Regional Economics

Regional Economics Lecture 5 and 6 Sedef Akgüngör

Regional Growth • Processes of growth (or more broadly, change) in the economies of regions is measured by: • Relative Regional Growth in Population • A substantial variation among major regions in per capita income • Regional Structural Changes

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

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

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

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

WHAT CAUSES REGIONAL GROWTH? • Self-Reinforcing and Self-Limiting Effects • Demand and Supply as Determinants of Regional Development

THE ROLE OF DEMAND • Economic Base Theory and Studies • Some activities in a region are peculiarly basic in the sense that their growth leads and determines the region’s overall development.

Explanation of regional growth consists of two parts: • (1) explaining the location of basic activities and • (2) tracing the processes by which basic activities in any region give rise to an accompanying development of non-basic activities.

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

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

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

Keynesian Model • Keynesian income-expenditure model… • The only difference being that all the expenditure variables refer to the regional or local economy instead of to nation. • The model begins with the familiar income-expenditure identity:

Y=C+I+G+X-M • Y : Regional income • C : Regional consumption • I : Regional investment • G : Government expenditure • X : Regional exports • M : 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,

k is the Keynesian regional multiplier and is given by: k=1/ 1-(c-m)(1-t) (c-m) =the marginal propensity to consume locally produced goods. t= tax rate

The multiplier is clearly sensitive to changes in c - m, rising quite rapidly as it increases. • Since the marginal propensity to consume locally produced goods (c - m) has a crucial effect on the magnitude of the regional multiplier.

This model says that the regional income can be magnified by the Keynesian regional multiplier. • To obtain higher regional income, we wish to have a bigger multiplier.

The strategical implications from this model are to lower the income tax rate and promote the propensity to consume locally produced goods. • This model justifies the demand-side policies • Promoting the demand, consumption of locally produced goods in this case, can boost the regional economy.

Export demand and cumulative growth model

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

Example: Label for Geographic Origin may help increase the value of local products and products to become world class brands….

Projection of the region’s prospective growth and structural change • 1) to identify the region’s export activities, (2) to forecast in some way the probable growth in those activities, and (3) to evaluate the impact of that additional export activity on the other, or nonbasic, activities of the region. • The result is not only a projection of the region’s prospective growth and structural change but also a model that can be used in evaluating the effects of alternative trends of export growth.

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

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

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

Regional Input-Output Analysis • input-output schema • • Intermediate—private business activities, within the region. The sector is broken down into individual industries or activities (such as mining, food processing, construction, and chemical products). It is sometimes referred to as the interindustry sector because much of the detail refers to transactions among the separate industries within the sector.

THE ROLE OF SUPPLY • flow of money payments "backward" from purchaser to seller, or we can follow the flow of goods and services "forward" from producer to user. • The scheme is symmetrical with respect to supply and demand, or input and output.

INTERREGIONAL TRADE AND FACTOR MOVEMENTS • A region’s growth involves at least three kinds of external relationships of the region: • (1) trade, or the import and export of goods and services; • (2) migration of people, both in their capacity as consumers and in their capacity as workers; and • (3) interregional "migration" of other production factors, notably investment capital.

INTERREGIONAL CONVERGENCE • convergence of regional income differentials. • Such convergence would seem to be a natural result of the gradual development and maturation of areas • Increased interregional trade resulting from improved transport can also promote convergence by permitting regions to share to a greater extent the benefits of the production economies of other regions.

EXTERNAL AND INTERNAL FACTORS IN REGIONAL DEVELOPMENT • We have seen that the development of a region—in terms of its size, income level, and structure—is affected by external conditions of two types: • (1) demand for the region’s outputs, or more broadly, external sources of income for the region, and • (2) supply of inputs to the region’s productive activity. We have also seen that the impact of these external factors is conditioned by the size and maturity of the region and by the internal relationships of its various activities in the form of vertical, horizontal, and complementary linkages.

Porter’s Diamond Model

Regional development agencies Objectives: • to further economic development and regeneration; • to promote business efficiency and competitiveness; • to promote employment; • to enhance the development and application of skills relevant to employment, and • to contribute to sustainable development.

Examples of Regional Development Agencies (some websites for your interest) • http://www.southwestrda.org.uk/ • http://www.englandsrdas.com/home.aspx • http://www.rdaova.cz/arr_onas_e.php • http://www.nsarda.ca/ • www.mersin-ka.org/

Regional Economics