Economics of Regional Development

This article focuses on the economics of regional development. It provides an overview of regional-development theory and approaches. Regional-development strategies, which have different effects on economic growth, inflation, welfare, income distribution, and interregional economic inequality, are assessed. The connections between regional development, planning theory, and neoclassical development theory are described. The funding issues of public sector and private sector regional-development organizations are included. Issues associated with measuring the economic effectiveness of regional-development networks are also addressed.

Keywords Developing Region; Development Networks; Economic Development; Economic Growth; Economic Inequality; Economic Problems; Free Trade Agreements; Globalization; Markets; Nations; Neoclassical Development Theory; Neoclassical Growth Theory; Planning Theory; Private Sector Regional Development; Private Sector; Public Sector; Regional Development

Trade

Overview

Regional development efforts and programs occur worldwide. The modern trend of globalization, and the resulting shifts from centralized to market economies in much of the world, has created both a need and an opportunity for economic development in depressed regions worldwide. International development organizations, national governments, and corporations are coming together to focus on building frameworks for development in order to achieve sustainable economic growth and solve economic problems. Regional-development strategies address the inequalities that form between municipalities and between urban cores and suburban peripheries. Examples of regional-development goals include reduced poverty, improved infrastructure, and the provision of job training. Different regional-development strategies have different effects on economic growth, inflation, welfare, income distribution, and interregional economic inequality (Kim & Kim, 2002).

Issues in regional development include:

• Divergence and convergence.
• Resource-dependent regional growth.
• The spatial centralization of the economy.
• Spatial divisions.
• The social construction of regional identity.
• Differentiation between the capital cities and rural areas.
• Indigenous issues.
• The suburbanization-versus-centralization debate.
• The regional effects of economic reform.
• Regional policy debates.
• Industry clusters. (Maude, 2004)

Traditional principles of regional development have led countries to group development initiatives by geography to maximize growth potential of the country as a whole. This approach tends to result in significant economic growth for the economy in general but also serious interregional income disparity.

Modern regional-development efforts work to distribute development efforts in a manner that strengthens the economies of core and periphery zones alike. Nations encourage decentralization of industries and industrialization in regions without industry to promote growth in small and medium-sized cities. Regional-development programs are expected to create growth on the regional and national levels simultaneously.

Regional development is affected by agglomeration, deglomeration, production factors, infrastructure, and access to markets and information. The connections between investment in regional infrastructure and regional development are very strong. Strong infrastructure lays the foundation for regional growth and development. Nations have different goals for regional development, including equitable interregional income distribution, productivity growth, increased gross domestic product and gross national product, and international competition (Kim & Kim, 2002).

The following section provides an overview of regional-development theory. This section serves as the foundation for later discussion of the funding options of regional-development organizations. The issues associated with measuring the economic effectiveness and success of regional-development networks are addressed.

Regional Development Theory & Its Influences

Development efforts, whether local, regional, or national, have historically been influenced and guided by the predominant theories of economic development and growth. Development theory, closely related to economic-growth theory, examines productivity, growth, income distribution, and economic equality. Development efforts and theory incorporate aspects of the following theories:

• Regional-science theory.
• Planning theory.
• Neoclassical development theory.
• New-growth theory.
• Modern political-growth theory.

Regional-Science Theory

Regional development is informed by regional-science theory. Regional-science theory includes a collection of social-science tools used to address regional problems. Regional science, which combines environmental analysis, transportation analysis, policy analysis, resource analysis, and special analysis, studies the connection between regional geography and regional economies.

Planning Theory

Regional-development efforts and theory also incorporate aspects of planning theory. Planning theory, which began in the 1940s, combines civic design, corporate management, and systems analysis. Planning involves an understanding of the development process, a long-term outlook, and planning processes or strategies. Planning theory has distinct aspects, including planning practice, political economy, and meta-theory. Planning practice encompasses planning processes and outcomes. The political-economy approach studies the connection between planning and capitalism. Planning meta-theory encompasses theories on epistemological and methodological questions, planning procedures, actions, and behavior. Ultimately, the planning field does not have a defining paradigm. Instead, planning is shared perspectives, interests, and concerns (Brooks, 1993).

Neoclassical Growth Theory

Regional-development efforts and theory were guided throughout the twentieth century by neoclassical growth theory. The neoclassical growth theory, also referred to as the exogenous growth model, focuses on productivity growth. The neoclassical growth theory, promoted by economists Robert Solow and Trevor Swan, was the predominant theory of economic growth and development from the nineteenth to the mid-twentieth century. Exogenous growth refers to a change or variable that comes from outside the system. Technological progress and enhancement of a nation's human capital are the main factors influencing economic growth. Technology, increased human capital, savings, and capital accumulation are believed to promote technological development, more effective means of production, and economic growth. The neoclassical growth theory prioritizes the same factors and variables as neoclassical economics, which emphasizes the belief that the market system will ensure a fair allocation of resources and income distribution. In addition, the market is believed to regulate demand and supply, allocation of production, and the optimization of social organization. Neoclassical economics, along with the neoclassical growth model, began in the nineteenth century in response to perceived weaknesses in classical economics (Brinkman, 2001). Criticism of the neoclassical growth theory focuses on the long-run productivity limitation created from the theory's exclusive focus on the addition of capital to a national economy.

New-Growth Theory

Over the last three decades, regional development has been strongly influenced by new-growth theory. New-growth theory, also referred to as the endogenous growth theory, began in the 1980s as a response to criticism of the neoclassical growth theory. Endogenous growth refers to a change or variable that comes from inside and is based on the idea that economic growth is created and sustained from within a country rather than through trade or other contact from outside the system. The new-growth theory identifies the main endogenous factors leading to sustained growth of output per capita, including research and design, education, and human capital (Park, 2006). There are three main criticisms of new-growth theory:

1. It lacks conceptual clarity in its underlying assumptions.
2. It lacks empirical relevancy.
3. It claims to be a wholly new theory when it is closely tied to growth theories that came before.
4. Economists debate the significance of this last criticism. The new-growth theory claims to represent a total break from neoclassical theory, but the continued focus on technology and its relationship to economic growth connects the two main growth theories in significant ways (Brinkman, 2001).

Political-Growth Theory

Regional-development efforts are, in some instances, highly politicized events. The modern political-growth theory argues that development, both regional and national, is heavily influenced by political and power relationships. It focuses on the fundamental determinants of economic growth, such as the quality of governance, legal origin, ethnic diversity, democracy, trust, corruption, institutions in general, geographical constraints, natural resources, and connection between international economic integration and growth. The modern political-growth theory of economics asserts that although developing and poor regions have potential for economic growth, they will never achieve this growth so long as the countries lack supporting institutions and infrastructures (Snowdon, 2006). Ultimately, the theories described in this section—planning theory, regional-science theory, neoclassical development theory, new-growth theory, and modern political-growth theory—have influenced regional-development efforts and theory since the end of the nineteenth century.

Applications

Regional-Development Organizations

Regional-development programs are undertaken at the local, regional, and national levels, by both private and public-sector stakeholders. Public and private-sector stakeholders direct development activities differently. Regional-development organizations from the private sector, the public sector, and public-private partnerships all tend to have similar structures, consisting of a governing board (which makes policy decisions, goals, and objectives) and an administrative work force (which carries out the board's instructions). What varies between regional development organizations is the level of participation and funding from either the private or public sector (Whitehead & Ady, 1989). The economics and funding sources of regional-development organizations are described below.

Private-Sector Regional Development

Private-sector regional development is a strategy for promoting economic development by private industries that benefits the poor in developing regions of the world. The private sector comprises all the micro, small, medium, and large enterprises that are outside of government ownership and control. Modern private-sector regional development involves numerous private-sector stakeholders—such as development agencies, corporations from industrialized countries, businesses from developing countries, community agencies, or populations in need—who are all committed to ending poverty and related conditions in developing regions. Private-sector regional development is funded by contributions from business, industry, and private individuals. Economic-development functions include a range of activities such as creating, attracting, and retaining jobs and capital investments. Board members may come from a wide range of non-governmental organizations, such as bankers or small-business owners. Operational advantages of private-sector regional-development organizations may include freedom from political boundaries or restrictions, freedom to maintain confidentiality about important issues, and knowledge of the business sector's interests and needs. Organizational disadvantages include lack of control over development issues requiring government involvement, such as investment incentives and infrastructure planning. Private-sector regional-development organizations may choose the legal form of a non-profit organization.

Public-Sector Regional Development

Local and national governments fund public-sector regional-development organizations. The public-sector model is often referred to as the government-agency model. While the governing body of private-sector regional organizations is usually a board of directors, the governing body of the public-sector regional organization is most often an elected or appointed government official, such as a mayor or city-council member. Public-sector regional-development functions, similar to those of the private-sector regional-development organizations, include creating, attracting, and retaining jobs and capital investment. Operational advantages may include control and direct access to investment incentives, such as tax abatements, and control over infrastructure planning, such as roads and utilities. In addition, the public-sector model invites, and sometimes requires, input and participation from all sectors of the community. Public-sector regional-development organizations are legally defined as government agencies for tax-reporting purposes.

Public-Private Regional Development

The private and public sectors both fund public-private regional-development organizations. Policy direction, objectives, and goals are determined through collaboration between public and private interests. Governing boards include members from business and government posts. The public-private regional partnership model is the most prevalent among economic-development organizations today. Public-private partnership organizations are often called balanced organizations. Reasons for the growing number of public-private partnership organizations include the burdensome and escalating costs of regional-development activities. In many instances, those involved in regional development combine public- and private-sector resources in order to acquire sufficient funds and staff to accomplish development projects and goals. Public and private sectors combine their respective operational advantages to benefit their regional communities and service areas.

Choosing an Economic-Development Model

Regional-development organizations consider two important organizational issues when choosing a model of economic development. First, there are numerous benefits gained from combining a new regional-development organization with an existing agency, either non-profit or government. This practice is called piggybacking. The public-private regional partnership often allows the new organization to use the legal status of the established organization, thus saving time and money resources. Second, regional-development organizations must choose the legal form and tax status most suited and advantageous to their organization. For example, the legal designation of a non-profit organization allows for tax-exempt status, which means that organizational revenues are not taxed and donations are tax deductible for the donor. Regional-development organizations usually apply and are approved for tax-exempt status. The organizational structure of a regional-development enterprise has the potential to influence the performance and success of regional-development organizations and projects.

Issues

Measuring the Effectiveness of Regional-Development Networks

Trends in development practices, including economic and environmental or sustainable development, are moving away from local and national development and toward regional development. The predominant regional-development model at the beginning of the twenty-first century was the regional-development network. These networks include regional networked environments and regional trade partnerships. New networked-development environments in regions worldwide form in response to the forces of the new information society and globalization. There are three main types, or archetypes, of regional-development networks:

• Large and loose
• Heterogeneous, multi-actor, and innovative
• Closed, homogeneous, and public-actor

Economists increasingly consider sub-national regions to be the real players in international competition. Regional economies interact and trade in the global marketplace (Harmaakorpi, 2007).

Economic Integration

At the beginning of the twenty-first century, regional trade partnerships were found in every region of the world, and economic-integration efforts between nations characterized international relations. Economic integration refers to the integration of commercial and financial activities between countries through the abolishment of nation-based economic institutions and activities. Economic integration between nations includes the following four stages:

• Free-trade agreements (FTA)
• Customs unions (CU)
• Common markets
• Economic unions (Holden, 2003)

Nations choose different levels of economic integration and trade partnerships based on variables such as the strength of their national economy and trade relationships and forecasted trade prospects. Nations may have multiple trade relationships and levels of economic integration with other countries, or they may have none at all. Nations that reject or do not pursue economic integration, as described above, are characterized as autarkic. An autarkic nation is a self-sufficient country that does not participate in international trade. Autarky, which derives from a Greek word meaning self-sufficient, confers independence from other states, resulting in both benefits and costs (Anderson & Marcouiller, 2005). The stages of economic integration and partnership are rarely fixed or permanent; rather, they are generally fluid and overlapping.

Economic Indicators

Different models and incarnations of trade partnerships produce a wide range of economic outcomes. Nations and economic-development organizations track trends in economic development at the regional and national levels. Economic indicators, which are statistical data reflecting general trends in the economy, reveal discrepancies between economic development in regional and national economies. Examples of economic indicators include monthly sales of goods and services, gross domestic product, productivity levels, manufacturing shipments and inventories, wholesale trade, new construction, personal-income figures, and balance of trade. The model of regional development driven by and based on innovation and trade argues that regional trade and information networks create growth. Regional trade and information networks produce different outcomes and levels of economic growth (Werker & Athreye, 2004).

Index-Based Regional Analysis

Different regional-development strategies generally create different levels of economic growth, inflation, welfare, income distribution, and interregional economic inequality than national-development planning. Nations and regional-development organizations measure regional-development efforts to assess the effectiveness of strategies and programs. The main tool for measuring regional-development results and levels is index-based regional analysis, which is used throughout the world to compare development efforts in different regions. For example, the Republic of Korea, which has numerous regional-development organizations that produce different economic outcomes, uses index-based regional analysis. The West Coast regional-development program in Korea created substantial gains in gross domestic product and a reduction in regional income disparity (Kim & Kim, 2002). The three Korean coastal-area development strategies—East Coast, South Coast, and West Coast—and the Seoul-Pusan development-corridor strategy have created different levels of efficiency and equity distribution.

Index-based regional analysis is also used throughout eastern Europe. Giannias et al. (2000) ranked the members of the former Soviet Union and the regions of Russia on a regional-development index that includes per capita income and various socioeconomic measures and components. According to the index, of the former Soviet Union states, Lithuania ranked the highest and Tajikistan ranked the lowest. An analysis of Russia's various regions shows that the central-southern region and the Sackha Republic in the west ranked the highest, while parts of western and central Russia ranked the lowest (Giannias et al., 2000).

Regional Networks

Ultimately, regional economic integration and development between developing and developed countries is common and believed to lead to economic stability and development. Developing countries and international development organizations, such as the World Bank and the Organization for Economic Co-operation and Development, promote regional economic networks and regional trade agreements as a means of facilitating stability, development, information sharing, and trade creation. Examples of regional trade agreements include the European Free Trade Association (EFTA), the Southern African Customs Union (SACU), the Gulf Cooperation Council (GCC), the Monetary and Economic Community of Central Africa (CEMAC), the Southern Common Market (Mercosur), and the West African Economic and Monetary Union (UEMOA). Tracking the effectiveness of these regional networks has become the responsibility and challenge of all stakeholders. Index-based regional analysis is one method by which the economic effectiveness of regional-development programs, networks, and partnerships is evaluated.

Conclusion

The economics of regional development changes as a result of new global forces of economic integration and globalization. Nations, which once centralized their economic-development efforts in single or multiple cores, are suffering from the problems associated with unequal development and income distribution. Nations attempting to strengthen regional economies are allocating resources to create infrastructure, jobs, and industry. Regional-development efforts may be funded by the public sector, the private sector, or public-private partnerships. Economic analysis of regional-development efforts suggests that sustained regional development, as represented by enhanced productivity and growth, may require structural transformation within the nation. Economic development and growth, while encouraged and facilitated by factors such as a large labor supply, national infrastructure, and a resource-rich environment, is hindered by economic problems and cultural obstacles inherent in the business climate and by troughs in the business cycle. Economic problems of all kinds, including structural, fiscal, and cultural, impact regional-development efforts by national governments, corporations, and international development organizations. Regional development encompasses a wide range of programs and strategies aimed at promoting growth in a part or whole of an economy. Successful regional development may require a nation to undertake creative changes to its old economic institutions, modes of production, and power relationships.

Terms & Concepts

Developing Region: A region or country characterized by an underdeveloped industrial base, low per capita income, and widespread poverty.

Economic Development: Programs and strategies aimed at promoting growth in a part or whole of an economy.

Economic Growth: The quantitative change or expansion in a country's economy.

Economic Problems: Factors that hinder the functioning and growth of an economy.

Free-Trade Agreement: An agreement that states that goods and services can be bought and sold between countries or sub-national regions without tariffs, quotas, or other restrictions being applied.

Globalization: A process of economic and cultural integration around the world caused by changes in technology, commerce, and politics.

Markets: A social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange of goods and services.

Nations: Large aggregations of people sharing rules of law and an identity based on common racial, linguistic, historical, or cultural heritage.

Neoclassical Growth Theory: A growth model that focuses on productivity growth. Also referred to as the exogenous growth model.

Private Sector: All enterprises that are outside of government control, including micro, small, medium, and large enterprises.

Private-Sector Regional Development: A strategy for the promotion of economic development by private industries that benefits the poor in developing regions of the world.

Public Sector: The economic and administrative enterprises of a local, regional, or national government.

Regional Development: A strategy for promoting economic growth and development in discrete geographic regions.

Trade: The export and import of goods and services.

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Suggested Reading

Estrada, M. (2013). The Global Dimension of the Regional Integration Model (GDRI-Model). Modern Economy, 4, 346–369. Retrieved November 21, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89712689&site=ehost-live

Matuschewski, A. (2006). Regional clusters of the information economy in Germany. Regional Studies, 40, 409-422. Retrieved November 7, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=20650800&site=ehost-live

Mcmaster, I. (2006). Czech regional development agencies in a shifting institutional landscape. Europe-Asia Studies, 58, 347-370. Retrieved November 7, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=20617590&site=ehost-live

Ward, N., Lowe, P., & Bridges, T. (2003). Rural and regional development: The role of the regional development agencies in England. Regional Studies, 37, 201. Retrieved November 7, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9428838&site=ehost-live