What is different in the regional case, is that because we are dealing with regions inside a country, labour and capital are free to move anywhere in the country at the discretion of the individual worker or owner of capital. Which brings us back to the issue of how markets adjust and what government involvement in regional development should encompass.
In many respects, the issue of regional development is comparable to the issue of international development. The former is concerned with how to encourage development in less developed regions of a country and narrow the gap in economic well-being between regions while the latter is concerned with the same questions but at the country level.
When this happens, the supply of workers in A will rise and the supply of workers in B will fall.
When the supply of workers goes up, all other things equal, the wage rate paid to workers will fall.
There is a difference between Asking how to encourage development in a region Asking how to make all regions equal in terms of development and Asking how to narrow the gap in income and other indicators between regions.
But more significantly, there are major restrictions on the mobility of labour between countries.
Most countries have strict immigration laws that control the movement of workers across borders.
An example of the latter is when we talk about the region of South-East Asia. An example of the former is when we talk about the western provinces of China.
In the most general sense, regional development is about facilitating/creating development in different parts of a country. But our concern will specifically focus on poor regions and how they can be made to “catch-up” to the national average in development. This means that we want to look at why differences exist in the first place and what can be done about it in the second place.
In this case, government interference will impede the adjustment of markets and cause the problem of regional disparities to be perpetuated.
In practice, this market adjustment mechanism does not work as the theory predicts, at least not to the point where disparities are eliminated.
Suppose we have two regions, A and B.
Assume A is a high-wage, high-income region and B is a low-wage, low-income region.
If labour is free to move from B to A, then the relatively higher wage in A will cause workers to move to A and leave B.
At the country level, there may be barriers to mobility of both capital and labour. Capital in today’s world has become much more mobile than was the case, say, 50 years ago or even twenty years ago. But there are still restrictions in many countries on the flow of financial capital in and out of a country.
Regional disparities refer to the fact that when a country grows, not all parts of the country may grow equally. This means that, over time, a gap may open up between regions. This gap may be in income, employment, social development, or all of these.
Why not?
Not all workers are the same. Workers in B may not have the skills required for jobs in A. Some people may not want to move for personal or non-economic reasons. Government rules and programs may reduce incentives to move or increase incentives to stay. Workers in the high wage region will not support equalization if this means their wages will fall. Markets are not perfect.
WA > WB before migration WA falls and WB rises with migration When WA = WB, migration stops
In this type of perfectly functioning market, income/worker converges across regions and regional disparities will be eliminated.
Income disparities are what we will be mainly concerned with but usually, when a region lags behind in income, it will also lag in many, perhaps most, other areas as well.
Regional development refers to the economic development of a region. Our emphasis will be focused on less developed regions, or what sometimes are simply referred to as poor regions. And how they can be developed so that they catch up with thห้องสมุดไป่ตู้ more developed or rich regions of a country.
But there is a significant difference between the case of regions within a country and whole countries and this has to do with the mobility of factors of production.
One school of thought argues that the market will not create equality across regions and therefore, government intervention is required if this result is to be achieved.