geographical income disparities within countries: is regional development policy the answer? what is...
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GEOGRAPHICAL INCOME DISPARITIES WITHIN
COUNTRIES: IS REGIONAL DEVELOPMENT POLICY THE
ANSWER?
What is regional policy?
Is there a convincing case for regional policy?
What form should regional policy take?
Regional policy in practice: success or failure?
Lessons for the future
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WHAT IS REGIONAL POLICY?
Initially- labour migration- Special Areas- location controls
Current- FDI- indigenous growth- human capital- de-centralisation
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DO WE NEED A REGIONAL POLICY?
THE CASE AGAINST
Unnecessary: automatic convergence- but convergence is very slow
Intervention is harmful
Regional policy has failed- but expenditure has been very
low
Should stimulate out-migration- but problems for origin and
destination regions
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F ig u r e 1 M e m b e r S ta t e a n d E U R e g io n a l A s s is t a n c e
0
1
2
3
4
National Regional Aid
EU Regional Aid
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THE CASE FOR REGIONAL POLICY
Regional convergence not inevitable
Equity
Unemployment = lost output
Jobs = training = competitiveness
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Social benefits
Net migration flows (cumulative causation)
- selectivity may harm origin region - population pressure in destination region
Political cohesion
A zero sum game or real benefits?
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REGIONAL POLICY OPTIONS
Market-based- labour market flexibility
Government intervention - to stimulate private
sector investment
Fiscal transfers
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GOVERNMENT INTERVENTION
Objective: to improve competitiveness
- private investment in industry
- public investment in infrastructure
- public investment in human capital
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Government policy Government policy
• transport • communications • recreation
• location controls • investment incentives • labour subsidies • business advice
• basic education • vocational education • training • health
Indigenous growth Indigenous growth FDI FDI Infrastructure Infrastructure Human capital
Human capital
• productivity • unit labour costs
COMPETITIVENESS COMPETITIVENESS
Income level Income level
Figure 2 Government policy and regional competitiveness
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REGIONAL POLICY IN PRACTICE:SUCCESSES AND FAILURES
Location controls- highly effective but adverse
effects
Investment incentives
- automatic: costly + ‘deadweight’- discretionary: good value
(strict criteria) e.g. only 20% = deadweight
cost / job = 1/3 un-benefit- failure to support incentives in
1990s
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F ig u r e 4 E x p e n d i tu re o n R e g io n a l A s s is ta n c e , 1 9 6 0 - 0 0
0
0.5
1
1.5
2
2.5
1960 65 70 75 80 85 90 95 2000
Employment Premiums
Automatic InvestmentSupport
Discretionary Assistance
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FDI
Rapid growth in 1990s
Increasingly important source of private investment for assisted areas (50% of grants to FDI in 1990s)
Seduced by wide range of policy instruments- sites, subsidies, infrastructure, agencies
assisted areas highly successful in attracting FDI
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TABLE 4. Jobs created or saved by destination of FDI, 1985-2001
Origin Total jobscreated or saved(in thousands)
% of UK Employment(in thousands)
1999
% UK
London 46 3.4 3284 12.1South East 197 14.5 3946 14.6Eastern 63 4.6 2616 9.7South West 54 4.0 2354 8.7East Midlands 53 3.9 1992 7.3Non-assisted regions 30.4 52.4
Yorkshire and Humberside 120 8.8 2258 8.3North West 129 9.5 3018 11.1North East 115 8.5 1035 3.8West Midlands 237 17.4 2438 9.0Scotland 151 11.1 2273 8.4Wales 122 9.0 1216 4.5Northern Ireland 73 5.4 676 2.5Assisted regions 69.6 47.6
UK 1360 100.0 27107 100.0
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FDI into China
- domination of coastal Provinces
(economic development zones)
- inland Provinces need infrastructure (low land &
labour costs not enough)
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INDIGENOUS REGIONAL DEVELOPMENT
Switch in policy to SMEs
- growth of interest in new & small
firms (entrepreneurial, flexible,
innovative, competitive)
Spatial dispersion in NFF
- highly correlated with unemployment & skill
- need to stimulate NFF in high unemployment regions (loans, workshops, grants, advice)
- spatial correlation is static
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Figure 5 New firm formation and % highly qualif ied, English districts
Note: new firm formation = new registrations / 10000 w orking population.
% of w orking age w ith high qualif ications, 1999
50403020100
New
firm fo
rmati
on, 1
994-9
9
100
80
60
40
20
0
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Figure 6 New firm formation and % unemployed, English districts
Note: new firm formation = new registrations / 10000 w orking population.
% unemployed (logged), 1999
121086420
New
firm fo
rmati
on, 1
994-9
9
4.6
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
2.8
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COMMUNITY DEVELOPMENT INITIATIVES
Target most deprived localities
Small scale but growing
‘Bottom-up’ to engage local community
Focus is on economically inactive
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Experimenting with new approaches- step-by-step- voluntary work- intermediate labour market- quasi-currencies (hours worked
credits)
Successful?- too early to tell- too few evaluations- but low cost, good response
from local communities
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LESSONS FOR THE FUTURE
1. Location controls- unlikely to be acceptable- congestion / pollution taxes
more likely
2. Investment incentives- automatic grants only for small
firms- discretionary grants should be
extended
3. FDI- crucial for assisted areas- how can developing countries get
a bigger share?
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4. New & small firms- success ‘national’ not ‘regional’- scope for greater regional
discrimination- must accept small firms are
vulnerable- need to ‘find’ & ‘target’ more
venture capital
5. CED initiatives- gaining in popularity- local projects need kick-start
and sustained help
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6. Infrastructure
- ‘attractiveness’ of lagging regions is critical
- need both physical infrastructure and investment
in education and training
7. Geography
- spatial concentration needed to benefit from localisation economies
- spatial disparities inevitable within regions
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CONCLUSIONS
1. Regional income disparities will not go away
2. Concern is with relative not absolute disparities
3. Governments becoming increasingly sensitive to spatial inequalities
4. Regional policy offers possibility of efficiency gains
5. Regional policy is not a temporary fix
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Some further questions:
Is regional policy a luxury that only rich nations can afford?
Can poor nations benefit from regional policy or should they simply ignore the consequences of their economic development policies for regional income disparities?
Can any country afford not to have a regional policy given the increasing demand at 'regional' level for greater involvement in economic development issues?