THE EFFECT OF REGIONAL SPECIALIZATION ON LOCAL ECONOMIC ACTIVITY: A STUDY OF CHILE

Abstract

Recent concern with increasing disparities between rich and poor nations has been paralleled by attention to differences in living standards among regions within nations. Accelerated development of lagging regions has been advocated both to meet pressures from the lagging regions themselves and as a means to promote national interests, for example, through the expansion of markets. While in richer countries the means to promote regional development are often available, this is usually not the case in poor countries where, given limited resources and possible conflicts between national and the particular interests of lagging regions, the promotion of regional development is a delicate and complex issue. However, it is our contention that hidden potential for regional growth lies in many poor regions themselves, and that national policy should be designed to build on such potential. Though most theorists emphasize the efficiency conflict between development of poor, outlying regions and development of the nation, and others defend programs for backward areas only with equity arguments [4, 7, 9, 10, 15, 20, 21, 22, 29], a few have contended that the development of backward regions may be nationally efficient, too. Rahman notes, for example, that if savings rates vary from region to region, then national income growth may not be maximized by concentrating investment in the country's most productive region [32]. Vietorisz shows, by similar arguments, that if coefficients describing savings behavior, capital absorption capacity, and productive characteristics of competing regions are allowed to shift, then optimal growth considerations may dictate heavy investment in initially inefficient, underdeveloped regions [40]. Though these arguments for investment in backward regions are difficult to test, when they are combined with notions of consumption as a productive investment (producing changes in health, skills, etc.) and notions of shifting institutions [3] they can be quite persuasive. One can also look at regional development from another direction, to consider the importance of local economic activity for welfare, for local development,