Regional Disparity and Development Pols 322 Douglas Brown February 2008

Theories of Regional Disparities and Development  Three main theoretical approaches:  Neo-marxist, theory of “underdevelopment”  Neoclassical economics  Institutional political science

Neo-marxist theory  Class-based analysis of society and politics  Ownership and spatial concentration of wealth is important  Structure of development versus underdevelopment: regions are “kept” undeveloped or underdeveloped  International application, but also within a large country such as Canada  Metropolitan-Hinterland a variant of this analysis

Neoclassical Economics  The market is (or should be) what determines development.  Geographic and natural resource development help determine economic distribution of resources  The free market will adjust labour and capital to promote optimal allocation of resources  Economic integration and trade patterns important to consider  More recently: human capital formation seen as important factor

Institutional Theory  Politics and the shape of institutions drive economic outcomes  Policy factors shape the economy over time  Market (and their rules) are themselves institutions.  In a regionally diverse economy, some regions win, some lose, according to their political influence and input to institutions

Actual Policy Solutions Employed in Canada to deal with regional disparities  Constitutional Provisions  Fiscal Federalism  Direct Regional Development Spending Programs  State Enterprises

Constitutional Provisions  Provinces have significant fiscal and legal power to shape their own economies (so-called “province-building”)  Federal government uses its spending power to redistribute income from richer regions and individuals to poorer ones.  Section 36, Constitution Act, 1982 provides general commitment to regional equality of opportunity, economic development to reduce disparities, and fiscal equalization.

Fiscal Equalization  A Federal government program to top-up the revenues of provinces with below-average fiscal capacity  Formula based on a Representative Tax System of 27 tax types.  Formula determines average potential (not actual) tax yield against a national standard.  Based on revenue capacity, not expenditure need  Importance to recipient provinces -- unconditional grants allow provinces autonomy to spend as they like

Regional Development Programs  All governments involved: both cooperative and competitive programs  Types of spending:  Public Infrastructure  Grants and Loans to Business  Sectoral strategies  Political and Bureaucratic Factors

State Enterprises  Role in Historic Development:  railways, canals, pipelines, airlines, telecommunications  Nationalization of Private Business:  uranium, potash, steel, hydroelectricity, shipbuilding  Decline as a policy instrument:  commercialization and privatization

Current issues  Is equalization sufficient to ensure similar national standards in programs?  Are regional development programs working? Is there fairness in federal industrial policy?  What impact is free trade having on regional disparities?  Are we allowing the market to work properly?