Regional Inequalities in Small Countries Determinants and Measurement

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Regional Inequalities in Small Countries
Determinants and Measurement

• Boris A. Portnov Daniel Felsenstein
• Haifa University Hebrew University of
  Jerusalem

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Research questions

• Can we expect small countries to have smaller
  regional disparities?
• What are the main factors affecting the extent of
  regional disparities in small countries?
• Lastly, do small countries require specific
  inequality measurement, as opposed to their
  larger counterparts?

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Popular belief

• small states succeeded in spreading the fruits
  of economic growth more widely ... than the
  larger states at comparable levels of income per
  capita

Simon Kuznets (1960)
income is distributed more equally in the
Scandinavian countries and Switzerland than say
in France, Germany or even the United States.
These smaller countries have no large regions
like our South with a per capita income
distinctly lower than the rest of the country
(ibid.)
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• in small developed countries there seems to be
  less inequality in income distribution than in
  large ones (Streeten, 1993)
• if inequality between regions in a country is a
  major source of inequality between households,
  then one would expect large countries to have
  greater regional diversity and hence higher
  levels of inequality (Perkins and Syrquin, 1989)

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Regional growth theories

• Neo-classical growth theory (NGT) competitive
  forces and interregional migration equalize
  differences and factor prices across regions and
  lead to more even regional development,
  specifically in a small country (CONVERGENCE)
• New economic geography (NEG) the uneven
  concentration of production is sustained by
  circular production linkages and may become
  increasingly entrenched over time (DIVERGENCE).

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Empirical evidence

• Much of the evidence, in both directions, is
  based on large countries such as the U.S.A. and
  U.K. or areas within a supra-national economy
  such as the EU (Armstrong 1995, Le Gallo and
  Ertur 2003, Tsionas 2000 etc)

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Defining a Country as Small

• Population
• Land area
• Economy (problematic)

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Rank-size distribution of countries
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Attributes of small countries

• Limited natural resources
• Small variation of climatic conditions and
  agricultural productivity
• High population density
• Openness to the global economy
• Centralized governmental structure
• Short distances
• Small Number of Regions
• Small Size of Regions

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Limited natural resources
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High population density
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Openness to the global economy
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Centralized governmental structure
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Short distances
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Preliminary conclusion

• There is no reason to expect a priory that small
  countries may exhibit smaller regional
  disparities than their larger counterparts.
  Depending on the local setting (e.g.,
  agglomeration economies, openness to external
  trade, government structure, and practicability
  of daily commuting), the outcome of regional
  development may be indeterminate, leading in
  either direction - both towards regional
  divergence and convergence.

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Empirical test

• Dependent variables - the population weighted
  coefficient of variation of regional GDPpc, or
  Williamson Index (WI) and ratio of regional GDPpc
  (max/min)
• Explanatory variables - Land area in 1,000 km2
  (Land) GDPpc, 1000 US in PPS terms (GDP) the
  coefficient of variation of the population sizes
  of a country's regions (Pop_Distrib) population
  size of a country, million residents (Pop) a
  country-size dummy (1 for a small country, and 0
  otherwise (Smallness)
• Sample 22 European countries of different size
  (NUTS II regions or their equivalents)

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Country list
Large
Small
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Models
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Conclusion

• In general, the analysis supports our initial
  assumption that small countries do not
  necessarily have smaller regional gaps than their
  larger counterparts. To the contrary, smallness
  (i.e. the combination of small population size
  and small land area) tends to result, ceteris
  paribus, in larger regional gaps.

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Measurement issues

• The commonly used inequality indices (WI, GINI,
  etc.) are abstract mathematical formulas.
  Therefore, one can assume that they can be
  applied to both large and small countries alike.
• Is this assumption correct?

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Characteristic features of small countries

• Smaller number of regions than a large and more
  populous nation (e.g., 47 prefectures in Japan
  vs. 6 districts in Israel)
• Varying population sizes of regions (small
  countries are often mono-centric with a clearly
  emphasized urban core)
• Possibility of rapid change in the parameter
  distribution

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Testing
Reference distribution
Test 1 (number of regions)
Test 2 (Population distribution)
Test 3 (District ranking)
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Measurement Indices

• Coefficient of variation (CV) (unweighted)
• Population weighted coefficient of variation
  (Williamson index (WI))
• Theil index (TE(0))
• Atkinson index (AT)
• Hoover coefficient (HC)
• Coulter coefficient (CC)
• Gini (U) (unweighted)
• Gini (W) (population weighted)

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Test results
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Permutation test (unrestricted)
CV GINI (U) AT and TE(0)
WI GINI (W) and CC
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Permutation test (restricted)
ALL OTHERS
CC
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Conclusions
A small country may differ from a country of
larger size in three fundamental features

• First, it is likely to have a relatively small
  number of regional divisions.
• Second, its regional divisions are likely to vary
  considerably in their population sizes.
• Lastly, regions of a small country may rapidly
  change rank-order positions in the country-wide
  hierarchy, by changing their attributes (e.g.,
  population and incomes).

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• In order to formalize these distinctions, we
  designed a number of simple empirical tests, in
  which income and population distributions,
  presumably characteristic for small countries,
  were compared with the reference distribution,
  assumed to fit better a country of a larger size.
  In the latter (reference) distribution, the
  population was distributed evenly across regional
  divisions and assumed to be static.

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• Somewhat surprisingly, none of the indices we
  tested appeared to pass all the tests, meaning
  that they may produce (at least theoretically)
  misleading estimates if used for small countries
  and compared to countries of bigger size.
• Although further studies on the performance of
  different inequality indices may be needed to
  verify the generality of our observations, the
  present analysis clearly cautions against
  indiscriminate use of inequality indices for
  regional analysis and comparison.

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Catch-22

• There are big and small countries
• Small countries are like big countries, but
  smaller
• Everything is small in small countries, but
  inequalities