Within all countries, both developed and developing, there exist ...

Discussion of "Models of Regional Growth: Past, Present and Future" By Prof Richard Harris Dr Mark Roberts Dept of Land Economy 19 Silver Street Cambridge, CB3 9EP E-mail: [email protected] 17th October, 2011 Within all countries, both developed and developing, there exist large gaps in GDP per capita and standards-of-living between constituent regions, no matter how these are defined. For example, within England, the leading South East region had a level of GDP per capita that was roughly twice that of the Northeast region in 2004. Likewise, within China, the poorest performing provincial level region, Guizhou, has a level of GDP per capita which is a little over one-tenth of that of Shanghai's, China's most prosperous region (World Bank, 2008). Such large internal disparities in material well-being have long been a key concern for policymakers  concern with regional disparities in, for example, the UK dates back to the 1930s. More recently, narrowing regional disparities, or, at least, preventing them from widening further, has been seen as fundamental to social cohesion within the European Union, whilst, in China, an ambitious "Go West" program of development has been launched in an effort to help the country's lagging inland regions catch-up with its prosperous Western ones. At the root of these large internal disparities  and the policy concerns that they engender  are differences in long-term growth rates. Frequently, the difference between the long-run growth rate of a country's leading region and its most lagging may only be small. However, small differences in growth rates cumulated over long periods of time give rise to large differences in levels of prosperity between regions. With the above backdrop in mind, Prof Richard Harris' paper "Models of Regional Growth: Past, Present and Future" provides an extremely welcome and useful survey of developments relating to the theory of regional economic growth, as well as some suggestions as to where the future direction of research should lie. In particular, the paper is divided into three sections. The first section reviews "the past", which is seen to consist of aggregative models of the regional growth process. Thus, the one-sector neoclassical growth model is contrasted with Kaldorian models. Meanwhile, the second section surveys "the present", which takes the form of more sophisticated empirical techniques (most notably, the application of spatial econometric techniques) for analysing regional convergence, the development of new economic geography (NEG) models, and an emphasis on the importance of agglomeration economies more generally which has led to the emergence of both the "learning region" and regional innovation system (RIS) concepts. Finally, the third section presents Prof Harris' suggestions as to where the future direction of research needs to lie if we are to be able to further enrich our understanding of the regional growth process. Thus, Prof Harris calls for: (a) more detailed micro-econometric analysis of geo-coded firm level datasets that recognises the heterogeneity of firms and plants; (b) the estimation of regional (and sub-regional) industry knowledge production functions; and (c) increased research on the interaction between productivity and exporting at the spatial level.

1

Overall, there is not much in Prof Harris' paper that I find myself able to disagree with. Hence, with respect to "the past", I very much agree that, owing to its restrictive and unrealistic assumptions, the neoclassical model fails to provide a very useful framework for understanding regional growth. 1 I further agree that, in this regard, Kaldorian theory, with its emphasis both on the openness of regional economies and the circular and cumulative nature of regional growth processes, provides for a more informative overall vision. Likewise, with respect to "the present", I agree that, in the application of spatial econometric methods to the estimation of regional convergence models (not to mention more generally), the central problem is how to correctly specify W, the spatial weights matrix. This is even though I am perhaps more optimistic on the prospects for doing this. I also agree that, whilst it has its strengths and has provided many interesting insights on a case study basis, the RIS concept is undermined, from an economist's viewpoint, by both its overall apparent vagueness and its lack of clear policy insights. Finally, as regards "the future", I agree that there is a very important need for more detailed micro-econometric analysis of firm level datasets with a view to both better un-packaging the individual processes that generate regional growth and improving the measurement and understanding of spillover effects. Where I do perhaps have more difference with Prof Harris is in believing that the future research agenda needs to be broader than the micro-econometric analysis of firm level data and that, within this broader agenda, there remains an important role for both more theoretical and aggregative research. Part of this difference is perhaps due to a belief that there is a broader set of questions regarding the nature of the regional growth process that needs to be addressed. Thus, in the introduction to his paper, Prof Harris emphasises the importance of "identifying those determinants [of growth] that are exogenous at a regional level and are thus amenable to policy intervention." Amongst such determinants are national policies which have uneven regional impacts. For example, even short-run monetary policy, which is formulated at a national level with the aim of primarily controlling inflation, may have differential regional impacts which, because of hysteresis effects, can "permanently" impact a region's long-run growth prospects. However, to date, relatively little research has been done on the asymmetric impacts of national policies on long-term regional growth and little is known about their relative contribution to regional growth disparities. More generally, research is required on how the overall policy environment – which operates at various levels (local, national and supra-national) – interacts with local conditions to shape the overall regional growth process. Related to this, there is also the question of what determines the resilience of regions to, both policy- and non-policy related, shocks and the factors that determine their ability to reinvent themselves over time when faced with seemingly inevitable structural decline (their "bouncebackability"). The importance of the latter to long-term regional/urban growth prospects has been emphasised by, amongst others, Glaeser (2005, 2010), but there remains an important lack of rigourous empirical understanding of the reasons why some regions have managed to reinvent themselves over time, whilst others have not. In the quest for better answers to such questions, much of the required empirical work is likely to be micro-econometric in nature, but this should not prevent more macroeconometric style work – in the spirit of, for example, Blanchard and Katz (1992), but applied to a growth rather than an unemployment context – from playing an important complementary role.

1

In addition to the list of shortcomings of the model mentioned by Prof Harris, one can add the failure of the model's prediction that capital and labour should flow in opposite directions. Hence, whilst, in general, labour does seem to flow in the predicted direction from poorer to more prosperous regions, it is much less clear that capital flows in the opposite direction.

2

Meanwhile, with respect to theoretical research, Prof Harris makes no mention of this in "the future." Yet, much important work still remains to be done before we have anything approaching a complete theoretical understanding of the regional growth process. Thus, with respect to purely aggregative Kaldorian models, these retain many theoretical loose ends. For example, the models face the difficulty that, when they produce cumulative growth, such growth is predicted to be explosive (see fig. 2, p. 9 of Prof Harris' paper). However, in reality, we tend not to observe such explosive growth. This is because of the emergence of constraints on regional growth, which may originate from different potential sources – for example, diseconomies of agglomeration (the localised bidding-up of factor prices) and/or the emergence of a binding regional balance-of-payments or other policy constraint. One of the central problems for Kaldorian growth theory is how to model the endogenous emergence of such constraints (some preliminary attempts at this have been made by, for example, Setterfield, 1997a, 1997b, and Roberts, 2006). In this respect, NEG models may be considered superior because they incorporate both centripetal and centrifugal forces within a framework that, by virtue of its incorporation of distance dependent transport costs, is also explicitly spatial. However, the NEG framework is primarily a static one and, as such, NEG models are not per se models of regional growth. Important work which attempts to introduce growth into an NEG framework has taken place (most notably, Baldwin and Martin, 2004), but more research in this direction would be welcome, as would further research aimed at enriching the treatment of both transport costs and industrial structure in NEG models. In particular, by providing it with theoretical underpinning, work aimed at better incorporating firm and plant heterogeneity into an NEG framework would prove a useful complement to the micro-econometric analysis of firm and plant level data that Prof Harris calls for. Finally, the future research agenda needs to be broader in the sense that, when it comes to empirical research, there is a need for greater use, where possible, of impact evaluation style techniques. Thus, in the introduction to his paper, Prof Harris states, quite rightly, that "an important aim [is] to establish (causal) linkages between variables for both policy purposes and to understand the processes underlying growth" (pp 1-2). The gold standard for establishing causality and measuring impacts, especially with respect to policy interventions, is randomisation as to which actors/entities receive "the treatment" (e.g. which regions benefit from, say, a particular type of infrastructure upgrade or education policy) and which do not. However, randomisation tends – for perhaps obvious reasons – to be a luxury that empirical researchers in the social sciences rarely have the luxury of enjoying. Still, there are alternative strategies that researchers can fall back on to help in achieving identification. These include, for example, regression discontinuity and propensity score matching techniques, as well as the cleverer, more clearly thought-out, use of instrumental variable techniques. The analysis of regional growth – and the field of regional and spatial economics more generally – has yet to benefit from the application of such techniques to the extent which some other branches of economics (most notably, development economics) have. To conclude, Prof Harris' paper represents both an excellent and comprehensive survey of developments relating to the theory of regional economic growth, and, overall, I agree with virtually everything in the paper. If there is a difference, it is regarding the breadth of the research agenda required for "the future." Thus, in these comments, I have tried to make a tentative attempt at articulating a broader research agenda than that set forth by Prof Harris, which retains a (complementary) role for both more aggregative and theoretical research.

3

References Baldwin, R.E. and Philippe M., 2004, "Agglomeration and Regional Growth" in J.V. Henderson and J.F. Thisse (eds.), Handbook of Regional and Urban Economics, Amsterdam: Elsevier B.V. Blanchard, O. and L.F. Katz, 1992, "Regional Evolutions", Brookings Papers on Economic Activity, Vol. 23, No. 1, pp 1-76. Glaeser, E.L., 2005, "Reinventing Boston: 1630-2003", Journal of Economic Geography, Vol. 5, No. 2, pp 119-153. Glaeser, E.L., 2010, The Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier, Penguin Press. Setterfield, M., 1997a, "History versus Equilibrium and the Theory of Economic Growth", Cambridge Journal of Economics, Vol. 21, pp 365–78. Setterfield, M., 1997b, Rapid Growth and Relative Decline: Modelling Macroeconomic Dynamics with Hysteresis, London: Macmillan. Roberts, M., 2006, "Modelling historical growth: a contribution to the debate", in P. Arestis, J.S.L. McCombie and R.W. Vickerman (eds) Growth and Development, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. World Bank, 2008, World Development Report 2009: Reshaping Economic Geography, Washington, D.C.: The World Bank.

4