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SSR3033:Theories & Techniques of Regional

Planning

METHODS & TECHNIQUES OF REGIONAL ANALYSIS Part 11

3rd and 4th October 2016

Industry% w/f at

study regionRegions Minimum

require-ment

Basic work force

A B Z

Agriculture 14 2 8 14

Food 12 16 21 23

Engineering 16 10 16 11

Textile 12 24 17 6

Services 46 48 38 46

Total a = 100 100 100 100

3. Minimum Requirement Technique

Continuation from last lecture

Industry% w/f at

study regionRegions Minimum

require-ment

Basic work force

A B Z

Agriculture 14 2 8 14 2 12

Food 12 16 21 23 12 -

Engineering 16 10 16 11 10 6

Textile 12 24 17 6 6 6

Services 46 48 38 46 38 8

Total a = 100 100 100 100 68 b =32

Minimum Requirement Technique - solution

Multiplier, k = a/b… Calculate!Q: What is the regional income if export value increases by £2000?

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Steps for solving the question

1. Find the k-value (i.e. multiplier value) = 3.1252. Then use the k value to determine the

changes– Increase by $2000, so the total increase = $6250

3. Conclusion is that:– An increase of S2000 in export value (i.e. basic

sector) increases the income to $6250– So, $2000 increase in basic sector is also

corresponding to an increase of $4250 in non-basic sector income

Min Requirement: Important to remember

• Criteria for selection of region: comparison areas will not be precisely match with the selected region

• Criteria use – size (not only referring to population)- what else?

• Identifying minimum share regions

Summary: Methods & Technique (S/Term Changes)

• EBT – categorized the economy into basic and non-basic sector

• Use multiplier effects in calculating the growth or changes

• LQ – uses local conditions and national conditions to determine the levels of employment in basic & non-basic sector

• Min Requirements Technique – compares local conditions with other regions (of similar size & characteristics)

Objectives of this learning unit:

• To describe the methods and techniques of regional analysis – focusing on Aggregate Model – long term prediction

• To explain regional growth in the context of Neo Classical Growth Theory

• To explain regional growth in the context of Sector Theory, Stages Theory and Rostow Theory

Regional growth

What are the factors that determine the basic economic growth in a region?

•There are a number of factors that should be considered when talking about regional planning

•Planners must be aware of these factors …otherwise the plan may not be in the full interest of the people

• It is not just about financial budget and political affliation!

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Factors of production

Wages

Price of products and

services

Technology

Availability of

resources

Population

Income distribution

Factors of regional growth:

Factors of regional growth

1. Endogenous: from within the region itself (examples?

2. Exogenous: from outside the region (examples?)

3. Combination of both: examples?

Neoclassical growth theory

Neoclassical growth theory is an economic theory that outlines how a steady economic growth rate can be accomplished with the proper amounts of the three driving forces: labour, capital and technology.

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Video link (49 seconds)

• https://www.youtube.com/watch?v=3ZR0oXazMpw

Neo-Classical Growth Theory• In this approach,

regional growth determines regional income, economic and social welfare

• Looking at long run reduction of geographical disparities in income per capita and output

• Output growth – the expansion of productive capacity within a region; and illustrates the extent to which the region is attracting the key factors of production (capital & labour)

contd

• In this theory, regional output growth is dependent upon the growth of three factors of production– Capital stock– Labour force– technology

Contd.

• Technological progress – seen as a key contributor to growth due to its influence upon productivity growth rates in the long run

• Innovation & technology – potential to increase output growth per worker

INVESTMENT IN EDCATION AND SKILLS

INFLOW OF TECHNICAL KNOWLEDGE FROM OTHER REGIONS

REGIONAL OUTPUT GROWTH

GROWTH OF LABOUR FORCE

TECHNICAL PROGRESS

NET IN- MIGRATION OF WORKERS

REGIONAL WAGES RATE RELATIVE TO OTHER REGIONS

POPULATION GROWTH

BIRTH AND DEATH RATES

INVESTMENT BY REGION’S RESIDENTS

REGIONAL SAVING RATE

NET INFLOW OF CAPITAL INTO THE REGION

RATE OF RETURN RELATIVE TO OTHER REGIONS

GROWTH OF CAPITAL STOCK

The determinants of regional output growthsource: Pike et al (2006:63)

• This theory is often referred to as exogeneous growth theory (external)

• Regional growth – explained by growth in the main factors of production

• Assumptions: – high wage regions lose capital but attract labour– Regional disparities are only temporary as spatial

inequalities set in motion self correcting movements in prices, wages, capital and regions

Neo classical approach to regional policy

• Regional policy underpinned by neo-classical growth theory – described as a “free-market” approach

• The focus – the determinants of regional per capita income levels and how low income regions can ‘catch-up’ with relatively higher income regions

• Policy focus on looking at identifying intervention to correct market failures and to speed up convergence

The critiques

• The assumptions are unrealistic – factor mobility is less than perfect (e.g. Access to capital)

• Imperfect competition• External (or exogenous) treatment of

technology and labours weaken the model – technological progress is geographically uneven

• Hard to predict the convergence – coz uneven distributions of capital, labour and technology

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Aggregate Model

Aggregate Model

• Focus on the “overall”• Provide information about the situation of

economic development at macro level• E.g. using GDP and Consumer Price Index to

describe the current economic conditions in a region

• Includes: Sector Theory, Stages Theory and Export Base Theory

1. Sector Theory

• The sector theory is an economic theory which divides economies into three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and services (tertiary).

• Developed by Alan Fisher, Colin Clark and Jean Fourastié.

• Based on an empirical study – looking at the increase of per capita income, which is followed by the relocation of resources.

• Examples?

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• Reduced number of workers in primary sector – due to increased number of workers in secondary & tertiary sectors

• Economic growth: demand for production from secondary & tertiary sectors increase faster than primary sector (hence, reduced number of workers)

• Growth in secondary & tertiary sectors – offers more incomes (unlike primary sector)

Examples:

• Increased productivity in agriculture frees farmers to work in manufacturing sector

• Increased productivity in manufacturing & incomes – spending less on agricultural goods but more on manufactured goods…but spend more on services!

Glasson’s explanation “Pertambahan per capita di dalam kawasan

yang berbeza pada masa yang berbeza, pada umumnya disertai oleh pengagihan sumber, manakala tenaga buruh berkurangan dalam aktiviti utama (pertanian) dan berlaku pertambahan pada aktiviti ke-2 (pembuatan) dan ke-3 (perkhidmatan)

Glasson, 1990: 97

Sector Model

• Clark-Fisher Model (of Sector Model): uses % employed in each sector to show that many economies move through three stages: primary, secondary & tertiary

• Problem: do not take into account international economic context – outsourcing or imported goods.

Implications

• Changes will benefit the secondary & tertiary sectors more!

• Changes driven by increased in productivity per employee

• Rates of sectoral changes – offer dynamic elements in regional growth

• Focus more on internal changes (endogenous factors!)

2. Stages Theory• Has been claimed that the Sector Theory is

closely linked to Theory of Stages of development of regions.

Stages Theory• According to Glasson (1990):

– Development of regions is characterized by these sequences:

1. Stage of self-sufficient subsistence economy2. Growth through specialization production in

primary activities & inter-regional trades (link with improved transportation)

3. Introduction of secondary industries due to increased demand from increasing population & diminishing returns of primary industries

Stages Theory4. Shift from basic agricultural production to a more

diversified industrialization based on internal industrial-linkages and rising incomes

5. Advanced stage: specialization of certain tertiary industries for exports and services to less advanced regions .

Which is similar to Rostow’s model

Rostow’s Theory

• Stage 1: Traditional Society• Stage 2: Transitional Stage• Stage 3: Take Off• Stage 4: Drive to Maturity• Stage 5: High Mass Consumption

https://www.youtube.com/watch?v=20p34dZWtEI

Limitations of Stages Theory• Impractical in terms of real development – too much

emphasis on industrialization as economic boost• Rigid – determination of sectors (primary, secondary,

tertiary)• Excludes external factors – focus on endogenous factors

only• Discuss the growth process but not mentioning the

income per capita• Lack of discussion on effects & reasons of growth

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Summary

• Neoclassical theory – focus on labour, capital and technology

• Aggregate model – Sector Model (primary, secondary and tertiary)– Stages Model (similar to Rostow’s Theory)

• How do these models assist planners in regional planning?

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Disaggregate ModelShift Share Analysis

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• Focus on disaggregate• Components rather than the overall• Must have ‘timeframe’• advantage of disaggregate models is that they

are sensitive to the mix of variables explaining a change (in this case: regional change).

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Shift Share Analysis

• a standard regional analysis method that attempts to determine how much of regional job growth can be attributed to (i) national trends and how much is (ii) due to unique regional factors

Question: How does this work in regional planning and regional development?

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Growth or decline?

• Why is employment growing or declining in this regional industry, cluster, or occupation?”

• Shift share analysis’s components: – national change effect, – industrial mix effect, – regional competitiveness effect.

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i. how much of the regional industry’s growth is explained by the overall health of the national economy

ii. the share of regional industry growth explained by the growth of the industry/ cluster/ occupation at the national level.

the national growth rate of the total economy is subtracted from the national growth rate of the specific industry, and this growth percentage is applied to the regional jobs in that industry.

iii. how much of the change in a given industry is due to some unique competitive advantage that the region possesses, because the growth cannot be explained by national trends in that industry or the economy as whole.

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Example of a shift share scenarioAssume that: • The national economy grew by 4% (total

employment) in the given timeframe. • The Employment Services industry grew by 15%

nationally, and by 350 jobs regionally. It had 1000 total jobs regionally at the beginning of the given timeframe.

• The Apparel Manufacturing industry declined by 5% nationally and by 80 jobs regionally. It had 200 total regional jobs at the beginning of the given timeframe

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National growth effect

• if the entire national economy grew at 4%, we might have expected the regional Employment Services industry would also grow by 4%,

• Which is: 0.04 * 1000 = 40 jobs. • These 40 jobs = the national growth effect for

Employment Services. • For Apparel Manufacturing, the national growth

effect is 0.04 * 200 = 8 jobs, meaning that we might have expected it to grow by 8 jobs over the time period simply because of general economic growth.

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Employment Services= 15% nationally, Subtract 4% growth of the national economy (to arrive at a national industry)= 11% growth rate that exceeded overall trends).

Applied to the regional industry, we expected Employment Services to grow by (0.11 * 1000) = 110 jobs due to industry-specific trends at the national level.

A national industry-specific relative growth rate of (-5% - 4%) = -9% for Apparel Manufacturing (i.e., the industry not only declined 5% nationally but failed to grow 4% with the rest of the nation), meaning we would have expected a regional loss of (0.09 * 200) = 18 jobs due to national industry-specific trends.

Industrial mix effects

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Regional competitiveness effects (i)• Employment Services grew by 350 jobs regionally

– 40 of those jobs might have been expected due to national trends in the economy as a whole,

– 110 jobs might have been expected due to national trends in employment Services specifically.

– This makes a total of 150 jobs expected from national trends.

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• Since the actual growth was 350 jobs, (350 – 150) = 200 jobs cannot be explained by national trends, – they must be attributed to unique conditions and

advantages that the region possesses which contribute to the growth of this specific industry.

Regional competitiveness effects (ii)

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• For Apparel Manufacturing, we might have expected a net change of (8 + (-18)) = -10 jobs regionally, while in fact there was a regional change of -80 jobs.

• The regional competitiveness effect is thus (-80 - 10) = -90 jobs,

• Thereby, indicating that it fell short of the expected change by 90 jobs due to some specific conditions in the region, such as the closing of a factory.

Regional competitiveness effects (iii)

References• Neoclassical growth theory –

http://www.yourarticlelibrary.com/economics/neoclassical-theory-of-economic-growth-explained-with-diagrams/38321/

• Pike (2006) – read Chapter 3• Shift share analysis -

http://www.economicmodeling.com/wp-content/uploads/2007/10/emsi_understandingshiftshare.pdf