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1 the case for regional policy(4)-1



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  • 1. Dr John MoffatRichard Price Building, Room F49Email: Hours: Tuesday & Friday, 1:30-2:30pm
  • 2. Section Outline The following topics will be covered in the next fiveweeks:1. The Case for Regional Policy2. UK Regional Policy3. EU Regional Policy4. Devolution5. Regional Funding The exam will be a two hour written examination(worth 45% of the final course grade) on all thematerial covered in semester 2Topic 1: The Case for Regional Policy 2
  • 3. Readings The main textbook for this section of thecourse is: Armstrong, H. & Taylor, J.(2000), Regional Economics andPolicy, 3rd ed. Oxford: Blackwell This week’s reading is: Armstrong & Taylor, chapter 83Topic 1: The Case for Regional Policy
  • 4. Learning Outcomes Students should be able to answer the followingquestions: What are the main justifications for the existence of aregional policy? Should regional economic disparities be alleviated by amarket-based or an interventionist approach?4Topic 1: The Case for Regional Policy
  • 5. The Case for Regional Policy Regional policy aims to reduce disparities in livingstandards across regions Arguments for a regional policy can be based onconsiderations of: Equity Policy motivated by equity concerns aims to make thedistribution of income/wealth more equitable Efficiency Policy motivated by efficiency concerns attempts to makesome people better off without making anybody worse off5Topic 1: The Case for Regional Policy
  • 6. The Equity Case Substantial differences in living standards lead todissatisfaction and resentment This is most strongly felt by those whose livingstandards are poor through no fault of their own A regional policy motivated purely by equityconsiderations could make certain people worse off6Topic 1: The Case for Regional Policy
  • 7. The Efficiency Case To understand the efficiency case for regional policy, askthe following question: How would somebody living in a wealthy region (such as aLondon banker) benefit from, or at least not be harmedby, government policy that seeks to create employment forpeople in disadvantaged regions (such as the North East)?Topic 1: The Case for Regional Policy 7
  • 8. The Efficiency Case Most obviously, reducing unemployment indisadvantaged regions, without leading to a loss ofincome/jobs elsewhere (i.e. displacement), will makethe whole nation better off Those who were unemployed will produce output andwill not have to be supported through transferpayments such as unemployment benefits The social costs associated with unemployment(discussed earlier in the course) will also be reduced8Topic 1: The Case for Regional Policy
  • 9. The Efficiency Case Congestion costs arise in regions that experience rapideconomic growth because of excess demand forinfrastructure and public services According to the Eddington Transport Study(2006), reducing the travel time for all business travelon the roads by 5% could generate around £2.5 billionof cost savings Congestion can be relieved by shifting the demand forinfrastructure and public services away from congestedareas and towards under-performing regions whereinfrastructure is used less intensively9Topic 1: The Case for Regional Policy
  • 10. The Efficiency Case Low unemployment regions experiencing fast growthwill tend to experience labour shortages The resultant wage inflation will be transmitted topoorly performing parts of the country throughnational wage-setting and inter-plant bargainingwithin firms National inflation rates can therefore be reduced byequalising unemployment rates across regions so thatlabour shortages do not arise in fast growing areas10Topic 1: The Case for Regional Policy
  • 11. Policy Alternatives There are two main approaches to removing disparitiesin economic performance: Market-based (neoclassical) approach generally favoured by those on the right Interventionist (spatial Keynesian) approach generally favoured by those on the left As will be seen in the next lecture, the interventionistapproach has been the dominant approach in recentBritish history11Topic 1: The Case for Regional Policy
  • 12. Market-Based Approach Proponents of this approach argue that if marketsare allowed to operate efficiently, disparities inwages and unemployment rates will beautomatically eliminated though: Wages falling in areas of high unemploymentand rising in areas of low unemployment Workers migrating from low wage to high wageareas12Topic 1: The Case for Regional Policy
  • 13. Market-Based Approach Assume a country with tworegions, North and South In the North, the wage is W1 andthere is unemployment of L2-L1 This unemployment can beremoved by a fall in the wage toWN But if there are regions (i.e. thesouth) with a higher wage ratethan WN, this difference inwages will induce migrationfrom the North to the South (seenext slide)Topic 1: The Case for Regional Policy 13Source: Adapted from Clark (2010)WageEmploymentSN1DNWNLNW1L1NorthL2
  • 14. Market-Based ApproachTopic 1: The Case for Regional Policy 14Ss2W*L*WageEmploymentSs1DsWSL2SouthWageEmploymentSN1DNWNL1SN2W*L*NorthSource: Adapted from Clark (2010)
  • 15. Market-Based Approach But wage differentials may not arise in the first place ifwages do not respond to local labour marketconditions because of: Industry-wide collective wage agreements rather thanlocal wage bargaining Unemployment benefit and income support that is ‘toohigh’ and too easy to access A minimum wage that is too high15Topic 1: The Case for Regional Policy
  • 16. Market-Based Approach Even if there are significant wage differentials acrossregions, there are barriers to the migration of labourbecause: Workers may be unaware of opportunities to obtain higherwages elsewhere Workers may not be able to afford to migrate because: House prices are too high in low-unemployment areas They currently live in subsidised housing Workers will lose some of their pension entitlements if theyleave their present employer Workers may be unwilling to incur the psychological costs ofleaving friends and family16Topic 1: The Case for Regional Policy
  • 17. Market-Based Approach The solution is therefore to remove theseconstraints on the free operation of the market: Increase wage flexibility by: Reducing benefits and making them harder to access Reducing union power and encouraging more localwage bargaining Reducing the minimum wage To what extent can these policies be pursued in theUK?17Topic 1: The Case for Regional Policy
  • 18. Net replacement ratio summary measure ofbenefits entitlements, 2000-2010 (%)Topic 1: The Case for Regional Policy 18Source: OECD (2013)0102030405060702001 2002 2003 2004 2005 2006 2007 2008 2009 2010France Germany Japan Spain United Kingdom United States
  • 19. Union density, 1960-2010 (%)Topic 1: The Case for Regional Policy 19Source: OECD (2013)01020304050607080901960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010Germany Italy Sweden United Kingdom United States
  • 20. Minimum wage relative to average wages offull-time workers, 2000-2011 (%)Topic 1: The Case for Regional Policy 20Source: OECD (2013)01020304050602000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011France Japan Netherlands Spain United Kingdom United States
  • 21. Market-Based Approach Even if large wage differentials exist, the costs ofmigration may need to be cut by: Raising public sector rents to market levels Encourage ‘portable’ private pensions Increasing the affordability of accommodation in lowunemployment areas Making it easier to access information aboutemployment opportunities in other regions To what extent can these policies be pursued in theUK?21Topic 1: The Case for Regional Policy
  • 22. Mean weekly rents net ofservices, England, 2008-2009Topic 1: The Case for Regional Policy 22Source: DCLG (2010)
  • 23. Proportion of employees withworkplace pensions, 2011Topic 1: The Case for Regional Policy 23Source: ONS (2012)Defined benefitschemes aregenerally lessportable thandefined contributionschemes andtherefore discouragemobility
  • 24. Average house prices, July-September 2012Topic 1: The Case for Regional Policy 24Source: BBC (2013)£0£50,000£100,000£150,000£200,000£250,000£300,000£350,000£400,000£450,000£500,000GreaterLondonSouth East South West East Anglia WestMidlandsEastMidlandsYorks &HumberNorth West Scotland Wales North NorthernIreland
  • 25. Market-Based Approach Even if the government were able to encouragemigration from low to high wage regions, this may nothelp in removing disparities in economic performance This is because those leaving low wage areas will tendto be younger, higher skilled workers who willcontribute most to economic growth Furthermore, migration to high wage areas will createextra demand for over-utilised social infrastructure25Topic 1: The Case for Regional Policy
  • 26. Interventionist Approach This approach, also known as the spatial Keynesianapproach, argues that direct state intervention isrequired to remove disparities in regional economicperformance Such disparities are viewed as the consequence of: Structural weaknesses in the regional economy A lack of investment as capital drains from poor to richregions26Topic 1: The Case for Regional Policy
  • 27. Interventionist Approach The solution is supply-side policies to: Encourage the migration of capital into high-unemployment areas Encourage indigenous growth in high unemploymentareas Enhance competitiveness by regenerating highunemployment areas through public investment in thesocio-economic infrastructure27Topic 1: The Case for Regional Policy
  • 28. Interventionist Approach A serious criticism of the interventionist approach toregional policy is that it creates ‘deadweight’ spendingwhere public money is spent on private sector projectsthat would have gone ahead anyway One way around this is through providingdiscretionary rather than automatic assistance (seenext lecture) But even when discretionary assistance isprovided, funding may still go towards projects thatare not successful (see next slide)28Topic 1: The Case for Regional Policy
  • 29. Interventionist Approach The governmentprovided the DeLoreancar factory in NorthernIreland with £80 millionto produce the DMC-12(BBC, 2005) Production started in1981 but fewer than9,000 cars wereproduced before thefactory’s closure in 1982Source: Kevin Abato29Topic 1: The Case for Regional Policy
  • 30. Summary Regional policy can be justified on efficiency andequity grounds The market-based approach to regional policyattempts to remove distortions which prevent themarket from equalising unemployment and wage ratesacross regions The interventionist approach is based on theassumption that direct state intervention is required toremove regional disparities in economic performance30Topic 1: The Case for Regional Policy
  • 31. Next topic:UK REGIONALPOLICY31Topic 1: The Case for Regional Policy