REGIONAL DEVELOPMENT AS A POLICY FOR GROWTH WITH EQUITYThe State of Ceara (Brazil) as a Model

Raphael Bar-El and Dafna SchwartzSchool of Management, Ben-Gurion University

May 28, 2006Annual Meeting of the Regional Science Association

The Israeli Section

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Problem of persistent poverty and inequality together with economic growth.– Poverty in the rural area.

– Inequality within and between cities.

– Inequality between regions.

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It characterizes most countries in the process of economic growth (Cardoso and Helwege 1992, Selowsky 1981, Haddad and Hewings 1999; Schalk and Unitiedt 2000, Cannon, 1980)

Basic explanation: “Big push” theory (Rosenstein-Rodan, 1961): efforts for macro-economic

growth lead to concentration in specific sectors and regions (Hasan

and Quibria, 2004),“Unbalanced growth” theory (Hirschman, 1988): development as a chain of

disequilibria. BUT:The hypothesis of the existence of a “Kuznetz U curve” (growth

causes inequality in first phase and equality in second phase) was not proved: no “trickle down” effects and no evidence that such growth reduces poverty (Mold, 2004, Michel 1991, Lee and Townsend 1994, Gupta 2000, Hsieh and Hsing 2002)

FURTHERMORE:Inequality may lead to slower growth in the longer run, because of

the exclusion of a large proportion of production factors from the growth process (Fishman and Simhon, 2002)

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The question:

how to achieve both economic growth and reduction of poverty and inequality.

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Response 1:

Direct assistance to the poorest people: remittances, welfare assistance.

Tends to be “non-developmental” (Ellerman, 2004).

Immediate effect of poverty reduction, no or negative effect on medium and long term growth and social balance.

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Response 2:

• Direct assistance to the poorest sectors- agriculture and the rural sector:– Solution of agricultural development problems (Dorward et.al.,

2004, Kidd et.al., 2004), land reform (Balisacan and Fuwa, 2004).

– “Empowerment”, education, increasing participation of poor labor force (Berner and Phillips, 2005, Timmer, 2004), assistance to rural skilled poor (Banik and Bhaumik, 2005), or young rural entrepreneurs (Burger and O’Neill, 2004), or other specific groups (Galster et.al., 2004).

Hidden assumptions about the contribution of agriculture to economic growth and about the population distribution between the rural and the urban sectors.

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Response 3:

Stimulation of increased economic activity:– Supporting decentralized industrial development (Hasan and

Quibria, 2004).

– Attracting FDI

No “filtering down” effects and no evidence that they reduce poverty (Mold, 2004)

Even when attracted to periphery, competitive capability is not created as reflected by unchanged technical efficiency (Haddad

and Hewings 1999, Schalk and Unitiedt 2000).

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Response 4:

Urbanization and the “growth pole” strategy:- Growth pole (Perroux 1955): complex of mutually related industries,

stimulated by a leading specific one.- Urbanization as a response to the relative decline of the weight of

agriculture in economic growth.

Problems with the spatial configuration of poles, their external effects, their embedding in the urban system, mechanism for the transmission of growth at various levels, identification of policy instruments (Parr 1999).

“Backwash effects” of urbanization (Myrdal 1957), need for a “functional integration approach” (Rondinelli 1990, 1993).

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Our thesis

• The roots of the problem are in the existence of a basic market failure in the process of adaptation to structural changes.

• The answer should be therefore in the solution of such market failure.

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A traditional model

Economic growth

Changing economic structure:

less agriculture, more industry and later more services

Changing demographic spatial structure:

Increasing urbanization

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The market failure:

The changing economic structure at the state level is not met by a changing demographic and socio-economic changes, mainly in the periphery.

“…increasing returns to scale are inherently associated with market failure that can be damaging for real income both in the short and the long run… The extent of the inefficiency depends on… the extent to which economic agents are able to internalize externalities” (Venables, 2005)

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Rural area:6% agricultural product32% agricultural employmentNo productivity growth

Non-farm employment

No sufficient conditions of urban support, services, human capital

Migration to local city

Insufficient conditions for industrial competitivity: low industrial growth, low demographic growth

Low potential

Migration to RMF

Inability of part of the population to migrate,

Inability of RMF to provide all necessary support.

High concentration of economic activity and of population

In the rural area:

Disguised unemployment, low productivity, poverty.

In the local towns:

Insufficient urban basis, inability to integrate into the state economy, low productivity, low attractiveness to rural population.

RMF

In RMF:

Inability to support economically the too rapid population growth, increasing inequality between population groups.

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Growth is accompanied with urbanization and diminution of the share of agriculture,

But:• Insufficient urbanization growth• Urbanization but with polarization• Decreasing share of agricultural product but not

sufficient decrease in agricultural employment• Insufficient increase in industrialization• Too low productivity growth

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The policy approach

Structural adaptation of the interior to economic and demographic changes that are naturally required for development:

REGIONAL DEVELOPMENT

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RMFRMF

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1. Spatial restructuring: reinforcing urban centers

2. And supporting regional collaboration: increasing agglomeration economies

3. Stimulating the increase of productivity: education, entrepreneurship, rural organization, technology

Consequence 1: higher supply of employment opportunities to the rural population in nearby cities

Consequence 2: deviation of migration- more to local cities, less to RMF

Consequence 3: more balanced demographic growth in RMF

Consequence 4: less excess labor force in the rural area, higher productivity, higher income levels

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Implementation: some of the measures taken by the State of Ceara

• Spatial urban restructuring: 4 secondary urban centers, 13 tertiary centers, regional development plans.

• Establishment of a special ministry for regional development, and of regional offices, for regional coordination and budget allocation.

• Regional councils, for social regional participation.• Support to entrepreneurial activity, for the solution of

lack of access to public services.• Support to technological advance.• Support to rural tourism.

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Changing economic and demographic structures

• Urbanization: increase of share of urban population from 33% in 1960 to 67% in 1999 and 76% in 2004. Decreasing absolute number of rural population.

• Decreasing rate of growth of the MRF in the last 4 years: 10% as compared with 15% in the preceding 4 years.

• Illiteracy rate in rural area: almost 50% in 1997, 2.30 times that of urban area, decreased to 2.05 in 2004 (lower that NE and Brazil).

• More than 10 years of schooling: in the rural area 1.2% in 1997, 0.08 times that of the urban area (15.4%), increased to 4.8% in 2004, 0.20 times that of the urban area (23.5%).

• Increasing share of interior in manufacturing activity.• Share of agriculture in Added Value: from 6% in 1999 to 7% in 2004• Share of agriculture in Employment: from 40% in 1999 to 31% in 2004.• Rural employment in manufacturing: increase from 7% in 1999 to 11% in

2004 (no increase in NE- 7% and in SE- 11%).• Employed in agriculture: 20% live in urban area in 1999, 33% in 2004, with

additional employment options (26% in NE, 43% in SE).

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Changing development indicators

• Decreasing income gap between rural and urban labor force from 28% in 1999 to 35% in 2004 (better improvement as compared with NE and Brazil).

• Income p/c: increase from $R135 to 191 (41%), compared with NE from 147 to 197 (34%) and Brazil from 273 to 360 (32%).

• Reduction of Gini index from 0.62 during 15 years to 0.57 in 2003, now lower than in NE (0.59) and in Brazil (0.58).

• Poverty: decreased poverty rate from 71% in 1992 to 57% in 1998 and 54% in 2003 (compared with NE from 68% to 55% and Brazil from 43% to 32%).

• Gap between richest 20% and poorest 20%: Decreased from 26 in 98 to 21 in 2003 in Ceara, compared with a smaller decrease in Northeast (24 to 22) and Brazil (28 to 25).

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Summing up• Poverty and inequality are influenced by a failure of the free market

system to adapt to the structural changes in the economy (diminution of agricultural employment).

• Supporting agriculture or the rural population is not a sufficient response (and in some cases may even be counterproductive) if a process of urbanization and industrialization is required.

• The policy model presented by the state of Ceara tries to respond to the failures of the market system with an integrated three dimensional policy:– On the macro level, urban spatial restructuring in order to create a basis

for industry and services in non-metropolitan regions, and provide support services to rural activities.

– On the micro level, providing the local economic activities with support in factors that were less accessible in a basically agricultural environment: industrial entrepreneurship, technological advance, and also rural entrepreneurial initiatives.

– On the regional level, strengthening the regional forces by promoting social capital: organization of regional leadership, cooperation between the localities, coordination with the state level.