The Three Types of Regional Multiplier - Assignment Example

Regional Economic and Policy Three types of regional multiplier The three types of regionalmultiplier are: the economic base multiplier, Keynesian regional income and expenditure multiplier, and the input-output multiplier. 1.1 Economic Base Multiplier Economic base multiplier is useful in making economic forecasting. The disadvantage of using economic base multiplier could mainly result from an inaccurate data. This could be very misleading when used in an economic forecast. 1.2 Keynesian Regional Income and Expenditure Multiplier The relative merits of using the Keynesian Regional Income and expenditure multiplier model is that it determines the impact of exogenous shocks on a regional economy and provides a reliable prediction on the consequences of a policy action that aims to reduce regional disparities simply by using statistical data on regional income and employment. (Armstrong and Taylor, Ch.1 p.33) Predicting the consequences of a policy is essential on improving the economic performance of a region. This model is also useful in estimating the effect of expenditures of local and regional economies. The disadvantage of using the Keynesian model is the fact that the leakages from the regional expenditure could greatly influence the accuracy of the computation. (Armstrong and Taylor, Ch.1 p.13) These data are difficult to obtain. 1.3 Input-Output Multiplier The ‘Input and Output multiplier’ is useful in providing a detailed industry-by-industry breakdown of the projected effects of changes in the demand of goods and services. (Armstrong and Taylor, Ch.2 p.43) This can be achieved by constructing sectoral output multipliers and household income multipliers. This benefit of using this type of multiplier model is its internal consistency since all factors that affect the final demand are recorded. (Armstrong and Taylor, Ch.2 p.57) The disadvantage of using the input and output multiplier includes the fact that there are some limitations when it comes to data gathering. (Armstrong and Taylor, Ch.2 p.56) Data gathering for this purpose is very expensive especially when studying a large region. Sometimes, private companies do not cooperate with the researcher. (Armstrong and Taylor, Ch.2 p.56) The reliability of this forecast highly depends on the accuracy of data gathered from the private companies. Also, this model uses the national input-output data such as import figure. This figure could be highly underestimated. 1.4 Why these regional multiplier models are only good as assumptions. To what extent is it useful in the process of regional policy making? There are drawbacks in using regional multiplier models. Data that comes from a region or locality are merely estimated figures. Specifically the Keynesian regional multiplier requires the need to determine the amount of expenditure that leaks out of the region. (Armstrong and Taylor, Ch.1 p.17) This process is tedious since it demands a lot of time and effort in determining the nature of the leaks. Among the reasons why the analysis using regional multiplier is weak is because it does not take the capacity constraints into consideration; it fails to allow interregional feedback effects; it does not show the full impact of expenditure injections; and lastly, the companies inputs is highly concentrated only on regional purchases – ignores importation of raw materials. (Armstrong and Taylor, Ch.1 p.20) Many times, researchers or economists fail to get the actual value of required data. (Armstrong and Taylor, Ch.2 p.56) This is the main reason why regional multiplier models should be use only as an assumption when it comes to regional policymaking. 2.1 Describe the evolution of regional policy within the European Union, commenting on its relative importance in relation to other approaches to economic integration. To what extent can regional policy cope with the further enlargement of the EU which took place in 2004? In 1973, EU regional-level agencies and its national level organization participated in the regional policy of Britain. (Armstrong and Taylor, Ch.8 p.221) The creation of European Regional Development Fund (ERDF) in 1975 was designed to complement the British government’s regional policy. This project aims to provide financial assistance to individual investment projects within the industry and small companies in the form of grants and interest rebates. In 1989, as a response to the introduction of the Single European Market, the EU regional policy was officially introduced and implemented. Under the EU regional policy, the European Social Fund (ESF) – designed to finance training, retraining, migration, anti-discrimination and other labour market policies; European Regional Development Fund (ERDF); the Agricultural Guidance and Guarantee Funds (AGGF) – used to encourage restructuring of farming in EU as well as a diversification into non-farming activities like tourism and manufacturing in rural areas; etc. were converted into ‘Structural Funds’ in order to reduce possible regional disparities when it comes to economic development funding. (Armstrong and Taylor, Ch.8 p.221) The Reforms in 1989, triggered by the SEM process, resulted to serious challenges for the disadvantageous EU regions were the most important. (Armstrong and Taylor, Ch.11 p.324) Between the years, 1989 to 1993, the size of the Structural Funds doubled. (Armstrong and Taylor, Ch.8 p.222) Specifically the monetary union in 1990s resulted to new challenges for the disadvantaged regions. Since monetary union has led to problems for some weaker state members, EU introduced a new financial instrument called ‘Cohesion Fund’ in 1994. (Armstrong and Taylor, Ch.11 p.325) Cohesion Funds provide grant assistance for transport and environmental projects in Greece, Ireland, Portugal, and Spain. This helps the weaker states member by enabling their economies perform close with the rest of the EU. The purpose of this reform is to prepare the weaker countries for the ‘Economic and Monetary Union’ (EMU). In 1999, EU regional policy commands 36% of the EU budget. (Armstrong and Taylor, Ch.11 p.325) This reform was expanded again between the years 2000 – 2006. In relation to the economic integration of EU, the EU regional policy is necessary in the making the development of EU’s goal of becoming a Single European Market, its economic and monetary union, and the Central and Eastern European Enlargement more efficient because it could greatly improve the coordination of regional policy within the European Union members. (Armstrong and Taylor, Ch.11 p.305 - 312) This also brings up the possibility of having a richer state member to voluntarily be involved in solving the regional problems of other less capable member states. Each EU members have different financial capacity in solving regional problems. (Armstrong and Taylor, Ch.11 p.320) For this reason, some country like Greece and Portugal has severe regional problems as compared with the United Kingdom and other richer EU members. This makes Greece and Portugal less attractive towards investors. EU regional policy is a mixture of financial transfers and control. (Armstrong and Taylor, Ch.11 p.320) Tighter controls is beneficial in times of financial stringency while financial transfer could increase the overall spending on regional policy in order to mobilize each member states to solve their own problems. Therefore, with EU regional policy, disparities on the development funds between EU members can be closely monitored. For this reason, EU regional policy is very important in sustaining further integration among the EU members and other countries. 2.2 Discuss the relative importance of EU regional policies in the United Kingdom since 1975. To what extent does the process of political devolution complicate this relationship? Since 1975, EU regional policies in the United Kingdom were useful in minimizing and disparities in the living standards of each individual. (Armstrong and Taylor, Ch.8 p.206) This can be attained by using regional policies as a tool in preventing harmful political and social consequences due to the regional economic disparities. The common economic disparities are related to unemployment rates, per capita income, unequal distribution of wealth, etc. Regional policies are important because it provides feasible long-term alternative solutions to regional disparities. A good example is the diversion of demand for social infrastructure away from the south-east towards the less congested areas in the north and west. This is one solution on preventing high unemployment rate within the region. Particularly the development of the north and west would eventually create demand for necessary infrastructure. This way, south-east will be free from over population and being over congested while the north-west also benefited in such a way that the land is used to it full potential. Also, reducing regional disparities in terms of excess in labour demand would be beneficial to the whole economy because it could eventually reduce inflationary pressure. (Armstrong and Taylor, Ch.8 p.207) This is important issue since inflationary pressure could result to the increase in prices of goods and services. Political devolution complicates this relationship because the power devolution on regional authorities of the fiscal and monetary as well as trade policy is not necessarily the best solution to the regional economic disparities. (Armstrong and Taylor, Ch.12 p.360) Regional governments should have the freedom to develop their own strategy on regional policy. This way, they could manipulate the supply-side initiatives that are necessary for economic growth. (Armstrong and Taylor, Ch.12 p.360) However, the strategy developed by the regional governments should be closely coordinated with the national government as well as with the different local authorities in order to prevent personal interests and red tapes. Devolution of the fiscal policy powers could have substantial adverse effects on EU regional policy. Centralization on the government is necessary in order to ensure the effective coordination of the regional policy as well as to monitor and guarantee that each region is adequately funded according to seriousness of regional disparities in EU states member. (Armstrong and Taylor, Ch.12 p.342 - 343) Decentralized governments could make the checking of a regional policy instrument less effective. 2.3 To what extent has membership of the European Union changed the evolution of regional policies in the United Kingdom? Comment on the degree to which the recently proposed ‘repatriation’ of regional policy is realistic. There has been a change in the basic nature of the regional policy. There is more participation on the regional and local tiers due to European Union. Since the European Union involves several countries, it is necessary for the regional governments of each country to coordinate with other governments regarding a proposed regional policy. Therefore, centralization among the active regional and local participation is important. (Armstrong and Taylor, Ch.12 p.341 - 344) European Union follows a single monetary policy. This leaves them to control over the fiscal policy each time the EU states member is facing an economic crisis. Specifically the regional funding has become wider because of the membership of the European Union. (Armstrong and Taylor, Ch.11 p.311) This resulted for the necessity for constant reformation of the regional policy over the years. It was much easier to implement a regional policy before the United Kingdom became a member of the European Union. The system of regional governance changed. Radical reforms were necessary in order to make the regional policy effective based on the European Union situation. Over the years, a lot of deregulation of the economy has taken place. Particularly the role of the state became limited. Instead, the use of agencies has become widespread in regional policy. I believe that the repatriation on the new ESF is realistic and much easier to accomplish. (Armstrong and Taylor, Ch.11 p.333) The new ESF focuses on training and other labour market initiatives including the funding on the goal of tackling the social exclusion and discrimination. This will eventually increase the eligibility status of some weaker state. Therefore, promotes their economy as a whole. 2.4 To what extent is the framework of regional support proposed for the European Union in 2007-2013 an improvement on what currently exists? The current framework of the regional policy will serve as the foundation/backbone for the continuously expanding European Union. Over the years, regional governments have done its best to come up with a framework that could support the case of the European Union. Each existing economic problems are taken into consideration upon designing a new reform on its regional policy. Since we have entered the globalization stage, the present regional policy of the European Union specifically on the preferential tariff areas, customs unions, common markets, economic and monetary unions as well as the free trade areas are very much beneficial for the economic growth of each EU members. (Armstrong and Taylor, Ch.11 p.304) Specifically the SEM legislation that we have today has concentrated on resolving issues related to cost-increasing barriers, market-entry barriers, and market-distorting prices. (Armstrong and Taylor, Ch.1 p.307) However, despite the implementation of SEM legislation and non-tariff barriers (NTBs), it is rather difficult to completely eliminate barriers related to transportation and language. *** End *** Bibliography: 1 Armstrong, H. and Taylor, J. (2000) ‘Regional Economics and Policy’ 3rd Edition. Blackwell, Oxford. Read More