The term the regional problem emerged as a method for describing the obvious disparities in economic development and performance between boundaries within a specific region (Bramford and Robinson 1983, 217). In common parlance, economic disparities are expected to follow from the natural course of socio-economic changes. However, when those disparities are significantly large and relatively persistent they are then identified as the regional problem (Worswick 1991, 47). Although the regional problem is observable and easily recognizable it is entirely difficult to define (Tsoukalis 1999, 188).
The regional problem is manifested in disparaging conditions such as employment, income and productivity. These gaps occur in different regions within the same country. However, in order to fully define these disparities in the context of the regional problem it is necessary to venture beyond simple economic theories and other presumptions such as rigid competition, employment policies and production factors. It is necessary to refer to different methods of market failure to identify and understand the nature of the regional problem. The regional problem can be related to unequal demand and supply curves. It can be related to weak infrastructure or the remote location of the lagging region. In all events it is necessary to evaluate the difficulties that rest beneath the surface and to determine what method of government intervention is necessary to remove the barriers to equal economic development as an effective method of eradicating the regional problem.
Question B.
The regional problem which is recognized in terms of inequities in economic growth and development is usually identified by reference to a regions GDP per head andor the GDP growth. Economists typically use the GDP per head as a proxy for welfare, despite its known limitations. For example, population change for instance through migration can result in a weak region losing population resulting from out-migration with little impact on GDP per head. In fact out-migration may even cause GDP to rise. Then again it might result in a fall in GDP per head if external and internal economies suffer a loss relative to population declines. In this regard regional growth rates probably be more properly although not perfectly identified by reference to unemployment trends. Economic performance of a specific region is evidenced by labour productivity which in turn is evidenced by employment rates (United Nations 2008, 5). Moreover, unemployment rebounds to budget deficits as governments are deprived of a source of revenue from income tax (Willet 1988, 308). Lower employment rates also means less consumer spending and this also rebound to low demands and over supply which inevitably heightens poor economic performance (Sloman 2006, 440). In this regard, the unemployment trends in Australia from the period between 1978 to 2002 illustrate that Tasmanias economic performance was poor in relation to other regions within Australia.
The unemployment trends demonstrate that in 1978 Tasmanias unemployment rate was not different from Western Australia since both had unemployment rates of 6.4 and was lower that that of Queensland which stood at 7.2. Similar trends followed until 1994 when the disparity between the unemployment rates of Tasmania with Queensland and Western Australia is more pronounced. Unemployment in Tasmania for the year 1994 was at 12.6 markedly higher than those for Western Australia at 10.4 and Queensland at 8.5. Again in 1998, although Tasmanias unemployment rate dropped slightly to 11.2 it continued to lag behind Western Australia with an unemployment rate of 6.0 and Queensland at 7.3. The gap narrowed somewhat in the year 2001, but widened slightly in 2002 (see table below).
Australia Tasmania Western Australia Queensland
1978 6.41978 6.419786.41978 7.2 1982 6 1982 5.6 19825.51982 5.6 1986 8.04 1986 8.0 19867.819869.41990 6.221990 5.6 19905.41990 6.41994 9.681994 12.6199410.81994 8.51998 7.321998 11.219986.01998 7.32001 6.920018.82001 5.620017.22002 6.32002 8.92002 5.52002 6.9
The main regional problem is perceived to be outmigration from Tasmania to other parts of Australia for the purpose of finding employment. This accounts in some instances for a drop-off in unemployment rates in Tasmania and explains why the gap is not narrowed exponentially (Grownewold and Hagger 2003, 11). Moreover, the governments infusion of welfare expenditure did not resolve the problem of unemployment. It is also obvious from the drop in unemployment rates in 2001 and 2002, that the government injected public expenditure in the region to close the gap between Tasmania and other parts of Australia. However, the economy continues to lag behind the other regions and this may be a result of out-migration. Although these unemployment trends in Tasmania have impacted the overall unemployment trends in Australia, they are still relatively high compared to Australia as a whole and in comparison to other regions in Australia.
Question C
Part 1
Interregional policies focus on closing the economic performance gaps between regions within the same country (Huang and Bocchi 2009, 250). Intra-regional policies are aimed at partnering with other countries within the same geographical area to improve each countrys economic performance (Mori and Hirano 2007, 102). Whether or not economic development policies are based on interregional or intra-regional policies they will each be concerned with space. Either approach will focus on either a prosperous place or a problem place (Felzenshtain 2007, 17).
Under intra-regional and interregional policies there is a trade-off between economic growth and regional equity. There are risks involved in both to the extent that the injection of funds in infrastructure in weak regions in terms of intra-regional policies do not guarantee that that these improvements will attract businesses. One thing is certain however, and that is that the cost of trade inter-regionally is more expensive than intra-regional trade. On the other hand, interregional trade injects foreign funds into the economy with positive consequences for local currency value. Moreover, interregional trade has the capacity to invite technology transfer and can improve technological capabilities (Baldwin, Forslid, Martin, Ottaviano and Robert-Nicoud 2008, 427).
While interregional policies can encourage and promote innovation and by extension competitiveness, it can also distort these objectives. This can occur when the quality of goods from outside the region is better than those produced locally. The likely result is that money leaves the region and is spent in other regions and the objective of narrowing the gap on an interregional level is exacerbated. Another likely problem is outmigration from the weaker region to the stronger region. However, in both an interregional and intra-regional scenario, the problem of out-migration may turn into a positive thing. According to Savioe, Brecher and Higgins (2005), if persons in a region that is more economically advanced feel threatened by the prospect of immigration from the weaker regions either within their own country or from abroad, they may be inclined for purely selfish reasons to subsidize economic and educational opportunities for residents in the weaker region. These measures may be calculated to discourage immigration or to ensure that when migration does take place, they are not social burdens when they do arrive (175).
Despite their setbacks, both interregional and intra-regional policies have their advantages in that they both have the capacity to create innovation and promote competitiveness. It is difficult to imagine any large economy operating without either policy in place. Interregional policies are necessary for creating free and open markets and for the injection of foreign money into the economy. It also provides governments with an added source of revenue in terms of import taxes. Similarly it offers a method for the exchange of technologies and information. By doing so, interregional policies open up performance opportunities with the consequence that countries are able to ensure that all regions are able to participate. Intra-regional policies are entirely necessary to ensure the fair distribution of the countrys wealth, part of which no doubt comes from interregional policies.
In all the circumstances, interregional and intraregional policies will be more promising if they are implemented simultaneously. It is unlikely that an interregional policy will succeed in removing or at the very least narrowing the economic gaps within a specific country unless attention is paid to intra-regional policies. In this regard, no one policy is superior to the other and neither should be employed in isolation. The European Community provides a good model for the prevalence of the use of interregional and intra-regional policies. Within the Community, governments are encouraged to cooperate and coordinate with each other and to ensure that their own residents have opportunities.
Part 2
The success of intra-regional trade policies is illustrated by the trade integration efforts of the East Asian region from the 1980s onward. These efforts were spearheaded by the stronger regions of the Peoples Republic of China and Japan who both became actively involved in networks for regional production. From about the close of the 1980s, Japans trade with the rest of East Asia in the manufacturing industry was in terms of setting up a setting up an assembly forum for regional demand in East Asias least developing nations. These assemblies were also used for external exports. With the Peoples Republic of China emerging as the regions leader in assembly productions, the Peoples Republic of China also joined Japan in importing parts and other relevant components from the least developing nations of the East Asian region.
Therefore with both the Peoples Republic of China and Japan setting up manufacturing trade networks with the least developed nations in the East Asian region with respect to assembly parts, the final product was sent out for export to international markets. These intra-regional efforts served to narrow the economic performance gaps between the least developed regions in East Asia and the more developed regions with significant turnovers for a number of East Asian countries such as Malaysia, Singapore, Taiwan and Korea. Essentially, innovation has rebounded to these regions picking up improvements in modern technology with the result that many of the East Asian countries are now able to offer substantial foreign direct services to other first and second world countries.
The East Asian experience demonstrates the success of intra-regional trade shares and how integration can if used to establish vast production networks throughout one vast area of regional networks, economic divergences can be minimized. These areas however could be more successful in intraregional trade in terms of manufacturing networks remove trade restrictions so that the least developed regions in East Asia may export parts and components more freely to the rest of the world. So far, the intraregional aspect of manufacturing is largely confined to East Asia, although some trade is emerging under the World Trade Organization. However, dependence on the stronger East Asian countries in the region might be more easily overcome if and when the least developed countries in the area expand intra-regional trade policies to include more free and open trade with the rest of the world.
Question D
The isocostIsoquant analysis is used to demonstrate how a number of combining and contributing factors can function to produce a specific output. In this regard, the Isoquant curve is representative of how a combined number of factors pertaining to production can result in equal output so that the isoquant curve is efficient at least on a technical level. In formulating the isoquant curve, a marginal rate of substitution is used to determine the rate for which a specific factor is required to be added in order to compensate for losses accruing out of another factor so that the output remains constant.
In this regard factor subsidies as an instrument of interregional policies take into account the minimal combination of costs for inputs necessary for outputs. Attention is paid to the isocost curve and its tangency to the isoquant curves output. In this regard, an entity is functioning at efficient and productive levels when the output for each dollar on labour is equal to the output on each dollar for machinery. Therefore subsidy factors in interregional policy strategies relying on the isocostisoquant curve seek to determine whether or not subsidies can maintain the output level for the targeted region or firm.
It has been argued by economists that government subsidies to individual entities has the potential to create production inefficiency in both the market and the economy. However, the magnitude of the efficiency will largely depend on the government subsidy types. In general lump sum subsidies will not encourage self-sufficiency and can be entirely inefficient and counterproductive as it encourages dependency rather than independence which is entirely necessary for innovation which in turn creates and generates competition.
The East Asian experience is instructive in the sense that it demonstrates the significance of indirect subsidies rather than full and direct subsidies by governments. The intra-regional trade policies in East Asia cannot be the only factor that explains the economic growth rate of success in that region. This is because the Philippines, although a party to the same intra-regional policies has continued to lag behind the remainder of the East Asian region in terms of economic growth and development.
One explanation is quite possibly the measure of indirect subsidies accorded the governments of the other East Asian nations and the fact that similar indirect subsidies are denied the Philippines firms and individual entities. These indirect subsidies include the equitable policies that guide and dictate the distribution of land. This is a structural element which is common across East Asia but sorely lacking in the Philippines. Amsden(1991) offers that this factor is definitely capable of explaining the economic divergences between the Philippines and the rest of the East Asian region (282). Again, there are other indirect subsidy factors that are common to the East Asian region but neglected altogether by the Philippines.
These indirect subsidies include wage regulation that are deemed equitable and these collaborated policies have removed social conflicts and encouraged the necessary collaboration for encouraging interregional economic growth and development. Essentially, direct subsidies in one area that are unmatched in another region could tilt the isocostisoquant curve so that the subsidy is counter-productive. It therefore follows that the methods of indirect subsidies in terms of regulating equitable wages and the equitable distribution of the land are more conducive to interregional collaboration as it promotes innovation and fair competition. The East Asian region and the Philippines were chosen for demonstrating how indirect subsidies as opposed to traditional subsidies which are constrained by budgets can produce similar results across the board. The Philippines is selected from this region because it demonstrates the difference between utilizing indirect subsidies so as to capitalize on free and open trade markets in the same region.
Question E
Until the mid-1990s, the UKs regional policies were virtually dormant. In 1997 with the Labour governments election, regional policies took on more significance. Regional development surfaced with the creation of a Scottish and Welsh parliament in 1999. Legilstive authority was conferred upon the Scottish parliament but with very little authority to increase taxes. The Welsh parliament had no legislative or tax powers. In addition the Labour government of the UK established approximately 9 Regional Development Agencies (RDAs) (Floud and Johnson 2004, 359).
The RDA were responsible for collecting data, analyzing that data, planning and implementing regional policies for the greater economic performance of the UK. As a result of the RDAs work, the Labour government placed it regional policy emphasis on knowledge, skills, innovation and free enterprise. The Labour government took the position that the less prosperous regions were not failing because of transportation, a shortage of factories and poor infrastructure. Rather the UKs Labour government took the position that the less prosperous regions were suffering from low investments, a lack of workforce skills training and a lack of entrepreneurship policies (Floud and Johnson 2004, 359).
Despite coming to these conclusions the UKs labour government allocated only minimal funding to measures aimed at promoting innovation and free enterprise. The emphasis remains on out-migration from weaker regions to stronger regions for the purpose of finding employment. So while the UKs regional policies recognizes that investment in human capital is the key to removing the gap between the economic disparities among its regions it takes the position that what is good for all of the UK is good for the weaker regions (Floud and Johnson 2004, 359). In other words, regional policies in the UK have taken a turn backward and currently embraces the nationalism policies of the countrys conservative government of the 1950s.
Question F
Additionality The European Communitys definition of additionality sheds some light on its meaning in the context of regional policies. The European Community define additionality by mandating that European Regional Development Funds are required to have an added impact and must result in an increase in total spending (Bolye 2006, 243). While this broadens the definition of additionality it stems from the use of the term as a method for measuring success in regional policy expenditures. In regional policies additionality is divided into three metrics. Multiple additionality is an indication that the expenditure has had a positive effect. The In-stu additionality indicates that the results were good but there are no promising spread effects although the target has been contacted. Inward additionality is indicative of negative results the region is either a failure of has resulted in expensive success.
Deadweight When public funds are transferred by distorting taxes, these funds are regarded as deadweight losses. However, deadweight losses can be justified in there are public policy interests supporting the expenditure. Justification could come from the fact that there is an appreciable social rate of return from the investments financed that are adequate for replacing the deadweight losses and provides an opportunity cost of the funds (Funck and Pizzati 2008, 74). The extent to which deadweight spending is perpetuated is entirely dependent on the project contemplated. In many cases, the deadweight spending is used to generate job creation. Deadweight spending is more prevalent in start-up businesses than for established businesses because the former entails a greater risk (Armstrong and Taylor 2000, 385).
Displacement (in product and labour Markets) Displacement has two residual effects that help to explain its meaning and consequences for regional policies. First, it can involve policies that while focusing on one group functions to displace others. For instance, the subsidizing of long-term unemployed individual effectively displaces the short-term unemployed individual who would otherwise have got the job (Schmid, OReilly and Schomann 1999, 226). In another scenario, an employer the employment of one person with the expectation that heshe will receive a subsidized wage if heshe hires someone else. Secondly, in terms of market displacement, a business firm is subsidized and as a result is positioned to lower princes to the detriment of other business firms who do not have the benefit of a subsidy.
Multiplier Effect As Mankiw (2008) explains, when the government puts billions of dollars into a single purchase or expenditure, that sum has consequences (484). For instance if the government were to put billions into the purchase of products from Boeing, it is immediately expected that the expenditure would result in the governments insistence on increased employment as well as increased profits from Boeing (Mankiw 2008, 484). Workers are expected to obtain more earnings and Boeing gains greater profits these factors should rebound into the general economy with greater spending. In other words the governments expenditure invokes the multiplier effect in that the funds trickle down to the general economy with positive effects. The perception is that every time the government spends money, aggregate demands are raised in respect of goods and services to an extent that exceeds the governments expenditure. Therefore the government expenditure has a multiplier effect on demand. The multiplier effect continues in the sense that increased consumer spending shortens supplies so that more workers are required to ensure that supply and demand match.
Question G
From a practical perspective deadweight and additionality work in tandem in terms of effectuating regional policies. For instance in order to identify the level that deadweight spending might reach and therefore to estimate any additionality of the desired plan it will be necessary to consider and determine the number of jobs that might be created and whether it would surpass the number that would have been created if the financing was not made available. In other words, deadweight and additionality turn on the evaluation of one question Would the goals or objectives of the project have been possible without the available funding In the answer to that question is no, then deadweight spending is justified quite simply because the project will result in the required additionality.
The end result of that the deadweight spending is projected to induce additionality in the sense that it should have at the very least positive social returns on the loss. To take one example, suppose that the government intends to inject subsidies into a firm in a weak region. While the government will suffer a deadweight loss, the funds can be expected to improve the productivity of the regional firm so that it competes with other firms, grows in size, hires more persons and generally contributes to the economic growth and development.
Displacement effects might arise in areas where infection of funds or other assistance in one firm or one region, might create higher unemployment in another firm or region. Or subsidizing one firm or one region may result in unfair competition if that firm or region is able to offer goods and services at a price that is not conducive to the prices offered by competing businesses or regions. Essentially, displacement can, while increasing the wherewithal of one business or one region could have detrimental consequences for another region or business. It is therefore important for policy-makers and planners to research and evaluate the possible outcomes and to ensure that while strengthening one region or one business, another firm or region is not weakened in the process. Therefore, in implementing regional policies it is important to develop a metric for measuring the effectiveness of policies so that workers and markets are not subsidized or placed to the detriment of other workers and markets.
The multiplier effect commands attention to the link between the expenditure of public funds and the effected economy. The injection of funds are calculated to increase opportunities for job creation with the result that this trickles down to household income empowering consumers to spend money. It therefore requires thinking and calculating ahead. Much will depend on the nature of the expenditure. If the expenditure is an indirect investment it becomes all the more important to ensure that it will generate profits, create job opportunities, increase demand and generate a need for supply which will in turn create more jobs and improve competition.
Additionality, deadweight, displacement and the multiplier effects engages attention to a cost-benefit analysis. It requires that some form of indicator is used for the purpose of balancing the benefits and costs of the specific regional economic development policy. These perceived effects call specific attention to proportionality and provides a safeguard against wasted expenditures and unworkable regional economic development policies.