Explaining Disparities in Regional Growth:

(A Supplement to Mills-Ch. 3)

What Determines Regional Flows? Two Polar Views

1. One view assumes that commodities are free to flow but resources are immobile. The law of comparative advantage results in specialization in areas of relative resource abundance and trade of commodities with other regions also specializing in commodities in which they enjoy a comparative advantage.

2. The Hechscher-Ohlin Theorem says that in the long run immobile resources become embodied in those products that require large amounts of the abundant factor. Hence, labor-intensive products would be shipped from Mexico as their dominant export. Commodity flows would eventually equalize wages among regions because labor short countries would lower their demand for labor while factor abundant countries would increase their demand for labor.

3. An opposite view emphasizes the mobility of resources rather than the flow of commodities among regions. In a world of perfect information and no relocation costs, flows of resources will move from the region with lower compensation to the region with higher compensation, equalizing differences.

4. The simple factor mobility model accurately describes many location pulls, but it hides many impediments to the movement of resources. (Will a free trade agreement stop the flow of immigrants from Mexico?)

Economics of Migration

1. Economist assume that relative advantages versus disadvantages among regions encourage migration. However, migration occurs at specific periods of a person’s life: graduation, marriage, birth of children, retirement, death of spouse. Each of these "passages" involves different motives for movement.

2. The most obvious economic motives are wages and employment opportunities that either pull or push persons among regions when differential exist.

3. Evidence suggests that the pull of higher wages or employment opportunities has a greater effect on migration than the push of low wages or lack of current employment opportunities.

4. The pull also tends to increase during economic expansion and decline during economic contraction. Employers and individuals will take more career risks during expansion.

5. Migration is also highly correlated to the age distribution of the population.

6. Other nonwage factors affecting migration are fringe benefits, cost of living, quality of life, future opportunities, cost of relocation (proximity to relatives), and the "beaten path" effect of following others, especially friends or relatives.

The Harris-Todaro Model tries to explain migration problems facing developing countries in which persons crowd into areas characterized by high unemployment rates.

1. The Harris-Todaro model postulates that migration occurs when the actual wage of the place of origin is less than the expected wage of the place of destination. New residents believe that they have the same probability of being employed as existing residents, but, in reality, the glut of new workers will increase the unemployment rate and lower wages for all residents.

2. The Harris-Todaro Model implies that it may be difficult to prevent rising unemployment in "high" wage areas open to migration.

Gross Migration versus Net Migration

1. Higher growth areas have a higher rate of in migration, out migration, and net migration.

2. The greater cross migration in high growth areas is also correlated with a more "footloose" population base (younger, without children, sensitive to small changes in opportunities because of fewer relocation costs.)

3. Low growth, rural areas have less mobile populations, but younger persons grow up an leave as out-migration dominates.

Do Opportunities Equalize?

1. Some believe that migration to high-opportunity regions will not necessarily reduce economic differentials between regions as predicted by the neoclassical model but, in fact, add to the differential. How?

a. Larger more diverse population of higher growth areas increases the demand for goods and services, raising their costs as well as nominal wages.

b. High growth areas experience greater agglomeration economies and productivity increases that offset higher nominal wages.

c. The selective nature of migration may result in prosperous areas attracting more productive and enterprising individuals (brain drain).

d. In declining areas out-migration further reduces economic opportunities and reduces the incentive for new businesses seeking a site location.

The Mobility of Capital

1. Capital means investment in plant and equipment (the physical inputs in the production function.)

2. Money capital can be transferred from one region to another to finance real capital investment. But, it can also be transferred in return for goods and services (or the promise of future goods and services.)

3. Speculative motives for financial investment may outweigh real motives for capital investment and can result in short-run problems for the debtor region. (Mexico)

4. Real resources for capital expansion (construction labor and materials) may come from local areas.

Obstacles to Capital Mobility

1. In theory, risk adjusted rates of return on capital would equalize. In reality, differences in rates of return differ among regions. Why?

a. The pattern of past investments results in sunk costs that affect mobility or the willingness to admit that an existing plant is failing.

b. Agglomeration economies with other investments or infrastructure in a region help account for regional differences.

c. Lenders may be reluctant to extend loans to businesses located in some areas because of perceived risks or bias (discrimination).

d. Rural areas may be underserved by financial institutions or business lenders to small firms that require face-to-face contact. This will increase transactions costs for small investors, especially for venture capital.

e. Firms may have a preference for reinvesting profits internally at existing locations, even though higher returns could be found elsewhere.

Innovations and Ideas

1. Innovation is the incorporation of ideas (inventions) into real investment.

2. Innovation may not spread uniformly and rapidly as predicted by competitive economic models.

2. Spatial patterns exists in which innovations tend to originate in larger metropolitan areas. Why?

a. The greater variety of people, ideas, and resources in larger areas are an important ingredient for development of new innovations.

b. On the demand side, urban areas provide greater expected rewards for new innovation because the market for new products and processes is more proximate.

c. On the supply side, there is greater availability of support activities needed for innovation (technical engineers, marketing firms, legal expertise, venture capitalists, and being a part of the national information loop)

3. Innovations spread three distinct ways.

a. Consumer-oriented innovations tend to spread radially to nearby places due to proximity and lower information costs, especially when strongly influenced by the need for personal contact.

b. Innovations that require similar supporting services tend to move laterally among similar cities rather than to nearby smaller cities. (Hub aircraft cities)

c. Decentralizing innovations may move from larger to smaller nearby central places. Administrative/back office operations of a large health insurance firm headquartered in Dallas may locate in Waco.

Mobility and Spatial Policy

1. Will removing barriers to resource mobility increase aggregate economic performance?

2. Should public policy encourage more jobs in high unemployment areas or encourage people to move to growth centers?

3. The jobs-to-people approach that dominated the 1960s says that people are reluctant or unable to move. Enterprise zones is a return to this view.

4. The people-to-jobs approach was more prevalent in the 1980s, rejecting job-creating efforts in high unemployment areas as futile efforts to shore up an inefficient spatial distribution of resources.

5. How can the public sector encourage private investors to generate employment opportunities for the disadvantaged?

6. What about the flow of foreign investment into this country? Who owns America? U.S. became a debtor nation in 1986, but what does this mean? Is foreign investment a sign of strength and stability in this country or a threat to U.S. political sovereignty?