Regional development as self-ogranized converging growth

Spatial disparities reflect differences in regional growth and productivity, and call for a profound analysis of t heir driving forces. This paper offers a concise and selective overview of various elements of regional development theories. Starting from traditional regional growth theory, it introduces next findings from location and agglomeration theory, including infrastructure and network modelling, with a particular emphasis on spatial ac cessibility. Next, innovation, entrepreneurship and knowledge are addr essed, and interpreted as critical success conditions for mode rn regional development. Elements from endogenous growth theory and the new economic geography are introduced as well. We pay also attention to contributions from the soc ial capital school, as they may be particularly relevant for enhancing regional productivity. Finally, attention is paid to the reg ional convergence debate, while the paper concludes with some prospec tive views on spatial disparity analysis. 1. Force Field of Regional Development Regional development is not only an efficiency issu e in economic policy, it is also an equity issue due to the fact that economic developm ent exhibits normally a significant degree of spatial variability. Over the past decades this empirical fact has prompted various strands of research literature, in particular the measurement of interregional disparity, the causal explanation for the emergence or persistent presenc of spatial variability in economic development, and the impact assessment of policy me asur s aimed at coping with undesirable spatial inequity conditions. The study of socio-eco nomic processes and inequalities at mesoand regional levels positions regions at the core p laces of policy action and hence warrants intensive conceptual and applied research efforts. For decades already, the unequal distribution of we l are among regions and/or cities has been a source of concern of both policy-makers and researchers. Regional development is about the geography of welfare and its evolution. I t has played a central role in such disciplines as economic geography, regional economi cs, regional science and economic growth theory. The concept is not static in nature, but refers to complex space-time dynamics of regions (or an interdependent set of regions). C hanging regional welfare positions are often Technical University of Košice, Faculty of Economi cs 2 Central European Conference in Regional Science – CERS, 2007 – 30 – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– hard to measure, and in practice we often use Gross D mestic Product (GDP) per capita (or growth therein) as a statistical approximation (cf. Stimson et al. 2006). Sometimes alternative or complementary measures are also used, such as pe r-capita consumption, poverty rates, unemployment rates, labour force participation rate s or access to public services. These indicators are more social in nature and are often used in United Nations welfare comparisons. An example of a rather popular index in this framew ork is the Human Development Index which represents the welfare position of regions or nations on a 0-1 scale using quantifiable standardized social data (such as employment, life expectancy or adult literacy) (see e.g. Cameron 2005). In all cases however, spatial dispar ity indicators show much variability. Clearly, the concept of a region is a problematic c oncept in empirical research, as the spatial scale of regions may exhibit much variation ra ging, for example, from the larger US states to relatively small regions in Europe, even sometimes down to the municipality level. A key feature of any region – in contrast to a nation – is its relative openness (see e.g., Blanchard 1991). From a statistical viewpoint, regi ons are often administrative spatial units with a certain competence for socio-economic policy and planning. The relatively small scale of a region leads normally to a high degree of hete rog neity and interaction with each other, as a result of locational features such as local pr oduction factors, institutions, transport infrastructures and local market size (see also Arm strong and Taylor 2000). Regional disparities may have significant negative socio-economic cost consequences, for instance, because of social welfare transfers, inefficient production systems (e.g., due to an inefficient allocation of resources), and undesirab le social conditions (see Gilles 1998). Given a neoclassical framework of analysis, these dispari ties (e.g., in terms of per capita income) are assumed to vanish in the long run, because of the s patial mobility of production factors which causes at the end an equalization of factor product ivity in all regions. Clearly, long-range factors such as education, R&D and technology play a critical structural role in this context. In the short run however, regional disparities may show rather persistent trends (see also Patuelli 2007). Disparities can be measured in various relevant cat egories, such as (un)employment, income, investment, growth etc. Clearly, such indic ators are not entirely independent, as is, for instance, illustrated in Okun’s law, which assu mes a relationship between economic output and unemployment (see Okun 1970, Paldam 1987 ). Convergence of regional disparities is clearly a complex phenomenon which r efers to the mechanisms through which differences in welfare between regions may vanish ( cf. Armstrong 1995). In the convergence debate, we observe increasingly more attention for the openness of spatial systems, reflected inter alia in trade, labour mobility, commuting etc . (see e.g., Magrini 2004). In a comparative static sense, convergence may have varying meanings in a discussion on a possible reduction in spatial disparities among regions, in particular (see also Barro and Sala-i-Martin 1992, Baumol 1986, Bernard and Durlauf 1996, Bodrin and C anova 2001): • β-convergence: a negative relationship between per c apita income growth and the level of per capita income in the initial period (e .g., poor regions grow faster than initially rich regions); • σ-convergence: a decline in the dispersion of per ca pita income between regions over time. The convergence hypothesis in neo-classical economi cs has been widely accepted in the literature, but is critically dependent on two hypotheses (cf. Cheshire and Carbonaro 1995, Dewhurst and Mutis-Gaitan 1995): • diminishing returns to scale in capital, which mean s that output growth will be less than proportional with respect to capital; Technical University of Košice, Faculty of Economi cs 2 Central European Conference in Regional Science – CERS, 2007 – 31 – –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– • technological progress will generate benefits that also decrease with its accumulation (i.e., diminishing returns). Many studies have been carried out to estimate the degree of β-convergence and σconvergence (see e.g., Barro and Sala-i-Martin 1991 , 1 92). The general findings are that the rate of β-convergence is in the order of magnitude of 2% ann u lly, while the degree of σconvergence tends to decline over time, for both US states and European regions. Clearly, there is still an ongoing debate world-wide on the ype of convergence, its speed, its multidimensional conceptualisation, and its causal significance in the context of regional policy measures (see e.g., Fagerberg and Verspagen 1996, Fingleton 1999, Galor 1996). Important research topics in the current literature appear to be: the role of knowledge and entrepreneurship, spatial heterogeneity in location l or socio-cultural conditions, and institutional and physical barriers. An important n ew topic in the field has become group convergence (or club convergence) (see e.g., Islam 2003, Fischer and Stirbock 2006, Baumont et al. 2003, Chatterji 1992, Chatterji and Dewhurst 1996, López-Bazo et al. 1993, Quah 1996, Rey and Montouri 1999, and Sala-i-Martin 1996). Thu s we may conclude that the research field of spatial disparities is still developing an d is prompting over the years fascinating policy issues. In the sequel of this paper we will now add ress more in particular prominent policy questions, as they have emerged over the years. 2. Spatial Disparities: Productivity is the Key Spatial disparities may manifest themselves at dif ferent geographical levels, ranging from nations to urban districts. The lower the geog raphical scale, the larger normally the geographical variation in the welfare variable(s) c onsidered. This scale dependence of spatial disparities calls for great caution in comparing th e performance of nations or regions. But in most cases, differences in spatial performance (e.g ., income per capita, employment growth etc.) are directly or indirectly related to differe nces in productivity among regions. Clearly, such differences may be ascribed to physical geogra phy, to inefficient use of human resources, to inadequate availability of physical o r human capital, to lack of recourses and so forth, but overall we may conclude that deficiencie s on the supply side of production factors – whatever the cause of these deficiencies may be – l eads to a lower performance of the region concerned. And therefore, the measurement and evalu ation of total factor productivity (TFP) is of great importance for understanding spatial we lfar disparities. The motives to measure regional development are ma nifold. But a prominent argument all over the years is that welfare positio ns f regions or nations may exhibit great disparities which are often rather persistent in na ture (see Fingleton 2003). These in turn translate into large disparities in living standard s. For example, in 1960, the world’s richest country had a per capita income that was 39 times g r ater than that of the world’s poorest country (after correcting for purchasing power), wh ile by the year 2000, this gap had increased to 91 (Abreu 2