Economic Environment of Business Lecture Eight: Regional Policy: Divergence and convergence.

What constitutes a regional problem? Some regions might experience differences in: Income Work opportunities Infrastructure Once we have defined different regions, we might find some have deficient levels of these – Regional Problems

Policy makers interested in the following regional problems:  High and persistent unemployment  Low levels of growth of GDP per head  Heavy dependence upon a narrow industrial base  Rapid decline in manufacturing  Inadequate levels of infrastructure  Net migration out of the region The following slides give an example of some disparity within regions of the UK economy.

Index of GDP per Head NB – Want to be as high as possible!

Index of UK Unemployment NB – want to be low as possible!

What policy should we employ to overcome regional problems? Depends on whether the regions are believed to be:  Converging (Free Market Policy), or  Diverging (Interventionist Policy) These shall be examined in detail:

Convergence: Start with an initial disparity in wages: In economically depressed areas ( traditionally the North of England):- Low Demand for goods and services  low demand for labour (Derived)  Price of Labour (Wage) is low In prosperous areas:- (traditionally the South of England):- High demand for goods and services  high demand for labour (Derived)  Price of Labour (Wage) is high

As a result: Workers in the north may move south to find work. Employers in the south may move north to find cheap labour.

Long-run Equilibrium NORTH (economically depressed area) Supply of Labour falls as workers migrate to South raising wages in the North Demand for labour rises increasing demand and wage for labour. SOUTH (prosperous area) Supply of Labour rises as workers migrate to South reducing wages Demand for labour and wage falls as employers move North Thus, disparity can only be short-run in this model. Policy: Minimal: Make sure markets operate effectively

Divergence: the case for intervention In practice, labour and capital markets may be imperfect because of: Imperfect knowledge amongst firms and employees Costs of moving – economic and social Minimum wage legislation etc. Disparity may be worsening without government intervention.

However, in the long term divergence will persist because:- Skilled labour leaves North seeking prosperity Markets continue to grow in South Demand for goods and services is strong in South In UK, South is close to mainland Europe Infrastructure may decline in North

However, in the long term divergence will persist because:- Skilled labour leaves North seeking prosperity Markets continue to grow in South Demand for goods and services is strong in South In UK, South is close to mainland Europe Infrastructure may decline in North

Regional Policy and Policy Instruments Special Areas Act (1934) established:  Government trading estates  Subsidised rents  Low interest rates as a basis of regional policy.

Recent Policy initiatives: Assisted Areas set up the 1990s (reviewed in 1999 under EU directive)  Development areas (DAs) which need most help  Intermediate Areas (IAs) need least help and;  Split areas (SAs) with localised problems

Financial Incentives RDGs (Regional Development Grants) were abolished in 1988 in favour of RSA (Regional Structural Assistance) REG (Regional Enterprise Grant), EG (Enterprise Grant) and other assistance

Expansion control IDC (Industrial Development Certificate) ( ) required following Town and Country Planning Act (1947) to avoid industrial congestion. This is claimed to be the most cost-effective. Problem: Firms might go abroad if turned down for an IDC, rather than to a less congested part of the UK!

Policy effectiveness is often difficult to assess:  Statistics often unreliable  Redefined boundaries – difficult to compare like with like  Actual v estimate i.e. We can only hypothesise what the alternative outcome would have been without intervention.

Summary We established:  A definition of the regional problem  The convergence theory  The divergence theory  The policy options  The problems of evaluating policy

Next Class International Trade Consider why trade is so important and think about the barriers that exist to trade. Read up on the latest Doha Round of the GATT trade talks. (General Agreement on Tariffs and Trade). Now known as World Trade Organisation