Regional benchmarking of Flanders within Europe

1. Introduction

Flanders has scored reasonably well in a European perspective in recent decades, both on economic growth and labour market performance. For example, in two-thirds of the years since 1960, real GDP growth in Flanders has been higher than in the former EU15 (until 1991) and the euro area (since 1992) (see Figure 1). This means that, cumulatively, economic activity has risen almost 23% more in Flanders than in the EU15/euro area¹. The generally stronger economic growth in Flanders over that period was achieved mainly thanks to its relatively stronger growth in employment; the growth in labour productivity was around the European average². The relatively good labour market performance is also reflected in the employment rate (i.e. the share of people of working age in the population who are actually in work). Both these measures have been consistently higher and lower, respectively, than in the euro area since the mid-1990s (see Figure 2).

Flanders’ leading position in Europe has however ebbed away somewhat since 2012. Economic growth in Flanders has actually fallen below that of the euro area since 2016, while the rise in the employment rate and the fall in the unemployment rate have both been lower than in the euro area. This was due in part to the fact that the Flemish economy was less badly hit during the Great Recession in 2008/2009 and the subsequent smaller recession during the European sovereign debt crisis in 2012, and consequently did not have to climb out of such a deep dip. Despite this, the question remains of whether there is more going on and whether Flanders is seeing a relative decline in its potential rate of growth. 

To answer this question, it makes more sense to compare the performance of Flanders with that of other regions within Europe, rather than with the European country average. In this research report we first look at how Flanders has performed economically over the last two decades relative to all other European regions. This regional benchmarking of Flanders within Europe is the focus of section 2. In practice, economic performance is driven to a large extent by innovation³. As Flanders has the ambition of being among the top regions in Europe, it makes most sense to compare its economic performance with that of those regions which are in the leading group in Europe in terms of innovation (section 3). We define those regions using the European Commission’s Regional Innovation Scoreboard, which is discussed in more detail in the Box text. We conclude the analysis by looking to the future and discussing a few policy implications (sections 4 and 5).

2.Benchmarking Flanders within Europe

Although a comparison with relevant peers – prosperous, innovative European regions – is the most appropriate approach, we will first benchmark Flanders against all European regions. Given the increased economic importance of the most recently acceded Member States of the European Union (EU) and the existence of statistics for European regions outside the EU, our benchmarking adopts the broadest possible regional approach. Eurostat publishes figures on gross domestic (regional) product (GDP), the employment rate and the unemployment rate for the 92 NUTS1 regions in the EU⁴. Although the United Kingdom (UK) is no longer a member of the EU, the British regions are also included. For the employment rate and unemployment rate, regional figures are also available for Norway, Switzerland and Serbia. If we leave regions out of consideration for which no or insufficient statistics are available, we arrive at a total of between 84 and 107 regions, depending on the variable concerned. 

Figure 3 shows that Flanders comes fairly high in the rankings within this large group in terms of prosperity (measured as GDP per capita in purchasing power parities (PPP)). Flanders has actually improved its position since 2001, though this does appear to have stabilised in the most recent years. The figure also confirms our assertion in the introduction that Flanders has come through the 2008-2012 financial crisis relatively well in terms of real GDP growth. Flanders was also in a leading position relative to many other European regions in terms of growth prior to the crisis, but has lost that ground again in the more recent period, partly due to the economic catching-up exercise by the newly acceded EU Member States from Central and Eastern Europe.

A similar picture emerges in Figure 4, which portrays the relative labour market performance of Flanders. Until 2011, Flanders managed to improve its position in the rankings of European regions in terms of employment rate and unemployment rate, but slid well down the rankings thereafter. In 2017 its relative position on both measures had even fallen below where it was at the start of the 2000s, although there was a slight improvement in its relative position again in 2018-2019, due to the increased labour intensity of Flemish GDP growth.  

3.Benchmarking Flanders against the most innovative regions

Besides the general ranking covering all of the NUTS1 regions in Europe, it makes more sense to benchmark Flanders against the top regions in Europe. The Flemish government has a long-held ambition to make Flanders one of those regions. In 2009 the then Flemish government set out a number of objectives in the context of the ‘Flanders in Action’ programme (Vlaanderen in Actie (ViA)) to make Flanders one of the best (top five) knowledge-intensive regions in Europe⁵ by 2020 (Pact 2020).  This commitment was driven by the desire to safeguard and improve the prosperity of the Flemish population. As part of this commitment, fifteen benchmark regions were identified which were a step ahead of Flanders in terms of innovation and against which Flanders could measure its own performance. In 2015 the new Flemish government adopted a new set of benchmark regions as part of its updated long-term strategy, ‘Vision 2050’ (Visie 2050). 

As innovation is a dynamic and often even disruptive process, the scores attained by European regions on this front tend to move around. In this report we have therefore opted not to compare the Flemish performance on prosperity, GDP growth, employment and unemployment with the performance of the benchmark regions adopted previously by the Flemish government, but rather with the performance of the European regions which are in the top group today in terms of innovation. We identify those regions using the Regional Innovation Scoreboard, (RIS), which has been compiled by the European Commission every two years since 2009. The most recent RIS rankings relate to 2019. The Box text provides more detail about the RIS and the position of Flanders within it. The figures from the 2019 update show that, while Flanders is still a strongly innovative region, it is no longer in the top group of 38 ‘Innovation Leaders’, defined in the RIS as the regions which score 20% better than the EU average for innovation.

For economic prosperity (GDP per capita in purchasing power parities (PPP)) and real GDP growth, we can only compare Flanders with 25 of the 38 RIS Innovation Leaders in 2019. This is because Eurostat does not publish GDP figures for non-EU regions (a number of European Innovation Leaders are regions outside the EU). For some Innovation Leaders, GDP figures are not available for the entire period under consideration, and can therefore also not be included in the comparison. Figures are however available for all Innovation Leaders on the employment rate and unemployment rate, and we can therefore compare Flanders with all 38 regions on these metrics. Figures 5 to 8 each compare Flanders with the average for the Innovation Leaders; we include Flanders in the group so that we are able to determine its relative position in the rankings.

Although Flanders is no longer among the European Innovation Leaders, its economic prosperity (GDP per capita) is higher than in many of the regions within this top group (Figure 5). On the other hand, the average prosperity level in the top group of innovative regions is higher than that of Flanders, and this gap appears to be widening slightly in recent years: GDP growth in Flanders has been generally lower since 2010 than the average among the Innovation Leaders. If we rank Flanders against the Innovation Leaders, we see that its position in those rankings is falling in terms of economic growth (see Figure 6). 

The relative decline compared with the Innovation Leaders is even more pronounced when we look at the two labour market indicators. The relative position of Flanders in the rankings for both employment rate and unemployment rate is deteriorating (a lower unemployment rate translates into a higher position in the regional rankings). The negative gap in the employment rate between Flanders and the Innovation Leaders has widened systematically and, although the unemployment rate in Flanders is still lower than the average among the Innovation Leaders, that gap is narrowing steadily (see Figures 7 and 8).

4.Looking to the future

Our analysis of regional economic performance shows that Flanders has seen a relative weakening in its position in recent years within Europe, including when compared with the top regions for innovation. A key question here is whether Flanders has the potential to narrow the widening gap over the coming years and decades. Answering this question is not easy because it depends not only on how Flanders itself evolves, but also on developments in other regions. Many factors play a role here. Among the key factors are: (1) the relative demographic trend as a driver of the potential growth in employment; (2) the relative investments in innovation and how they are translated into new products and efficiency gains, as a key determinant of productivity growth; and (3) government policy which creates a framework offering optimum conditions for employment and productivity growth.   

Demography is a key determinant of the potential labour supply. According to the estimates by the Belgian Federal Planning Bureau (June 2020), the population of working age (20-64 years) in Flanders will shrink by 2.2% by 2035. Flanders has a comparative demographic disadvantage within Belgium (the population of working age in Wallonia is falling by less than 1.7%, and in Brussels is actually growing by 2.6%), but that is not the case within Europe as a whole (Figure 9). According to the latest demographic forecasts from Eurostat (June 2019), many European countries will see their labour potential fall even more steeply than in Flanders in the coming years. Compared with countries where the top innovation regions are located – the Scandinavian countries, Germany, the Netherlands and Switzerland – the relative demographic position of Flanders is partly positive and partly negative⁷. Germany, in particular (-11.0%), but also the Netherlands (-4.4%) and Finland (-2.9%) are projected to see a bigger decline in the number of 20-64 year-olds between 2019 and 2035 than in Flanders (-2.2%). By contrast, the number of people aged 20-64 years is set to increase in Switzerland (+2.0%) and in the other Scandinavian countries (Sweden +16.4%, Norway +6.7%, Denmark +1.8%). 

The negative demographic impact on the labour potential can however be partly offset by increasing the labour participation rate by cranking up the employment rate further. The employment rate in Flanders in 2019 was higher than in the EU as a whole (75.5% versus 73.8%) and higher than in the euro area (72.6%), though the Flemish employment rate was substantially lower in that year than in the top regions in Europe for innovation (Figure 7). At this point in time that is a handicap, but it does mean there is potential to increase the rate further. Employment in the top regions is generally around or even above 80%, which means it is pushing against the maximum limits, with only limited headroom for a further increase. 

The demographic pressure on the labour potential implies that more attention needs to be given to productivity growth as a driver of future GDP growth, which has been trending downwards in recent decades. Many of the reasons for this are general in nature, such as the trend away from industrial activity towards new activities in the service sectors, where productivity is lower on average⁸. In a large study in 2019, the OECD made a number of recommendations for Belgium aimed at boosting its low productivity growth: (1) promoting competition and easing the strict regulation of the service sector; (2) ensuring a better return on government support for research and development; (3) strengthening the role of venture capital; (4) promoting job mobility between companies; (5) creating a permanent learning culture (lifelong learning); (6) creating greater freedom in pay negotiations between employers and employees; (7) more government investments in transport and digital infrastructure^9.

Figure 10 shows that the slow growth in Belgian labour productivity was primarily a problem for Wallonia and Brussels in recent years; although productivity growth also slowed in Flanders, it still remained around the European average. Flanders also scores reasonably well relative to the most innovative European regions (see Figure 11): over the last decade, with the exception of 2010 and 2017, productivity growth in Flanders has been above the average in the top regions every year. The fact that Flanders has posted weaker GDP growth than these regions in most years since 2010 (as Figure 6 showed) has been due more to the relatively lower average growth in employment (Figure 12).

5.Policy implications

5.1. For the labour market

Regional benchmarking of Flanders and the policy lessons to be drawn from it for the Flemish government provide useful analyses in that the main policy instruments in relation to labour, the economy and innovation are situated at regional level. The ambitions set out by the Flemish government on these fronts at the end of 2019 have since been thwarted by the severe coronavirus crisis¹⁰, which has hit economic activity in Flanders, and by extension the labour market, hard. The new context marked a stark contrast to the situation at the start of 2020, when job creation in Flanders was still being badly impeded by an unprecedented tightness on the labour market caused by a combination of a historically low unemployment rate and a record number of unfilled vacancies. With the exception of a few regions in the Czech Republic, there was no region in Europe, including the referenced top regions, which had such a high vacancy rate (the number of vacancies relative to the total number of jobs available) as Flanders in 2019. 

The coronavirus crisis is leading to a renewed rise in unemployment. The uncertainty brought by the pandemic has also prompted a renewed fall in the general vacancy rate. Now that the number of jobseekers is increasing relative to the number of vacancies, the situation on the labour market will ease, but the mismatch on the labour market could increase. This is because of the nature of the crisis, in which specific sectors (including the hospitality and events sectors) have been badly hit while the employment volume in other sectors has been unaffected or is even growing. According to Eurostat figures, for example, the vacancy rate in industry in the second half of 2020 was once again higher than before the onset of the crisis. Where the education/training, skills and interests of employees in the affected sectors who lose their jobs do not align with the remaining demand for labour, the existing mismatch on the Flemish labour market is in danger of becoming an even bigger problem. A great many vacancies that are hard to fill (‘bottleneck vacancies’), such as nurses and technical specialists, remain unfilled, including during the crisis. Flexibility on the part of the labour supply (retraining, switching to different jobs or sectors, etc.) will accordingly prove to be a key factor in a healthy economic recovery in the years ahead. 

With its recently launched 'All hands on deck' plan, the Flemish government has taken an important step in helping more people of working age into work. It is encouraging that the government is sticking to its ambition of raising the employment rate to 80% by 2030, despite the coronavirus crisis. To support the (potential) growth in employment in the short and longer term, government policy needs to focus more prominently on activating the residual labour reserve. Aside from the (new) jobseekers, there is an even larger and less visible group in Flanders of other economically inactive people who are (temporarily or permanently) not or no longer looking for work. They include the long-term sick, young women with a migration background, people in receipt of subsistence benefits¹¹, etc.. Bringing them back on board will require a broad approach involving further labour market reforms. The measures that could be taken are diverse. As well as focusing on retraining and activation, it is vital to make work more attractive. Working must always pay more than not working. The Flemish ‘jobs bonus’, which is intended to ensure that low-paid employees take home a bigger slice of their pay from 2021, will go some way to achieving this. 

The number of people becoming economically inactive also needs to be closely monitored. While the ‘subsidising’ of this inactivity through the social security system (e.g. time credits and thematic leave) is valuable to those concerned, it also comes at a cost because it leaves labour potential untapped. More than in most other EU countries, the relationship between the resources for passive labour market policy (all social security benefits) and the resources for active labour market policy (activation, retraining, etc.) is skewed in Belgium. Attention must also be given to sickness absenteeism. More needs to be invested in the prevention of lifestyle-related conditions, such as burnout, and promoting labour market re-entry following long-term illness. To make it easier for people to achieve a good work-life balance, consideration could be given to making systems such as teleworking (working from home), which has been widely used during the coronavirus crisis, more generally available. The opportunities for dual learning for young people could also be increased, while measures could be deployed to keep older employees in work as far as possible until state retirement age. Many such measures have already been incorporated in Flemish labour market policy, but this process will need to be speeded up over the coming years.

5.2. For innovation and productivity

It is important to get more people into work, but in parallel with this, the quality of work must be increased. Flanders does not score particularly well in the RIS on employment in the high-tech industry and knowledge-intensive services sector. Innovation is traditionally seen as the engine of productivity growth, but also needs to become the driver of high-value job creation, that is often the route to higher productivity. The government must promote this by improving the quality of education and the match between education and the needs of an innovative economy, and by creating a permanent learning culture by devoting more attention to aspects such as digital skills. The continuing decline in the ranking of Flemish education in the PISA and TIMSS surveys¹² demonstrates that there is scope for improvement here, as does the fact that too few young people in Flanders are graduating in STEM disciplines (Science, Technology, Engineering and Mathematics). Although the number of STEM graduates has increased in recent years, it remains low compared with countries where the leading innovation regions are located (such as Germany and the Scandinavian countries).

Although Flanders does not score too badly on productivity growth relative to other countries in Europe, including the most innovative regions, the need to raise the low level of that growth remains an issue. The Flemish government has a leading role to play here in creating a favourable environment in which companies can innovate and function more efficiently. Earlier in this report, reference was made to the OECD recommendations on this for Belgium, but also specifically for its regions. These recommendations mainly revolve around investing in good infrastructure (for example to relieve traffic congestion and support digitalisation), reducing the fairly restrictive regulations, promoting competition (especially in the service markets) and increasing the flexibility of product and labour markets¹³. 

Some of the OECD recommendations are specifically concerned with innovation. One of them relates to strengthening the role of venture capital. Flemish companies do not always find ready access to this capital; the problem is not so much the availability of capital, but rather the rather fragmented landscape¹⁴. While this has the advantage that lots of (small)  companies can be helped with fairly modest sums, the flipside is that there is sometimes a lack of the funding needed to fuel further growth. This calls for more targeted deployment of financial support (subsidies as well as venture capital), focusing particularly on promising, rapidly growing companies in sectors or clusters where Flanders has a competitive advantage. Research has shown that these are the companies which deliver the biggest productivity gains and greatest job creation.

This does not alter the need for more innovation across a border swathe of companies, including and especially small and medium-sized enterprises. As a rule, innovation is concentrated among multinationals, especially in the chemical, pharmaceutical, food, construction, logistics and distribution sectors. This is due in part to their larger research budgets and the fact that they can readily import new technologies developed in other entities of the group. The Flemish government supports innovation by smaller, often non-international companies among other things by providing advice and support through Flanders Innovation & Entrepreneurship (VLAIO). It is important that this support is viewed as broadly as possible, With more attention for knowledge-sharing and the dissemination of existing technologies, stronger networking and collaboration among companies and between companies and knowledge institutes, the introduction of management best practices, encouraging entrepreneurship, etc.. Good follow-up and measurement of the performance in all these areas is also essential, as is learning from best practices abroad to promote innovation (especially in the top innovation regions).   

Another recommendation relating to innovation is to secure a better return on government support for research and development (R&D) and specific innovation projects. This support only generates a return if the innovation is valorised in terms of more high-grade employment, more efficient business processes or the commercialisation of new products and services. The RIS also shows that economic valorisation remains an issue for Flemish innovation¹⁵. The government can help eliminate this weakness by attaching conditions to its support for R&D and innovation and linking it to measurable result targets. In addition to ‘incremental’ innovations which lead to more rapid economic results (e.g. optimising processes and products), sufficient attention must also be given to ‘disruptive’ innovations. These generally take longer to deliver a return, but also have greater economic potential. They often involve radical innovations which address the rapidly evolving world and major societal challenges, such as digitalisation, climate change or population ageing. 

A final recommendation for the Flemish government is that it is perfectly fine to be ambitious as long as this is combined with realism. The desire to drive Flanders into the European top five innovation regions (as defined in the RIS) is set out in the Flemish coalition agreement 2019-2024 and is also included in the vision document for 2030 ('Vizier 2030'). In fact, this ambition is described as the ‘central touchstone of our innovation policy’. However, the top-five ambition looks unattainable given the 40th place currently occupied by Flanders in the RIS rankings. Previous Flemish governments have also had the ambition of achieving this top-five position, whereas in reality the position of Flanders in the rankings has changed relatively little since 2009. It would be a great achievement in itself if Flanders were to rapidly return to the RIS top group of Innovation Leaders – a minimum minimorum –  and was able to move ahead a couple of places within that group each year.  

¹The Regional Accounts published by the Belgian National Accounts Institute do not yet contain any growth figures for the three Belgian regions for 2019.

² In the absence of regional data, it is not possible to analyse productivity in this report based on the concept of ‘total factor productivity’.

³ See e.g. Maradana et al. (2017), 'Does innovation promote economic growth? Evidence from European countries’, Journal of Innovation and Entrepreneurship 6:1.

⁴ Together with the two other Belgian regions, Wallonia and Brussels, Flanders is classed as a NUTS1 region within Europe (the NUTS2 regions in Belgium are the ten provinces plus Brussels).

⁵ See Cabinet of Kris Peeters, Prime Minister of the then Flemish government (2009), ‘Pact 2020. A new future pact for Flanders – 20 objectives’.

⁶ These are regions at different NUTS levels, depending on the availability of regional data. There are 32 NUTS1 regions (including Flanders) and 206 NUTS2 regions from 23 EU Member States (including the UK), plus Norway, Switzerland and Serbia. Cyprus, Estonia, Latvia, Luxembourg and Malta are included at national level, since their NUTS classification corresponds with the national level.

⁷ Eurostat does not publish demographic forecasts at regional NUTS level.

⁸ For an extensive analysis see J. De Mulder & H. Godefroid (2018), 'Slowing productivity: findings and an attempted explanation’, NBB Economic Review, pp. 53-70.

⁹ See OECD (2019), ‘In-depth productivity review of Belgium’.

¹⁰ See policy memorandum ‘Economie, Wetenschapsbeleid en Innovatie 2019-2024’ [‘Economy, Science Policy and Innovation 2019-2024’], 8 November 2019.

¹¹ See also KBC Economic Opinions, ‘High number of economically inactive people in Belgium a cause for concern’, 31 January 2018.

¹² PISA stands for Programme for International Student Assessment, TIMMS for Trends in International Mathematics and Science Studies. 

¹³ KBC Economic Research has written a number of opinions on this; see e.g. KBC Economic Opinions ‘Verkeersinfarct bedreigt ons groeipotentieel’, 17 February 2017, and KBC Economic Opinions ‘Relanceplannen moeten focussen op verlaging regeldruk en paperasserij’, 2 October 2020.

¹⁴ See Flanders Innovation & Entrepreneurship (Agentschap Innoveren & Ondernemen), ‘Overzicht risicokapitaalverschaffers in Vlaanderen’ [Overview of venture capital providers in Flanders’], July 2019.

¹⁵ See also Flanders’ Chambers of Commerce and Industry (VOKA) paper, ‘Innoverend ondernemen: naar meer koopmansgeest in Vlaanderen’ [‘Innovative business: towards a more entrepreneurial spirit in Flanders’], October 2020.

Terug naar boven