This document discusses the rationale for place-based policies in addressing spatial economic inequalities. It examines the problems of lagging regions in developing economies and adverse economic shocks experienced by certain areas in high-income countries. Two main adjustment mechanisms, the movement of people and jobs, often fail to alleviate regional disparities due to small price signals between areas, agglomeration economies that incentivize firms remaining in existing clusters, and cumulative cycles of decline or growth reinforcement. Place-based policies aim to shift lagging areas out of low-level economic equilibriums by creating the conditions for new sectors to develop, though this requires concentrating efforts in select places rather than fragmented interventions.

1. Place-based policies;
theoretical rationale
Tony Venables,
Oxford and The Productivity Institute
• What is the problem that policy is supposed to address?
• Diagnosing the problem and its underlying causes
• Policy responses

2. Place-based policies: rationale
What is the problem that policies are trying to address?
• Persistent spatial inequalities
• Income/ Productivity/ Well-being
• Population growth/ decline (?)
• Equity
• Efficiency
• Two main contexts:
• Developing economies
• Booming vs lagging regions
• High income economies
• Long run consequences of adverse shocks (trade or technology)
• Loss of key sectors – deindustrialisation of a region
• Derelict area of a city.

3. The problem: developing economies
Developing economies: booming versus lagging regions
• Growth starts somewhere
• Kuznets curve of divergence and convergence
• Spatial disparities within developing countries larger than in developed, but
some evidence of narrowing
• The rationales for policy:
• Many policy areas involve spatial choices:
• Eg what region gets electricity/ transport infrastructure first?
• Speeding up the spread of growth
• Shaping long-run outcomes
• The urban structure; e.g. mega-cities and excess primacy
• National distribution of population
The spatial economy has numerous externalities
• Positive – agglomeration and the attraction of cities
• Negative – congestion.
There is no presumption that a free market outcome leads to an efficient outcome

4. The problem: high income economies
High income economies: adverse shocks have long run consequences
• UK: Places that had negative shocks in the 1970s were ‘average’ performers
• Now, 2/3rds of them amongst the most deprived areas in the UK
• Convergence or persistence:
• Evidence of convergence some countries (Germany, Poland)
• Failure of convergence in others (UK, France, US):
• Why have convergence mechanisms – and policies – failed?
• Two main convergence mechanisms
• Movement of people to jobs
• Movement of jobs to people

5. Adjustment mechanisms: movement of people
Movement of people to jobs:
• Can be an important mechanism
• During process of development and urbanisation
• In some high income countries – eg US, until 1990s
• Problematic:
• What is the endpoint?
• Out-migration from a low density rural area?
• Out-migration from an established commercial town or city ?
• Out-migration is higher for the young and the skilled
• Out-migration can contribute to a vicious circle:
• Demography/ skills/ local tax base/ public services/ land values/
building maintenance……
• Low expectations

6. Adjustment mechanisms: movement of jobs
Movement of jobs to people:
• Textbook economics:
• Jobs will move in to replace jobs that were lost
• Every place has a comparative advantage in something – if a traditional
comparative advantage is lost, another one will be found.
• Why does this not always work?
• Place that has experienced a shock remains unattractive for inwards
investment
• ‘Price signals’ are too small
• Agglomeration economies: relocating involves forgoing the benefits of
being in an existing cluster

7. Movement of jobs: adjustment failure
Adjustment failure:
I) ‘Price signals’ are small
• Regional adjustment is not like a national currency devaluation, that opens
up wage differences between countries
• Significant wage differentials do not open up between regions
• Integrated national labour markets, so regional differentials are
modest (zero in many professions)
• Negative shock impacts prices of immobile factors (land, housing) –
but these are not intensively used by firms
• Problem exacerbated by lack of appropriate skills/ infrastructure/ public
services…..vicious circle

8. movement of jobs; adjustment failure
Adjustment failure:
II) Agglomeration economies:
• Productivity advantage of being in an existing cluster/ centre
• Access to customers and suppliers
• The ‘business ecosystem’ – scale and specialisation
• Knowledge spillovers and networks
• ‘Coordination failure’: cluster as a whole might gain from moving – but no
incentive for a single firm to be the ‘first-mover’
• NB – strength of agglomeration forces varies across sectors
• Strong if internationally traded/ knowledge & skills intensive (high
tech, financial services)
• Weak if non-tradable/ low skill (haircuts, warehouses)
Combination of (I) and (II) means that, for many sectors, its hard to attract firms
to new places.

9. Response to a negative shock
What happens following a negative shock?
• Fall in employment rate (persistent)
• Directly affected sector
• Local multiplier effects to other sectors
• Fall in prices of immobile factors (land, housing)
• Relatively small fall in nominal wage
• Little out-migration
• Some new jobs created -- BUT, typically in low-skill, low-wage ‘non-
tradable sectors’.
• Hysteresis: move to a ‘low-level equilibrium’
• Low participation/ low value jobs (but possibly no unemployment)
Two types of ‘cumulative causation’ create the regional problem and the
case for policy
1) Vicious circle of decline in left-behind places: low employment feeds
into out migration, low skills, low tax base…….
2) Virtuous circle of agglomeration in booming places: firms want to
stay close to other firms; the first-mover problem.

10. Policy remarks
Shifting out of low-level equilibrium
• To grow a new sector requires many conditions
• Some directly controlled by policy:
• Infrastructure, some elements of costs, training
• Most not directly controlled by policy:
• Presence of related firms…… the first-mover problem
• Packages of measures, not fragmented interventions
• Can only create these conditions in a few places: concentrate don’t smear
• Superficially attractive policies have ambiguous effects
• Integrative (eg transport links);
• Enables ‘exports’ from a place …. and ‘imports’ to it.
• Movement of low-skill jobs:
• Fills place with low value activities with few linkages