Regional Disparities: Once Again

Canadian Public Policy

Regional Disparities: Once AgainAuthor(s): William J. WoodfineSource: Canadian Public Policy / Analyse de Politiques, Vol. 9, No. 4 (Dec., 1983), pp. 499-505Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3551134 .

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VIEWS AND COMMENTS

COMMENTAIRES

WILLIAM J. WOODFINE* Department of Economics, St. Francis Xavier University

Regional Disparities- Once Again Introduction

Students of regional analysis will welcome Ralph Matthews' (1981) article primarily because it clearly distinguishes, almost dichotomizes, two approaches to the problem of regional disparities: namely, the economic and the sociological. The article has three distinct themes. First, it is argued that the economic approach to regional disparities is deficient because 'such an approach fails to clearly distinguish economic and social welfare, and frequently advocates economic policies which would have deleterious social consequences' (Matthews, 1981:269). Second, the claim that greater income differentials via lower minimum wages would promote greater mobility and/or increased employment is dis- puted. Finally, it is argued that sociological dependency theory provides a better explanation of the causes of regional disparities than does conventional economic theory. What follows is, a critique of Matthews' interpretation of the economic approach to regional disparities, an examination of the sociological approach, and some general concluding comments on regional problems.

Matthews on Economic Aspects

Matthews chooses the writing of Thomas J. Courchene as an example of neo-classical economics applied to the problem of regional disparities. The 'bottom line' of Matthews criticism focuses on Courchene's argument that out- migration is potentially helpful and 'that transfers from Canada's federal government may actually serve to make poor provinces more dependent on federal assistance and less in- clined to alter the conditions which create their underdevelopment' (p.270). The argument re- flects the neo-classical economist's faith in the working of the price system as an allocator of resources in a market economy, including both commodities and factors of production such as labour. For Matthews, adjustment through migration is unacceptable because it involves high social costs, and, in any event, lower transfer payments and the resulting lower wage rates will not work along the lines suggested by Courchene. He writes,

There is yet a further obstacle to out-migration becoming a significant 'adjustment' as to be assumed in the transfer dependency model (i.e. Courchene). The model does not seem to fully take into account the fact that migration from any region is also a reflection of the opportunities available elsewhere. Lowering minimum wage rates in the dependent regions is not likely to produce out- migration unless there is somewhere for

Canadian Public Policy - Analyse de Politiques, IX:4:499-505 1983 Printed in Canada/lmprim6 au Canada



people to go. The historical evidence would

appear to support this contention. (p.276).

Matthews states an important point but fails to realize its significance not only for the under-

standing of Courchene's analysis but also for the understanding of the nature of regional im- balance. The main point about regional disparity is that there is a differential between the regions - that there is a 'have' and a 'have-not'

region. Matthews is right about the 'historical evidence' which suggests that, in the absence of differential income and employment opportunities, migration will not occur. What is happening however, is that regional disparities are being reduced because of slow growth in the 'have' area.

Regional analysis must always proceed in tandem. That is, what is happening in one

region must always be paired with its counter-

part in another region. For many, this is little more than a statement of the obvious, but the

point has not always been that obvious to governments and their economic advisors whose

plans for regional development are often based on a strategy of import substitution with little if any regard for comparative advantage and/or the supply restraints of local resource endowments.

It is important, moreoever, not to use as the measure of disparity the gap between the region in question and the Canadian average. For ex-

ample, it is not the wage rate in Glace Bay com-

pared to the Canadian average but rather the Glace Bay rate compared to Toronto or Calgary or Yellowknife. This is important for a variety of reasons. In a neo-classical analysis, this difference is a measure of the disequilibrium. For

Courchene, the observed disequilibrium is

'artificially' small because of transfer payments and, therefore, appropriate adjustments don't take place. For Matthews, the social costs

necessary for the 'appropriate' adjustment are

unacceptably high. I might note in passing, however, that the econometric finding of a very low elasticity response of migration to income differentials may be biased and may exaggerate the required income differentials. This analysis takes as given the non-economic social parameters affecting migration. It is not improbable

that these non-economic parameters may, in

time, become less significant in preventing some desirable migration even if income and distance factors have not become more significant.

A major part of Matthews' objection to Courchene's analysis relates to the consequences of a lower minimum wage. For the most part, Matthews does not understand the economics of the minimum wage but his discussion is suggestive. Too much importance is attached to the use of minimum wages to prevent exploitation, especially of non-unionized workers. Not considered are the variety of ways by which

employers are able to circumvent the intent of minimum wage legislation. Moreover, in the face of adverse market conditions, high wage rates, even for unionized workers often result in a form of work sharing through 'short-time,' a very common experience for the miners and steelworkers of Cape Breton, especially during the fifties and sixties.

As for the point that a lower minimum wage will increase employment, Matthews suggests that: 'such measures would not eliminate re-

gional disparity, but rather they (lower wage rates) would institutionalize it'. (p.274). Besides, he argues, the industries that are attracted will

ultimately require government assistance to survive and the costs of supporting this low-wage type of industry will be borne by the low income residents of the 'have-not' region. That these costs may, in fact, be shifted to the federal

government is not considered by Matthews, al-

though his comment is suggestive of an important point often missed in regional analysis: that there is a basic instability in a situation where a low-wage industry operates close to a

high-wage, often capital-intensive industry. For

example, the wage disparities between a fish

plant (low wages) and a newsprint mill (high wages) may doom the former whether unionized or not. The problem with low-wage industries is that they often require low wages to survive.

For Matthews any extra employment gener- ated by low wages is not worth the social costs. But there are two disparities: an income disparity and an employment disparity and often

progress on one must be at the expense of the other. To specify that there must be high wages and low unemployment and no inducement to

500 William J. Woodfine



emigrate may not be a possible combination

given the region's resource endowment.1 That a lower rate of out-migration may involve higher unemployment and lower earnings is ignored by Matthews' sociological approach. One could very well argue that, over the years, most social

policy towards Atlantic Canada has emphasized social and not economic considerations, and that is part of the problem.

It is unfortunate that Matthews' obvious con- cern for social and cultural values is couched in terms that tend to be moralistic. He approvingly quotes Daniel Bell's complaint that contempo- rary economists 'make accumulation an end in itself' (p.281): or 'A major bias of the Courchene

position is its tendency to ignore the cultural values of many of those who wish to remain in Canada's dependent regions' (p.281). The sug- gestion here, of course, is that the economic

approach is uncaring and inhuman, concerned

only with dollars, etc. Matthews suggests 'that those who do move are economically motivated, while those who remain behind ... are motivated

by more social considerations'. (p.276). Is Matthews suggesting that those who stay behind are somehow better than those who leave? In- deed it's very much a possibility that some

migrants would view better income and employment opportunities outside the region as more conducive to the enhancement of cultural values than staying home 'on the unemployment'.

It is more than a matter of semantics to reject Matthews' view that Courchene's regional anal-

ysis represents a school of thought. On the con-

trary, Courchene's analysis is an example of mainstream economic theory along with the econometric testing of hypotheses. Having pioneered much of the work in migration anal-

ysis, Courchene wonders whether the size and nature of transfer payments to individuals and

governments in the 'have-not' areas could pos- sibly affect the pattern of economic activity in the region. This is a more specific articulation of a growing awareness that very large amounts of money have been transferred to the Atlantic Provinces with little indication that disparities are being reduced. This, in turn, has raised

questions as to the purpose of the transfers and whether the objectives are being achieved. To ask whether individuals and governments may

behave differently in situation A where money is easily available for doing little or nothing compared to situation B where no money is available hardly provides the intellectual focus for a new school of thought. Courchene is but one economist who has studied the problem of migration in the context of Canadian regional problems and not all economists agree with Courchene's methodology or with his policy recommendations.

Matthews on Regional Disparities

For the most part, Matthews' explanation of

'regional underdevelopment' is the sociological theory known as 'dependency theory', a pseudo- Marxist interpretation of events that explains regional disparities in non-economic terms. Ac-

cording to Matthews:

The sociological approach, known as dependency theory, was developed by Latin Ameri- can economists as an alternative to these modernization theories in explaining under-

development in their home countries. In recent years it has also been used by sociologists in the developed societies to explain the per- sistence of regional pockets of underdevelopment in these more developed nations (p. 278).

Matthews notes that the theory is in its youthful stages and, therefore, there is no clear, systematic body of theory directly applicable to Cana- dian regional problems.2 Nevertheless, having rejected the neo-classical analysis, he goes on to

explain the causes of regional disparities, linking the Latin American dependency theory with Innis' staple theory, providing an explanation in terms of centre-periphery relationships.

According to this analysis, the Atlantic region is not characterized by any deficiency in its endowment of physical and natural resources. The real problem is that 'the dependent regions have been historically drained of their resources and wealth by the developed ones' (p.280). The un-

derdeveloped regions provide not only raw materials, wealth, and a market for more de-

veloped regions, but also function as a reserve labour supply. After a time, this process results

Views and Comments/Commentaires 501



in a highly stratified social system in which the dominant class of the developed region links up with the dominant class of the dependent region. What is evident in much of this discussion is a

great readiness to infer causal relationships on the basis of much assertion and little empirical evidence. There is always the implication that

'things could have been different' without any analysis of how a significantly different pattern could have emerged. Applied to Atlantic Canada, dependency theory would require much rewrit-

ing of the area's economic history. There are a great many myths about eco-

nomic conditions in pre-Confederation Atlantic Canada and it's the myth, not the reality, that lies behind much of Matthews' explanation of

regional disparities. For the most part, the few

periods of prosperity were short-lived and de-

pended on fortuitous external factors that were

basically non-economic in character. Unlike most other parts of early North America, agri- culture did not provide much scope for development. Fishing and lumbering produced periods of prosperity but this depended largely on the extent to which Maritime products received favorable preferences from Britain. The history of this period suggests an economic structure that is relatively high cost with much difficulty in being competitive.

Atlantic Canada during the mid-1800s is best described as a small-scale economy with a resource base that is not as good as that found in

nearby areas. The area is far from the major centres of economic activity in North America and the forces of geography gradually turn

against Atlantic Canada. It is generally believed, however, that the National Policy of high tariff

protection was the final blow to the Maritime

provinces. This point of view is based on the adverse shift in a region's terms of trade that occurs when a primary-producer type of eco-

nomy is faced with tariffs on imported manu- factured goods. The same argument has been used to explain the shift of economic power from the American south to the north which, in

turn, was one of the causes of the American Civil War.

There can be little doubt that the terms of trade aspect of the National Policy was detri- mental to the Maritime provinces because the

tariff caused a redirection of trade and an ac- centuation of the geographical impediments to an easy integration with Upper Canada. But there were some gains for the area. There was, for example, the development of the coal and steel industry in Cape Breton and this industrial

complex, the largest east of Montreal, provided employment opportunities for people from the

surrounding rural communities. The other aspect of the National Policy, railway construction, provided a ready market for the rails from the steel industry. In addition to this positive aspect of the National Policy there has also been a substantial amount of compensation through large subsidy payments.

What stands out about Atlantic Canada

throughout most of its history compared to

many other Canadian regions is that it never did

experience a great boom that could be identified with a particular resource discovery. The 'good times' have generally been associated with the two world wars and with the American Civil War. In all three situations, war created new opportunities because there was a need for military production, regardless of cost, and, in general, a reduction of normal competitive pressures that

encouraged plant expansion, especially in

secondary manufacturing. With the end of hostilities and the emergence of normal economic forces, economic weakness once again surfaced. The worst of times existed whenever

major developments occurred in other areas of Canada such as the great westward expansion before World War I, the expansion of the later forties and early fifties.

No doubt Matthews would see this as evidence of the thoroughness of the 'exploiters'. What is difficult to understand about the Matthews explanation is that, if there is nothing inherently deficient about Canada's Atlantic

economy, why don't the exploiters continue to

exploit the opportunities? After all, with lower

wage rates than elsewhere, the opportunities for

exploitation are almost limitless. One can't help but wonder whether sociological dependency theory is not much more than the discovery of what the market system is all about.

There is another aspect to the notion of

exploitation and that is dependency theory's implicit judgement that the course of history




could have been different; that, for example, Atlantic Canada could have experienced a rate of growth that would have been high enough to make out-migration unnecessary. But how could this have been done? How could it have been managed that Canada's several regions with different resource endowments could have developed so that the outcome would have been substantially different from what, in fact, did happen? And could this have been achieved with no reduction in the overall national rate of growth? This is not to deny that there could have been a better distribution of the social costs of regionally unbalanced growth. At times, dependency theory comes very close to being a variant of the non-economic arguments for tariff protection.

Matthews cannot accept the fact that many of Atlantic Canada's resources are physically inferior in both quality and quantity to competitive supplies that are readily available as imports into the region. There are probably hundreds of areas in the Atlantic region where, a few genera- tions ago, small and not-so-small communities thrived. Invariably, these communities were of the subsistence type and out-migration was both an opportunity and a necessity. Does Matthews think that this out-migration was wrong? Can he point to any social indicator such as infant and maternal mortality rates, the incidence of TB, levels of education, etc. to indicate that conditions were anything beyond the barely tolerable? Throughout the pre-World War II period, for example, infant mortality in Nova Scotia, New Brunswick and Quebec was the highest in Canada and Newfoundland's rate of infant mortality was almost twice that of Nova Scotia.

What about the claim that there was a systematic drain of resources from the Atlantic region for use elsewhere in Canada and that this helps explain regional disparities? Or, as stated by Matthews:

From dependency theory perspective dependency is caused by the systematic draining of capital and resources out of a region by other regions. In the case of Canada, there are data which can be used to support both positions. Dependency theorists rely heavily

on the historical data documenting the movement of wealth from Canada's eastern provinces in the period from 1890 to 1920 (p.279).

There are two problems with this interpretation of events. First, did resources and capital migrate because better opportunities existed elsewhere. If so, then what we have witnessed historically as noted above has been nothing but the opera- tion of a market economy and the play of world economic forces. No one argues that this system produces a regional distribution of income that is acceptable on ethical grounds. For Matthews, this is not the movement of resources in search of higher economic returns and better living conditions. It is rather the conscious manipulation of the system to achieve the exploitation of a particular region.

There is yet another obstacle in the way of Matthews' interpretation of events. For there to have been 'a systematic draining of capital and resources out of (Atlantic Canada)' there must have existed a substantial current account sur- plus in the region's balance of payments and for this to have happened, there must have been high levels of personal, business and/or government saving. We do know that there was occa- sionally strong performance in the export of such commodities as coal, steel and lumber but we don't know much about imports into the region and the flow of funds on a net basis. What really stands out during the 1880-1920 period is the very rapid expansion that took place in western Canada. At least one study suggests that this period's westward expansion had a beneficial impact on industry in Quebec and Ontario but only a minor impact in Nova Scotia. In fact, it may well have been, during this period of time, that the future course of Canada's regional disparities became entrenched and, from that time on, it became common knowledge for Maritimers that a much easier life was available in other parts of Canada. Green's analysis has provided worthwhile in- sights about this period of Canadian economic history (Green, 1967).

The dependency theory explanation of regional disparities generally supports the centre-periphery explanation; namely that




central Canada, the 'golden horseshoe', is the seat of Canada's economic elite and the area from which the tentacles of manipulation and exploitation extend to the rest of Canada. It is difficult to know how present economic events would be explained by dependency theory. What about the current situation with western Canada and even much of Atlantic Canada ex-

periencing faster economic growth than Ontario? What Matthews does not see is the power of market forces to determine patterns of production, employment and income in a manner that generates regional disparities. Much of Atlantic Canada, indeed Canada itself, is an

open economy, terribly vulnerable because of its 'price-taker' status.

There are other dimensions to the Matthews'

paradigm of regional exploitation. Atlantic

Canada, he claims, is not only drained of its resources but it then becomes a captive market for the products of central Canada. It is not clear how the market of Atlantic Canada, with retail sales being less than metropolitan Toronto's and

spread out over four provinces, could provide much in the way of opportunities for profitable exploitation especially when most of its resources have already been drained away. The

view, moreover, that because of migration, Atlantic Canada provides, 'a large reserve army of the unemployed' (Ibid.:280) seems to be a little extreme when we look at the numbers in- volved and the possibility that these migrants could have much of an impact on upper Canadian labour markets. Indeed, if true, then the various econometric attempts to explain migration would find it much easier to obtain higher levels of statistical significance.

Conclusion

The search for the ingredients of a successful

regional development policy is far from over. The publication of Provincial Economic Ac- counts by Statistics Canada with considerable detail on provincial economic performance has confirmed the view of those who have argued that there has been no real payoff from regional development policies in Canada. This is not to

say that there are no areas of growth but where there do appear to be some opportunities for

viable growth, they are due primarily to changes in the international economic environment, especially to higher oil prices and not to regional development policies.

Matthews' sociological explanation of regional disparities does not get us very far. It is not a

good description of the reality of the region's economic history or of the economic forces that have been at work in more recent times. What is especially unfortunate is not so much its faulty economic analysis and its lack of

empirical support but rather its failure to tell us

something about the sociological aspects of

regional disparities. About all that Matthews has said is that migration may involve social costs and that transfer payments should not be

abruptly ended. It would be worthwhile to know, for example, how sociological factors

may affect the functioning of an industry that is brought to an area. Is there a difference between a depressed region's rural and urban areas? What, moreover, has been the experience of the

people who have migrated to other parts of Canada? With large groups in Ontario and Alberta, for example, it should be possible to

say something about the sociological aspects of life 'away from home'.

Finally, Matthews is mistaken if he thinks the status quo is protective of social values. The

present situation in much of Atlantic Canada is one without much hope for substantial change in the near future. The real unemployment is

probably understated because the area's industrial structure is characterized by a low rate of female participation in the labour force. For a

large number of unemployed persons and for

many of those already employed, the present grant system produces another type of dependency: an individual's income and employment opportunities are often dependent on political considerations. This is especially true among young persons and/or unskilled workers. With little or no growth in the private sector, the

public sector becomes the major employer. What we see in much of Atlantic Canada is without

parallel in the rest of Canada: that is, a situation where 'how you vote,' 'whom you know,' etc. is what determines whether you work or don't work. Such a system is hardly conducive to the preservation of wholesome social values.




Matthews would do well to examine some of the benefits that might accrue from dependence on a market system (I la Courchene) compared to the costs of being dependent on the local political machine.

Notes

* I wish to acknowledge the assistance of John Vanderkamp and Ronald Shearer. The comments of two referees, Paul Davenport and John Graham were also helpful. CP Ltd. does not necessarily share my views.

1 That a higher minimum wage might increase employment has not been considered by either Courchene or Matthews. This possibility exists when there is a combination of monopsony in the labour market and an imperfect goods market. This is not an unlikely possibility in the many areas dominated by a major employer.

2 Matthews does not go into much detail about dependency theory but he does provide several

references - of which a good exposition is Clement (1980).

References

Clement, Wallace (1980) 'A Political Economy of Regionalism in Canada', in Structured

Inequality in Canada, edited by John Harp and John R. Jofley, Prentice Hall, Scarbo-

rough, pp.268-284. Green, Alan (1967) 'Regional Aspects of

Canada's Economic Growth, 1890-1929,' Canadian Journal of Economics, and Political Science, XXX I I: 232-245.

Matthews, Ralph (1981) 'Regional Dependency in Canada,' Canadian Public Policy - Analyse de Politiques, VI 1:2:268-283.


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Regional Disparities: Once Again