Introduction to Regional Economics EC4313EC6313

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Introduction to Regional Economics EC4313/EC6313

• August 22, 2003

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Free Market or Interventionist

• Free market
• Deregulation of regional labor markets
• Tax incentives to improve efficiency
• Primary problems labor market inefficiency and
  too much regulation

• Interventionist
• Keynesian based
• Induce capital investment, endogenous growth, and
  public investment
• Primary problems market failure, structural
  weaknesses

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Free Market Approach

• Comes from a neoclassical (largely supply side)
  economic theory
• Promotes efficiency over equity
• Problems are largely due to intervention
• Business oriented
• Markets clear

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Interventionist Approach

• Markets fail because of imperfect information,
  transaction costs, institutional weaknesses,
  monopoly power, externalities and imperfect
  mobility of resources
• Need to induce human and physical capital
  investment, promote mobility of factors,
  stimulate endogenous growth, target needy areas,
  and increase public investment

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Why are regional disparities a problem?

• Reduces national economic efficiency
• Causes slower growth in GDP
• Causes social consequences crime, alienation
  social exclusion
• Problems in lagging regions may cause problems in
  healthy regions.

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Remember Hoovers 3 foundation stones to Regional
Economics

• (1) imperfect factor mobility,
• (2) imperfect divisibility, and
• (3) imperfect mobility of goods and services.

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Social Exclusion?

• European term meaning that some elements of
  society are not only poor but are also excluded
  from social, economic, political, and cultural
  life, and that this is really more of a problem
  than the income itself.

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Questions for the interventionists

• Efficiency versus Equity
• People prosperity versus place prosperity
• Diagnosis versus treatment
• How to triage worst, best, marginal
• Micro Policy versus Macro policy

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Macro Policy

• Regionally discriminating fiscal and monetary
  policy
• Automatic stabilizers (income tax, social
  security etc)
• Discretionary policy (regional preferences for
  contracts
• Industrial Policy targeted for regions.

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Micro Policy

• Reallocation of Labor
• In situ (retraining, education, etc)
• Spatial (migration policies, improved mobility)
• Taxes and subsidies, venture capital, micro
  credit, reduction of administrative control or
  bureaucracy.

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Community Economic Development Initiatives

• Similar to what is also called sustainable
  development
• A grass roots, democratic approach

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Conventional Economic Development (table 9.3)

• One size fits all
• Top down- trickle down
• Smokestack chasing
• Leadership driven with token input from community
  to buy legitimacy
• Ignores social and environmental consequences

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Sustainable (Community) Economic Development

• Democractic-requires participation across groups
  incorporating environmental and social concerns
  grass roots
• Long term approach to capacity building
• Emphasis on quality of life and socially
  desirable production
• Emphasizes internal growth, and goal oriented
  policies.

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Growth Theory Background
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What Constitutes a Region

• a geographical area constituting an entity
• general consciousness of a common regional
  interest making possible some rational collective
  efforts to improve regional welfare
• a high degree of correlation of economic
  experiences of the regions sub-areas and
  interest groups.
• Distinguish two different types of regions the
  homogeneous and the functional.

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Homogeneous Region

• A homogeneous region is demarcated on the basis
  of internal uniformity. Examples include
• The winter wheat belt in the central part of the
  United States is a homogeneous agricultural
  region because all its parts grow the same main
  crop in the same way.
• basis of a common syndrome of poverty, arrested
  economic development, and limited human
  opportunity
• a homogeneous zone or neighborhood within an
  urban area (such as a ghetto or other ethnic
  area, a wholesaling district, or a wealthy
  suburb)

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Map of Census Regions
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Functional Regions

• Nodal
• Non Nodal

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Nodal Regions

• a special case of a functional region
• has a single focal point
• the notion of dominance or order is introduced.
• The grouping is based upon both interactions
  between locational entities and the rank or order
  of one locational entity to another
• a single locational entity is identified as
  dominating all others,

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A city and its surrounding commuting and trading
area make a nodal region.
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RELATIONS OF ACTIVITIES WITHIN A REGION

• (1) vertical relationships,
• (2) horizontal relationships, and
• (3) complementary relationships

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vertical relationships

• outputs of one activity are inputs to another
  activity
• transfer costs are reduced by proximity of the
  two activities
• the presence of either of these activities in a
  region enhances to some degree the regions
  attractiveness as a location for the other
  activity
• vertical linkages normally imply mutual
  attraction.

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We can distinguish between vertical relationships
where the linkage is predominantly "backward" and
cases in which it is predominantly "forward."

• Backward linkage means that the mutual attraction
  is important mainly to the supplying activity (a
  market-oriented activity is attracted by the
  presence of an activity to which it can sell.
  This involves transmission of an effect to an
  activity further back in the sequence of
  operations eg. Retail establishments exist
  because of )
• Forward linkage means that an impact of change is
  transmitted to an activity further along in the
  sequence of operations (an activity using
  by-products from another activity is involved in
  a forward linkage e.g.,glue factory locates near
  meat packers)

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Complementary Relationships

• The locational effect is mutual attractionthat
  is, an increase of one activity in a region
  encourages the growth of a complementary
  activity.
• Mutual Attraction Among Suppliers Example
  Furniture Manufacturing in N.E. Mississippi.

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Horizontal Relationships

• Involve the competition of activities, or units
  of activity, for either markets or inputs.
• The locational effect is mutual repulsion,

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REGIONAL SPECIALIZATION

• The growth of a region and the kinds of
  opportunities it provides for its residents
  depend to a large extent on the regions mix of
  activities. We can characterize regions as being
  more or less narrowly specialized in a limited
  range of activities, or as being more or less
  diversified or "well rounded."

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Quantitative Measures of Specialization

• location quotient
• coefficient of specialization
• coefficient of concentration

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Growth theories

• Simple Neoclassical (supply side, production
  function based)
• Demand side Export Base
• Cumulative Causation
• Dualism Core/Periphery

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Neoclassical

• Output is a function of Capital and Labor
• More advanced theories recognize importance of
  human capital and technology (endogenous and
  exogenous)
• Relies on market mechanism
• Demand is not important

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Export Base

• Production is a function of exports from the
  region
• Local activity is a function of export activity
• Demand based
• Ignores supply

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Some Interrelated Concepts

• Cumulative Causation
• Agglomeration economies
• Industrial clusters
• Growth pole versus growth center
• Core/Periphery

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Cumulative Causation

• Myrdal 1957, Economic Theory and Underdeveloped
  Regions.
• Process in which change in one direction may
  reinforce other tendencies for change in the same
  direction.
• Part of Myrdals underlying belief that
  disequilibrium growth development patterns are
  common

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Myrdal on Cumulative Causation

• In the normal case, there is no tendency toward
  automatic self-stablization in the social system.
  The system is not by itself moving towards any
  sort of balance between forces, but is constantly
  on the move away from such a situation. In the
  normal case, a change does not call forth
  countervailing changes, but, instead, supporting
  changes which move the system in the same
  direction as the first change but much further.
  Because of such circular causation, a social
  process tends to become cumulative and often to
  gather speed at an accelerating rate.

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Agglomeration Economies

• Cost reductions that occur because economic
  activity is carried on at one place.
• A possible influence in cumulative causation
• A reason for central places

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Industrial Clusters

• the tight connections that bind certain firms and
  industries together in various aspects of common
  behavior, e.g., geographic location, sources of
  innovation, shared suppliers and factors of
  production, and so forth.

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Growth Poles vs Growth Centers

• The theory and policy of growth centers was
  developed in Europe and particularly in France,
  in the 1950s, before attaining much currency in
  the United States.
• The broader term "growth poles" does not always
  have a spatial meaning and based on the work of
  François Perroux. In the US such research
  currently goes on under the label of 'clusters'.

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How Growth Centers Work

• Spread Effects  try to establish an impetus for
  development in a particular area
• Backwash Effects  Forced Concentration  of
  resources in a particular area does not spread
  out,  just consolidates within that area

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Core/Periphery

• The core is more advanced, processes raw material
  and obtains high value added
• The periphery provides raw material (low value
  added) to the core and buys finished goods from
  the core
• The periphery is dependent on the core.

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An Eclectic View of Growth

• Supply and demand both matter
• Cumulative causation plays a role
• Dualism does happen

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