Regional policy from a supra-regional perspective

The issue of the interplay between the two objectives of equity and efficiency for national policy-makers in charge of regional policy is becoming topical once again in regional economics. This paper first reviews this issue theoretically and looks at recent literature contributions to show that, although many advances have been made, little attention has been paid to the effects of regional structural differences on the trade-off between the two objectives. Then, to demonstrate that differences between the regions of which a country is composed may influence the results of the models, a new simple short-run two-country four-region model is introduced to study the trade-off (differentiating for different regional productivity and different strengths of agglomeration economies-which are innovatively modelled on the demand side). In this short-term model, the national policy-maker can affect entrepreneurship through the set-up costs of firms. Similarly to the traditional literature, for countries composed of identical regions, spatially dispersed allocations of public support to production are more efficient with low agglomeration economies whereas spatially concentrated allocations are more efficient with high agglomeration economies. As the regions become different, however, unbalanced allocations of public support to the most advanced region become more efficient even in the case of relatively weak agglomeration economies, until, when regions are sufficiently different, the most efficient allocation of public support to production is always concentrated in the most advanced territories. If some sort of compensating mechanisms were available, in the short-run the policy-makers could decide to support the competitiveness of the already more-productive regions and transfer income to the lagging ones. All these issues are studied with reference to southern Italy ("Mezzogiorno") and eastern Germany (former DDR) in order to show not only the similarities with the model's predictions but also the many differences, resulting from the far greater complexity of actual development processes.