Regional disparities and policy responses. Tony Venables, DFID

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Regional disparities and policy responses.Tony
Venables, DFID
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• Issues

• What do we know about spatial disparities in
  developing countries Kanbur and Venables
• Measurement issues and tools
• Policy responses
• Equity
• Efficiency

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• Policy responses Need analysis at several
  levels.
• What is the exogenous dynamic? Are disparities
  just part of a process of change or are they long
  run?
• Europe? long run?
• Enlarged Europe? a dynamic has been
  initiated?
• Developing? dartboard development?
• persistent asymmetry?
• What would the economic response be in a (near)
  perfect economy? Could involve substantial
  migration.
• What are the market failures?
• cumulative processes
• Increasing returns public goods.

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A textbook case

• Initial equilibrium at 1.
• Positive shock A to region S.
• Response?
• Wage gap (3 - 1)
• Migration (1 - 2)
• Productivity response B in N.
• Due to?
• Diffusion?
• Public investment
• NB benefit depends on response
• Full migrn, 2,4,5,6
• No migrn, 1, 7,5,6

• 5
• 6

• 3

• A

• B

• 4

• 7

• 2

• 1

ws
wN

• Pop. in S -gt lt- Pop in N.

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Cumulative causation and increasing returns to
scale

• Mechanisms
• Thick market effects labour matching
  incentives for skill acquisition.
• Linkages between firms
• Knowledge spillovers
• Public goods public finance
• Within or across sectors?
• Versus dispersion forces
• Commuting costs
• Land rent/ house prices
• Congestion externalities
• Magnitudes
• Doubling city size increases productivity 3-8
• Narrow spatial range up to 45-60 minutes
  driving time.

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Increasing returns 1

• Initial equilibrium at 1.
• Positive shock A to region S.
• Response?
• Wage gap (3 - 1)
• Migration (1 - 2)
• Qualitatively as before
• Migration response amplifies the increase in
  income (previously dampened).
• But increasing returns need micro-foundations

• 3

• 2

ws APLs

• A

• 1

wN

• Pop. in S -gt lt- Pop in N.

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Increasing returns 2 cities

• Each city described by average revenue schedule
  (AR) starting at AR(0) and attaining maximum.
• Existing cities expand up to the point where AR
  w.
• If there is just 1 city, equilibrium is at point
  1.
• (Imagine initial pre-shock situation with low AR
  curve and equilibrium at point 0)

AR
wN
AR(0)

• 1

• 0

• Pop. in cities -gt lt- Pop in N.

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Increasing returns 2 cities
Will second city develop? AR(0) gt wage at (1),
therefore second city enters and starts to grow,
new equilibrium at (2). Will third city
develop? AR(0) lt wage at (2), therefore no
migration to 3rd city Equilibrium supports 2
cities Optimum is 4 cities. Economic
development fails to spread to new locations
AR
wN

• 2

AR(0)

• 1

• 0

• Pop. in cities -gt lt- Pop in N.

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Policy issues?

• Importance of market failures
• Two market failures Coordination failure/
  externality
• Externality suggests Pigovian subsidy, but
  impossible to target.
• Coordination failure suggests spatially
  concentrated commitment.
• Where do further cities enter? peri-urban areas
  or regional secondary/ tertiary cities.

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Messages for PREM

• Data
• Mechanisms
• Analytical framework
• Build evidence base on what sort of interventions
  have worked and what have failed.