Assess the economic case for and against regional development policies
The emerging character of regional economic policies necessarily raises the question of whether or not traditional regional policies are more conducive to regional economic development than cluster policies are. In general regional economic development policies are aimed at measures calculated to promote internal investment and to increase opportunities for income in weak regions. The underlying actions involve a tempering of interregional relations. These policies are typically case oriented and will usually be characterized by quid pro quo measures. Clustering focuses on interconnectedness between existing firms so that the new social concerns emerging under regional policies are given more effective attention. In this regard, clustering focuses on bringing the weaker performers into contact with stronger performers. Traditional regional development policies however, focus on turning specific attention to weaker performers. There are a number of arguments to made in favour of and against the traditional regional development policies in relation to economic policies and outcomes. It is also arguable that cluster policies are more suited to enhance regional competitiveness and future development prospects, since it takes greater account of the social and welfare issues that are now falling under regional development considerations. This paper examines both sides of the argument and concludes that the cluster policy, although far from perfect, is more likely to enhance regional competitiveness and future development prospects.
Traditional regional economic policies take the position that focusing on emphasizing the potential of specific businesses while cluster policies are aimed at supporting all business that have the potential to improve production at the local level (Goetz and Harris 2009, 75). Regional economic development policies are characterized by attempts to improve employment rates, income, general wealth and opportunities within a specific territory. Regional economic development therefore takes up the workforce, infrastructure, industries and other areas of development (Martinez-Vazquez and Vaillancourt 2008, 29). In sum, regional economic development policies emphasizes shifting attention from export and import substitutions to promoting export, to creation of human capital resources and from an employment-based to a knowledge-based economy (Martinez-Vazquez and Vailancourt 2008, 31). In other words, as different problems arise markets and governments respond accordingly. It is against this background that regional development policies are assessed in terms of its pros and cons and whether or not cluster policies are likely to enhance regional competitiveness and future development prospects.
Regional Development Policies
The Organization for Economic Co-operation and Development (OECD 2009) defines regional development policies as a shared responsibility among levels of government which brings together a number of public and private actors (3). Essentially, regional development policies are complex and the applicable conditions consist of coordination and cohesion between various stakeholders both at a public and private level. Increasingly, individuals and organizations alike are insisting on exercising the right to take part in development policy decisions. With the emphasis on sustainability rather than modernization, the ideal regional development policy is much more than economic growth but also about human equality and well-being. This requires taking into consideration the needs and values of diverse populations and necessarily requires input from individuals and institutions (Eversole and Martin 2005, 1). It therefore follows that regional development policies are entirely complicated and might be entirely incapable of accurate and proficient calculation.
Regional policies depend in large part on whether or not equity among regions is for the greater good of national economic development. For instance if strategies for diverting economic growth from strong areas to weak areas are detrimental to the overall national economic performance, regional inequities will not be altered by regional development strategies. However, if interregional inequities are far too imbalanced and persistent and stronger areas result in regional congestion so that national inflation is actually occurring or is at risk, these inequities are viewed as an interregional failure requiring attention. This is primarily because economic policies typically only take account of commercial factors rather than the broader socio-economic factors (Rodwin and Sazanami 1991, 21).
Within this complex environment, regional development focuses on the future and takes into account both plurality and diversity (Eversole and Martin 2005, 2). The ultimate goal is to realize the utmost human and resource potential, to overcome poverty and meet basic human needs as well as to improve material resources and access to those resources. However the shift toward a human rights-based approach to regional development policies is easier said than done. It is entirely unrealistic yet desirable to take account of the diverse needs and values of different populations within a particular region. However, the term region itself presupposes that the common needs and mutual needs of the region are singular rather than pluralistic.
Regional development policies are aimed at identifying the connection between regional development and the gaps such as poverty, unemployment, access to products and services, cultural differences and environmental protection. Regional development policies are similarly about exploring how regional development can narrow these gaps (Kumssa and Nickum 2001, 4). Even so, the diversity within and between regions ultimately means that regional development can mean different things to different people and formulating an effective policy can be compromised by the diversity that exist between different populations and state actors. No doubt, different perspectives on regional development can be significant barriers to the coordination and cooperation required among stakeholders from different sectors, governance, values and populations within a specific region. The only common ground is that regional developmentplanning is a creature of Western practice and is essentially a government oriented goal (Kumssa and Edginton 2001, 3).
Regional development is essentially regarded as a conventional economic paradigm, but one that emphasizes resource allocation within and among regions so that clearly defined goals are met. Regional development is also physical in nature in that it also focuses on the construction of infrastructure particularly those that enhance communication, travel and provide for basic needs such as utilities. Regional development also gravitates toward the inclusion of social concerns which include poverty and enabling populations and integrating economies (Kumssa and Edginton 2001, 3). The upside of this expanded approach is that it creates opportunities for the creation of products, goods and human capital and by doing so, not only closes the economic and development gap between regions and within regions, it also opens the door to free and open markets by lifting rigid competition creating greater opportunities for fair competition (see Chart A).
There are essentially two regional strategies that dictate the adoption of regional development policies. They are either interregional policy strategies or intra-regional policy strategies. Interregional policy strategies focuses on two specific areas that are designed to manipulate the allocation of physical capital such as the provision of work and the getting labourers to work. If economic growth has resulted in congestion of the stronger regions it will become necessary to implement a strategy that provides work for workers. If the gap between regions is more complimentary to national economics, then the strategy of getting workers to work will be a more favourable interregional policy strategy (Brocker, Dohse and Soltwedel 2003, 360).
Costbenefit analysis dictates that interregional strategies can benefit regional development if capital relocation promotes andor preserves the economic, social and cultural infrastructure in an inherently stronger but problematic region. Likewise labour relocation can also be beneficial if it ensures that workers obtain higher wages relative to the market in the stronger areas. However there can be costs attached to capital and labour relocation. With respect to cost, the problem region may be required to take on mobile capital. Meanwhile it is possible for specific firms to develop problems associated with the firms commerce and ownership. Labour relocation itself is a difficult policy to incorporate often requiring the development of back-up social infrastructure such as new townships and other communities for sustain the influx of new labour. Other social problems include the separation of families as a result of migration, selective migration as a result of social concerns and the number of workers migration might not be sufficient (Suhr 1989, 139).
Intra-regional policy strategies are focused on developing the growth potential of weak regions by emphasizing their respective competitiveness. In other words, supply-side policies are the underlying goal. A good example is found among the least developing countries in the Asian Region. In 1970, least developing countries in Asia only exported approximately 10 percent of their total export commodities to the more developed countries in the Asian region, approximately 0.5 percent to South Asia and 7 percent to other least developing countries in the region (James, Naya and Meier 1989, 218). However, in the latter part of the 1970s intra-regional trade among the countries in the Asian region increased demonstrating the possibility that expansion in trade among countries within a region with diverging degrees of income and resources. What was required was a collaborated effort at reducing barriers to trade and the adoption of more out-ward oriented policies (James, Naya and Meier 1989, 219). The result was an increase in exports from least developing countries in the Asian Pacific region to the more developed countries in the Asian Pacific area and a drop in exports from other regions such as Europe, the Americas, the Middle East and Africa, therefore increasing the economic performance of the least developed areas in the Asian Pacific region (see diagram below).
Export Trends for least Developed countries in the Asian Pacific From 1975 to 1955. (Year to year trends are noted at the bottom of the diagram, the percentage for each trade partner is noted in the far left column).
28 Asia24Asia20Asia16AsiaThe AmericasThe Americas12 AsiaThe AmericasThe Americas8 Africa Middle EastMiddle EastMiddle East (Just below 8)4 Europe
Europe
Africa
Middle EastEurope
AfricaEurope
AfricaEuropebelow 4
Africa0 Middle East (just above 0)Trade yr 1975 Trade yr 1977 Trade yr 1979 Trade yr 1983 Trade yr 1985
The diagram above shows the trend in exports from the least developed countries in the Asian Pacific from 1975 to 1985 the critical period in which the Asian Pacific implemented an interregional trade policy. The diagram shows that as the interregional policy gained momentum, trade within the region increased while trade from the least developed countries to other countries decreased or was sustained. The point is, these countries within the Asian Pacific regions were able to increase their export markets with Asia and at the same time continue to hold on to external markets.
Historically, regional development policies evolved around political, social and economic considerations during the decades of the 1950s and 1960s at a time when the global economy was comparatively stable. Regional development was aimed at the distribution of production factors as a method of achieving regional equity and at the same time maintaining economic efficiency. By the 70s and 80s different countries began to adopt different approaches to regional development. For instance, the developed countries looked for decentralization of regional development actors and promoted an institutional regime with a greater emphasis on localized regional planning (Kumssa and Eghington 2001, 4).
Economists argue that this new approach to regional planning came about in response to the tensions between the two different theories of regional development. On the one hand, regional development policy theories rested on a diffusion process that envisaged top-down from above (Kumssa and Eghington 2001, 4). On the other hand, regional development policy theories promoted a bottom-up from below approach (Kumssa and Eghington 2001, 4). Despite the tensions between the two theoretical approaches to regional development, both theories address the necessity for a practical solution to regional development policies that are conducive to reality.
Regional development policies can be complicated in that they seek to bring together diverse cultures and diverse economies with the result that coordination and cohesion can be problematic with respect to removing production gaps in terms of supply and demand. When this happens it is certainly true that regional development might result in outmigration of resources to one area to such an extent that competition is distorted. However, when the proper balance of supply and demand is achieved, countries within a region and neighbouring regions can evolve into relatively stable economies.
When countries within a region and neighbouring regions are similar in terms of development, markets, cultures and legal regimes, the likelihood of greater cohesiveness in trade and competition is greater (OECD 2001, 20). This cohesiveness can be harnessed by virtue of interregional trade agreements or by virtue of bilateral trade agreements. The idea is to set parameters for competition and trade policies so that production in terms of supply and demand and competition has a horizontal effect to the benefit of the contracting parties.
An effective approach to regional development requires identification of those factors that create gaps for specific regions and those factors need to be a priority. Any policy calculated to appeal to outside or inside investors will not be a success if the quality of local organizations are poor, human capital resources are weak or the location is too far removed from important markets, there is little or no venture capital and there are security concerns. Integration is more likely to succeed if and when infrastructure investment results in transport for both goods and people at a reduced cost. This is because it will empower the population and lead to incentives for technical solutions (World Bank 2007, 205).
Cluster Policies
Hertog and Remoe (2001) distinguish between clusters and clustering (389). Clusters are characterized by actual amalgamation of businesses that relate to one another with a view to improving their own competitiveness. Clustering relates to interconnections between businesses with a build-up of cluster externalities so that weaker businesses improve their competitiveness (Hertog and Remoe 2001, 389). Drawing on this distinction, this part of the essay focuses on the concept of clustering.
Economist have acknowledge and accepted for the most part and for a long time that spatial clustering of business organizations and entities have the capacity to become independent of single units but come into being as a result of the creation of spatial links among a conglomeration of firms with the independence representing a natural trickle down consequence (Karlsson 2008, 23). In 1920, Marshall put forth three reasons for the general acquiescence on the merits of clustering. First, he suggested that it clustering creates opportunities for information sharing in the sense that it trickles down in interpersonal contacts so that knowledge is transferred. Secondly clustering has the potential to localize non-traded inputs in the sense that suppliers of specialist and expensive services as a result of the concentration of demand for specific services generated as a result of clustering. The result is, with demand concentrated, the cost of those services are naturally reduced. Thirdly, skilled labour becomes localized (Press 2006, 41).
Elaborating on Marshalls argument, Porter goes further to suggest that clustering permits entities within the same industry andor market to organize and arrange business transactions in a manner conduce to the perpetually and quickly changing environment of information and technology. Firms are also able to collaborate with their respective competitors with concurrent benefits to all such as in the pooling of research and development. This can be accomplished without compromising any gained or forthcoming competitive advantage. In fact, clustering, according to Porter enhances the opportunities for competitiveness. Moreover, clustering keeps the firm abreast of its competitors developments and encourages competitive initiatives (Porter 1998, 279).
The OECD (1999) describes cluster policies as occupying the boundaries of industrial policy, regional development policy, and science and technology (384). Industrial policies were aimed at lending assistance to local industries that were confronted by growing foreign competition. Government assistance to local industries was largely viewed as a barrier to fair competition worldwide so that the international regulatory regime modified the trade laws to alter these tactics. As a result of restrictions on government subsidies firms and public institutions began to turn greater attention toward science and technology (OECD 1999, 384).
Simultaneously, industries looked for ways to improve competition by virtue of deregulation, tax and labour reforms (see Charts 2 and 3 for comparison of direct and indirect government intervention in regional development) . Each of these incentives did not call for direct government aid. By the early 1990s, policy agendas saw governments and private actors take a broader approach so that instead of direct financial support, it was accomplished by virtue of indirect support. However the OECD (1999) explains that
Cluster policy is not solely about science and technology policy in fact in many policy programmes science and technology is not a key issue at all. Nevertheless, cluster-based activities are inspired by the notion that the linkages between industry and research need to improve in order to sustain competitiveness (384).
Cluster policies are designed to combine science and technology (innovation) with market centric policies (OECD 1999, 385). The resulting clusters are best understood in the description offered by Karlsson (2008). Karlsson (2008) describes clusters as comprising firms in a particular field that are linked in some ways and that are geographically proximate (234). In particular, clusters are a concentration of interconnected companies, specialized suppliers, service providers, firms in related industries as well as trade associations in a particular field that compete andor cooperate with each other (Karlsson 2008, 234-235).
When one takes account of the interconnectedness of these firms and businesses, from a regional development perspective, it is conducive to regional competitiveness and future development prospects. This is because the interconnectedness of these firms and the close proximity between them facilitates the free and unobstructed exchange of information and ideas which not only spurs competition but also creates the opportunity for innovation (Karlsson 2008, 235).
The OECD (1999) identified a number of reasons for the implementation of cluster policies at the regional level. They include
State restrictions under national regulatory frameworks have a tendency to stifle innovation andor competitiveness in specific clusters.
Small and medium enterprises (SMEs) do not generally take available opportunities to collaborate resources and information with other businesses that have the capacity to transfer resources and knowledge.
Businesses and in particular SMEs, are not able to gain strategic knowledge when operating in isolation (OECD 1999, 385).
In instances where those who supply knowledge are not armed with the facilities to market that knowledge, business will not take-up the knowledge specialization of those suppliers.
Clusters existing with no specific cluster policy do not have identify and are generally unaware of the positive benefits of cluster cooperation and competition.
Clusters existing with no specific cluster policy do have the wherewithal to benefit from or adhere to synergy (OECD 1999, 385).
Each of these scenarios require a systematic cluster policy to remove the weaknesses that threaten cluster failure and to ensure that the benefits which are generally in the way of competition can be realized. In this regard, the OECD (1999) have identified a number of key characteristics of regional and state cluster policies designed to procure optimal results
Evaluate, map and identify existing and potential clusters as well as their corresponding strengths and weaknesses.
Ensure that clusters are provided with strategic information by virtue of benchmarking and foresight studies (OECD 1999, 385).
Modify existing laws that are barriers to cluster development.
Heighten knowledge of the advantages associated with cluster networking.
Set up casual links via market sectors, groups or clusters.
Aid in bringing businesses together by taking on the role of stakeholder broker.
Inject funding for collaboration of knowledge, technology and technical support.
Inject funds for networking and collaboration between businesses.
Take on the role of launching customer bringing together various partners with a view to developing new technologies, goods andor services particularly among the public sector (OECD 1999, 386).
Ensure that absent cluster elements are attracted (OECD 1999, 386).
Cluster policies have grown in popularity as a result of the their innate ability to promote and improve innovation. Regions and nations that were particularly successful during the 1980s and 1990s had been noted for their business collaboration and networks and resulting competitiveness. One of the factors that stood out was the fact that these nations housed networks that linked businesses and technology that resulted in innovation. These successes gave birth to the idea that weaker regions could experience economic growth should they model policies after these more successful regions (Hertog and Remoe 2001, 390).
Cluster policies are consistent with learning economies and as such are entirely suitable to regional development that seeks to close the gap between weaker and stronger economies within a specific region. This is because cluster policies are predicated on the concept of business-led interactive learning (Hertog and Remoe 2001, 390). Moreover, cluster policies leave problem solving to business and commercial solutions rather than to excessive government intervention which can lead to rigid competitiveness.
Michael Porter is credited with giving birth to the concept of cluster policies. As such, Porter has been consulted by a variety of policy-makers seeking to identify pivotal commercial clusters either in their nation or region. The OECD, the World Bank, national governments including the UK, France, the Netherlands, Portugal and New Zealand as well as regional actors such as the UKs Regional Development Agencies have illustrated a keen interest in the promotion of cluster policy and practices. The fact is, cluster policies are gaining momentum in all levels of economies and not just developed economies. In academic circles, clusters have become a new trend, often referred to as the new economy (Breschi and Malerba 2007, 434).
Although clusters have been criticized as having the potential to box out smaller businesses in terms of the inequalities between bigger firms and smaller firms, economists are for the most part entirely comfortable with the notion that cluster policies are the best way forward for regional development. Clusters are appealing because it invites economic learning which is key to creating competitiveness. Competitiveness are also consistent with economic growth and development as it feeds into corresponding demand and supply policies and initiatives. In all the circumstances and the reality of disparities between nations and regions, cluster policies represent an effective method for enhancing regional competitiveness.
Theories pertaining to regional development have in the past twenty years or so undergone a significant metamorphosis. Since the 1980s attention has been focused on the region as an important source of economic development and growth. New approaches to regional development have evolved to take greater account of more complicated issues. This complicated and somewhat sophisticated approach now envisages learning rather than pure capital regions. The focus is now on interregional dependencies and the advantages of relationships. Increasingly the emphasis is on local knowledge, interpersonal exchanges, networking, institutional quality and communications.
The natural result is that physical capital is no longer the focal point of regional development. The new competitive environment places significant value on social and human capital. The cluster policies are designed to respond to this initiative more effectively than traditional development policies which emphasize physical resources. Cluster policies emphasize knowledge, information sharing, networking and coordination. It opens up the human capital resources in SMEs to expand into the broader market so that competition is enhanced. The new regional development policies are far more conducive to cluster policies in that they drive competition along the same rationale and ambitions. In other words, new regional policies look to focus attention on innovation, cooperation and networking between businesses which are emphasized as a significant factor for regional development. Cluster policies are virtually identical in nature, rationale and intentions.