GEOGRAPHICAL INCOME DISPARITIES WITHIN COUNTRIES: IS REGIONAL DEVELOPMENT POLICY THE ANSWER? What is regional policy? Is there a convincing case for regional policy? What form should regional policy take? Regional policy in practice: success or failure? Lessons for the future

WHAT IS REGIONAL POLICY? Initially - labour migration - Special Areas - location controls Current - FDI - indigenous growth - human capital - de-centralisation

DO WE NEED A REGIONAL POLICY? THE CASE AGAINST Unnecessary: automatic convergence - but convergence is very slow Intervention is harmful Regional policy has failed - but expenditure has been very low Should stimulate out-migration - but problems for origin and destination regions

THE CASE FOR REGIONAL POLICY Regional convergence not inevitable Equity Unemployment = lost output Jobs = training = competitiveness

Social benefits Net migration flows (cumulative causation) - selectivity may harm origin region - population pressure in destination region Political cohesion A zero sum game or real benefits?

REGIONAL POLICY OPTIONS Market-based - labour market flexibility Government intervention - to stimulate private sector investment Fiscal transfers

GOVERNMENT INTERVENTION Objective: to improve competitiveness - private investment in industry - public investment in infrastructure - public investment in human capital

REGIONAL POLICY IN PRACTICE: SUCCESSES AND FAILURES Location controls - highly effective but adverse effects Investment incentives - automatic: costly + deadweight - discretionary: good value (strict criteria) e.g. only 20% = deadweight cost / job = 1/3 un-benefit - failure to support incentives in 1990s

FDI Rapid growth in 1990s Increasingly important source of private investment for assisted areas (50% of grants to FDI in 1990s) Seduced by wide range of policy instruments - sites, subsidies, infrastructure, agencies assisted areas highly successful in attracting FDI

FDI into China - domination of coastal Provinces (economic development zones) - inland Provinces need infrastructure (low land & labour costs not enough)

INDIGENOUS REGIONAL DEVELOPMENT Switch in policy to SMEs - growth of interest in new & small firms (entrepreneurial, flexible, innovative, competitive) Spatial dispersion in NFF - highly correlated with unemployment & skill - need to stimulate NFF in high unemployment regions (loans, workshops, grants, advice) - spatial correlation is static

COMMUNITY DEVELOPMENT INITIATIVES Target most deprived localities Small scale but growing Bottom-up to engage local community Focus is on economically inactive

Experimenting with new approaches - step-by-step - voluntary work - intermediate labour market - quasi-currencies (hours worked credits) Successful? - too early to tell - too few evaluations - but low cost, good response from local communities

LESSONS FOR THE FUTURE 1. Location controls - unlikely to be acceptable - congestion / pollution taxes more likely 2. Investment incentives - automatic grants only for small firms - discretionary grants should be extended 3. FDI - crucial for assisted areas - how can developing countries get a bigger share?

4. New & small firms - success national not regional - scope for greater regional discrimination - must accept small firms are vulnerable - need to find & target more venture capital 5. CED initiatives - gaining in popularity - local projects need kick-start and sustained help

6. Infrastructure - attractiveness of lagging regions is critical - need both physical infrastructure and investment in education and training 7. Geography - spatial concentration needed to benefit from localisation economies - spatial disparities inevitable within regions

CONCLUSIONS 1. Regional income disparities will not go away 2. Concern is with relative not absolute disparities 3. Governments becoming increasingly sensitive to spatial inequalities 4. Regional policy offers possibility of efficiency gains 5. Regional policy is not a temporary fix

Some further questions: Is regional policy a luxury that only rich nations can afford? Can poor nations benefit from regional policy or should they simply ignore the consequences of their economic development policies for regional income disparities? Can any country afford not to have a regional policy given the increasing demand at 'regional' level for greater involvement in economic development issues?