Regional Regional EconomicsEconomics

Lecture 5 and 6Lecture 5 and 6

Sedef AkgüngörSedef Akgüngör

Regional GrowthRegional Growth

PProcesses of growth (or more rocesses of growth (or more broadly, change) in the economies of broadly, change) in the economies of regions regions is measured by:is measured by:

Relative Regional Growth in Population Relative Regional Growth in Population AA substantial variation among major substantial variation among major

regions in per capita income regions in per capita income Regional Structural Changes Regional Structural Changes

Some Basic Questions on Some Basic Questions on Regional Development Regional Development

1. 1. Causes of growth. Causes of growth. Why do some Why do some regions grow faster than others? regions grow faster than others? What are the primary initiating What are the primary initiating factors responsible, and through what factors responsible, and through what processes do these causes operate? processes do these causes operate? What is the role of interregional What is the role of interregional trade, migration, and investment in trade, migration, and investment in the spread of development from one the spread of development from one region to another?region to another?

2. 2. Structure. Structure. How does regional How does regional economic structure relate to economic structure relate to growth? What kinds of structure are growth? What kinds of structure are conducive to growth, or the reverse? conducive to growth, or the reverse? What structural changes are What structural changes are associated with growth?associated with growth?

3. 3. Convergence. Convergence. Why is convergence Why is convergence so much in evidence? Is it universal so much in evidence? Is it universal and inevitable, or is it subject to and inevitable, or is it subject to reversals?reversals?

4. 4. Control over regional Control over regional development. development. Can regional Can regional development be substantially guided development be substantially guided by policy? If so, what are defensible by policy? If so, what are defensible objectives and appropriate policies?objectives and appropriate policies?

WHAT CAUSES REGIONAL WHAT CAUSES REGIONAL GROWTH? GROWTH?

Self-Reinforcing and Self-Limiting Self-Reinforcing and Self-Limiting Effects Effects

Demand and Supply as Determinants Demand and Supply as Determinants of Regional Development of Regional Development

THE ROLE OF DEMAND THE ROLE OF DEMAND

Economic Base Theory and Studies Economic Base Theory and Studies

SSome activities in a region are ome activities in a region are peculiarly peculiarly basic basic in the sense that in the sense that their growth their growth leads and determines leads and determines the region’s overall developmentthe region’s overall development..

EExplanation of regional growth xplanation of regional growth consists of two parts: consists of two parts:

(1) explaining the location of basic (1) explaining the location of basic activities and activities and

(2) tracing the processes by which (2) tracing the processes by which basic activities in any region give basic activities in any region give rise to an accompanying rise to an accompanying development of nondevelopment of non--basic activities. basic activities.

The usual economic base theory The usual economic base theory identifies basic activities as those identifies basic activities as those that bring in money from the outside that bring in money from the outside world, generally by producing goods world, generally by producing goods or services for exportor services for export

The argument advanced for this The argument advanced for this approach is that a region, like a approach is that a region, like a household or a business firm, must household or a business firm, must earn its livelihood by producing earn its livelihood by producing something that others will pay for. something that others will pay for.

A household, a neighborhood, a firm, A household, a neighborhood, a firm, or a region cannot get richer by or a region cannot get richer by simply "taking in its own washing"; it simply "taking in its own washing"; it must sell something to others in must sell something to others in order to get more income. order to get more income. Consequently, exports are viewed as Consequently, exports are viewed as providing the economic base of a providing the economic base of a region’s growth.region’s growth.

Keynesian ModelKeynesian Model

Keynesian income-expenditure Keynesian income-expenditure model…model…

The only difference being that all the The only difference being that all the expenditure variables refer to the expenditure variables refer to the regional or local economy instead of regional or local economy instead of to nation. to nation.

The model begins with the familiar The model begins with the familiar income-expenditure identity:income-expenditure identity:

Y=C+I+G+X-MY=C+I+G+X-M

Y : Regional incomeY : Regional income C : Regional C : Regional

consumptionconsumption I : Regional I : Regional

investmentinvestment G : Government G : Government

expenditureexpenditure X : Regional exportsX : Regional exports M : Regional importsM : Regional imports

I = I0 , G = G0 , X = X0

C = C0 + cDY

M = M0 + mDY Where DY is

disposable income and given by

DY = Y-tY Where t is the rate of

income tax Y = k (C0 +I0+X0+M0)

Where, Where,

kk is the Keynesian regional is the Keynesian regional multiplier and is given by: multiplier and is given by:

k=1/ 1-(c-m)(1-t)k=1/ 1-(c-m)(1-t)

(c-m) (c-m) =the marginal propensity to =the marginal propensity to consume locally produced goods.consume locally produced goods.

tt= tax rate= tax rate

The multiplier is clearly sensitive The multiplier is clearly sensitive to changes in to changes in c - m, c - m, rising quite rising quite rapidly as it increases.rapidly as it increases.

Since the marginal propensity to Since the marginal propensity to consume locally produced goods consume locally produced goods (c (c - m) - m) has a crucial effect on the has a crucial effect on the magnitude of the regional magnitude of the regional multipliermultiplier..

This model says that the regional This model says that the regional income can be magnified by the income can be magnified by the Keynesian regional multiplier. Keynesian regional multiplier.

To obtain higher regional income, To obtain higher regional income, we wish to have a bigger multiplier. we wish to have a bigger multiplier.

The strategical implications from this The strategical implications from this model are to lower the income tax model are to lower the income tax rate and promote the propensity to rate and promote the propensity to consume locally produced goods. consume locally produced goods.

This model justifies the demand-side This model justifies the demand-side policies policies

PPromoting the demand, consumption romoting the demand, consumption of locally produced goods in this case, of locally produced goods in this case, can boost the regional economy. can boost the regional economy.

Export demand and Export demand and cumulative growth model cumulative growth model

This model says that if the world income This model says that if the world income grows, the region's exports will increase grows, the region's exports will increase which will lead to the region's output to which will lead to the region's output to increase. The region will be more increase. The region will be more productive in production. Thus, the productive in production. Thus, the region's competitiveness will increase region's competitiveness will increase which will decrease the region's price which will decrease the region's price and increase the exports. Another round and increase the exports. Another round of productivity increase and of productivity increase and competitiveness increase begin. competitiveness increase begin.

Example: Label for Example: Label for Geographic Origin may Geographic Origin may

help increase the value of help increase the value of local products and local products and

products to become world products to become world class brands….class brands….

1) to identify the region’s export activities, 1) to identify the region’s export activities, (2) to forecast in some way the probable (2) to forecast in some way the probable growth in those activities, and (3) to growth in those activities, and (3) to evaluate the impact of that additional evaluate the impact of that additional export activity on the other, or nonbasic, export activity on the other, or nonbasic, activities of the region. activities of the region.

The result is not only a projection of the The result is not only a projection of the region’s prospective growth and structural region’s prospective growth and structural change but also a model that can be used in change but also a model that can be used in evaluating the effects of alternative trends evaluating the effects of alternative trends of export growth. of export growth.

PProjection of the region’s rojection of the region’s prospective growth and prospective growth and

structural changestructural change

A more sophisticated approach is to A more sophisticated approach is to recognize that almost all activities in recognize that almost all activities in a region produce partly for export a region produce partly for export and partly for the regional market, and partly for the regional market, and to try to estimate how much of and to try to estimate how much of each activity is for export. each activity is for export.

The simplest way to make such The simplest way to make such estimates is by using location estimates is by using location quotients. For example, in 1970 quotients. For example, in 1970 North Carolina accounted for 2.45 North Carolina accounted for 2.45 percent of the national output of percent of the national output of men’s and boys’ work-clothing men’s and boys’ work-clothing factories, while personal income in factories, while personal income in North Carolina was estimated at North Carolina was estimated at 2.04 percent of the national total. 2.04 percent of the national total.

The location quotient is The location quotient is 2.45/2.04=1.20. From this we could 2.45/2.04=1.20. From this we could surmise that 20/120 or about one-surmise that 20/120 or about one-sixth of North Carolina’s output of sixth of North Carolina’s output of work clothing was for export to work clothing was for export to other areas and the remainder for other areas and the remainder for consumption within the state. consumption within the state.

Regional Input-Output Regional Input-Output Analysis Analysis

input-output schema input-output schema • • Intermediate—private Intermediate—private business business

activities, within the region. The sector activities, within the region. The sector is broken down into individual is broken down into individual industries or activities (such as mining, industries or activities (such as mining, food processing, construction, and food processing, construction, and chemical products). It is sometimes chemical products). It is sometimes referred to as the interindustry sector referred to as the interindustry sector because much of the detail refers to because much of the detail refers to transactions among the separate transactions among the separate industries within the sector.industries within the sector.

THE ROLE OF SUPPLY THE ROLE OF SUPPLY

flow of money payments "backward" flow of money payments "backward" from purchaser to seller, or we can from purchaser to seller, or we can follow the flow of goods and services follow the flow of goods and services "forward" from producer to user. "forward" from producer to user.

The scheme is symmetrical with The scheme is symmetrical with respect to supply and demand, or respect to supply and demand, or input and output. input and output.

INTERREGIONAL TRADE INTERREGIONAL TRADE AND FACTOR MOVEMENTS AND FACTOR MOVEMENTS AA region’s growth involves at least three region’s growth involves at least three

kinds of external relationships of the region: kinds of external relationships of the region: (1) trade, or the import and export of goods (1) trade, or the import and export of goods

and services; and services; (2) migration of people, both in their (2) migration of people, both in their

capacity as consumers and in their capacity capacity as consumers and in their capacity as workers; andas workers; and

(3) interregional "migration" of other (3) interregional "migration" of other production factors, notably investment production factors, notably investment capital. capital.

INTERREGIONAL INTERREGIONAL CONVERGENCE CONVERGENCE

convergence of regional income convergence of regional income differentials. differentials.

Such convergence would seem to be a Such convergence would seem to be a natural result of the gradual natural result of the gradual development and maturation of areas development and maturation of areas

Increased interregional trade resulting Increased interregional trade resulting from improved transport can also from improved transport can also promote convergence by permitting promote convergence by permitting regions to share to a greater extent the regions to share to a greater extent the benefits of the production economies of benefits of the production economies of other regions.other regions.

EXTERNAL AND INTERNAL EXTERNAL AND INTERNAL FACTORS IN REGIONAL FACTORS IN REGIONAL

DEVELOPMENT DEVELOPMENT We have seen that the development of a region—We have seen that the development of a region—

in terms of its size, income level, and structure—in terms of its size, income level, and structure—is affected by external conditions of two types: is affected by external conditions of two types:

(1) demand for the region’s outputs, or more (1) demand for the region’s outputs, or more broadly, external sources of income for the broadly, external sources of income for the region, and region, and

(2) supply of inputs to the region’s productive (2) supply of inputs to the region’s productive activity. We have also seen that the impact of activity. We have also seen that the impact of these external factors is conditioned by the size these external factors is conditioned by the size and maturity of the region and by the internal and maturity of the region and by the internal relationships of its various activities in the form relationships of its various activities in the form of vertical, horizontal, and complementary of vertical, horizontal, and complementary linkages.linkages.

Porter’s Diamond ModelPorter’s Diamond Model

Regional development Regional development agenciesagencies

Objectives:Objectives: to further economic to further economic

development and development and regeneration; regeneration;

to promote business to promote business efficiency and efficiency and competitiveness; competitiveness;

to promote employment; to promote employment; to enhance the to enhance the

development and development and application of skills application of skills relevant to employment, relevant to employment, and and

to contribute to to contribute to sustainable development. sustainable development.

Examples of Regional Examples of Regional Development Agencies (some Development Agencies (some

websites for your interest)websites for your interest) http://www.southwestrda.org.uk/http://www.southwestrda.org.uk/ http://www.englandsrdas.com/home.http://www.englandsrdas.com/home.

aspxaspx http://www.rdaova.cz/arr_onas_e.phhttp://www.rdaova.cz/arr_onas_e.ph

pp http://www.nsarda.ca/http://www.nsarda.ca/ www.mersin-ka.org/ www.mersin-ka.org/