Globalization and regional economic development needs fresh thinking

Globalization and regional economic development needs fresh thinking

Will halting globalization improve the lot of deprived regions and countries? Are the moves by the governments in the US, UK and some others to restrict globalization going to revive those regions that voted for the policies to ‘protect local jobs’? Are there other ways in which government policy could help underdeveloped regions to revive themselves through local technical colleges or research institutions, as in Germany?

This was the topic of the cover story of a recent issue of The Economist, with its lead editorial, “The right way to help places hurt by globalization”, in which it suggests it is time for fresh thinking about the changing economics of geography.

We present extracts from this editorial, which highlights why the outcome that people votred for may not necessarily be addressed by the policies being implemented.

Extracts of the article follow:

“Economic theory suggests that regional inequalities should diminish as poorer (and cheaper) places attract investment and grow faster than richer ones. The 20th century bore that theory out: income gaps narrowed across American states and European regions. No longer. Affluent places are now pulling away from poorer ones.

This geographical divergence has dramatic consequences. A child born in the bottom 20% in wealthy San Francisco has twice as much chance as a similar child in Detroit of ending up in the top 20% as an adult. Boys born in London’s Chelsea can expect to live nearly nine years longer than those born in Blackpool. Opportunities are limited for those stuck in the wrong place, and the wider economy suffers. If all its citizens had lived in places of high productivity over the past 50 years, America’s economy could have grown twice as fast as it did.

Divergence is the result of big forces. In the modern economy scale is increasingly important. The companies with the biggest hoards of data can train their machines most effectively; the social network that everyone else is on is most attractive to new users; the stock exchange with the deepest pool of investors is best for raising capital. These returns to scale create fewer, superstar firms clustered in fewer, superstar places. Everywhere else is left behind.”

The article goes on to talk about regional policies and their effectiveness, about mobility and the re-establishment of local colleges:

“To avoid these outcomes, politicians have long tried to bolster left-behind places with subsidies. But such “regional policies” have a patchy record, at best. South Carolina lured BMW to the state in 1992 and from it built a thriving automotive cluster. But the EU’s structural funds raise output and reduce unemployment only so long as funding continues. California has 42 enterprise zones. None has raised employment. Better for politicians to focus on speeding up the diffusion of technology and business practices from high-performing places.

A beefed-up competition policy could reduce industrial concentration, which saps the economy of dynamism while focusing the gains from growth in fewer firms and places. Fostering clusters by encouraging the creation of private investment funds targeted on particular regions might help.

Bolder still would be to expand the mission of local colleges. In the 19th century America created lots of public technical universities. They were supposed to teach best practice to farmers and factory managers in small towns and rural areas.

They could play that role again today for new technologies, much as Germany already has a network of applied-research institutions. Politicians might even learn from Amazon, whose search for a home for a second headquarters has set off a scramble among cities hoping to lure the giant etailer.

Governments could award public research centres—in the mould of America’s National Institutes of Health or Europe’s CERN—to cities which prepare the best plans for policy reform and public investment. This would aid the diffusion of new ideas and create an incentive for struggling places to help themselves.”

The Economist’s main article adds:

“If there is a particular reason to favour dispersion of technological know-how and economic activity, it is that the concentration of such things also corresponds to a concentration of power. Since the late 1990s, as you would expect given the logic of globalisation, American industry has become more concentrated and more profitable. Superstar firms can draw on their financial and political capital to quash or take over would-be rivals, leaving fewer high-growth companies with the potential to anchor local economies. Not all these superstar perks are necessarily invidious, but looked at in the context of regional economies they can have striking effects.”

It concludes:

“Efforts to accelerate technological diffusion—which might include the more rigorous application of antitrust rules—could raise competitive pressures in the national economy in a way that favoured regional competitors.

But the segregation of cities into a small set of haves and a much larger set of have-lesses tends to mean that elites (in business and politics) rub elbows only with each other. That makes them ever less sensitive to the costs of regional inequality. The growing concentration of corporate offices in the vicinity of Washington, DC is a particularly obvious example of this.

Votes for Brexit and for Mr Trump were often cast as an expression of anger at a system that seems rigged. Unless policymakers grapple seriously with the problem of regional inequality, the fury of those voters will only increase.”

The full article in The Economist, ‘Globalisation has marginalised many regions in the rich world’, can be found here.

[Image: World Economic Forum]

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