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

WHAT IS REGIONAL POLICY?

Initially- labour migration- Special Areas- location controls

Current- FDI- indigenous growth- human capital- de-centralisation

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

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

THE CASE FOR REGIONAL POLICY

Regional convergence not inevitable

Equity

Unemployment = lost output

Jobs = training = competitiveness

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?

REGIONAL POLICY OPTIONS

Market-based- labour market flexibility

Government intervention - to stimulate private

sector investment

Fiscal transfers

GOVERNMENT INTERVENTION

Objective: to improve competitiveness

- private investment in industry

- public investment in infrastructure

- public investment in human capital

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

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

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

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

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

FDI into China

- domination of coastal Provinces

(economic development zones)

- inland Provinces need infrastructure (low land &

labour costs not enough)

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

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

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

COMMUNITY DEVELOPMENT INITIATIVES

Target most deprived localities

Small scale but growing

‘Bottom-up’ to engage local community

Focus is on economically inactive

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

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?

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

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

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

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?