sufficient personal data protection.6 Making use of digital tools for data monitoring and reporting is also proving essential to keep citizens well informed and improve the interaction between citizens and governments. Many jurisdictions have developed specific web sites to disseminate information on the crisis’ development, communicating daily, for example, the number of cases and new measures adopted. Even when there is no dedicated website, most cities and regions around the world provide information about the pandemic situation on their own website, and provide links to their Ministry of Health’s website, their country’s national COVID-19 platform, or to the WHO website. The realisation of the potential benefits of digitalisation in this matter depends crucially on the relevance, quality and user-friendliness of the information being generated by the digital systems and made available to the public. To ensure a good and efficient use, it is important to involve key stakeholders (CSOs and other groupings of users of public services) early in the process of designing these systems. Accelerated digitalisation of services at the local level and digital divides across placesConfinement measures have accelerated the digitalisation of services, broadening the range of services provided on-line, including online administrative services, e-education and e-health. Trends towards the digitalisation of services were increasing even before the COVID-19 crisis. Across OECD countries, access to government services through digital portals has tripled since 2006 (de Mello and Ter-Minassian, 2020[131]). Prior to the crisis, the results of a survey on the use of digital information systems by local governments suggested that, on average, the degree of digitalisation was larger for local services in spatial planning, construction, tourism and culture and sports, and smaller for social services.
Digital divides across regions and across urban-rural areasThe pandemic has also helped reveal the digital divides within countries and has, in some cases, accelerated digital inclusion responses. In OECD countries, access to, and use of, the internet varies significantly within countries. Regional differences in the percentage of households with broadband access are strongly pronounced both in countries with a high ICT penetration, such as France, Israel, the United States and New Zealand, and countries with low average ICT access such as Mexico or Turkey (OECD, 2018[134]). In the US, for example, nearly 25% of 15 years old with disadvantaged backgrounds have no access to a computer. In the poorest regions of Italy, 42% of families have no access to a computer/tablet at home and 20% of 6-7 year-old children are in that same situation. In addition, substantial gap remains in access to high quality internet among urban and rural households. Across OECD countries, 85% of urban households vs 56% of rural households have access to high quality Internet (OECD, 2020[135]). This inequality gap risks being accentuated as some municipalities do not have the capacities to follow the digital transition in the short and medium term. To reduce this risk, local initiatives need to be accompanied by nation-wide initiatives to tackle the digital divide (de Mello and Ter-Minassian, 2020[131]). e-Democracy at the local levelWhile there was a growing tendency among governments to adopt e-democracy tools (e-government, e-governance, e-deliberation, e-participation and e-voting), the pandemic has accelerated it. Regional and local governments, which were often reluctant to adopt such measures, have been forced by the circumstance to overcome this in order to ensure the continuity of their work. Proof of this is that many regional and local councils, for example, have moved to permit on-line debating and voting (de Mello and Ter-Minassian, 2020[131]). Country examplesUse of digital tools to track the pandemic
Informing and engaging citizens
Moving towards e-governance and digital services
Addressing digitalisation challenges: bridging the digital divide
Pointers for action
Supporting subnational financeThe expenditure effects of COVID-19 on subnational governments are considerable, especially in countries with decentralised service provision, and the revenue effects are even greater. Without sufficient compensation for the extra spending and the revenue losses caused by COVID-19, many subnational governments could be forced to implement sharp cuts on operating and capital spending. This could endanger the efforts for a coordinated recovery response, and weaken the equity and quality of service availability among subnational governments. Many central governments have announced considerable fiscal measures to help subnational governments cope with the fiscal shocks. State governments in federal countries have also announced measures to support local governments. Two-thirds of OECD countries have adopted measures in support of subnational government finance. The measures implemented in countries can be classified into four categories (Figure 17). They include revenue-side measures), expenditure-side measures (e. financial management measures and measures related to fiscal rules and debt, including to facilitate the use of debt for short and long term needs. Fiscal rules, whose purpose is to mitigate subnational fiscal risks through the imposition of constraints on fiscal policy, are susceptible to pro-cyclical tendencies if they are too rigid or subject to short time frames. During a crisis, it may be possible to relax such rules along two lines, either formal escape clauses that can be triggered by prescribed circumstances, and/or an effective suspension of the rules in practice when it is unreasonable to expect subnational governments to comply (OECD, 2020[68]). Revenue-side measures and more flexible fiscal rules seem to be the more frequently applied measures, although measures to improve financial management are also quite widespread. For example, 46% of CoR-OECD survey respondents –– report that some fiscal rules have been relaxed or are planning to be (18%) in the near term (OECD-CoR, 2020[65]).
Figure 17. Four main categories of fiscal instruments to support subnational finance Source: Authors” elaboration These measures can be further divided according to the time span of the effects. For example, subnational governments grant permit a relatively quick compensation of lost tax revenue and increased expenditure. Transferring or creating new taxes or providing more taxing powers to subnational governments are effective in the medium and long terms, but not always adequate for responding to immediate needs. Also transferring service responsibilities from subnational governments to central governments is likely to be slower than transferring additional resources to subnational governments to secure service provision. Some measures are meant to be temporary, others can be implemented in a more permanent way. Increases in central or state government transfers are likely to be insufficient to fully offset decreased revenues from taxes, user charges and tariffs, and property income. Furthermore, in the longer term, central government transfers will probably be cut to rebalance public budgets and restore fiscal stability, for example through future austerity measures. While in the short term the support from higher levels of government may help fill the fiscal gap created by the crisis, subnational governments need to prepare for the crisis recovery phase, and possible consolidation plans. The crisis is likely to have negative medium and long term effects on subnational government finances. Reforms that ensure the stability, the operational capacity and the resilience of subnational finance are important, and should be carefully planned and implemented. Support to subnational government finance can also be indirect, by supporting related entities, such as public transport agencies, energy companies and other utility companies. In Germany, the federal government will take over the costs of housing benefit for welfare recipients from the municipalities (EUR 4 billion) and support local public transport networks (EUR 2.5 billion) (BNP Paribas, 2020[145]). In Latvia, municipal capital companies, whose turnover has decreased by 50% due to the COVID-19 crisis, may receive a state budget loan to increase the company’s share capital in order to finance its maintenance costs. In the US, the CARES Act includes USD 25 billion for transit agencies to compensate for part of the revenue gap. The methods used to prepare these measures vary from country to country, depending on existing inter-governmental fiscal relations, and the culture and practices of dialogue and negotiation between the central and subnational governments. In countries where fiscal coordination is already well developed and effective, support measures have been developed and discussed between the different responsible ministries and representatives of subnational governments. In several countries, the discussions about urgent support, compensation schemes and other financial measures have been discussed and agreed upon with the national associations of subnational governments, resulting in formal agreements or more informal deals. Country examples
Pointers for action
Invest in ICT and e-government tools for fiscal and financial management and skilled financial managers to help financial decision and management, especially in times of fiscal crisis Public investment recovery strategiesNational investment recovery strategiesImmediate fiscal responses to COVID-19 focused on supporting firms and households. Since June, many national governments have announced large economic recovery packages, focusing largely on public investment. These investment recovery packages prioritise three areas: (i) strengthening health systems; (ii) digitalisation; (iii) accelerating the transition to a carbon neutral economy. The OECD and the IMF have made a strong call to scale-up public investment to address the challenges for COVID-19 recovery, and subnational governments play a key role as they are responsible for 57% of public investment in OECD countries. Quality infrastructure investment is part of the answer to the COVID-19 crisis. National and subnational governments need to invest more – by better exploiting the existing and potential fiscal resources for investment and mobilising private investment. The IMF Fiscal Monitor estimates that a 1% GDP increase in public investment in advanced economies and emerging markets has the potential to push GDP up by 2.7%, private investment by 10%, and to create between 20 and 33 million jobs, directly and indirectly (IMF, 2020[124]). Local, regional and national governments also need to invest in a smarter way, by prioritising needs, focusing on post crisis priorities in health, digital and environment infrastructure and better managing public investment at all levels of government (OECD, Forthcoming[166]). The demand for infrastructure was already high before the COVID-19 crisis, not only for new construction but also for operating and maintaining existing stock. The OECD estimates that USD 95 trillion in public and private investment will be needed in energy, transport, water and telecommunications infrastructure, globally, between 2016 and 2030 (OECD, 2017[167]). Cities and regions have important needs for maintenance and new investment in renewable energy, low-carbon buildings, energy efficiency, waste and pollution management systems, and clean public transport. Developed countries will have to invest heavily in infrastructure, in particular to maintain, upgrade or replace existing (and often obsolete) infrastructure. US infrastructure, for example, is in need of investment, according to the American Society of Civil Engineers, which estimates that the US needs to spend some USD 4.5 trillion by 2025 to repair the country's roads, bridges, dams and other infrastructure, such as schools and airports. Similar issues are evident in Europe. In Germany, for example, the KfW, Germany’s state investment bank, calculated that municipalities need to spend at least EUR 138 billion to bridge the backlog of urgent infrastructural investments. Investment recovery strategies need to be well targeted to a few priority areas, and how these strategies are managed largely determines their outcomes, as highlighted by the OECD Recommendation on Effective Public Investment across Levels of Government(OECD, 2014[168]). Recovery investment strategies should align with ambitious, long-term policies to tackle climate change and environmental damage. Post-crisis recovery strategies are a unique opportunity for governments to allocate recovery funds to sustainable initiatives and take measures to reduce the carbon-intensity of economic activities. Technologically advanced, sustainable and resilient infrastructure can pave the way for an inclusive post-COVID economic recovery (WEF, 2020[169]). It is also essential to look beyond physical infrastructure investment, and consider investment needs in skills development, innovation and R&D. It is particularly important to ensure that investments from stimulus packages do not impose large stranded asset costs on the economy in coming decades, for instance because they bet on declining technologies or place projects in high-risk flood zones (World Bank, 2020[170]). It is important for these investment recovery strategies to have an explicit territorial dimension. Although this seems to be more visible in some countries, for example in Australia, Canada or France, it is still a challenge in many. It is also crucial to actively involve subnational governments in their implementation early on, and not only municipalities but regions as well. It is important to draw some lessons and avoid mistakes made with the 2008 crisis when considering investment recovery strategies associated with the COVID-19 crisis (OECD, 2020). While many public investment projects can be launched in the short-term, care must be taken not to focus on speed as the only criteria. The risks are also to atomise the allocation of the funding in a myriad of small infrastructure projects to spend the money rapidly, at the expense of long-term priorities (e.g. sustainability and resilience). In the implementation of investment recovery strategies in 2008-09, a large part of the funding was fragmented into small projects at the municipal level – rather than the regional level. For example, while Spain’s 2008 investment recovery plan allowed for joint applications through the state fund for local investment, most municipalities did not use this option. Only six out of more than 1 000 associated municipalities applied for project funding (OECD, 2013[27]). For COVID-19 recovery, intermediary levels of government – regions, states, provinces – should be included in implementing national investment recovery strategies. The European Union Recovery PlanThe EU has redirected a significant level of funds to help Member States tackle the COVID-19 crisis, for example:
The EU also adopted measures to ensure additional flexibility in the use of structural funds. Through the Coronavirus Response Investment Initiative Plus, Member States can transfer money between different funds to meet their needs. Resources can be redirected to the most affected regions, thanks to a suspension of the conditions on which regions are entitled to funding. Finally, Member States can request up to 100% financing from the EU budget between 1 July 2020 and 30 June 2021 for programmes dealing with the pandemic’s impact. The EU has enabled maximum flexibility in the application of EU rules on:
Unlike in 2008, in 2020 the EU strongly mobilised cohesion policy to address the COVID-19 crisis, lifting or modifying the rules that apply to European Structural and Investment Funds.. As of October 2020, more than100 programmes were changed to respond to the COVID-19 crisis. On July 21, the EU announced that EUR 390 billion would be distributed as grants and EUR 360 billion would be available in loans to Member States, in this way introducing the fiscal stimulus package of EUR 750 billion announced in late May 2020. To fund the package, the EU proposes borrowing up to EUR 750 billion on financial markets (European Council, 2020[171]). Supporting subnational public investmentThe risk of using public investment as an adjustment variable is high post COVID-19, given the contraction of self-financing capacities and increasing deficits (OECD, 2020[17]). The scissor effect on subnational public finance, i.e. an increase in expenditure and a decline in revenue, could lead to increased deficits and short and long-term debt. This may lead to fiscal consolidation plans in the medium term, as after 2010, leading to potential cuts in public investment and undermining recovery. To a large extent, the fiscal impact of the COVID-19 crisis on subnational governments depends on the support provided by central or federal government to maintain, or boost subnational investment through stimulus packages (capital transfers), as well as to build the capacity of subnational governments to access long-term borrowing. While watching the sustainability of public finances over the longer-term, it is important for countries to avoid replicating the scenario that took place after 2010, when drastic cuts in subnational public investment created a pro-cyclical effect impeding the recovery. In some regions and cities, public investment projects are already cancelled or postponed. In June/July 2020, 31% of EU subnational governments respondents to the OECD-CoR survey were active providing public investment stimulus measures (OECD-CoR, 2020[65]). Regions were more active at providing public investment stimulus than municipalities, with 40% of regions having done so to a large extent compared to 26% of municipalities COVID-19 exit plans and recovery strategies are being used by 42% of subnational government respondents to promote the greening of their agenda, and 28% are considering to do so. Regions (50%) and large municipalities are particularly interested. More than two-thirds of regional and municipal respondents state that the transition to a sustainable and low-carbon economy should shape long-term regional development policy to a large extent. This contrasts with the fact that less than 50% of respondents are considering the use of exit plans and recovery strategies to promote a greening policy or sustainability agenda. It is critical that subnational governments make the most of their recovery strategies by integrating green and climate priorities. Different instruments are being activated to maintain, or even accelerate, public investment projects at the subnational level (Figure 18). In addition to improving self-financing capacity i.e. gross savings, these include various classical fiscal instruments: relaxing budget rules, increasing capital transfers and subsidies, easing the access to long-term projects on both credit and financial markets and supporting projects preparation and implementation. Other financing mechanisms may be activated in the future such as public-private partnerships schemes or equity financing.
Figure 18. Boosting public investment at subnational level Source: Authors’ elaborationCountry examplesNational investment recovery strategies
Specific measures to support subnational public investment
A number of states and regional governments are also developing initiatives to support public investment in their areas, and to support local government investment projects.
Pointers for action Implementation of national investment recovery strategies
Supporting subnational public investment
Inter-governmental coordination: an essential driverInternational co-operation is proving essential for tackling this global challenge, and so is domestic coordination among levels of government, particularly for addressing regional and local socio-economic issues and long-term recovery. A coordinated response by all levels of government can minimise crisis-management failures. Effective coordination between national and subnational governments, and across jurisdictions, is required in all countries, be they federal, unitary, centralised or decentralised, and for all dimensions of the crisis – health, economic, social and fiscal.. In the OECD-CoR,, 71% of EU subnational government respondents surveyed in the European Unionhighlighted that the lack of coordination (vertical and horizontal) with other levels of government is among the biggest challenges they face in managing the health crisis (OECD-CoR, 2020[65]). Vertical coordination among the national and subnational governmentsCoordination among the national and subnational governments is the “first step of an effective response”, as stated by the World Health Organisation (WHO) at the pandemic’s outset. Non-coordinated action among levels of government can generate collective risks, such as “passing the buck”, and conflicting responses. In places where subnational governments operate with high degrees of autonomy, policy responses are more likely to be fragmented. In countries where bottom-up coordination and communication is weak, there is a greater possibility of operating with one-size-fit-all measures that may not address local needs. These problems can be avoided or curbed through effective vertical coordination. Many countries have experienced coordination challenges between national and subnational governments. Less than half (49%) of respondents representing subnational governments in the EU believe that vertical coordination mechanisms with the national government have been effective in managing the COVID-19 crisis in their country (OECD-CoR, 2020[65]). Associations of regional and local governments are playing an important role in supporting vertical coordination. On the one hand, they act as interlocutors between national and subnational governments On the other hand, they continue to coordinate efforts, identify solutions, and support the implementation of emergency measures. Regular dialogue between the national government and these associations can be particularly valuable to address crisis-generated social and economic damage throughout a country. Country ExamplesHealth responses: vertical coordination
Economic and social responses: vertical coordination
Coordinated fiscal responses
Pointers for action
Supporting cross-jurisdiction cooperationHorizontal cooperation across jurisdictions – be they countries, regions, or local governments – is just as important as vertical cooperation, particularly in in decentralised and federal countries, which have more differentiated approaches across territories. Externalities linked to the coronavirus are so high, that no single jurisdiction, or country, can manage these on its own. Coordination across regions is essential to avoid disjointed or contradictory responses, which pose a collective risk to a country’s population. For example, in federal systems, there may be limited incentive for cross-jurisdiction cooperation (e.g. sharing equipment, skilled personnel, etc.) if supporting a neighbour jeopardises one’s own ability to adequately respond to a crisis situation. Cooperation is an imperative – and not an option. The role of national governments is essential in minimising coordination failures and ensuring a coherent approach, even in federal countries. Cooperation across jurisdictions is fundamental to limit the risks of new waves of infections or to mitigate the impact where cases have already rebounded. Information about new cases and clusters needs to be communicated extremely quickly to avoid propagation – across states and regions, and especially among municipalities belonging to the same functional area. Cross-jurisdiction cooperation also supports recovery efforts, including by avoiding a fragmented approach to public investment recovery strategies. The assessment by EU subnational governments on the effectiveness of horizontal cooperation mechanisms is very heterogeneous across categories: 75% of inter-municipal groupings (IMC bodies) and 55% of regions consider they have been effective in managing the crisis compared to 42% of municipalities (Figure 19) (OECD-CoR, 2020[65]).
Figure 19. The effectiveness of horizontal coordination mechanisms among subnational entities Source: OECD (2020) Such cooperation extends across-borders, too. A critical issue emerged in cross-border regions where cooperation has been made more difficult because of borders closure, restrictions on mobility in particular for cross-borders workers, and the lack of effective coordination arrangements. In many cases, EU Member States have implemented uncoordinated border closures and unilateral measures. In the OECD-CoR, the lack of cross-border coordination was the strongest coordination issues. Around one-third of respondents reported that cross-border cooperation between subnational governments was broadly ineffective or non-existent, while only 22% found such cooperation effective or very effective (OECD-CoR, 2020[65]). However, several cross-border cooperation mechanisms did function well through the crisis and, arguably, allowed for increased resilience and paving the ground form reinforced cooperation (EU Committee of the Regions, 2020[108]). Country examplesMany countries, regions, cities and associations of subnational governments have put in place specific measures to support horizontal and cross-border cooperation. A few examples are highlighted below. Cooperation across municipalities
Cooperation across regions
Cross-border cooperation
Pointers for action
Looking ahead: How COVID-19 is reshaping multi-level governance and regional developmentNavigating the emergency: a challenge in sequencingThe COVID-19 pandemic is requiring all levels of government to act in a context of great uncertainty and under heavy economic, fiscal and social pressure. Since mid-2020, and especially with the onset of a second wave of infections in many countries, a new challenge has been revealed: the limited ability to sequence policy action. National, regional, and local governments find they cannot count on following a straight or linear course of policy action to manage, exit and recover from the crisis. Instead, governments must act on all fronts simultaneously and in synchrony. This need – for flexibility and adaptability – is leading governments to reconsider their multi-level governance systems, to revaluate their policy tools, and to reassess their regional development priorities. Success depends on mobilising and coordinating multiple policy sectors and all levels of government, and adopting place-based approach. It relies on clear leadership, balanced with effective coordination, consultation, and a collaborative approach among government and non-government actors. It also depends on reinforcing trust in public institutions and harnessing the power of regular communication with stakeholders and citizens. The responses to COVID-19 are revealing a potential in regional development priorities – emphasising greater regional resilience, including through more accessible basic services, narrower digital divides, adjusted global value chains and industrial policy, and broader climate action. How COVID-19 is shaping the future of multi-level governanceThe COVID-19 crisis highlights the importance of effective multi-level governance in managing this crisis. It is leading countries to re-evaluate their multi-level governance systems and regional policy instruments in an effort to make them more “fit for purpose”, more flexible, and better able to respond to the differentiated needs of regions. Doing so could mitigate the sequencing difficulty, helping subnational governments simultaneous manage new eruptions of the virus or other emergencies, recover from the crisis, and achieve greater resilience. The balance between centralised and decentralised territorial management is being reconsidered, as are coordination mechanisms. The COVID-19 crisis underscores the fundamental need for a coordinated response to emergencies and their aftermath, and accentuates the risks associated with uncoordinated and/or heavily bureaucratic approaches to crisis management – regardless of whether a country is federal or unitary, centralised or decentralised. Coordination is just as necessary across and among levels of government as it is between government and non-government actors, including citizens. Successfully managing the pandemic’s differentiated impact rests with differentiated responses, emphasising the potential advantages of experimentation and a place-based approach to exit and recovery strategies. Success also depends on a strong partnership between national and subnational governments, as well as with the private and third sectors, civil society and citizens. Effective central-level leadership, particularly in setting strategy and guidelines to support coherent responses and minimise competition among jurisdictions, a clear assignment of roles and responsibilities, and subnational governments well-capacitated to act in a manner coherent with meeting the immediate needs and long term priorities of their territories are contributing factors to an effective partnership. It is also reinforcing how national governments can best support regional and municipal authorities manage and recover from a crisis. Among the 300 EU regional and municipal governments surveyed by the OECD and the Committee of the Regions (CoR) in June 2020, 75% indicated that funding was one of the most helpful levers for addressing the next crisis (OECD-CoR, 2020[65]). This highlights the increasing importance of subnational finance and well-funded mandates. On the one hand it can lead to a re-evaluation of traditional budget sources, just as it could mean identifying external funding possibilities. Clearly established roles and responsibilities among levels of government (58%), and offering incentives for pilot policies or programmes in sectors increasingly important since COVID-19 (52%) were also identified as areas where higher-level government support is particularly welcome (Figure 20). A change in how responsibilities are assigned and financed among levels of government, including for crisis response and management, and more experimentation though pilot policy actions and initiatives could result in more flexible multi-level governance systems and facilitate territorially differentiated responses.
Figure 20. Multi-level governance policy reforms Notes: N=300 EU regional and municipal governments; Original question asked: How helpful would the following national government measures be to manage the next crisis. Source: (OECD-CoR, 2020[65]) A centralised or decentralised approach in equilibriumCOVID-19 reveals the advantages and disadvantages to both highly centralised and highly decentralised approaches. For instance, a centralised approach to managing aspects of the public health emergency can support a rapid and uniform response across a country, overriding potential inequalities, be they in resource capacity or in the treatment of individuals (e.g. quarantining those who traveling from a specific country, state, region or province). This is evident in the ability of national governments to transfer patients from hospitals in highly affected regions to less affected ones, as seen in France. In the early days of the pandemic, for example, the French government transferred patients from hospitals in the most affected regions, such as Grand-Est to those less affected in the South. It can also facilitate quick information and knowledge sharing, which is essential in times of crisis (Silberzahn, P., 2020[193]). On the other hand, a decentralised system can support greater flexibility and experimentation in the face of uncertainty, making room for “bottom-up”, innovative approaches (Silberzahn, P., 2020[193]) that can be applied elsewhere, if successful and appropriately adapted. The multi-pronged “Veneto approach” to controlling the COVID-19 virus originated in a single Italian town, Vò-Euganeo, extended to entire Vento region and eventually was adopted, in part or in full, by other Italian regions. Additionally, decentralised approaches create space for regional and local governments to react and respond quickly. The decentralised networks of German laboratories were instrumental in realising the proactive testing strategy put in place by the country. Furthermore, COVID-19 is reinforcing centralisation/decentralisation as a means to achieve objectives and not an end-state (OECD, 2019[194]). A good illustration is the fact that some governments are temporarily recentralising while others are temporarily decentralising in order to manage the crisis. Many countries adopted state-of-emergency laws, giving central or federal governments the right to take over some subnational responsibilities. By contrast, some countries decided to decentralise additional powers to subnational governments, at least temporarily. For example, Switzerland has temporarily recentralised health management in response to the crisis. In the early days of the pandemic, the UK temporarily decentralised health management, and as the pandemic continues the government is evaluating how to engage more with devolved governments. Successful short, medium and long term responses to the coronavirus-induced crisis does not depend heavily on whether a country is federal or unitary or on its degree of decentralisation. Rather, it depends more on the coordination mechanisms applied, as well as on the ability of government actors to align priorities, implement joint responses, support one another, and foster information sharing, including with citizens (OECD, 2019[194]). The crisis is also accentuating the importance of a risk management strategy, a clear assignment and understanding of responsibilities among levels of government, particularly in responding to a crisis, and of ensuring properly funded mandates at the subnational level. This contributes to meeting the immediate needs that keep arising, but also to ensuring future capacity to do so. Emergency or crisis situations demand rapid response capacity to prevent escalation and control damage. The ability to adapt to uncertainty and change, and to course correct as needed becomes central to successful crisis management. Because an emergency’s immediate impact is felt locally, regional and local governments need room to act quickly, effectively and responsibly – regardless of whether they operate in centralised or decentralised contexts. Such capacity, however, can frequently depend on having sufficient flexibility and discretion to mobilise resources, for example, or to make and enact decisions that can help mitigate or prevent further crisis-induced damage. It can also mean temporarily or permanently reducing burden and red-tape surrounding administrative procedures, making it easier for subnational governments to fulfil responsibilities and take decisions, and for eligible businesses and citizens to apply for and receive emergency support. Finally, managing COVID-19’s differentiated impact requires a degree of flexibility to allow for territorial responses that are place based and adapted to the most pressing needs and the preparedness of specific localities. This is can support a region in taking non-sequential but coherent action – addressing the emergency, containment and recovery demands based on the pandemic’s status in a region. This differentiated territorial approach is as apparent and relevant in federal or highly decentralised countries as it is in unitary or highly centralised ones. The importance of a place-based approach in response to the health crisis has consistently grown. In many countries specific measures regarding masks, closure of schools or restaurant closures, and full versus partial lockdowns are adopted for specific localities and territories, rather than applied to the national level, to limit the economic impact. Good coordination minimises the risk of crisis management failuresA coordinated response by all levels of government, in both federal and unitary systems, can minimise crisis-management failures. Many countries with past experience in crisis management seem better prepared to tackle the COVID-19 crisis in terms of coordination. The main risk of non-coordinated action in a crisis is to “pass the buck” to other levels of government, which can result in a disjoined response and generate collective risk. For example, in federal systems, there may be limited incentive for cross-jurisdiction cooperation (e.g. sharing equipment, skilled personnel, etc.) if supporting a neighbour jeopardises one’s own ability to adequately respond to a crisis situation. Horizontal coordination is essential to minimise coordination failures and avoid disjointed responses that can lead to collective risk. Countries are approaching this in a variety of ways and at different levels of government. When consulted on how to manage a successful exit strategy, respondents indicate coordination and financial resources as of utmost importance: 90% of subnational governments report that coordination in the design and implementation of measures among all levels of government is very important, and 79% cite additional financial resources for subnational entities is very important. Communication with the public and the possibility to adapt measures to the local situation are also considered as key in a successful exit strategy (Figure 21). While results are broadly homogeneous between the different subnational government categories, regions and municipalities have slightly different priorities. Regions place more emphasis than municipalities on adapting exit measures to the local context (76% versus 68%), while municipalities are more likely than regions to highlight the need for additional human resources (48% versus 33%).
Figure 21. Policy tools at the core of a successful exit strategy Source: (OECD-CoR, 2020[65]) Many critical aspects of crisis response – such as containment measures, health care, social services, economic development and public investment – are shared among levels of government, reinforcing the need for effective vertical coordination. Federal and unitary countries alike have been introducing or mobilising vertical coordination mechanisms to ensure a coherent crisis response. Multi-level coordination bodies are commonly being used for this purpose, for instance the National Cabinet in Australia, the COVID-19 Social Roundtable (Mesa Social COVID-19) in Chile, and the Conference of Presidents in Spain. The more decentralised the country, the greater the need to mobilise coordination platforms to minimise the risk of a fragmented policy response. National associations of subnational governments are also playing a role to ensure vertical coordination efforts – disseminating information, identifying and sharing solutions, and supporting the implementation of emergency measures by their members. Effective crisis response highlights that robust vertical and coordination mechanisms are more important than ever. The value of partnerships and communication for crisis management and beyondNo single government, or level of government, can meet the demands of crisis management alone. The COVID-19 crisis, given its scope and magnitude, is challenging all levels of government to reinforce their partnerships – with each other, with the private and third sectors, and with citizens. If priorities are mutually identified and agreed upon, and initiatives are designed with sufficient information exchanged between the developers and implementers, then the likelihood of an effective support programme will be greater. While this certainly requires coordination, it also means a clear delineation, understanding and agreement of roles and responsibilities, and mutual respect, in the short, medium and long term. Quickly mobilising necessary public, private and third sector actors can help governments respond to a crisis more effectively. Countries are applying this insight in various ways. Asian countries, for example Korea, are drawing on their experience with SARS. In Attica Greece, the regional government is working with the Medical Association of Athens to establish preventive measures against the coronavirus (European Committee of the Regions, 2020[195]). Crisis management plans used in Asia and in the Nordic countries, for example, can help rapidly mobilise diverse actors to meet crisis-induced challenges, such as those arising from this pandemic. Clear, transparent, rapid, and accurate communication among all parties is fundamental on many levels. First, it helps government and emergency personnel respond in a targeted manner. New Zealand’s COVID-19 Local Government Response Unit (New Zealand Government, 2020[196]) such activity. Second, it can promote knowledge sharing which then leads to the application of more effective solutions. Portugal’s General Directorate of Local Authorities established a contact line to support information exchange and peer learning among municipalities. The Local Government Association in England provides communications templates to help City Councils share good practices and exchange information (Local Government Assocciation, 2020[197]). Third, and perhaps most importantly, it contributes to trust in the institutions and people leading the crisis management effort, which in turn can mitigate the crisis’ negative impact. Effective crisis communications depends on the relationships across all levels of government and with the public and private sectors. It means communicating early, clearly, regularly and with a coherent message. Subnational governments need to know what they are facing and what is expected of them – their role must be clear. Citizens and businesses need to be reassured that the government has a strategy for each stage of the crisis Like subnational governments, they too need to know what is expected of them, and feel reassured that they are supported through a difficult period (Smith, N., 2020[198]). There is evidence that in the face of COVID-19 people expect government to lead in all areas relevant to the pandemic: containment, information dissemination, economic relief and support, helping people cope, and getting the country back to normal (Edelman, 2020[199]). Less is expected of business, NGOs and media. One of the most powerful aspects of a partnership the ability to generate agreed upon objectives, priorities and plans. Taking unilateral decisions can lead to non-compliance with measures at a minimum and larger-scale demonstrations or conflict at a maximum, as seen in France (Marseille), Italy, Spain, the UK and the US during this crisis. Bringing together a territory’s various levels of government to identify objectives and design measures in collaboration can lead to stronger implementation of containment and recovery efforts. It is also important to ensure sufficient and timely consultation with other stakeholders, including business owners, service providers, teachers and parents, and civil society. This can increase the possibility that measures are followed, despite “virus-fatigue”, and can lead to more locally appropriate, more innovative initiatives. A September 2020 survey on the perception of EU citizens regarding the role of regional and local authorities in managing the COVID-19 crisis, and subnational government influence in EU politics and policies more broadly indicates that about two-thirds of Europeans think that regional and local authorities have insufficient influence on decisions made at the EU level (EU Committee of the Regions, 2020[108]). Specifically Europeans would like their regional and local authorities to have more influence on policies related to health (45%), employment and social affairs (43%), and education, training and culture (40%). Furthermore, 58% of surveyed Europeans think that greater influence of regional and local authorities would have a positive impact on the EU’s ability to solve problems (EU Committee of the Regions, 2020[108]), and, implicitly, those associated with the coronavirus. The importance of trust in governmentThere is evidence that, in some countries, trust in national government is increasing during this crisis. Where it is not, the gap is often filled by increased trust in local government (which tends to be higher even in non-emergency times) (Edelman, 2020[199]). This holds true at the European level, as well. More Europeans trust regional and local authorities (52%) than they trust the EU (47%) or their national government (43%) (EU Committee of the Regions, 2020[108]). More Europeans (48%) trust that regional or local authorities are taking, and will continue to take, appropriate measures to overcome the economic and social impact of COVID-19 crisis than the European Union (45%) or national governments (44%). Citizen trust in government can help mitigate the impact of “virus-fatigue” that contributes to a more lax uptake of virus control measures (e.g. confinement, social distancing, wearing masks), and jeopardise the success of emergency and containment actions. This further highlights the importance of successful multi-level governance. Each level of government depends on the other for different aspects of policy and service design and delivery to manage the impact of COVID-19. At the same time, ensuring policy success will depend heavily on subnational governments and their ability to deliver solutions. Citizen trust can play a role in ensuring compliance with containment measures and mitigate the impact of “virus-fatigue”. It becomes that much more important, then, to ensure that subnational governments have appropriate and adequate support from higher levels of government the to deliver solutions. Furthermore, trust in government may play a role in COVID-19 related health outcomes. In some countries, COVID-19-related fatality rates are higher where governments enjoy lower degrees of trust (Figure 22). This is particularly the case in Brazil, Chile, Colombia, Italy, Mexico and the US. While many factors are at play, including health and social system capacity, deprivation levels, etc., it could signal that governments facing lower degrees of trust may have difficulty enforcing containment measures and ensuring their population’s compliance with public health measures. Moving forward, these governments may be less likely to benefit from any uptick in trust generated by the crisis.
Figure 22. The relationship between trust in government and COVID-19 fatalities Note: Data for COVID-19 deaths have been retrieved for OECD countries, Brazil, Russia and South Africa on 8 November 2020. Source: Authors’ elaboration, based on data from: Johns Hopkins University Coronavirus Resource Centre, OECD Trust in government database While this crisis may be generating record levels of trust in government, the challenge for public officials will be to maintain the trust. All levels of government may want to take stock, evaluate the trust-building actions adopted during the pandemic, and consider the opportunities they offer, post-pandemic. While it can take many years to build trust, it can be rapidly lost (Edelman, 2020[199]). More resilient regions: a regional development policy priority post COVID-19COVID-19’s differentiated impact on individuals, communities, and regions and the potential risk of its accentuating territorial disparities lends new urgency to a place-based approach to regional development and generating greater inclusiveness. The role of effective partnerships and trust among different sets of actors, the need for flexibility and adaptability, and the importance of an equilibrium between top-down and bottom-up action serve to reinforce this urgency. It has also rekindled policy dialogue around regional resilience. The pandemic and the demands it places on all levels of government is generating a shift in regional development priorities towards reinforcing regional resilience (Figure 23).
Figure 23. Identified regional development policy priorities arising from the COVID-19 crisis Note: N=300 EU regional and municipal governments; Original question: To what extent would you like the COVID-19 crisis to reshape regional development policy priorities in the future by putting more emphasis on the following elements? Source: (OECD-CoR, 2020[65]) Generating more resilient regions means first ensuring that regions are able to absorb, recover (or bounce-back) from and/or adapt to the impact of economic, financial, environmental, political and social shock or chronic pressure; and then that they are able to continue meeting the needs of citizens and businesses at least as well as – and ideally better – than before a crisis. Post-COVID-19, building more resilient regions may see greater national and subnational-level investment in health care and other public services. In the EU, 76% of surveyed regional and municipal governments believe that regional development strategies should place greater emphasis on accessing quality public services, including health in all territories (OECD-CoR, 2020[65]). It is also likely to result in a re-evaluation of regional policy objectives, including with respect to their urban/rural equilibrium, the digital divide, the balance between tangible and intangible assets (infrastructure such as broadband, public transport, and social housing, R&D, innovation, well-being and culture, productivity and industrial profiles, and how to best meet higher-level aims, including those relating to the climate imperative. Rethinking the urban/rural spatial equilibrium and the role of teleworkThe COVID-19 pandemic and its aftermath might contribute to strengthening urban-rural links. Teleworking is a significant factor in a territory’s ability to mitigate the crisis’ economic impact. It has required investment and adaptation (including cultural and behavioural) on the part of employers and employees. There is some discussion around whether increased possibilities for teleworking will lead people to leave large cities and establish residence in smaller cities or rural areas; yet this is unlikely to be the case. People are attracted to cities for their employment opportunities but also for access to services and amenities. At the same time, medium-sized cities could see a boom, as well as smaller municipalities adjacent to larger cities. The long-term impact on the urban/rural spatial equilibrium may be difficult to predict, though telework is likely to remain a permanent feature of work to some degree. Rethinking global value chains and industrial policyThe impact of COVID-19 on national, regional and local economies is also propelling governments to rethink their industrial policies and production processes and the length of global value chains. Consideration is being given to the opportunities associated with reshoring strategic industries. Doing so in raw materials, for example, could reactivate rural economies as hosts of these industries. Also beneficial to rural economies can be the potential jobs created if the manufacturing sector uses and produces services in addition to goods. Greater emphasis on local production processes can favour shorter lead times and also shorten supply chains, making these more sustainable by reducing carbon emissions – a popular point with consumers. There are challenges to manage, however, and these can vary according to a region’s industrial drivers. For example, regions with major ports or logistics centres and those with large shares of employment in manufacturing or other tradeable sectors may be more affected by disruptions in global value chains. In addition, reshoring or producing locally can be more costly than offshoring. Production shifts can also be difficult to accomplish if a region lacks the necessary resources or skills as inputs. Meanwhile, regions with a productivity profile reliant on SMEs may be less resilient to disruptions, such as COVID-19, as these enterprises often operate in a limited number of markets and rely on a short list of suppliers and buyers. Despite these challenges, the COVID-19 crisis can be used as an opportunity to accelerate the reconstruction of productive processes, industries and regions that were latent or growing only moderately. It may also be a good moment to reinforce investment in reorganising production methods in areas that did not exist during previous crises (e.g. 3D-printing and production, e-commence, digital technologies that support easier teleworking, etc.). The COVID-19 crisis could introduce an exponential shift in the circular economy, the relocation of production, short circuits, logistical reorganisation, and the digitalisation of companies, for example (Assemblée des Communautés de France, 2020[200]). Finally, COVID-19 may create space for improved and expanded services, contributing to regional attractiveness in remote and rural areas. Rethinking the approach to the climate imperativeRegions and cities are ideally placed to create links between COVID-19 recovery packages and the climate change policies. They are responsible for about 64% for the public investment dedicated to climate and environmental initiatives. Using this power to invest in the green transition and properly target local needs, could further turn the COVID-19 crisis into an opportunity. For example, investing to reduce health risks can reinforce or be reinforced by investing to reduce pollution levels, as health and a clean environment can be positively related and contribute to a community’s resilience. Making the most of such links can also support local business innovation, and generate a transition whose benefits reach the broadest possible numbers. A balance must be struck, however, with the challenges that can arise in this effort. For example, short-term spending and investment to mitigate the impact of COVID-19 might derail long-term priorities, such as a net-zero emissions, due to the increasingly tight fiscal environment and capital constraints. This makes diversifying sources of financing fundamental to success, which in turn can require appropriate multi-level governance mechanisms and higher-levels of government support (e.g. relaxed fiscal rules, reduced red-tape, etc.) In the effort to respond effectively to COVID-19, it is also critical not to lose sight of long-term, large-scale, societal objectives, such as ensuring greater inclusiveness or addressing climate change. Building resilience can help. So can experimenting with new ways of working. For example, the city government of Barcelona developed a multi-stakeholder strategic pact. Representatives from different political parties, NGOs, the private sector, academia, etc., agreed to work with the government to develop and implement a strategy for addressing structural measures over the next two years. The city’s budget will be pinned to the strategy that emphasises four needs arising from COVID-19: economic recovery, social solutions, rethinking the urban model, and enhancing the culture/education/knowledge sector (Barcelona City Council, 2020[201]). Significantly, the city reaffirmed its commitment to its 2030 Agenda and considers it more relevant than ever – highlighting how medium- and long-term responses to COVID-19 can go hand-in-hand with existing strategic priorities for regional and local development and investment. The arrival of COVID-19, and its second wave in many countries, has thrown the significance of multi-level governance into relief – highlighting the need for a place-based approach to crisis management and recovery, shedding more light on the balance of centralised versus decentralised approaches to crisis management, the need for effective leadership balanced with effective coordination, consultation, and a collaborative approach among government and non-government actors. It is underscoring the role that trust in public institutions plays – not only in crisis management but also in health outcomes – and the power of effective communication with stakeholders and citizens. 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Acknowledgements This note was written by Dorothée Allain-Dupré, Isabelle Chatry, Antoine Kornprobst and Maria-Varinia Michalun, with substantial inputs from Charlotte Lafitte, Antti Moisio, Louise Phung, Kate Power, Yingyin Wu, and Isidora Zapata, from the OECD Centre on SMEs, Entrepreneurship, Regions and Cities. Comments and inputs received from Delegates of the OECD Regional Development Policy Committee are gratefully acknowledged. Notes1. The method is detailed in Capacity for Remote Working can Affect Lockdown Costs Differently across Places (OECD, 2020[45]). 2. 24.5% refers to unweighted average for OECD countries. When taking weighted averages (by population), subnational governments represent 31.8% of total non-consolidated public health expenditure and 38% of consolidated public health expenditure. 3. 12% refers to unweighted average for OECD countries. When taking weighted averages (by population), health expenditure accounts for 18% of subnational expenditure. 4. Economic affairs are mainly composed of transport but also including commercial and labour affairs, economic interventions, agriculture, energy, mining, manufacturing, construction, etc. 5. This can be difficult however, if central government grants are financed by national tax receipts, which themselves would have declined or which are indexed to GDP growth. 6. On 13 May 2020, EU Members States, with the support of the European Commission, adopted interoperability guidelines for approved contact tracing mobile applications in the EU. How did the Qing government manage trade between China and the outside world?Qing China attempted to regulate European interactions in Chinese territory through the Canton system, which required European merchants to trade through approved Chinese guild merchants.
Which trade item directly escalated violence and political destabilization across the globe?Which trade item directly escalated violence and political destabilization in multiple locations? Guns: In both North America and Africa, indigenous people made trade decisions with negative long-term consequences in order to acquire weapons, and then used those weapons in heightened local conflicts.
Who or what was most responsible for facilitating global trade networks in the 17th and 18th centuries?Who or what was most responsible for facilitating global trade networks in the seventeenth and eighteenth centuries? Mercantilists believed that there was a fixed amount of wealth in the world, and they cooperated to share equal access to that wealth among European powers.
Which of the following statements is a likely explanation for the movement of silver through the Netherlands?Which of the following statements is a likely explanation for the movement of silver through the Netherlands? In the Ottoman Empire and Ming China, silver was used for both private transactions and paying taxes. Both governments were severely destabilized by the influx of New World silver.
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