Policy, Planning, and People: Promoting Justice in Urban Development

Chapter 9. The Center-Periphery Dilemma: Spatial Inequality and Regional Development

Chapter 9 The Center-Periphery Dilemma: Spatial Inequality and Regional Development Daniel Shefer and Amnon Frenkel Variations exist among regions. These variations manifest themselves in the levels of the population’s economic and social well-being. Different regions are endowed with production factors and characteristics that offer different opportunities for specialization, which can be exploited to gain regional comparative advantage. They then may add to the region’s aggregate income and well-being. It is of paramount importance, then, first to identify a region ’s comparative advantages and then to devise policies that exploit those advantages. Many outlying regions (peripheral regions) suffer from a high rate of unemployment, a low level of per capita income, and net out-migration. Most often the out-migrants come from the highly educated and highly motivated population. Among them, we can find a high percentage of potential entrepreneurs. Outlying areas attract less investment than do central regions because of the low marginal productivity of factors of production in the former . In order to alleviate these hardships and prevent them from being further inflicted on outlying regions, central governments often devise incentive and investment programs whose main objective is to reduce gaps among regions and, thus, to reduce regional inequalities. Over the past three decades, high-technology industries have expanded worldwide at a tremendous pace. Attracting high-tech firms to outlying regions is now in vogue, due in part to the image they project as magnets for highly educated and highly paid employees. Public/private investment in large-scale facilities, such as highways and railways, technological incubators, 13423-Policy Planning and People_Carmon1.indd 183 3/14/13 9:48 AM 184 Daniel Shefer and Amnon Frenkel universities, and hospitals, are among the projects proposed in order to facilitate economic growth in outlying areas The principal objective of this chapter is to critically review the spatial implications of alternative public investment programs designed to facilitate the growth of peripheral regions, reducing the disparities between central regions and outlying (peripheral regions). We begin with the economic growth model and the Conversion-Diversion hypothesis, followed by Krugman’s New Economic Geography model. This is followed by a discussion of the spatial concentration of economic activities—agglomeration economies, clustering, and networking—that spawn innovations, entrepreneurships, and start-ups, and in turn result in creation of new enterprises. All this activity contributes to regional growth. We then turn to a recently employed policy instrument—the technological incubator—and an extensive assessment of the impact of investment in transport infrastructure on regional development , particularly in a peripheral region. Economic Growth: Conversion-Diversion and the NEG Model The restrictive assumptions embedded in the neoclassical growth model— exogenous technology, constant returns to scale, and diminishing marginal productivity of capital in a perfect competition situation—do not provide a good explanation for the observed process of continuous growth in per capita income and, thus, in the standard of living (Solow 1956). The endogenous economic growth models that emerged in the 1980s prompted by the seminal work of Romer (1986) and Lucas (1988) brought to the fore the importance of endogenous technological progress (Aghion and Howitt 1998; Romer 1994; Grossman and Helpman 1991; Nijkamp and Poot 1997). Thus, technological progress could explain the persistent growth in income and, consequently, in income per capita or standard of living. In recent years, researchers have become increasingly aware of the role of technological progress and innovation on regional development and economic growth. Regions with a high level of innovation have become a destination for highly skilled labor and an impetus for improved social and physical infrastructures . These regions enjoy at times unique opportunities for development of new firms, expansion of market share, profitability, and employment growth. 13423-Policy Planning and People_Carmon1.indd 184 3/14/13 9:48 AM 185 The Center-Periphery Dilemma Industries that are heavily engaged in technological innovation usually possess a high market value resulting from a comparative advantage, at least during the first stage of the diffusion process. Open economies can take advantage of an expanded market and, through increasing returns to scale, have the benefit of greater production efficiency and a higher rate of economic growth. Greater production efficiency enables industries to expand their domestic market share through import substitution and increases in local consumption and, at the same time, to penetrate new foreign markets and raise their export share (Porter 1990; Krugman 1979, 1991, 1995). In a classic article...