We discuss regional disparities in economic performance and living standards. We first set out some key facts, and provide a conceptual framework to help analyse whether such disparities are efficient, or instead reflect market and/or policy failures.
We examine whether policy attempts to reduce regional disparities necessarily involve a trade-off between equity and efficiency. We then investigate whether policymakers should focus on boosting the economic performance of lagging regions—or, conversely, accept the presence of regional disparities, and instead assist households in lagging regions through transfer payments, investments in education, health, and other basic services, and by facilitating out-migration.
This paper was published as an International Monetary Found Working Paper No. 2021/038. Co-author Anthony J. Venables is is the Research Director of The Productivity Institute.