REGIONAL DEVELOPMENT AS A POLICY FOR GROWTH WITH EQUITY The State of Ceara Brazil as a Model

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REGIONAL DEVELOPMENT AS A POLICY FOR GROWTH WITH
EQUITYThe State of Ceara (Brazil) as a Model
Raphael Bar-El and Dafna Schwartz School of
Management, Ben-Gurion University
May 28, 2006 Annual Meeting of the Regional
Science Association The Israeli Section
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• Problem of persistent poverty and inequality
  together with economic growth.
• Poverty in the rural area.
• Inequality within and between cities.
• Inequality between regions.

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• It characterizes most countries in the process of
  economic growth (Cardoso and Helwege 1992,
  Selowsky 1981, Haddad and Hewings 1999 Schalk
  and Unitiedt 2000, Cannon, 1980)
• Basic explanation
• Big push theory (Rosenstein-Rodan, 1961)
  efforts for macro-economic growth lead to
  concentration in specific sectors and regions
  (Hasan and Quibria, 2004),
• Unbalanced growth theory (Hirschman, 1988)
  development as a chain of disequilibria.
• BUT
• The hypothesis of the existence of a Kuznetz U
  curve (growth causes inequality in first phase
  and equality in second phase) was not proved no
  trickle down effects and no evidence that such
  growth reduces poverty (Mold, 2004, Michel 1991,
  Lee and Townsend 1994, Gupta 2000, Hsieh and
  Hsing 2002)
• FURTHERMORE
• Inequality may lead to slower growth in the
  longer run, because of the exclusion of a large
  proportion of production factors from the growth
  process (Fishman and Simhon, 2002)

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• The question
• how to achieve both economic growth and reduction
  of poverty and inequality.

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Response 1

• Direct assistance to the poorest people
  remittances, welfare assistance.
• Tends to be non-developmental (Ellerman, 2004).
• Immediate effect of poverty reduction, no or
  negative effect on medium and long term growth
  and social balance.

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Response 2

• Direct assistance to the poorest sectors-
  agriculture and the rural sector
• Solution of agricultural development problems
  (Dorward et.al., 2004, Kidd et.al., 2004), land
  reform (Balisacan and Fuwa, 2004).
• Empowerment, education, increasing
  participation of poor labor force (Berner and
  Phillips, 2005, Timmer, 2004), assistance to
  rural skilled poor (Banik and Bhaumik, 2005), or
  young rural entrepreneurs (Burger and ONeill,
  2004), or other specific groups (Galster et.al.,
  2004).
• Hidden assumptions about the contribution of
  agriculture to economic growth and about the
  population distribution between the rural and the
  urban sectors.

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Response 3

• Stimulation of increased economic activity
• Supporting decentralized industrial development
  (Hasan and Quibria, 2004).
• Attracting FDI
• No filtering down effects and no evidence that
  they reduce poverty (Mold, 2004)
• Even when attracted to periphery, competitive
  capability is not created as reflected by
  unchanged technical efficiency (Haddad and
  Hewings 1999, Schalk and Unitiedt 2000).

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Response 4

• Urbanization and the growth pole strategy
• - Growth pole (Perroux 1955) complex of mutually
  related industries, stimulated by a leading
  specific one.
• - Urbanization as a response to the relative
  decline of the weight of agriculture in economic
  growth.
• Problems with the spatial configuration of poles,
  their external effects, their embedding in the
  urban system, mechanism for the transmission of
  growth at various levels, identification of
  policy instruments (Parr 1999).
• Backwash effects of urbanization (Myrdal 1957),
  need for a functional integration approach
  (Rondinelli 1990, 1993).

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Our thesis

• The roots of the problem are in the existence of
  a basic market failure in the process of
  adaptation to structural changes.
• The answer should be therefore in the solution of
  such market failure.

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A traditional model
Economic growth
Changing economic structure less agriculture,
more industry and later more services
Changing demographic spatial structure Increasing
urbanization
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• The market failure
• The changing economic structure at the state
  level is not met by a changing demographic and
  socio-economic changes, mainly in the periphery.
• increasing returns to scale are inherently
  associated with market failure that can be
  damaging for real income both in the short and
  the long run The extent of the inefficiency
  depends on the extent to which economic agents
  are able to internalize externalities (Venables,
  2005)

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In the local towns Insufficient urban basis,
inability to integrate into the state economy,
low productivity, low attractiveness to rural
population.
In RMF Inability to support economically the too
rapid population growth, increasing inequality
between population groups.
High concentration of economic activity and of
population
RMF
No sufficient conditions of urban support,
services, human capital
Inability of part of the population to
migrate, Inability of RMF to provide all
necessary support.
Non-farm employment
Rural area 6 agricultural product 32
agricultural employment No productivity growth
Insufficient conditions for industrial
competitivity low industrial growth, low
demographic growth
Migration to RMF
Migration to local city
Low potential
In the rural area Disguised unemployment, low
productivity, poverty.
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• Growth is accompanied with urbanization and
  diminution of the share of agriculture,
• But
• Insufficient urbanization growth
• Urbanization but with polarization
• Decreasing share of agricultural product but not
  sufficient decrease in agricultural employment
• Insufficient increase in industrialization
• Too low productivity growth

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The policy approach

• Structural adaptation of the interior to economic
  and demographic changes that are naturally
  required for development
• REGIONAL DEVELOPMENT

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Consequence 3 more balanced demographic growth
in RMF
1. Spatial restructuring reinforcing urban
centers
RMF
2. And supporting regional collaboration
increasing agglomeration economies
RMF
Consequence 2 deviation of migration- more to
local cities, less to RMF
Consequence 1 higher supply of employment
opportunities to the rural population in nearby
cities
3. Stimulating the increase of productivity
education, entrepreneurship, rural organization,
technology
Consequence 4 less excess labor force in the
rural area, higher productivity, higher income
levels
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Implementation some of the measures taken by the
State of Ceara

• Spatial urban restructuring 4 secondary urban
  centers, 13 tertiary centers, regional
  development plans.
• Establishment of a special ministry for regional
  development, and of regional offices, for
  regional coordination and budget allocation.
• Regional councils, for social regional
  participation.
• Support to entrepreneurial activity, for the
  solution of lack of access to public services.
• Support to technological advance.
• Support to rural tourism.

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Changing economic and demographic structures

• Urbanization increase of share of urban
  population from 33 in 1960 to 67 in 1999 and
  76 in 2004. Decreasing absolute number of rural
  population.
• Decreasing rate of growth of the MRF in the last
  4 years 10 as compared with 15 in the
  preceding 4 years.
• Illiteracy rate in rural area almost 50 in
  1997, 2.30 times that of urban area, decreased to
  2.05 in 2004 (lower that NE and Brazil).
• More than 10 years of schooling in the rural
  area 1.2 in 1997, 0.08 times that of the urban
  area (15.4), increased to 4.8 in 2004, 0.20
  times that of the urban area (23.5).
• Increasing share of interior in manufacturing
  activity.
• Share of agriculture in Added Value from 6 in
  1999 to 7 in 2004
• Share of agriculture in Employment from 40 in
  1999 to 31 in 2004.
• Rural employment in manufacturing increase from
  7 in 1999 to 11 in 2004 (no increase in NE- 7
  and in SE- 11).
• Employed in agriculture 20 live in urban area
  in 1999, 33 in 2004, with additional employment
  options (26 in NE, 43 in SE).

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Changing development indicators

• Decreasing income gap between rural and urban
  labor force from 28 in 1999 to 35 in 2004
  (better improvement as compared with NE and
  Brazil).
• Income p/c increase from R135 to 191 (41),
  compared with NE from 147 to 197 (34) and Brazil
  from 273 to 360 (32).
• Reduction of Gini index from 0.62 during 15 years
  to 0.57 in 2003, now lower than in NE (0.59) and
  in Brazil (0.58).
• Poverty decreased poverty rate from 71 in 1992
  to 57 in 1998 and 54 in 2003 (compared with NE
  from 68 to 55 and Brazil from 43 to 32).
• Gap between richest 20 and poorest 20
  Decreased from 26 in 98 to 21 in 2003 in Ceara,
  compared with a smaller decrease in Northeast (24
  to 22) and Brazil (28 to 25).

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Summing up

• Poverty and inequality are influenced by a
  failure of the free market system to adapt to the
  structural changes in the economy (diminution of
  agricultural employment).
• Supporting agriculture or the rural population is
  not a sufficient response (and in some cases may
  even be counterproductive) if a process of
  urbanization and industrialization is required.
• The policy model presented by the state of Ceara
  tries to respond to the failures of the market
  system with an integrated three dimensional
  policy
• On the macro level, urban spatial restructuring
  in order to create a basis for industry and
  services in non-metropolitan regions, and provide
  support services to rural activities.
• On the micro level, providing the local economic
  activities with support in factors that were less
  accessible in a basically agricultural
  environment industrial entrepreneurship,
  technological advance, and also rural
  entrepreneurial initiatives.
• On the regional level, strengthening the regional
  forces by promoting social capital organization
  of regional leadership, cooperation between the
  localities, coordination with the state level.