Bridging the Economic Divide Within Countries: A Scorecard on the Performance of Regional Policies in Reducing Regional Income Disparities

Abstract

Regional inequalities represent a continuing development challenge in most countries. There is a presumption in development economics that decentralized fiscal arrangements would lead to ever-widening regional inequalities. This paper provides an empirical test of this hypothesis. We conclude that regional development policies have failed in almost all countries, federal and unitary alike. Still, federal countries do better in restraining regional inequalities, because of the greater political risk these disparities pose for such countries. Our findings also suggest that countries experiencing divergence tend to focus on interventionist policies, while those experiencing convergence have taken a hands-off approach to regional development and instead focus on promoting an economic union by removing barriers to factor mobility and ensuring minimum standards in basic services across the country.