What are the features of a regional/local economy?

Dave Clark, University of Portsmouth
Put online February 2010

This text is extracted from a set of teaching materials from a Local and Regional Economics course, taught 2009/10. These have been shared through the TRUE wiki for Regional and Local Economics. The text is available under a Creative Commons license, some rights reserved.

Regional analysis is mostly based on the theories and analytical tools developed for national economies. Many models are based on the assumption that similar sorts of fundamental components and relationships exit at the regional/local level as are present at the national level. This is often a second-best option brought about by the lack of hard data at the sub-national level. Researchers are well aware that regional dynamics will be different from national dynamics. For example, the production of one unit of output in a given industry may involve a greater proportion of imported inputs in one local economy (a) than an adjacent local economy (b). Thus increases in demand for the given product nationally will be more beneficial in income and employment terms to local economy (b) than local economy (a).

Whereas national governments and policy makers are able to exercise a degree of control over external trade, domestic consumption, private domestic investment and government expenditure, regional or local government (in the UK) is not. (Not even in any meaningful way in devolved Scotland or Wales). External trade plays a more important part in the economic life of a regional/local economy than the national economy. For a start, by definition, region/local firms may be exporters (and importers) both within the UK and outside it. Viewed in national terms only external trade is classified as imports or exports. Therefore regional/local economies are much more open than national economies.

Regions also tend to be much more specialised than national economies. For instance, the defence industry is highly regional with significant activity in the South East, South West and North West; yet the UK as a whole is recognised as having a highly developed defence industrial base.

Factors of production also flow more easily between regional and local economies than they do between national economies for the following reasons:

• Barriers to trade are missing at the local level.
• Distance to market is shorter - transportation costs (lower).
• Labour and capital are more mobile within the region than between countries.
• There are no defence or political considerations.
• Cultural and language differences do not exist.
• Legal tools - tariffs - quotas etc. (restrictions to trade) are not present.

In the region - income is largely determined by what happens outside the region e.g. government spending, taxation, national wage rates etc.; import/export flows are large; factors of production are mobile; taxes and savings may be lost to the region; thus leakages are higher, and consequently multipliers lower.

Regional/local economies are thus unique entities - smaller and more open than the national economy, more specialised and less hampered by political, legal and cultural diversity.

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