Wiberg, Μ. (2014) “The political economy of regional policy and industrial location“, VoxEU Organisation, 03 Σεπτεμβρίου.
Regional policy is a primary expenditure item for many countries. A substantial share of the regional policy budget is allocated to firms in poor regions. This column argues that electoral concerns and rent-seeking behaviour bias regional policy in favour of smaller regions. However, this bias lowers total welfare.
The EU spends €130 billion per year, equivalent to roughly 1% of the gross national income of its member states. One of the primary expenditure items is regional policy. A substantial share of the regional policy budget consists of subsidies to firms located in poor regions. The purpose is to attract firms to lagging regions based on the assumption that this will reduce regional inequalities, while ensuring that policy is consistent with overall economic growth and efficiency. In times of shrinking national budgets, it is fair to ask to what extent regional policy actually achieves this purpose, and if not, why.
It is a consensus in the field of political economy that policy is not the outcome of a sole decision made by a welfare-maximising social planner, but instead determined by the interaction of politicians, interest groups, and voters. Moreover, there are grounds for believing that inefficient policies are chosen because they serve the interests of politicians or social groups with political power. Subscribing to this view, this article reviews and draws out the policy implications of the small but emerging literature on the political economy of regional policy and industrial location.
The literature takes as its starting point the observation that governments tend to favour rural regions to an extent that seems out of proportion with their population size.1
According to the explanation put forward below, political-economy factors bias regional policy in favour of economically smaller regions (as measured by population size). This reverses the agglomeration process that follows from traditional models of the new economic geography, which treat regional policy as exogenous and predict that all industry concentrates in economically larger regions when trade is liberalised (see, for example, Krugman 1980). As will be seen, this reversed agglomeration process has implications for total regional welfare and the design of regional policy.
Σχετικές αναρτήσεις:
- Monastiriotis, V. & Martelli, A. (2013) “Beyond Rising Unemployment: Unemployment Risk, Crisis and Regional Adjustments in Greece“, Hellenic Observatory Papers on Greece and Southeast Europe, GreeSE Paper No.80, Δεκέμβριος.
- Weeks, J. (2013) “Unemployment in the Eurozone: Alternatives for α Regional Support Program“, Social Europe Journal, 21 Οκτώβριος.
- Dao, Μ., Furceri, D. & Loungani, P. (2013) “Regional Labor Market Adjustmentsin the United States and Europe“, IMF Working Paper, 11 Φεβρουάριος.