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REGIONAL ECONOMIC ISSUES Working Paper Series Regional Growth and Development Theory: Summary and Evaluation Geoffrey J. D. Hewings FEDERAL RESERVE BANK OF CHICAGO WP- 1990-5 Regional Growth and Development Theory: Summary and Evaluation Geoffrey J.D. Hewings* A bstract Regional growth and development theory has undergone several periods of intense introspection and re-evaluation. After four decades of work in this area, there remains little consensus as to a generally accepted theory. In this paper, a review of the approaches will be provided, beginning with the neoclassical ideas and moving to the set of debates that appear to be of importance at the present time. These focus on the role of linkages and alternative forms of production space. Some new ideas are presented about the role of change in structure and the important role played in innovation diffusion and adoption. ’•‘Department o f Geography and Regional Science Program and Director, Regional Economics Applications Laboratory, University of Illinois at Urbana-Champaign. FRB CHICAGO Working Paper June 1990, WP-1990-5 1 I. Introduction Assume that an analyst was faced with the following problem. A nation was divided into n distinct, mutually exclusive and exhaustive regions; data were available for the major aggregates associated with macroeconomic accounting at the national level but, at least initially, the analyst was not provided with information at the regional levels. Drawing on received theory, what could the analyst say about the expected patterns of growth and development at the regional level? Essentially, one is asking the analyst a set of questions: • how do regions grow? • why do some grow more quickly than others while others decline? • will regional growth and eventually measures of regional welfare all converge on the national values or diverge? While these are eminently reasonable questions, a review of the available literature would suggest that there is little consensus on the process of change and the expected outcomes and that the empirical evidence is often inconclusive or just unavailable. In the final analysis, the major question of concern revolves around the expectation that levels of welfare among the region, no matter how measured, will either converge on or diverge from the national average. Of course, more recent work in dynamic theory suggests that the patterns themselves (whether of divergence or convergence) may have some cyclical component; these findings cast suspicion on the acceptability of any equilibrium criterion. However, it should also be stated that many of the recent theoretical contributions have yet to be subjected to extensive empirical validation. One feature that is quite prominent throughout the regional growth and development literature is the heavy intellectual debt owed to macroeconomic growth and development theory, international trade theory and behavioral relationships among macro and micro variables. A distinctive, quintessential regional theory has yet to emerge although reliance on mainstream economics appears to be weakening over time. In the next section, the tour through the literature will begin with the neoclassical approaches; thereafter, some of the more recent perspectives will be reviewed. The roles of linkages and interaction and the problem of FRB CHICAGO Working Paper June 1990, WP-1990-5 2 causation will provide the focus for the next section. The question of space will be addressed very briefly before some concluding comments are provided. n . N e o c la s s ic a l T h eory 1 The problems stated in the first section present an attractive challenge to the analyst stepped in the neoclassical paradigm. However, as Isard (1956) pointed out so eloquently, the "Anglo-Saxon bias" characterizing the foundations of modem economic theory precluded any direct and easy translation to a real world in which space had dimension and distance represented a real obstacle to overcome. Furthermore, this bias reflected itself in the lack of awareness of some of the important work being undertaken in languages other than English by scholars such as Palender, Predohl, Weber, Von Thunen. In the beginnings of regional theory, most closely associated with the work of Olsen (1971), Borts and Stein (1964) and later with Siebert (1969), real space was transformed into the physical complement of homo economicus. It was rational (i.e., uniform), with no barriers to entry; transportation costs were assumed to be either negligible or a simple function of distance. Factors were able to move between parts of the space, i.e., between regions, freely and without incurring transaction costs. In equilibrium, factor equality would be achieved across space with all factors paid their marginal products. The neoclassicists begin with a standard production function: Yr = f T [K,L,t] where Y is gross regional product in region r, and K and L are levels of labor and capital respectively. The final argument is technical progress, an amalgam of effects that combine to improve the efficiency of the stock of resources within the region. Growth in the system is assumed to be fullcapacity growth; the interest rate serves as the mechanism to equate investment and savings. Within the national system, regions can grow at different rates (in terms of population and rates of progress). Adjustments take place in the capital/output ratio. Although there is a global equilibrium in the savings/investments relations, there is no restriction that this should occur at the regional level. For example, the higher the region's growth rate, the more likely it will be to import capital. Since capital and labor are assumed to be perfectly mobile, and that each region produces homogeneous outputs, one FRB CHICAGO Working Paper June 1990, WP-1990-5 3 would expect that capital will flow from high to low wage regions and labor will flow in the opposite direction until factor returns are equal. Hence, the long run effect will be for low wage regions to grow faster; the influx of new capital will raise wages but begin to decrease the marginal product of capital that was initially higher than in the high wage regions. Eventually, convergence will take place. Criticism of the neo-classical model can be provided from any number of perspectives; perhaps, though, the assumption of perfect mobility of factors (and the implicit assumption of omniscience on the part of those factors-e., they have perfect information) creates the most difficulty. Notion of inertia, lumpiness of capital, the interindustrial and interregional linkages that characterize modem production systems all serve to dampen the transfer of the theory to reality. The Harrod-Domar model, on the other hand, would predict that with initial differences in regional growth rates, divergence in levels of welfare between regions will occur. The model examines rates of growth in output and capital; the rate of growth for population (and hence, labor) is assumed to be constant. Trade among regions is considered explicitly with the result that steady growth in a single region would alter the interregional flows of labor and capital elsewhere in the system. In this model, a steady-state path of growth would be unlikely; regions with higher propensities to save and lower capitaloutput ratios will grow faster. Their growth rates will, in turn, attract inmigration and further the growth processes, further enhancing the separation in levels of welfare between regions. In the context of the known real world, such theories are easy targets for criticism (see for example, Clark et al. 1987); however, as a theory, it does provide important insights into the potential functioning of markets in a world in which physical distance is an important concern. However, the nature of this distance impact-i.e., its embodied characteristics-precludes a simple translation of space into a transport surface in which costs are purely a function of length of travel. The costs of overcoming space involve time as well as real monetary outlays; they are further tempered by the nature and volume of the good being transported (including the possibility that the good might be individuals), the direction travelled, the final distance, and so forth. Other authors, such as Thirlwall (1974), have argued that regions should be treated no differently than nations. With the exception of some functions (such as the ability to issue currency), they behave very much the same way as FRB CHICAGO Working Paper June 1990, WP-1990-5 4 nations. Accordingly, Thirlwall argues, many regional problems are really balanceofpayments problems. Ifwe believethatregionsbehave ina similar fashion to nations, then we might find Thirlwall's arguments persuasive. Essentially, he argues that in line with national development problems, the problems ofregional adjustment stem from an inabilitytohandle balance of payments crises. With no ability to regulate exchange rates through devaluation/revaluation, what options are open to regional governments? In the US-modest taxation policy; industrial incentives (to lower costs of production and thus provide an analogous response to devaluation at the national level), exportpromotion plans, industrial targeting (usually focused on import substitution). However, it is not clear whether initiatives undertakenby thestateshavecreatedsignificantimpactsincomparison tothe effects generated by the differential, spatial expenditures by the federal government. In particular, the role of defense spending in the 1980s has significantly altered the economic structure and nature of the growth processesinmany states. More Recent Perspectives The neoclassical theoriesand thepolicyprescriptionsderived therefrom have been subjecttoabarrageofcriticism. This "assault"mightbe summarizedas coming from structuralist/Marxistperspectives, regional adjustment theorists and, most recently, from those proposing notions of new production spaces. The movement of production away from a system of individually-owned plants producing single products for geographically limited markets to one characterized by multiregional and multinational enterprises has further dampened the enthusiasm for neoclassical vision of regional growth and development. The structuralists (see Massey and Meegan (1982), Holland 1976a,b) focus attention on imbalances in accumulation between factors (labor and capital) and over space (between one region and another or between countries). Exploitation oflabor inevitably resultsin concentration of wealth; itis not entirely clear whether this will always result in spatial concentration, although the empirical evidence used in support of these approaches usually documents the existence of a classic "north-south" problem. Itshouldalsobe mentioned thatthestructuralistapproaches tendto beascriticalofthoseanalystsusingmodels (suchaseconomic base orinputoutput)astheyareoftheneoclassicaltheorists. Althoughcriticalofthisbody oftheory,Clarketal(1986)havesuggestedthat firms (and hence regions) are in a state of continuous adjustment since the FRB CHICAGO Working Paper June 1990, WP-1990-5 5 environment in which they are operating is constantly, and not necessarily uniformly,changing. The neteffectofthisistointroduceuncertaintyintothe calculus of decision-making, thereby creating opportunities for investment andmarketingdecisionsthatwillturnouttobesub-optimal. While theideais intuitively appealing, the development of the theory and attendant empirical evidencehaslaggedbehind. Scott(1988) has recently provided what may be termed a mediated position between the stricttenets of the neoclassical vision of change and the more critical structuralist claims. His suggestion of "flexible production spaces" provides an attractive vehicle forexamining the dynamics of change within urbanandregionaleconomies. Essentially,hefocuseson thefactthatfirmsin the latterpartofthe twentieth century have a much greaterflexibilityto (a) choose production processes and (b)choose thelocationofsuppliers. Given therapidlywithwhich many products move through aproductcycle,thereis littleguarantee any longer thatnew products will be produced in the same location and with thesame setofsuppliers. This summary sketch ofScoot's ideasdoesnotprovideacompletepictureoftheapproach; however, from the perspective ofthispaper, itdoes suggest a number ofimportant dimensions. First,attention on the firm or industry isprobably more criticalthan before, essentially because the dynamics of change within a regions may not be evident from an examination ofgross, macro-level statistics. Secondly, the nature of change in one region at one point in time may provide a very imperfect guide to futureactivities; theflexibilityalluded toearliersuggests thatfirmscan searchaglobalmarketforsitesand inputsthatwillyieldhigher returns on investment. The ephemeral nature of the nonmetropolitan expansion heralded in the 1970s suggests thatrapid movements through the product cycle have the capability of disequilibriating growth patterns. Thirdly, Scott'sevidence suggests thateven though growth may be occurring in small firms,largefirms exact a very importantrole insettingdemand for productsandprovidingmany importantinputs. Ifanything,inthelasttwenty years,thenatureofinterdependenceintheeconomy hasincreasedratherthan decreased. This has been accomplished through extensive vertical disintegration; in some cases, the linked firms in the production chain have been scattered throughout the globe. In other cases, strong agglomeration economies, such as those associatedwith thejust-in-timeproduction system, havecreatedindustrialcomplexeswithinregions. Recent work by regionalanalysts,such asDendrinos and Mullaly (1981) and Dendrinos and Haag (1984), especially in the application ofnonlinear urban dynamics suggeststhatsome oftheprocessesidentifiedby Scott(1988)could FRB CHICAGO Working Paper June 1990, WP-1990-5 6 be conceived withinadifferentparadigm. For example, drawing upon chaos theory, one might consider regions as "strange attractors" in an economic sense, around which and through which gyrate a complex of interdependent flows within the social accounting production space. While the aggregate effectofdifferentinputs intothesystem (defensecontracts,export demands, new firms creation)may yieldsimilarchanges inthelevelsofkey variables, the paths through which these changes move will be different, generating differencesindistributionsacrossspaceandsectors. What is not clear from these new perspectives is the issue of regional convergence ordivergence; sincemost oftheanalyseshavebeen shortrun in nature,itmay beprematuretoexpectcommitments tothelonger-termoutlook forregions within a national economy. The changing nature of production creates options foronce laggingregions togrow more rapidly; whether they will or not still depends on many classical factors of location decision making. In the next section, some ofthesemore traditionalapproaches will beexamined. Linkages, Interaction, Causation Regional analystshave long had an interestintheroleoflinkages: theearly statement on location theory were very much concerned with the ability of firmstoassembleinputs,produceandmarketgoods withinacost-minimizing orprofit-maximizing environment. This interesthas manifested itselfin the constructionofregionalmodels thatfocuson theessentialinterdependence of activitieswithinregionaleconomies. Perhaps the best known theory that focuses on linkages was proposed by Perroux (1955); hisnotion of"poles de croissance" orgrowth polescaptured the essential interdependence within economic systems. Economies were assumed togrow asaresultofthepropulsive forcescreatedby key sectorssectorswith strongbackward andforwardlinkages. These linkagesgenerated impulses throughout the economy, creating industrial demand and, through payments of wages and salaries, consumption demand. A parallel concept, thegrowth center,may be thoughtofas thespatialanalog tothegrowth pole idea. Growth centers were regions/metropolitan areas in which there was assumed to exista strong degree of interaction among sectors. Hence, the multiplierand acceleratoreffectsofclassicalgrowthmodels were assumed to be concentratedinspace. Closelyalliedwith theseideasarethecircularand cumulative causation theories ofMyrdal (1957) and the work ofRasmussen FRB CHICAGO Working Paper June 1990, WP-1990-5 7 (1952) and Hirschman (1958). Myrdal envisioned growth as a selfperpetuating mechanism whereby additions tooutput generate attractions for more investment and so forth. Pred translated this idea into a theory of metropolitan growth; Thompson (1965) introduced the notion of a ratchet effect,a level ofsizethatassuredcontinuedgrowth within aregion or urban economy. Hirschman andRasmussen bothprovidedimportantideasaboutthe roleofkey sectors within economies. However, the empirical evaluation of theseconceptshasprovidedthesourceofagreatdealofdebate(seeHewings, 1982)much ofwhich hascenteredon theproblemsofconsistentidentification ofkey sectorsand theassociatedissueofwhether such key sectorsidentified from input-output models of the economy produced in the past provide accurateguidancefordevelopmentpotential. Taken asawhole,thesecontributionshavebeen importantessentiallybecause they have focused on the structure of the economy. In terms of convergence/divergence, there would appear to be suggestions that regions would tend to diverge, the divergence emanating from the properties of the cumulativecausationthatattractedgrowth inthefirstplace. Inthe 1960s and 1970s, there was a great deal of interestinpromotion regional development based on the creation of growth centers; however, many policy-makers felt that the process was akin to ordination-one simply anointed a regional economy asagrowth centerand waitedforgrowth tooccur. Needless tosay, most oftheresultswere disappointing! Thisisnottosuggestthatlinkagesare unimportant,butratherthattheprocessofcreationoflinkagepatternsisvery complex and notsubjecttothemere waving ofamagic wand. Therehasbeen agreatdealofinterestintryingtounderstandthedynamics of changewithinurbanandregionaleconomies intermsoftheevolutionofaset oflinkagesamong thecomponents oftheeconomy. The variousmodels, such aseconomic base, input-outputand econometric, thathave been developed at theregionallevelplaceheavyemphasis on asystem thatisdemand drivenand generates total impacts that are some multiple of the initial changes. The specification of this multiplier effect has been the source of considerable debate in the literature (see Hewings and Jensen, 1986; Richardson, 1985, Bolton, 1985 forreviews). Only afew authorshave attemptedtoexamine the natureofthisinteractioninterms ofthe stageofdevelopment characterizing the regional economy. Figure 1 provides a schematic space-time representationofthesetofeconomies withinanation. What canwe sayabout the expected paths ofdevelopment through which these economies might be expected to pass? How will this movement be associated with the changing nature of interactions among industries, consumers, governments and other FRB CHICAGO Working Paper June 1990, WP-1990-5 8 institutions? Can we expect some logical progression in the nature of the structure of the economy as we move from small,rural economies to those describing large, complex metropolitan/industrial systems? How will the natureoftheseeconomies,atdifferentstages,varyovertime? Figure 1 Space-tim e representation of structure o f economies Rural economy Urban economy National economy TIME The received literature in regional analysis provides very little help in answering these questions; as shown on Figure 1, we are able to offer comments to the effect that increasing complexity and increasing connectedness are associated with movements across space and over time. However, there is a dearth of empirical evidence and the accumulated information isnotenough toofferany comments as tothenature ofchange. Jensen etal.(1987) offera hypothesis thatthe evolution might be unilinear and be characterizedby thepathshown inFigure2. However, recentwork in urban dynamics and catastrophetheory suggeststhattheevolutionaryprocess is likely to be nonlinear with substantial discontinuities created by sharp changes in the external environment (i.e.,oil shocks) or the introduction of radicalnew innovationsinproductandproductionprocess. FRB CHICAGO Working Paper June 1990, WP-1990-5 9 Figure2 Unilinear evolution, fundamental economic structures and economies Phenotype Ka) Phenotype H(a) e • • Phenotype N(a) Phenotype 1(b) Phenotype H(b) • • • Phenotype N(b) Phenotype Kz) Phenotype H(z) • • • Phenotype N(z) Cross-section at time-period T ' FES Path of unilinear economic evoluation Fundamental economic structure Thompson (1965) offered a vision of regional growth and development that stressed the changing nature of linkages within the regional system. As the economy evolved, he suggested thatthethresholdlevelswhere localdemand would be feasiblecreated discontinuities in development thatwould witness the process of import substitution of inputs formally purchased outside the region. Agglomeration economies and the ever-expanding local market wouldprovideadditionalopportunitiesfornew firmstolocateintheregionor forexistingfirms toexpand. Thompson also stressedthekey roleplayedby inducedincome-the effectsofspendingfrom wages andsalariesgeneratedby export sales-even to the extentof suggesting thatthe economy may be ina position to begin exporting services originally located in the region toserve thelocalmarket. Infact,asBeyers (1989) has shown, theexportofservices from regionsinsome partsoftheUS isnow asimportantand asextensiveas the exports of manufactured goods. Figure 3 provides a version of the expected development path ofaregion interms ofstructuralcomplexity; the FRB CHICAGO Working Paper June 1990, WP-1990-5 10 Figure3 Nonunilinear evolution, fundamental economic structures and economies Phenotype 1(a) Phenotype 11(a) • • • • • • Phenotype l(z) Phenotype H(z) Unifinear evoluation Phenotype llla(1) Phenotype llla(z) Catastrophe Nonunilinear evoluation Cross-section at time-period T FRB CHICAGO Working Paper June 1990, WP-1990-5 11 suggestion here isthat the process islogistic with long periods of low and high levels of complexity and a relatively shorter period during which the regionmoves from thelow tothehighlevel. Recentwork by Okazaki (1989) inJapanhasintroducedthenotionof"hollowingout,"aprocessofdecreasing complexity inthestructureofaregionaleconomy. The processes ofvertical disintegration noted by Scott (1988) may be considered tobe a case inpoint wherein theproduction spaces offirms/industriesexpandbeyond theconfines of a single region’s economy. Do these processes enhance or retard the convergenceofregionalwelfarelevels? Itisclear that, apart from the abortive attempt to generate artificial growth centers,theroleoflinkagesand linkagedevelopment continues toplayakey roleingrowth and developmentprocessesattheregionallevel. However, the major differencesbetween the 1980s and earlierdecades istheenhanced role ofserviceactivityand institutions. The earliereconomic models ofregional economies were very much dominated by the demand (= export) lead economic development theories derived from international trade theory. Exports were assumed tocomprise mainly goods produced by manufacturing plants within the region; the service activity thatexisted was assumed to be supporting thefunctioning ofthemanufacturing exports. Littleattentionwas paid to monetary flows and "invisibles"; to be fair, some authors, such as Blumenfeld (1955), suggested thatthe economic base theorists had got itall wrong-it was the nonbasic sector thatprovided the attractionfor new firms and thusthebasisforgrowthand development. In attempting to assess the state of current thinking, several points emerge. First,the simplisticcategorization ofeconomies as manufacturing, serviceor resources based isprobably misleading. Regions should be characterized by the nature and strengths of their internal and external interactions; as economies evolve, itischanges in this part of the system that are likely to create the major impacts. In a sense, one is arguing that the processes describedby Scottarereallyprocesses oforganizationofproduction with the linkage pattern potentially undergoing substantial spatial shifts as new products and processes are introduced. Secondly, it is not clear whether regions can influence the nature of these changes through policies; as Glickman andWoodward (1989)haveargued,thereissome generalsuspicion about thezero-sum natureofindustrial incentivesprograms, especially those offeredtoforeignfirmsinterestedinlocatingintheUS. On theotherhand, it isclear thatregions do function as systems ofinteracting firms and thatthe more ofthisactivity thatcan be encouraged tolocate within theboundaries, FRB CHICAGO Working Paper June 1990, WP-1990-5 12 ceterisparibus,thebetterofftheregionaleconomy willbeintermsofincome, employment,andothermeasuresofwelfare. Figure 4 Innovation and the incom e-expenditure-industry system However, there isone dimension of change thatappears prominently in the regional science literature but rarely in the context of regional growth and development theory. The theory of innovation diffusion and adoption has provided substantial insights in the nature of change associated with the introduction of new products and the manner in which those products have been adopted by consumers or other firms. Rarely has this literature FRB CHICAGO Working Paper June 1990, WP-1990-5 13 examined the indirect and induced effects of innovation diffusion (see Hewings et al. 1989). Figure 4 suggests a way in which the innovation processmightbe capturedwithinthecontextofsome oftheformal models of regionaleconomies (suchasan input-outputoreconometric model). Figure 5 provides some speculation on thenature ofchanges ofindividual parameters and Figure 6 provides some possible ways in which change might be manifested withinasetofinteractingindustries. The suggestionismade that innovation spread and its impact on changes in structure provide a useful explanatory mechanism for understanding the changing complexity of economies. Figure 5 Qualitative description of redistributional dynam ics (diagram numbers refer to text classifications) Ju n e 1990, W P -19 9 0-5 Figure 6 Types of diffusion of change in an input-output modelling fram ework 1 n 1 n 1 n 1 n Does Space Matter? Wamtz (1967) ina provocative address totheRegional Science Association discussed the tyranny of space and itsrelationship to time. Many scholars remainskepticalabouttheimportanceofspaceinconditioningthegrowthand development paths of regional economies. Arguments are proposed to the effect that new developments in air travel and telecommunications have produced a "shrunken" world. Firms arenow freetolocateinawidervariety of locations than was the case two or three decades ago; in essence, to use Weber's (1929) distinctions,have more factorinputs become ubiquitous and thereforceasedtoprovideconstraintsonlocation?As withanygeneralization, therearewhole truthsandpartialtruths. Thereisno doubtthatfirmsdo have FRB CHICAGO Working Paper June 1990, WP-1990-5 15 potentially greater locational flexibility than ever before; however, as the ubiquityofsome resourcesincreasesand factorcoststendtoequalize,greater attentionisthereforetransferredtothosefactorinputswhose pricesstillvary substantially over space. The most important would appear tobe labor and the cost of capital. Small differences in labor costs can translate into substantial differences in unit costs and, with large production runs, into importantdifferencesinprofitmargins. Barnesand Sheppard (1984) haverecentlybegun toexploretheapplicationof Sraffa's (1973) ideas of switching and reswitching in a spatial context. In theirvision,product,processandlocationarelinkedinacomplex ofdecision making with little expectation that new product demands will necessarily followthesameprocessofproductioninthesame geographicallocations. The recent developments within the Chicago SMSA, especially firm migration to the suburbs, have created new problems for firms wishing to employ laboratthe lower end ofthe skillspectrum. The processes here are suggestive ofthefindingsofAmos (1988); he updated some ofWilliamson's (1965, 1977) work which lead to the hypothesis of an inverted ’u' shaped processofdevelopmentby suggestingthatmacro-levelconvergences(suchas that observed at the census region level in the United States) may be accompanied by increasing intra-regional disparities. When viewed at the metropolitan scale, this suggestion of divergence in access tojobs, income levels and welfare generally, would appear to be characteristic of a large number ofmetropolitancomplexes. Concluding Comments The majorwork inregionalgrowth anddevelopmenttheorywas articulatedin aworld thatwas strictlyhierarchical. Decisionswereassumed totakeplaceat the international level, then the national level and finally filterdown to the regionaland sub-regionallevels. Accordingly, theview ofdevelopment was essentiallytop-down. Inrecentyears,two majordevelopments appeartohave created a need tochallenge some of these ideas. The firstfinds regions and nations (other than the one in which the region is located) interacting and developing trade relationships directly. The second, and potentially more pervasive, isthe development of major groupings of nations into economic communities such as the European Community, the US-Canada Free Trade Agreement, ASEAN and soforth. FRB CHICAGO Working Paper June 1990 WP-1990-5 , 16 What are the implications for regional development? In the United States, several stateshave begun todevelop what isde facto a foreign tradepolicy; this has been manifested in the establishment of trading missions in several countriesinEurope and Asiainan attempttolureinvestmentcapitalwith the majorgoalofjobcreation. WhileGlickman andWoodward (1989)havebeen verycriticalofsuch "foreignsmokestackchasing,"thepressuresforallstates toentertheracehas been intense,especially intheMidwest. The incentives packages offered tomany ofthe firms have raisedjustifiableconcerns about the wisdom of such actions, measured in terms of traditional cost-benefit appraisalcriteria.2 The second development, multination tradingalliances,isnotnew; however, what characterizesthepresentdevelopments isthedegreetowhich individual autonomy willbe surrenderedinsome criticalareas(likemonetarypolicy). In the post 1992 European Community, the nature of regional development policy willbe different;itisnotclearwhether similarcriteriawillbe applied acrossallregionsorwhethertherewillbe some attempttodifferentiallyassist areas whose development indices are way out of line with the country in which they are located if not in terms of the EC as a whole. In North America, themuch vauntedUS-Canada FTA hasbegun totake shape. Initial estimates ofthe impacts suggest thatintheUS thebenefits from Free Trade are likely to be small, even negligible. A more interesting question is the degree to which the FTA will hurt or help specific sectors and regions, especially in the Midwest and Northeast-the major US-Canada trading partners. Scholars outside US, have been puzzled by the absence of a coordinated regionaldevelopmentpolicy. The roleoftheindividualstateshasbeen much strongerthancomparablerolesforregionsinothercountries. The one arm of the federal government that was specifically involved with regional development, the Economic Development Administration, has been ineffectivewithcontinualthreatsforitseliminationby successiveRepublican administrations. Changes in the pace of development over the next two decades are likely to reveal new spatial development configurations. The major concern in the Midwest will be the degree to which the optimism generated inthelasthalfdozen years willbe translated intoa foundation for growth well intothe next century. More generally, few scholars seem tobe preparedtooffersuggestionsastothelikelypathsofdevelopmentinthenext fiftyyears in terms ofregional convergence or divergence. The changes of thelasttwo decadeshavecreatedsome concernaboutventuringtoofarouton alimbwithforecastsofsuchcomplex patternsofdevelopment. FRB CHICAGO Working Paper June 1990, WP-1990-5 17 Footnotes ^This section draws heavily on Richardson (1969, 1973); Borts and Stein (1964), Siebert (1969) ^In many cases, a cost-benefit analysis has not been undertaken but assertions have been made about the stream o f benefits being positive. A great deal hinges on (1) number of indirect jobs created (which often depends on exchange rates (2) length o f time firm stays in state and (3) degree to which the fiim meets targets. The Volkswagen plant in New Scranton, Pennsylvania failed on all three counts (see Van Meter, 1989) FRB CHICAGO Working Paper June 1990, WP-1990-5 18 References Amos, O.M. (1988) "Unbalanced regional growth and regional income inequality in thelatterstages ofdevelopment," RegionalScienceandUrban Economics18:549-566. Barnes, T. and Sheppard, E. (1984) "Technical choice and reswitching in spaceeconomies,"RegionalScienceandUrbanEconomics14:345-362. Beyers, W.B. 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(1982) "The empirical identification of key sectors in an economy: aregionalperspective,"TheDevelopingEconomies20:173-195. Hewings, G.J.D. and Jensen, R.C. (1986) "Regional, interregional and multiregional input-output models," in P. Nijkamp and E.S. Mills (eds.) HandbookofRegionalandUrbanEconomics,Vol 1: Regional Economics (Amsterdam: NorthHolland)295-355. Hewings, G.J.D., Jensen, R.C., West, G.R., Sonis, M., and Jackson, R.W. (1989) "The spatialorganization ofproduction: an input-outputperspective," Socio-EconomicPlanningSciences23:67-86. FRB CHICAGO Working Paper June 1990, WP-1990-5 19 Hirschman,A.O. (1958)TheS trategyofEconomicDevelopment(New Haven: YaleUP). Holland,S.(1976a)CapitalVersust heRegion(London: Macmillan). Holland,S.(1976b)TheRegionalProblem(London: Macmillan). Isard,W. (1956)Locationandt heSpaceEconomy(Cambridge: MIT Press). Jensen, R.C., Hewings, G.J.D., Sonis, M. and West, G.R. (1987) "On a taxonomy ofeconomies,"A ustralianJournalofRegionalStudies2:3-24. 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(1988) Metropolis:Fromt heDivisionofLabortoUrbanForm (Berkeley:UniversityofCaliforniaPress). Siebert,H. (1969) RegionalEconomicGrowth:TheoryandPolicy(Scranton: InternationalTextbookCo.). Sraffa, P. (1973) ProductionofCommoditiesbyMeans ofCommodities, (Cambridge: UniversityPress). FRB CHICAGO Working Paper June 1990, WP-1990-5 20 Thirlwall, A.P. (1974) "Regional economic disparitiesand regional policy in theCommon Market," UrbanS tudies11:1-12. Thompson, W. (1965)APrefacet oUrbanEconomics(Baltimore:FreePress). Van Meter, W. (1989)AnExPostAnalysisoft heRegionalEconomicImpact oftheVolkswagenAutoFacilityinWestmorelandCounty,Pennsylvania, unpublishedM.A. thesis,DepartmentofGeography,UniversityofIllinois. Wamtz, W., "Global science and the tyranny of space," Papers oft he RegionalScienceAssociation,19:7-19. Weber, A. (1929) TheoryofLocationofIndustry(Chicago: University of ChicagoPress). Williamson, J.G. (1965) "Regional inequality and the process of national development,"EconomicDevelopmentandC ulturalChange13:3-45. Williamson, J.G. (1977) "Unbalanced growth, inequality and regional development: some lessons from US history," in V.L. Arnold (ed.) AlternativestoConfrontation:ANationalPolicyTowardRegionalChange (Lexington:Heath)3-61. FRB CHICAGO Working Paper June 1990, WP-1990-5 21 Federal Reserve Bank ofChicago RESEARCH STAFF MEMORANDA, WORKING PAPERS AND STAFF STUDIES The following listspapers developed in recent years by the Bank’sresearch staff. Copies of those materials that are currently available can be obtained by contacting the Public Information Center (312) 322-5111. Working Paper Series—A series of research studies on regional economic issues relating to the Sev enth Federal Reserve District, and on financial and economic topics. Regional Economic Issues *WP-82-l Donna Craig Vandenbrink “The Effects of Usury Ceilings: the Economic Evidence,” 1982 :*WP-82-2 David R. Allardice “Small Issue Industrial Revenue Bond Financing in the Seventh Federal Reserve District,” 1982 WP-83-1 William A. Testa “Natural Gas Policy and the Midwest Region,” 1983 WP-86-1 Diane F. Siegel William A. Testa “Taxation ofPublic Utilities Sales: State Practices and the IllinoisExperience” WP-87-1 Alenka S. Giese William A. Testa “Measuring Regional High Tech Activity with Occupational Data” WP-87-2 Robert H. Schnorbus Philip R. Israilevich “Alternative Approaches to Analysis of Total Factor Productivity at the Plant Level” WP-87-3 Alenka S. Giese William A. Testa “Industrial R&D An Analysis ofthe Chicago Area” WP-89-1 William A. Testa “Metro Area Growth from 1976 to 1985: Theory and Evidence” WP-89-2 William A. Testa Natalie A. Davila “Unemployment Insurance: A State Economic Development Perspective” WP-89-3 Alenka S. Giese “A Window ofOpportunity Opens for Regional Economic Analysis: BEA Release Gross State Product Data” WP-89-4 Philip R. Israilevich William A. Testa “Determining Manufacturing Output for States and Regions” WP-89-5 Alenka S.Geise “The Opening ofMidwest Manufacturing to Foreign Companies: The Influx of Foreign Direct Investment” WP-89-6 Alenka S. Giese Robert H. Schnorbus “A New Approach to Regional Capital Stock Estimation: Measurement and Performance” *Limited quantity available. **Out of print. Working Paper Series (cant'd) WP-89-7 William A. Testa “Why has Illinois Manufacturing Fallen Behind the Region?” WP-89-8 Alenka S. Giese William A. Testa “Regional Specialization and Technology in Manufacturing” WP-89-9 Christopher Erceg Philip R. Israilevich Robert H. Schnorbus “Theory and Evidence ofTwo Competitive Price Mechanisms for Steel” WP-89-10 David R. Aliardice William A. Testa “Regional Energy Costs and Business Siting Decisions: An IllinoisPerspective” WP-89-21 William A. Testa “Manufacturing’sChangeover to Services in the Great Lakes Economy” WP-90-1 P.R. Israilevich “Construction ofInput-Output Coefficients with Flexible Functional Forms” WP-90-4 Douglas D. Evanoff Philip R. Israilevich “Regional Regulatory Effects on Bank Efficiency” WP-90-5 Geoffrey J.D. Hewings “Regional Growth and Development Theory: Summary and Evaluation” WP-90-6 Michael Kendix “Institutional Rigidities as Barriers to Regional Growth: A Midwest Perspective” Issues in Financial Regulation WP-89-11 Douglas D. Evanoff Philip R. Israilevich Randall C. Merris “Technical Change, Regulation, and Economies of Scale for Large Commercial Banks: An Application ofa Modified Version of Shepard’sLemma” WP-89-12 Douglas D. Evanoff “Reserve Account Management Behavior: Impact ofthe Reserve Accounting Scheme and Carry Forward Provision” WP-89-14 George G.. Kaufman “Are Some Banks too Large to Fail? Myth and Reality” WP-89-16 Ramon P. De Gennaro James T. Moser “Variability and Stationarity ofTerm Premia” WP-89-17 Thomas Mondschean “A Model of Borrowing and Lending with Fixed and Variable Interest Rates” WP-89-18 Charles W. Calomiris “Do "Vulnerable'' Economies Need Deposit Insurance?: Lessons from the U.S. Agricultural Boom and Bust ofthe 1920s” ’•'Limited quantity available. **Out of print. 3 Working Paper Series ( cont'd) WP-89-23 George G. Kaufman “The Savings and Loan Rescue of 1989: Causes and Perspective” WP-89-24 Elijah Brewer III “The Impact ofDeposit Insurance on S&L Shareholders’Risk/Return Trade-offs” Macro Economic Issues WP-89-13 David A. Aschauer “Back ofthe G-7 Pack: Public Investment and Productivity Growth in the Group ofSeven” WP-89-15 Kenneth N. Kuttner “Monetary and Non-Monetary Sources ofInflation: An Error Correction Analysis” WP-89-19 Ellen R. Rissman “Trade Policy and Union Wage Dynamics” WP-89-20 Bruce C. Petersen William A. Strauss “Investment Cyclicality in Manufacturing Industries” WP-89-22 Prakash Loungani Richard Rogerson Yang-Hoon Sonn “Labor Mobility, Unemployment and Sectoral Shifts: Evidence from Micro Data” WP-90-2 Lawrence J.Christiano Martin Eichenbaum “Unit Roots in Real GNP: Do We Know, and Do We Care?” WP-90-3 Steven Strongin Vefa Tarhan “Money Supply Announcements and the Market’s Perception ofFederal Reserve Policy” WP-90-7 Prakash Loungani Mark Rush “Sectoral Shifts in Interwar Britain” WP-90-8 Kenneth N. Kuttner “Money, Output, and Inflation: Testing The P-Star Restrictions” WP-90-9 Lawrence J.Christiano Martin Eichenbaum “Current Real Business Cycle Theories and Aggregate Labor Market Fluctuations” WP-90-10 S. Rao Aiyagari Lawrence J. Christiano Martin Eichenbaum “The Output, Employment, And Interest Rate Effects ofGovernment Consumption” *Limited quantity available. **Out of print. Staff Memoranda—A series ofresearch papers in draft form prepared by members of the Research Department and distributed to the academic community for review and comment. (Series discon tinued in December, 1988. Later works appear in working paper series). **SM-81-2 George G. Kaufman “Impact ofDeregulation on the Mortgage Market,” 1981 **SM-81-3 Alan K. Reichert “An Examination ofthe Conceptual Issues Involved in Developing Credit Scoring Models in the Consumer Lending Field,” 1981 Robert D. Laurent “A Critique ofthe Federal Reserve’sNew Operating Procedure,” 1981* George G. Kaufman “Banking as a Line ofCommerce: The Changing Competitive Environment,” 1981 SM-82-1 Harvey Rosenblum “Deposit Strategies ofMinimizing the Interest Rate Risk Exposure of S&Ls,” 1982 ♦SM-82-2 George Kaufman Larry Mote Harvey Rosenblum “Implications ofDeregulation for Product Lines and Geographical Markets of Financial Instititions,” 1982 *SM-82-3 George G. Kaufman “The Fed’sPost-October 1979 Technical Operating Procedures: Reduced Ability to Control Money,” 1982 SM-83-1 John J. Di Clemente “The Meeting ofPassion and Intellect: A History ofthe term ‘Bank’in the Bank Holding Company Act,” 1983 SM-83-2 Robert D. Laurent “Comparing Alternative Replacements for Lagged Reserves: Why Settle fora Poor Third Best?” 1983 **SM-83-3 G. O. Bierwag George G. Kaufman “A Proposal for Federal Deposit Insurance with Risk Sensitive Premiums,” 1983 *SM-83-4 Henry N. Goldstein Stephen E. Haynes “A Critical Appraisal ofMcKinnon’s World Money Supply Hypothesis,” 1983 SM-83-5 George Kaufman Larry Mote Harvey Rosenblum “The Future ofCommercial Banks in the Financial Services Industry,” 1983 SM-83-6 Vefa Tarhan “Bank Reserve Adjustment Process and the Use of Reserve Carryover Provision and the Implications ofthe Proposed Accounting Regime,” 1983 SM-83-7 John J. Di Clemente “The Inclusion ofThrifts in Bank Merger Analysis,” 1983 SM-84-1 Harvey Rosenblum Christine Pavel “Financial Services in Transition: The Effects ofNonbank Competitors,” 1984 SM-81-4 **SM-81-5 *Limited quantity available. **Out of print. Staff Memoranda (cont'd) SM-84-2 George G. Kaufman “The Securities Activities ofCommercial Banks,” 1984 SM-84-3 George G. Kaufman Larry Mote Harvey Rosenblum “Consequences of Deregulation for Commercial Banking” SM-84-4 George G. Kaufman “The Role ofTraditional Mortgage Lenders in Future Mortgage Lending: Problems and Prospects” SM-84-5 Robert D. Laurent “The Problems ofMonetary Control Under Quasi-Contemporaneous Reserves” SM-85-1 Harvey Rosenblum M. Kathleen O’Brien John J. Di Clemente “On Banks, Nonbanks, and Overlapping Markets: A Reassessment ofCommercial Banking as a Line ofCommerce” SM-85-2 Thomas G. Fischer William H. Gram George G. Kaufman Larry R. Mote “The Securities Activities ofCommercial Banks: A Legal and Economic Analysis” SM-85-3 George G. Kaufman “Implications of Large Bank Problems and Insolvencies for the Banking System and Economic Policy” SM-85-4 Elijah Brewer, III “The Impact ofDeregulation on The True Cost of Savings Deposits: Evidence From Illinoisand Wisconsin Savings & Loan Association” SM-85-5 Christine Pavel Harvey Rosenblum “Financial Darwinism: Nonbanks— and Banks—Are Surviving” SM-85-6 G. D. Koppenhaver “Variable-Rate Loan Commitments, Deposit Withdrawal Risk, and Anticipatory Hedging” SM-85-7 G. D. Koppenhaver “A Note on Managing Deposit Flows With Cash and Futures Market Decisions” SM-85-8 G. D. Koppenhaver “Regulating Financial Intermediary Use of Futures and Option Contracts: Policies and Issues” SM-85-9 Douglas D. Evanoff “The Impact of Branch Banking on Service Accessibility” SM-86-1 George J. Benston George G. Kaufman “Risks and Failures in Banking: Overview, History, and Evaluation” SM-86-2 David Alan Aschauer “The Equilibrium Approach to Fiscal Policy” ^Limited quantity available. **Out of print. Staff Memoranda (cont'd) SM-86-3 George G. Kaufman “Banking Risk in Historical Perspective” SM-86-4 Elijah Brewer III Cheng Few Lee “The Impact ofMarket, Industry, and Interest Rate Risks on Bank Stock Returns” SM-87-1 Ellen R. Rissman “Wage Growth and Sectoral Shifts: New Evidence on the Stability of the Phillips Curve” SM-87-2 Randall C. Merris “Testing Stock-Adjustment Specifications and Other Restrictions on Money Demand Equations” SM-87-3 George G. Kaufman “The Truth About Bank Runs” SM-87-4 Gary D. Koppenhaver Roger Stover “On The Relationship Between Standby Letters ofCredit and Bank Capital” SM-87-5 Gary D. Koppenhaver Cheng F. Lee “Alternative Instruments for Hedging Inflation Risk in the Banking Industry” SM-87-6 Gary D. Koppenhaver “The Effects of Regulation on Bank Participation in the Market” SM-87-7 Vefa Tarhan “Bank Stock Valuation: Does Maturity Gap Matter?” SM-87-8 David Alan Aschauer “Finite Horizons, Intertemporal Substitution and Fiscal Policy” SM-87-9 Douglas D. Evanoff Diana L. Fortier “Reevaluation ofthe Structure-ConductPerformance Paradigm in Banking” SM-87-10 David Alan Aschauer “Net Private Investment and Public Expenditure in the United States 1953-1984” SM-88-1 George G. Kaufman “Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options” SM-88-2 David Aschauer “Public Spending and the Return to Capital” SM-88-3 David Aschauer “IsGovernment Spending Stimulative?” SM-88-4 George G. Kaufman Larry R. Mote “Securities Activities ofCommercial Banks: The Current Economic and Legal Environment SM-88-5 Elijah Brewer, III “A Note on the Relationship Between Bank Holding Company Risks and Nonbank Activity” SM-88-6 G. O. Bierwag George G. Kaufman Cynthia M. Latta “Duration Models: A Taxonomy” G. O. Bierwag George G. Kaufman “Durations ofNondefault-Free Securities” ^Limited quantity available. **Out of print. 1 Staff Memoranda (cont'd) SM-88-7 David Aschauer Is Public Expenditure Productive?” SM-88-8 Elijah Brewer, III Thomas H. Mondschean Commercial Bank Capacity to Pay Interest on Demand Deposits: Evidence from Large Weekly Reporting Banks” SM-88-9 Abhijit V. Banerjee Kenneth N. Kuttner Imperfect Information and the Permanent Income Hypothesis” SM-88-10 David Aschauer Does Public Capital Crowd out Private Capital?” SM-88-11 Ellen Rissman Imports, Trade Policy, and Union Wage Dynamics” Staff Studies—A series of research studies dealing with various economic policy issues on a national level. SS-83-1 **SS-83-2 Harvey Rosenblum Diane Siegel ‘Competition in Financial Services: the Impact of Nonbank Entry,” 1983 Gillian Garcia ‘Financial Deregulation: Historical Perspective and Impact of the Garn-St Germain Depository Institutions Act of 1982,” 1983 *Limited quantity available. **Out of print.
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