Transcript Economic Environment of Business

Economic
Environment of
Business
Lecture Eight:
Regional Policy:
Divergence and convergence.
What constitutes a regional problem?
Some regions might experience
differences in:
 Income
 Work opportunities
 Infrastructure
Once we have defined different regions,
we might find some have deficient levels
of these – Regional Problems
Policy makers interested in the
following regional problems:
High and persistent unemployment
Low levels of growth of GDP per head
Heavy dependence upon a narrow industrial base
Rapid decline in manufacturing
Inadequate levels of infrastructure
Net migration out of the region
The following
slides give an
example of
some disparity
within regions
of the UK
economy.
Index of GDP per Head
Table 1 UK Index of GDP per Head (UK = 100)
Adapted from Griffiths and Wall, p197
140
CORE
120
Inner Periphery
Outer Periphery
100
1971
80
1981
60
1999
40
20
0
SE
EM
E
WM
SW
Y/ H
NW
NE
W
Sc
NI
NB – Want to be as
high as possible!
Index of UK Unemployment
Table 2 Index of UK Unemployment (UK = 100)
250
Adapted from Griffiths and Wall, p197
200
Outer Periphery
1971
Inner Periphery
15 0
20
1981
CORE
10 0
1999
50
0
SE
EM
E
WM
NB – want to be low
as possible!
SW
Y/ H
NW
NE
W
Sc
NI
What policy should we employ to overcome
regional problems?
Depends on whether the regions are believed
to be:

Converging (Free Market Policy), or

Diverging (Interventionist Policy)
These shall be examined in detail:
Convergence: Start with an initial disparity in wages:
In economically depressed areas
(traditionally the North of England):Low Demand for goods and services
low demand for labour (Derived)
 Price of Labour (Wage) is low
In prosperous areas:(traditionally the South of England):-
High demand for goods and services
high demand for labour (Derived)
 Price of Labour (Wage) is high
As a result:
Workers in the north may
move south to find work.
Employers in the south may
move north to find cheap
labour.
Long-run Equilibrium
NORTH (economically depressed area)
Supply of Labour falls as workers migrate to South raising wages
in the North
Demand for labour rises increasing demand and wage for labour.
SOUTH (prosperous area)
Supply of Labour rises as workers migrate to South reducing
wages
Demand for labour and wage falls as employers move North
Thus, disparity can only be short-run in this model.
Policy: Minimal:
Make sure
markets operate
effectively
Divergence: the case for intervention
In practice, labour and capital markets may
be imperfect because of:
 Imperfect knowledge amongst firms and employees
 Costs of moving – economic and social
 Minimum wage legislation etc.
Disparity may be worsening without government
intervention.
However, in the long term divergence will persist
because:•Skilled labour leaves North seeking prosperity
•Markets continue to grow in South
•Demand for goods and services is strong in
South
•In UK, South is close to mainland Europe
•Infrastructure may decline in North
However, in the long term divergence will persist
because:•Skilled labour leaves North seeking prosperity
•Markets continue to grow in South
•Demand for goods and services is strong in
South
•In UK, South is close to mainland Europe
•Infrastructure may decline in North
Regional Policy and Policy
Instruments
Special Areas Act (1934) established:
Government trading estates
Subsidised rents
Low interest rates
as a basis of regional policy.
Recent Policy initiatives:
Assisted Areas set up the 1990s (reviewed in
1999 under EU directive)
Development areas (DAs) which need most
help
Intermediate Areas (IAs) need least help and;
Split areas (SAs) with localised problems
Financial Incentives

RDGs (Regional Development Grants)
were abolished in 1988 in favour of RSA
(Regional Structural Assistance)

REG (Regional Enterprise Grant), EG
(Enterprise Grant) and other assistance
Expansion control
IDC (Industrial Development Certificate)
(1947-1981) required following Town and
Country Planning Act (1947) to avoid
industrial congestion.
This is claimed to be the most cost-effective.
Problem: Firms might go abroad if turned down
for an IDC, rather than to a less congested part
of the UK!
Policy effectiveness is often difficult
to assess:
Statistics often unreliable
Redefined boundaries – difficult to
compare like with like
Actual v estimate i.e. We can only
hypothesise what the alternative outcome
would have been without intervention.
Summary
We established:
 A definition of the regional problem
 The convergence theory
 The divergence theory
 The policy options
 The problems of evaluating policy
Next Class
International Trade
•Consider why trade is so important and think about
the barriers that exist to trade.
•Read up on the latest Doha Round of the GATT
trade talks. (General Agreement on Tariffs and Trade).
Now known as World Trade Organisation