The objective of this essay involves a thorough and profound analysis of some fundamental arguments claimed by Albert Hirschman and Gunnar Myrdal. Myrdal claims that "the play of forces in the market normally tends to add rather than reduce regional inequality" and Hirschman that "non-market forces may be just as automatic as market forces". In order to analyse those two statements so as to reach useful inferences some of the most essential issues, developed by Myrdal such as the principle of circular and cumulative linkages and spread and backwash effects, as well as Hirschman's trickle-down and polarisation effects, will be investigated.
Regional inequality is a disparity between the standards of living applying within a nation. It is difficult to quantify the prosperity or poverty of a region, but there are two basic indicators. The first is unemployment, which has been used in Britain as a symptom since the 1920s. Most UK regional policy has concerned the alleviation of unemployment. The second indicator is per capita income, which in Britain generally falls to the north and west.
Other factors indicating disparity include the type of industry and its growth or decline, numbers of young people in further education, housing standards, and the quality of the environment. Some would assert that economic development brings about regional inequality, such as Hirschman and Myrdal. Both of them state that regional inequality cannot be utterly comprehended if attention is restricted to market forces. "Any tendency to regional equality may owe more to non-market forces than to price signals and the search for maximum return.
Any tendency to regional convergence, Myrdal states (1957, pp. 47-48), may be a contrived or 'created harmony', with 'complex networks of state interferences' emerging to protect vulnerable groups and weaker regions. "1 Hirschman brings particular attention to the idea that non-market forces arise as expected and anticipated, and yet, without meticulous and intentional decision. In addition, he claims that non-market forces may be relatively automatic as market forces. When the market does not succeed in achieving an equitable balance, society is able to detect that by understanding the gap.
However, it is state's policies and institutions role to endeavour to bridge it or emulate the disparities generated. This statement concerns various shorts of balance and is primarily linked to Myrdal's claim. Hirschman and Myrdal introduce a concealed and ongoing insight on the opposing forces, which encourage regional imbalance (backwash and polarising effects), and regional balance (spread and trickle-down effects) and the function of non-market forces in assessing comparative potency.
Myrdal in an attempt to illustrate and interpret the economic and industrial disparities that occur among different regions established the principle of circular and cumulative causation, while Hirschman used the term backward and forward linkages. The new economic activity and its multiplier effect help to expand the service sector, especially as local growth increases the size of the economy sufficiently to meet the threshold for new service activities. Increases in population in turn can spark a secondary multiplier effect as new investment enters the economy to serve expanded demand.
This circular and cumulative causation process captures the dynamics of regional growth. Conceptually, this effect captures the process whereby sectors are linked through flows of money and jobs. The effects therefore are primarily, if not exclusively, concerned with growth rather than development. Income, capital flows and especially employment are the principal variables considered. The size of a region's multiplier, however, varies with economic structure; it will be larger where control, information, and diversity are found, and will be smaller when regional structure is limited or narrow.
Hirschman emphasises that economic growth is typically unbalanced and, that development planning is only effective when it concentrates its efforts on key industries with ample backward and forward linkages to other industries. In a much quoted observation, Hirschman noted that the sociology of successful economic development truly involves the calling forth and enlisting for development purposes resources that are scattered, hidden, or badly utilised.
A backward linkage refers to the inputs which an industry employs, which connect it with the producers of raw materials, machinery, and semi-finished goods; a forward linkage refers to the output which an industry sells to other industries rather than to final consumers. Hirschman's ideas on unbalanced geographical growth and more specifically the core-periphery relationship that accompanies it has drawn more debate and conflicting views than any other part of his work from both theoretical and practical fields.
Myrdal, a contemporary of Hirschman, acknowledged the existence of the trickle-down and polarisation effects and he called them spread and backwash effects respectively. He disagreed with Hirschman however on the fundamental point of whether the trickle down outweighed the polarisation effects. Hirschman described Myrdal's ideas as being overly-dismal but Myrdal based his conclusions on the principle of circular and cumulative causation, a type of vicious circle which saw the more advanced regions become more advanced while the peripheral regions fell further behind.
Myrdal also pointed to the prejudicial factors which developed against such peripheral regions as being another obstacle to progress. Both Myrdal and Hirschman agreed on the importance of political forces in creating convergence on a regional and national level. Hirschman examined unbalanced growth in its geographical form as he built on Perroux's theory of Growth Poles. The development of these growth poles was, he contended, natural, inevitable and desirable. The logical corollary of this was the creation of a centre-periphery relationship.
Such a relationship could have positive (trickle-down) or negative (polarisation) effects on the periphery. Hirschman believed that the polarisation effects, inability to compete, loss of resources to the core, would be more than compensated for by the trickle-down effects, the natural spread of growth and investment, and the development of complementary industries. If disparities continued over an extended period of time government economic policy would be used to develop convergence. Furthermore, Myrdal's statement was that without government intervention, intra-regional disparities in income can actually increase with integration.
The result depends on the spread and backwash effects from more developed areas to less developed areas. The spread effect refers to the increased demand for products from less developed regions and the transmission of technological knowledge from more developed areas to less developed areas as a result of integration. The backwash effect refers to the movement of capital and skilled labour from the less developed areas to the more developed areas, and to changes in the location pattern of industries to the detriment of the less developed areas as a result of integration.
The backwash theme involves labour, capital and trade as indicators of increase regional inequality and thus, cumulative process operates advantageously for some regions and disadvantageously for others. Consequently, due to the backwash effects the best of labour, capital and trade are "migrating" to other regions, making the development of certain regions very problematical. "Labour" migration is accepted to be as one of the most reliable indicators because people are assumed to be able and prepared to move from one region to another in search of work.
However, migrants are not representative of the whole community they leave - they tend to be younger, more self-sufficient and better educated. Thus, it can be seen that through migration the best labour is "migrates" from poorer regions and to more developed and advanced regions. This results in generating an unfavourable distribution in the age and amount of population and human resources. As for the capital distribution, investments will increase hastily in the more advanced regions, while in the less advanced the investment will remain low.
The fact that more capital will be spent in the advanced regions will enhance regional inequalities. As far as trade is concerned, the industrial advantage of the more developed regions will stimulate all trade activities, and hence the industries of weaker regions will be dissatisfied, resulting once more, in the generation of regional inequalities. Conversely, spread effects aid towards the reduction of regional inequality. A term coined by Myrdal (1975) to describe the filtering through of wealth from central, prosperous areas, to peripheral, less wealthy areas.
Thus, increased economic activity at the core may stimulate a demand for more raw materials from the periphery, and technological advance in the core region may be applied to other regions. A belief in the spread effect lies behind the planning of growth poles; in a sense, the spread effect is the spatial equivalent of trickle-down economics. Therefore, it is very important how high the level of the economic development of a region is, because as stated by Myrdal "the higher the level of the economic development that a country has already attained, the stronger the spread effects will usually be. For instance, the industrial development of North Britain may benefit the less developed regions through increased demand for their products and this, in turn, may allow for improvements of production methods, and may also permit the establishment of processing facilities. However, in evaluating the importance of these spread effects, a very important consideration must be the supply of capital that is required for improving production processes and establishing processing plants.
In northern Britain, there is a limited supply of capital. This limitation may cause new capital to move to regions favoured by agglomeration economies, and unfavourable backwash effects may reduce the benefits from dynamic external economies of a larger market. Additionally, according to Hirschman (1958) national competitive advantage may derive through education, which has the unique advantage of being homogeneous and be equally distributed to the population of different regions within a country.
He also claims that education is the most apparent of all common services provided to the population of a country and should be strongly supported because a well-educated labour force arouses a superior and of high quality production. Ultimately, another claim of Hirschman is that non-market forces within the nation imply that taxes should be below expenditure in comparatively poor regions, and higher in more prosperous ones.
He also notes that "It is our contention that non-market forces are not necessarily less automatic than market forces"2. The form of automatic stabilisers varies from nation to nation, but there still is an average framework of intrinsic backing, whose function is to regulate taxes and augment public expenditure in regions, which suffer the loss of market share. Institutional features of the economy which without explicit government intervention automatically act to dampen down fluctuations in employment and national income.
Examples of these are (a) aggregate unemployment benefits and welfare payments, which automatically increase when unemployment increases and fall when unemployment falls, so that this part of government expenditure adjusts automatically in the desired directions to offset in part changes in other components of aggregate demand, and (b) government taxation, which falls in total as national income falls and rises as national income rises, both because the burden of income taxes changes and because, with changes in consumption expenditures, sales tax revenues also change.
Since an increase in taxation tends to restrain expenditure, while a fall in taxation stimulates it, we again have 'automatic' factors counteracting inflationary and deflationary pressures in the economy. These built-in stabilisers rarely have sufficient force to render positive corrective policies unnecessary. In conclusion, it can be understood that both Myrdal and Hirschman offer profound standpoints on the conflicting forces supporting both regional balance and imbalance.
It is obvious that a balanced regional development may be generated with a lot of effort and those regional imbalances 'surrender' to the natural amendment of labour and capital. Particular attention is brought to the individual flexibility in response to price signals. Automatic stabilisers are used as adjustments to fiscal policy that occur automatically during business cycles and smooth the path of economic growth.
For example, in a recession the government will pump money into the economy by paying more in unemployment benefit without a change in policy. Automatic stabilizers counterbalance the feedback effect of changes in economic activity, although in practice their effectiveness is limited. Lastly, regional transitions, such as capital reallocation may enhance the educational and even the health system of a country or a region, as well as improve resource qualifications in less developed regions.