Economists have tried to explain the reason for regional disparities by using models of regional development and underdevelopment. Models such as Ragnar Nurske’s vicious circle of poverty and the Andre Gundar Frank dependency model apply more to underdevelopment and poverty in less developed country and so do not play a significant role in this essay. However theories of development are important to varying success. These will be discussed in the essay and include Cumulative Causation (Myrdal), Core Periphery (Friedmann), Stages of Economic Growth (Rostow), Unbalanced Growth (Hirschmann), a political model of development (Marx), Harrod-Domar Growth model and the Neo-classical model of regional growth.
RF Harrod and ED Domar developed the Harrod-Domar growth model independently in the 1930’s. The main principles of the model were that the rate of an economies growth depends upon the level of saving and the productivity of investment i.e. the capital output ratio.
For example, if £12 worth of capital equipment produces ach £1 of annual output, a capital-output ratio of 12 to 1 exits.
Using the model it is possible to describe reasons for economic growth. Economic growth depends upon the amount of labour and capital. As LDC’s often have an abundant supply of labour it is the lack of capital that stifles their growth and development. More physical capital therefore generates growth. Therefore net investment leads to more capital accumulation, which generates higher output and therefore income. This higher income will therefore in turn allow higher saving levels.
The key to economic growth is expanding investment levels (both fixed and human) capital using polices which encourage technological advances.
(Diagram of Harrod-Domar Model – to insert)
The above production possibility curve shows the importance of capital growth. I is the change in capital stock, K. The national income, Y, increases if consumption, C, is reduced, in the short run from Ca to Cb, to release saving, S, and resources for additional I from Ia to Ib. In the long run, the increase in the economies capacity shifts the production possibility frontier outwards to the pecked line which can allow the both higher consumption and investment.
The Harrod-Domar can easily be related to regional disparities provided economic growth is linked with development. Disparities will arise within a country as a result of greater levels of government and consumer spending in some areas compared to others. A lack of physical capital in a region of a country will hold back economic growth. Net investment leads to more capital accumulation, which generates higher output and income. Higher income allows higher savings enabling firms to produce more output. This model suggest that the government can use polices which encourage saving and/or generate technological advances which enable firms to produce more output with less capital in the underdeveloped region to reduce the disparity. Increased government spending on research will therefore not only increase growth due to improvements being obtained in technology, pushing out the PPF for the region but it will increase output in terms of government spending and higher employment and development as a consequence. The government could increase interest rates to encourage savings. This would in the short run cause a decline in growth and possibly development but according to the Harrod-Domar model the increase in savings as a result will lead to economic growth and development.
However there are problems using this model as a basis to explain development. Economic growth and economic development are not the same. Economic growth is a necessary but not sufficient condition for development. Practically it is difficult to stimulate the level of domestic savings, particularly in LDC’ where incomes are low. Borrowing from overseas to fill the gap caused by insufficient savings causes debt repayment problems later. The Law of diminishing returns would suggest that as investment increases the productivity of the capital will diminish and the capital to output ratio rise.
Brazil is a country where the Harrod-Domar model applies. Much of Brazils development is due to foreign investment. This however concentrates around the core regions of Rio de Janeiro and Sao Paulo. As a result of this investment, economic growth has occurred in these regions increasing disparities with rural areas such as Campo Grande where there is little, if any foreign investment.
Gunnar Myrdal developed the model of Cumulative Upward Causation to explain regional development. It states that economic growth starts with a location of new manufacturing industry. Adoption of innovations is most likely in areas possessing appropriate resources and entrepreneurial attitudes, and where change is socially acceptable. The initial advantages of such areas attract more economic activity, both directly and indirectly. Expanding businesses attract other linked forms of employment, which in turn create more wealth. This can be observed in both urban and industrial contexts. Moreover the increasing scale of economic activity enhances these multiplier effects resulting in agglomeration economies. Growth feeds on itself and virtuous circles or upward spirals ensure the continued economic success of the favoured region (as shown by diagram 1 below). It becomes the economic core of a national regional mosaic.
(Diagram 1 – Cumulative causation model)
In peripheral regions the processes go into reverse and downward economic spirals develop. This is known as the backwash effect, which fosters inequalities because growth in the core is at the expense of the periphery. This condition is not necessarily permanent. According to the theory, development of regional imbalances follows a three-stage sequence where in stage three the spread effects begin to reduce regional disparities. The third stage begins when wealth generated in the core eventually percolates to the periphery as a result of demand for raw materials, expansion of agriculture and the search for investment of surplus capital.
This model can be used to explain regional disparities in Italy. Here there is a divide between the rich north and the poorer south. The North is the industrial region of Italy with cities such as Milan, Turin and Genoa being amongst the most affluent of the EU. These areas are still expanding their industries such as textiles machine tools, leather goods, footwear and fashions. As stated in the model the industries attract related business creating a multiplier effect whilst there is a downward economic spiral in the south peripheral regions such as Sardinia and Campania due to the lack of interest to invest in the region. As the model suggests the disparity will get worse before it stands a chance of improving. Since 1992 the economy in the south has only grown by 1.5% compared to 7.2% for the country as whole. Between 1993 and 1996 unemployment fell by 2% in the north to 5% whilst in the south it rose by 3% to 21%. Clearly this suggests the cumulative causation model is being realised and that the disparity is further worsening. However the model relies on industrialisation as the main cause of economic development when in fact other factors such as a green revolution, increased efficiency and communications will effect development also. More over development is not the same as economic growth as it involves people realising their potential by means of adequate housing, health and education systems. Mydral does not deal with evolving social structures and attendant injustices, which are consequent upon economic change.
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Friedmann’s core and periphery model is similar to that of Mydral. The diagram below shows it concepts:
(Core-Periphery model –insert)
The diagram shows how some areas become more economically developed than other and why some regions are wealthier than others. Friedmann perceived economic growth as having a pre-industrial phase, a transitional phase with limited investment, an industrial phase, in which sub centres begin to develop and a post industrial phase. For example the South east of England is the wealthy core region. Here employment develops using high technology, offers higher pay than elsewhere and promotes high capital investment. The regions wealth attracts high densities of service industries designed to provide for the population and demand means that house prices are higher than elsewhere.
Regions on the periphery attract employment using lower technology, with lower pay and low capital investment. However, there are benefits, as such regions are often cheaper for people to live in e.g. North east England is the periphery in England. This model again only considers industrialisation as the key to development and does not tackle the many social aspects involved with levels of development. Also it does not address why the disparity occurred in the first place as it only explains why the disparity has greatened.
Rostow’s Model shows the different stages if development. It is based on development being in 5 stages. Stage 1 (Traditional society) is when the economy is dominated by subsistence. Resource allocation is determined very much by traditional methods of production and so output is low and so is development. In contrast stage 5 (high mass consumption) is when the consumer durable industry flourishes and the service sector is increasingly dominant. As a result output is high and so is the level of development. Therefore output must be closely linked with development and so measures taken to increase economic growth will increase development. This could involve improving the quantity and quality of land resources, improving quantity and quality of human resources and improving the quantity and quality of land resources. Also by increasing the quantity and quality of enterprise will increase growth.
However many development economists argue that Rostow’s model was developed with Western cultures in mind and not applicable to LDCs. It addition its generalised nature makes it somewhat limited. It does not set down the detailed nature of the pre-conditions for growth. In reality policy makers are unable to clearly identify stages as they merge together. Thus as a predictive model it is not very helpful. Perhaps its main use is to highlight the need for investment. Like many of the other models of economic developments it is essentially a growth model and does not address the issue of development in the wider context.
The model is not very good at showing disparities within countries. This is because it is designed too look at the stage of growth of a country and provides little help in explaining how disparities develop within a country.
Karl Marx outlined a political model of development in which the final stage was communism as shown below:
Feudalism → Capitalism → Socialism → Communism
He believed that that the capitalist model contained the seeds of its own destruction through unrestrained competition, exploitation, social inequality and the class struggle, which would end in revolution as it, did in Russia. This model has only been realised ever by a few communist states, which are seemingly underdeveloped compare to some of their richer neighbours in terms of GDP and HDI. This would disprove the theory. Also the model is unlikely to be able to explain reason for disparities within a country because it is reliant upon political and theological change within the country, which would affect the country as a whole.
The neoclassical view of regional growth is shown in the diagram below:
(Diagram of neo-classical view on regional growth)
Neo-classicals believe that market forces will prevail and automatically bring about a convergence of regions with respect to economic prosperity, without the need for expensive regional assistance. However there are many problems with this model. The main one is that it relies upon perfect capital and labour mobility. This is almost impossible. In the UK, for example, capital remains in the south despite cheaper costs due to other factors such as closeness to markets, skilled labour closer and the prestige of the location. Labour is not perfectly mobile as people from the North do not want to move south away from families to an unattractive, polluted, congested and expensive area. Clearly in theory in the model might apply but in practice convergence will never lead to equilibrium. However it is true that the market forces as mentioned do reduce the disparities between regions in countries.
In conclusion these models all are correct to a relatively large extent at what they are designed to explain. However they are based on economic growth, industrialisation, market forces or political theories and none directly address the question of how disparities develop within a country. Models by Friedmann and Mydral are most useful, as they appear to show the main reasons for why disparities might grow between regions. However they do not take into account the main criteria of development and solely rely on level of industrialisation as a development indicator. The Harrod –Domar model states that investment might be a reason for disparities however it does not consider other factors effect development and the cause of the disparity. Also it assumes economic growth is responsible for development. Rostow’s model is out of date, applies to country’s more than regions within them and again presumes level of development is dependent on economic status and level of industrialisation. Marx uses a political model, which is unlikely to be realised, and modern life suggest that communism does not lead top higher levels of development. The neo-classical model stated that market forces would correct disparities. However if this was correct then it why are many disparities worsening? Clearly these models explain to some extent why disparities occur within to varying degrees. None of them fully explain the reasons for the disparities and some even contradict each other confusing the situation further. Also different models apply to different regions.