Half a century of economic theory suggests, and real-world experience – in places as diverse as Ireland, Japan, the Netherlands, South Korea, and US states such as Georgia and Michigan – confirms, that lagging economies naturally catch up with advanced ones. Even if advanced nations or regions grow quickly, lagging ones should grow even more quickly.
Under certain conditions, a lagging region should close the gap in economic performance with its relevant leading economy by 2 to 3 percent annually … Yet Atlantic Canada’s economy has converged with that of the rest of Canada at less than half that rate despite – or, more likely, because of – massive federal intervention.
Lagging economies that are closing the gap with advanced economies share a number of characteristics:
• an educated populace or, at a minimum, an emphasis on raising the educational standard of the population;
• a market economy and limited government interference in markets;
• the rule of law;
• property rights; and • stable institutions, including political stability.
Ottawa’s policies, however, have actually undermined some of the necessary conditions for convergence, by encouraging development by bureaucrats rather than by sound business planning, by regulating without full regard to long-term benefits, and by failing to develop clear systems of property rights in resources such as the fishery.
In the right setting, convergence occurs as a result of the spread of productive ideas and methods, the creation of profitable opportunities in economies with chronic underinvestment, the paying of competitive wages that draw capital, and the development of an increasingly skilled labour force as investment creates jobs.
Of particular relevance are the different ways in which labour and capital combine and fructify in different kinds of economies.
When labour is abundant relative to capital, labour costs should be relatively low and potential returns (profits) on the scarcer resource (capital) should be relatively high. The profit motive attracts capital, which creates jobs and economic growth. This mechanism, however, can be derailed by policies that either inflate the cost of labour or reduce returns on capital.
For a practical example of convergence, take Ireland, whose economy, until just a few years ago, was among the walking dead of Eurpoe. Now, it is one of the most successful in the developed world. This turnaround did not come about accidentally or because of fortuitous resource discoveries, but because of consistent, deep, and widespread policy changes that reformed Ireland’s economy from top to bottom.
Ireland’s economic purgatory, like its subsequent remarkable recovery, was policy induced. Getting the policy framework right made the difference between productivity and prosperity on the one hand, and unemployment and decline on the other. The foreward to an AIMS study summed up the right policy in the following way:
[The Irish] saw that trying to prop up dying industries was a mug’s game. Public debt needed to be brought under control, taxes lowered, and excellent value offered in public services when measured against the taxes paid. Politics needed to be banished from decisions about where and how to invest, whether in public infrastructure or private industry. Work incentives needed to be improved by reforming social welfare. Profitability in the private secotr needed to be improved. And costs, including labour costs, needed to be kept keenly competitive. The sum of these measures was a policy environment in which business had every reason to invest and build productive capacity, while workers had every reason to work hard and build their job skills. As the capital invest ment grew and workers became more skillful, real wages rose along with tax revenues, and a virtuous circle was created. Growth bred more growth, success bred more success.
Ireland’s turnaround did not happen because of governemtn spending, transfers from the European Union, or an activist ‘economic development policy’. Rather, Ireland, like other jurisdictions that have harnessed the forces of convergence, focused on getting the policy right and then letting employers and workers respond to the signals of the marketplace.
In Atlantic Canada, however, much ‘economic development policy; has been based on the government-driven model, which largely explains why, despite heroic efforts by the federal government to encourage economic growth, the region has failed to converge strongly with Canada’s ‘have’ provinces. In the postwar era up to 1971, Atlantic Canada’s per capita economic growth was strong, consistently outpacing the rest of the nation. Only when Ottawa dramatically increased regional subsidies in the early to mid-1970s did the region’s growth falter relative to the rest of Canada.
Programs such as employment insurance, equalization, and regional development initiatives aimed at accelerating convergence and minimizing the economic disparity gap have instead encouraged Atlantic Canada to rely on Ottawa’s generosity and have obstructed long–term skills training and enhancement. Former New Brunswick premier Frank McKenna, in his 1997 farewell speech, observed that dependency has become a narcotic to which Atlantic Canadians have become addicted.
The evidence demonstrates that success for Atlantic canada can come only from policies that focus sharply on productivity, investment, competitiveness, appropriate social support, removing disincentives within equalization, and eliminating barriers to the free functioning of the labour market, so that the region’s unemployment can be absorbed and labour shortages eliminated.
Atlantica: The International Northeast Atlantic Canada is part of a region that AIMS’ authors call ‘Atlantica’, which broadly encompasses the Atlantic provinces, eastern Quebec, the northern tier of the new England states, and northern new York state.
Geography has placed Atlantica near the centre of the two largest trading relationships in the world. On the one side is the Canada–US trading relationship, the largest in the world at $2 billion per day; on the other is the trading relationship between North America and the European Union which accounts for 40 percent of total world trade.
Atlantica’s relative degree of underdevelopment can be explained in large part by the failure of policy makers to think of the region as a whole, where local success depends on working effectively across boundaries to achieve the economies of scale, transportation efficiencies, and other regional coherences that more successful regions – such as the US Midwest and Ontario or Texas and Mexico – take for granted. In short, Atlantica’s political and natural disadvantages have been exacerbated by the Canadian and US governments’ relative disregard for the region’s economic requirements. On the Canadian side, the cumulative effects of more than a century of policies favouring the population centres of Quebec and Ontario are crumbling infrastructure and provincial governments and electorates corrupted by large transfer payments. On the US side, the northern New England states have been the losers in political battles with richer, more powerful states such as California, Texas, New York and Massachusetts.
Free trade and globalization now give Atlantica an opportunity to establish its rightful place in the continental economy. If the border cannot be made to disappear, its impact must at least be blurred.
The introduction of vehicle-handling efficiencies and the building of new crossings at the border will help, but the concept is much bigger than that. Ideally, commercial relationships should be equally attractive across provincial-state lines between the two countries as they are across political boundaries within the two countries. Canada’s Atlantic provinces and the US northeast must become as economically integrated and coherent as is, for example, southwestern Ontario and the US Midwest. Only then will Atlantica realize its economic potential.
In an election campaign that has centred on the Liberal [federal] government’s cavalier handling of public money, you might think a guy who left Cabinet amid accusations of nepotism would be a little sheepish. Not Lawrence MacAulay.
Seeking his fifth mandate as the MP for Cardigan in eastern PEI, the former Solicitor-General continues to deny any wrong-doing and is asking voters to judge him on his impressive record of bringing federal dollars to the riding.
“I thought when I was elected here, it was my job to make sure that this district received its fair share”, he said yesterday as he took a break from campaigning. “The truth is, we got some. It’s quite a thing. I would never in my wildest dreams have thought that I could have been criticized for taking too much to my district.” … It is true that people assess their politicians differently on the tight–knit Island, where patronage is so embedded that snow–plow operators and road construction crews can lose their jobs for supporting the wrong party.
Mr. MacAulay’s newspaper advertising has hammered home the message that he has delivered the goods for PEI since being elected in 1988, boasting that the Liberal government spent $70-million on job creation in the riding.
Kendall Docherty, manager of Royalty Hardwoods Ltd., saw some of that money when ACOA, the federal government’s regional development arm in Atlantic Canada, helped fund an expansion three years ago. The subsidy helped increase the company’s.
Workforce to 35 from five, he said. “I believe PEI as a whole will support the Liberals because they’ve done a good job for us.
They’ve certainly helped the Island”, he said. … The notion that political considerations influence Ottawa’s regional-development in Atlantic Canada is more than folk wisdom, according to new research by economists Kevin Milligan of the University of British Columbia and Michael Smart of the University of Toronto.
Their analysis of ACOA grants from 1998 to 2000 found that ridings represented by a minister received more funding per capita, as did ridings where the previous election was closely contested.
The economists theorize that governments focus on such swing ridings because they can get more bang for their buck.
“If we decide as a society that we want regional development programs, I think it would be best to have a way of doing that that doesn’t favour one set of people over another on an arbitrary basis”, Mr. Milligan said in an interview.
5. Main Conclusions and Economic Policy Recommendations The research findings regarding convergence processes in Russia’s regions and decomposition of their growth allow conclusions and recommendations as follows:
1. In the period in question (1994–2002), the average (across all the regions) Gross Regional Product per capita level (in constant prices) has been growing, albeit unevenly. A steady growth of the index was noted since 1999.
2. Since 1999 the growth in the average level of GRP per capita has been accompanied by a growth in the median value of per capita GRP. This means that the growth in the level became possible thanks both to a further rise in the welfare of the most prosperous regions (for instance, Moscow and oil producing regions) and the increase in per capita income in poor regions (whose income levels initially had been below the average level).
3. The dispersion of regions in terms of per capita income (in constant prices) has remained unimodal for each year of the period in question, i.e. there exists the trend to concentration of values of GRP per capita around the average (growing) value. According to Quah, this forms a necessary prerequisite for matching the hypothesis of convergence.
4. However, the analysis of the annual dynamics of dispersion of GRP per capita does not allow to argue that the differentiation between regions in terms of income level was declining. Furthermore, in 2002 the differentiation of this particular index showed a drastic rise vis--vis the prior years and reached its maximum value over the period of observations. Such a result, as well as those of other tests (Jini coefficient, Tale coefficient, etc.), testifies to the RF regions’ failure to meet conditions of the -convergence hypothesis.
5. Results of the regression analysis show that the concept of an absolute (unconditional) –convergence is accurate, as long as Russian regions are concerned. In other words, during the period in question, the regions with a 1994 lower GRP per capita rate have demonstrated higher growth rates of the respective index. The bias from results of the tests on presence of – convergence in this particular case can be explained by the fact that income levels of some regions (most likely, those that enjoyed the highest income level) have found themselves affected by new “shocks”, rising oil prices in particular, which has dramatically boosted the oil producing regions’ revenues and determined the rise in income differentiation across the whole sample, while growth rates in such regions over the period in question were likely to remain at a level not higher than those in poorer regions.
6. An additional analysis of the impact of the federal financial aid and the budget investment policy on GRP growth rates (the hypothesis of the conditional –convergence) showed the absence of such a correlation. More than that, assessment results were likely to evidence a negative effect of both the federal and regional budget policy (or its employment for purposes other than the encouragement of economic growth) on regional growth.
7. The analysis of convergence processes showed that despite the trend to income equalization, at least, among most regions, the processes of differentiation of regions with extreme (minimummaximum) values of indicators nevertheless intensified. Accordingly, while designing an economic policy, the RF Government, the RF Ministry of Economic Development and Trade and the RF Ministry of Finance should be attentive to the fact that the focus on averaged indices is not an efficient tactic, as it does not allow identification of a policy optimal for each of the groups of regions. This necessitates implementation of a more effectiveness equalization (redistribution of funds) policy towards the “richest” and “poorest” Subjects of RF.