Economics of Regional Development Policy
Abstract This paper offers a comparative analysis of supply and demand side policy approaches to regional development and their implications for regional competitiveness. This paper will demonstrate how demand side and supply side policies are used to narrow competitive gaps between regions and how they can both distort competitiveness. In general supply side regional policies are used for promoting regional competitiveness because they emphasize infrastructure, labor, innovation and capital or tax incentives. The demand side policies can also be used to promote regional competiveness because they focus on expanding internal markets so that regional consumer markets are likewise extended. In this regard, both demand side and supply side approaches to regional development are attempts to create and market services and goods making them available to the ultimate consumer and producers at prices, quantities and qualities that are competitive. Ideally, whether demand side policies or supply side polices are used in regional development, the cost of products and services should correspond with their relative availability and the cost of resources as well as infrastructure, technological, skills and capital efficiency and effectiveness in producing services and goods. When both demand and supply factors are conducive to a specific regions export expansion, an increase in demand is expected which will increase prices in relation to other regions. This can distort competitiveness by creating disparities among regions in a variety of ways. In either case, the interplay between equity and efficiency is the cornerstone of effective regional competitiveness and similarly, the interplay between supply side and demand side policy effectiveness commands that each policy must take account of the other when forming strategies to narrow regional economic disparities.
In general supply side economic policies are calculated to improve the potential of a regions supply-side facilities so that markets and industries are able to function more efficiently with the result that they enjoy a faster growth rate relative to the national real output. The focus is typically on the reduction of production costs. Demand side policies adhere to the concept that growth is facilitated by creating and expanding on new markets for products and services. In other words, supply side economic policies are concerned with the allocation of existing capital while demand side policies are concerned with creating new capital and encouraging the formation of new sources of commerce (Sinha 2005, 131). In general supply side initiatives are typically competition dependent to the extent that it can either distort or improve regional competition depending on whether or not supply-side policies create distortions or equality within a specific region or outside of the region (Sinha 2005, 131). Although intrinsically different in nature from supply side policies, demand side policies can also either distort or enhance regional competitiveness. In both cases much depends on the quality, resources, price of resources and availability of the goods and services. It therefore follows that when devising supply side regional policies attention must be paid to demand side factors and vice versa.
Demand Side and Supply Side Economic Policies A Comparison
Over the past 30 years or so, states have intensified attention to economic development polices fuel by ambitions to become competitive. The fact is, economic development strategies themselves have become competitive. As a result in developing economic development policies and strategies, policy-makers are aware that their neighbours are apt to adopt or expand upon their policies. Hunter (1999) explains the consequences of economic development policies for regional competitiveness as follows
To stay ahead of competing states, state officials must scour the countryside for new policies while every other state is doing the same, the officials must constantly look over their shoulders to see what the other states are doing to encourage economic development (145).
Regional development economic policies attempt to even out regional gaps in economic development. The underlying goal is to improve economic performance among and within regions and to improve economic performance as a whole. For example in 19851986, Indias economic liberalization policies introduced tax liberties and investment incentives calculated to stimulate both demand and production via supply side regional policies (Eur 2003, 446). Aswathi (1991) explained that by 1990, these supply side polices, which focused on demand side factors reduced the gap between the performance of regional industries (184). These supply side policies included restrictions on international exports, encouraging industries to use their own natural resources instead of exporting them. The emphasis was also on interregional collaboration in terms on inter-industry collaboration and agglomeration. The overall policy resulted in a spatial spread of industries throughout various regions (Aswasthi 1991, 188).
There are three specific areas of concern in regional economic development policies. First attention is focused on stabilization in relation to region-specific asymmetric shocks and enhancing demand while trying to offset inflation. Secondly, the focus is on diffusing inequities and thirdly, the focus is on convergence of economics and regional economic relocation so that competitiveness is heightened for long-term development and growth . The third axis of concern has gained momentum and significance from the 1970s onward (Brisoulis 2005, 85).
Economic development policies are usually divided into supply side and demand side divisions. Supply side economic development policies are aimed at creating new businesses or expanding on those that are already operative. This is usually achieved by introducing lower costs in terms of conducting commercial activities in the relevant area. To this end, taxation incentives can be a useful method for facilitating supply side policies. Other methods of facilitating supply side polices include the introduction of lower rates of interest on loans, subsidizing the infrastructure needed by specific business establishments and training workers (Blair and Reese 1998, 70).
Demand side economic development policies aim at cultivating homegrown industries which is predicated on the concept that state officials are at liberty to take action with a view to generating greater commercial opportunities. Demand side polices include venture capital funds, government subsidies for research relative to appropriate or putative businesses, and assistance in export initiatives (Blair and Reese 1998, 70).
The conventional view with respect to regional competitiveness was that efficient firms would expand while inefficient firms would continue to decline and government intervention would have little if any impact. However, emerging studies indicate that market and institutional factors have implications for firms performance and the firms creation and that the government can intervene with positive consequences for enhancing performance of existing firms and for the creation of new firms. These government intervention initiatives are found around the implementation of demand side and supply side policies which both seek to close economic performance gaps between regions.
Demand Side Policies
The most frequently used demand side policies on the part of policy-makers are monetary, fiscal and trade policies (See Table 1). These policies aim at what is typically referred to by economists as aggregate expenditures (Gamber and Colander 2005, 10-12). Fiscal policy has the capacity to impact demand side economics in that it has implications for the aggregate demand. To this end government spending and tax structures impact aggregate demand. Similarly, changes in consumer spending, investment as well as exports have the capacity to change aggregate demand and therefore impact the aggregate demand curve (Arnold 2007, 227).
Changes in tax structures typically have implications for consumer spending patterns andor investment and as a result have implications for aggregate demand. For example, an reduction of income taxes leaves the consumer with more disposable income with the result that consumer spending is likely to increase. When consumer spending goes up, so does demand. Similarly, tax increases leaves consumers with less disposable income so that consumer spending decreases and the aggregate demand curve will automatically fall (Arnold 2007, 227).
History bears this out. In 1962, US President John F. Kennedy was advised by Walter Heller, his economic advisor that an expansionary fiscal policy in the form of a tax reduction was necessary to stabilize the economy and to improve the chances of economic growth and development. By 1963, Kennedy came to the realization that the greatest barrier to full employment and economic growth is the unrealistic drag of federal income taxes on private purchasing power, initiative incentive (Arnold 2007, 229).
Kennedy proposed a fiscal expansionary policy in terms of tax reductions with a view to increasing economic growth and the employment rate. His proposal specifically called for the reduction of income taxes and capital gains taxes. Despite his assignation, Kennedys tax cut proposals were passed in 1964 at a time with unemployment was at just over 5 percent. By 1965 unemployment fell to 4.5 percent and by 1966 it fell to 3.8 percent. Moreover, when the tax bill was passed in 1964, economic growth was at 5.8 percent but by 1965 it rose to 6.4 percent and in 1966 it increased further to 6.6 percent (Arnold 2007, 229).
Broadly speaking, demand side economic policies are intricately tied to innovative policies. As seen with Kennedys tax cut bill, these innovative tools are typically a public methods for increasing demand so that conditions conducive to innovation uptake are improved and demand is improved. These innovations can be new for firms or a particular nation or region (Cunningham 2009, 1). Elder (2009) maintains that demand-based economic development policies are characterized by four specific factors (22). They are
Innovative incentives which are aimed at resolving failures in the system.
Meeting policy needs and the goals of society.
Industrial andor economic policies in terms of modernization.
Industrial andor economic policies which focus on promoting local or regional production in innovative fields and improving the chances of creating a leading market (Elder 2009, 22-23).
The size of markets is arguably the greatest source of influence with respect to demand growth and is in turn influenced by a number of economic policies. Tax structures are believed to be the greatest method for stimulating demand in general. Taxation structures can be useful for influencing and steering demands in particular markets and sectors (Cunningham 2009, 2).
In any event, the demand economic stimulus can propel other regions to adopt or expand on these demand policies so that production costs can increase. In this regard, regional competitiveness is compromised when consumers turn outside of the region to other suppliers. However, regional demand side economic policies can respond to these changes by either taking steps to improve regional competitiveness by either cost reduction or product improvements or the introduction of new products with a view to new market creation (Armstrong and Taylor 2000, 93).
Competition from outside of the region can also be tempered by the fact that growth and development will typically accumulate. Export demand stimulus usually has both a multiplier effect on regional income and may even induce or accelerate investment (Armstrong and Taylor 2000, 93). Moreover, increases in factor prices are expected to provide labour and capital inflows from outside the region. Labour inflows increases demands in respect of local goods and services including transportation, together with both personal and public services. Incidental markets that provide specialist goods and services for the export market are also expected to emerge as growth develops (Armstrong and Taylor 2000, 93).
Each of these factors are expected to stimulate local and agglomerated economics which together with localized economies in export markets will provide additional stimulus to export markets by cost and production reduction. Eventually, incidental and subsidiary markets are expected to become more independent to the extent that they are expected to pull away from over reliance on initial export sectors and may turn to their own export initiatives (Armstrong and Taylor 2000, 93). In this regard, regional demand side economic policies can produce positive competitiveness if fiscal policies stimulate export incentives and consumer confidence in regional products and goods.
Supply side Polices
Supply side policies are aimed at manipulating work incentives, improving production and innovation with the emphasis on labour, machinery and factory investments and technological advancements with a view to improving output capacities. To this end, the most important supply side economic development policies are aimed at tax reforms, welfare restructuring and industry deregulations (Gamber and Colander 2005, 13).
At the regional level, supply side economic development policies are entirely necessary for perpetuating regional economic institution effectiveness by promoting cooperation and collaboration. It draws attention to the need to construct regional strength and independence so that efforts to provide a flexible supply of industry, labor and public agencies at a regional level are effectively collaborated. This is particularly significant since it closes the gaps between national economic disparities and provides a method for compensating for the lessened effectiveness of national macro-economic policies (Jessop 2001, 540).
Proponents of supply-side policies in the context of regional economic development argue that this approach relieves rigidity in the market by facilitating flexibility in the economy. Supply side policies encourage regional competition, investment in infrastructure and deregulation. Infrastructure development is an essential precursor to productivity. The supply of transportation costs, communication, information, research and development and workers skills are all significant for economic development. Each of these supply side factors open up opportunities for remote areas in any given region, providing greater opportunities for regional competitiveness which inevitably trickles down to the consumer with the result that economic activity and development is stimulated (Hyttinen, Niskanen and Ottitsch 2000, 28).
Flexible specialization is an important and innovative aspect of supply-side economic development policies. Flexible specialization is best understood by contrasting it with mass production. Seen in this light, flexible specialization is also known as craft production in that involves the production of
A wide and changing array of customized products using flexible, general-purpose machinery and skilled, adaptable workers (Hollingsworth and Boyer 1998, 221).
In this regard, flexible specialization commences with the links required for effective and efficient strategies for performance and production and is focused on broader social and macroeconomic strategies (Storper and Scott 2001, 111).
In flexible specialization in the context of supply side strategies, the focal point is on variety in terms of the contemplating the forms comprising institutions. The strategies adopted are required to take account of both applicable regional and national conditions. To this end, political and institutional factors that are conducive to or present barriers to cooperation and coordination in the regional atmosphere with respect to flexible specialization are entirely important. Countries in any given region that are prone to lax competition policies are not likely to comply with the appropriate supply side strategies (Storper and Scott 2001, 111).
Failure to focus on or strengthen supply side conditions can contribute to rising unemployment rates in weak regions which is intricately tied to minimal productivity, a strong union presence, weak labour relations, immobile labour forces and national salary rigidity. When these kinds of supply side impediments exist and other difficulties limit adjustment to and adopting of regional industries and labour markets, competition and demand are inevitably compromised (Harrison 2001, 277).
Supply side economic development policies are those that have been adopted in the European Community (EC). The ECs regional economic development policies are designed to improve weaker regions economic efficiency investing in infrastructure, education and training. Supply side policies are entirely ineffective at a regional level when weaker areas are ignored. These areas will in addition to having low supply will also experience low demand and therefore stiffly competitiveness in the stronger areas by limiting the stronger areas opportunities for market expansion. As Hirst and Thompson (1999) explain
The regional provision of education and training, industrial finance and collective services for industry in gaining in importance in Europe. It is also a vital component of the new supply-side policies that promote industrial efficiency and reverse the trend of European economies towards declining competitiveness (245).
Supply side economic development policies that focus on improving transportation, communication, training and possibly technological capacities are believed to contribute to the restoration of or the introduction of regional competitiveness (Amin 240). This belief is predicated on the concept that improved supplies of human capital, infrastructure, technology, information, transportation and communication increases not only quantity but quality of the supply in products and services throughout a region. When this process takes place it not only improves interregional competitiveness, but it also improves that regions internal and international competitiveness (See Table 2).
Demand Side Policies vs Supply Side Policies
Theoretically, demand side policies have an edge over supply side policies. By focusing on demand as opposed to supply allows for early and definitive responses to private investment maneuvers and by doing so, can help to forestall head-on competition implicit in competitive incentives and also increases the likelihood of promotion of real capital creation in a more consistent manner than would supply side incentives. The latter poses a more significant risk that current resources will be relocated (Esinger 1998, 228).
Whether or not a demand side or supply side economic development policy will be successful in any given region will largely depend on the regions ability to capitalize on the growth of its main industry or the ability of industries to adjust to shifts in supply and demand. From the perspective of the demand side, the region will be required to develop new goods andor services. On the supply-side, a region may be confronted with growing and innovative competition and will necessarily have to enhance its own competitiveness (Coombs 2003, 48).
Coffey and McRae (1989) argue that it is counterproductive to regional or national economic development policies to pursue demand side and supply side policies individually (128). Policies aimed at intervening in the economy should embrace both demand side and supply side policies at the same time. For example, the pursuit of human resource initiatives are meaningless if corresponding attempts are not pursued for producing the demand for human resources. In this regard the most likely consequence is the out-migration of the newly created human resource skills (Coffey and McRae 1989, 128). To this end, competition is unlevel with disparities in output potential and economic growth within and outside of the region.
Kriesler, Sardoni and Harcourt (1999) make very similar arguments maintaining that demand side policies are reliant upon cohesive supply side regimes whose objective is required to be one that aims to develop a competitive, knowledge-based manufacturing sector (395) (See Fair Competition Chart). Potter (2006) also argues that supply side economic policies should correspond with demand side policies so that the efficiency of both policies are increased and strengthened (109). Ultimately, market adjustment failures in accomplishing regional consistency is vastly attributed to rigid supply side factors and uneven demand distribution (Harrison 2001, 277). In this regard, the key to effective regional economic development is therefore to ensure that regional demand distribution corresponds with supply and the supply side regional adaptability and capacity are accomplished (Harrison 2001, 277).
Conclusion
Regional economic development policies require that state actors keep an eye on opportunities for investments that may have been overlooked by the private sector, new market opportunities as well as new products and new industries (Sinha 131). By keeping abreast of these factors state actors may devise appropriate demand and supply side policies that are conducive to these developments. However, it is largely agreed that any response, whether supply side or demand side must always be mindful of gaps and inequities in terms of demand and supply within the region as well as externally. The lack of attention to either of these factors could result in declining competitiveness so that there is external spending with the result that imports rather than exports increase. When a disparity in imports and exports the region is not effectively competing with international markets.
Moreover, supply side policies must correspond with demand side policies and conditions. For instance the creation of human capital in the context of supply side policies is counterproductive if there is no demand for this resource. The inevitable result is that newly trained and educated workers will migrate either within the region or outside of the region. Therefore when the loss of supply is a natural result of low demand, competition declines in the region. The best regional economic development policies ensures that demand side policies corresponds with supply side conditions and vice versa. By taking this approach, competition is enhanced as both supply and demand are heightened in parallel dimensions.