An Institutionalist Perspective on Regional Economic Development

Until recently, regional policy has been firm-centred, standardized, incentive-based and state-driven. This is certainly true in the case of the Keynesian legacy that dominated regional policy in the majority of advanced economies after the 1960s. It relied on income redistribution and welfare policies to stimulate demand in the less favoured regions (LFRs) and the offer of state incentives (from state aid to infrastructural improvements) to individual firms to locate in such regions. Paradoxically, the same principles apply also to pro-market neoliberal experiments which have come to the fore over the last fifteen years. The neoliberal approach, placing its faith in the market mechanism, has sought to deregulate markets, notably the cost of labour and capital, and to underpin entrepreneurship in the LFRs through incentives and investment in training, transport and communication infrastructure, and technology. The common assumption in both approaches, despite their fundamental differences over the necessity for state intervention and over the equilibrating powers of the market, has been that top-down policies can be applied universally to all types of region. This agreement seems to draw on the belief that at the heart of economic success lies a set of common factors (e.g. the rational individual, the maximizing entrepreneur, the firm as the basic economic unit and so on). The achievements of both strands of such an ‘imperative’ approach (Hausner, 1995) have been modest in terms of stimulating sustained improvements in the economic competitiveness and developmental potential of the LFRs. Keynesian regional policies, without doubt, helped to increase employment and income in the LFRs, but they failed to secure increases in productivity comparable to those in the more prosperous regions and, more importantly, they did not succeed in encouraging self-sustaining growth based on the mobilization of local resources and interdependencies (by privileging non-indigenous sectors and externally-owned firms). The ‘market therapy’ has threatened a far worse outcome, by reducing financial transfers which have proven to be a vital source of income and welfare in the LFRs, by exposing the weak economic base of the LFRs to the chill wind of ever enlarging free market zones or corporate competition and by failing singularly to reverse the flow of all factor inputs away from the LFRs. In short, the choice has been that between dependent development or no development.