Economics Stack Exchange Archive

Does it make sense to support regional development?

Both the government of Denmark and Norway spends significant amounts of money on regional development. For example, the bridge below was built to an island with 72 inhabitants. enter image description here

The cost of this bridge was approximately 550.000$ per person.. My question is not whether it made sense to build this bridge, but whether it can make economical sense for a government to support remote regions. Usually this is done by taking money from the capital region in order to support the more remote regions. I am not asking about special cases where one has for example discovered a mineral in a region and the government wants to invest in order to profit from this mineral, but when the government in general has a policy of supporting remote regions, just because they are remote.

Answer 713

To start with the inevitable aphorism: it will make sense sometimes, and that will depend on a bunch of circumstances.

And to take the top-level view, Norway and Denmark do, as you say, both invest a lot in regional development. Both are very prosperous countries, with some of the highest median standards of living in the world, and Denmark in particular repeatedly scores highest in the world on quality of life (taking into account direct economic measures as well as other measures). So it would be very hard to make a case that their regional development has been very detrimental to their economies.

It will depend on where a country is within its economic cycle. At the moment, in Europe, rates of return are extremely low. Which means that the discount rate applied to long-term investment is also very low. And that means that large, long-lived capital schemes that carry on delivering benefits for many decades, will show a much better Net Present Value. To take that bridge, for example, that cost NOK 230m (US\$40m at exchange rates of 2011-12-09); with a discount rate of 2%, then that amounts to just NOK4.6m (US\$0.8m) per year. Now, if most of the capital expenditure stayed within Norway anyway, and the bridge creates a few permanent jobs, then the business case will quickly stack up.

Regional development also plays a role in compensating for the economic inefficiencies that come about from having economically-disparate regions sharing a common currency - see Does the financial system require different currencies to work properly? for related issues. Now, if they had different currencies, then exchange rates could vary to take account of different regions being at different parts of their economic cycle. Interest rates could also vary between regions. So there would be several additional adjustment mechanisms that would enable one region that was economically suffering, to have higher investment and cheaper exports to regions that were doing better. When those regions share a currency, and there is no exchange rate to vary, and no opportunity for differential interest rates, then regional development can provide inter-regional adjustment mechanisms, and improve economic efficiency. Particularly if there are impediments to the movement of labour between regions.

And finally, high inter-regional variations in wealth can create a wide variety of social, criminal and health problems for all regions concerned; reducing wealth-differentials can reduce those problems, making everyone better off as a result (see The Spirit Level for more on this).

That's not to say by any means that all regional development is desirable or economically successful: there are plenty of examples of failure too. And that can happen due to a variety of reasons: incompetence, corruption, bad timing, bad luck.

Answer 712

In general, the answer is probably no. In Alaska, USA, a similar boondoggle was called a “bridge to nowhere.”

The $550,000 cost per person for the bridge was rather high. To assess its economic impact, we need to know a couple more things. First, how much does it save a year (e.g. in transportation costs) for each of the 72 people on the island? Let’s say it was as much as $5,500 (a high estimate). Then the return on investment (ROI) is only 1%. (Maybe it’s more like $550 a year, in which case the ROI may be only 0.1%).

The other thing it would be helpful to know is how many people will be induced to commute to the island by the new bridge. If it’s 720 people, then the per-person cost of the bridge drops to $55,000, which might make it acceptable. On the other hand, if it’s 7 people, it might not be worth pursuing.

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