| World Bank IMF and Dev Agencies |    953 VIEWS  |
| World Bank IMF and Dev Agencies | |
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Wednesday,
November 06, 2019 /3:40 PM / By William Gbohoui, Raphael Lam
and Victor Lledo, IMFBlog / Header Image Credit: Brian Snyder/Newscom
Social and economic inequality between and
within regions in countries is rising in many advanced economies and is now at
the forefront of the policy debate because of perceptions that some people and
places have been left behind. Changes in global trade and technology have
shifted jobs and industries on the map, but the economic gains within countries
are not well shared.
One might think the solution is for people to move in search of better
jobs and lives. But people find it harder to move to booming cities with more
jobs like Washington D.C., San Francisco or London in part because they can't
afford to live there, or because they do not have the right skills required for
higher-paying jobs.
Our recent paper studies regional inequality in 20 advanced economies,
including the United States, Canada, Italy and Germany. We find that regional
disparities in income are large, persistent, and increasing over time.
This is where government policies on taxes and spending may require a
rethink, so countries can better tackle inequality between regions. Policies
could help people upgrade their skills for better-paying jobs and help
redevelop communities to create local jobs.
Regional Inequality: Facts and Forces
Disparity of income between regions has been large in many advanced
countries. One may think that it is primarily due to differences in regional
prices-for example, $100 can buy more goods and services in Missouri than in
New Jersey. But regional disparity remains sizeable even after we consider
regional price differences. A disconcerting fact is that regions with low
income levels tend to have less access to healthcare, lower education levels,
and higher unemployment rates.
More importantly, disparity of income between regions is also persistent
and has risen over the past 15 years, contributing to inequality. Regions that
have fallen behind-those with high unemployment rates-have on average a 70
percent chance of remaining behind. The chance of lagging behind can be even
higher than the average in some countries, such as in Italy and Canada. Instead
of catching up, regions that lagged in these countries grew at a slower rate-by
as much as 1 percentage point of GDP over three years.
You may think that people can simply move in search of better jobs in
high-income areas. But based on micro-data for individual households, we find
that the higher average income in the more prosperous regions is more often
offset by the high cost of living. People find it harder to move because
housing costs are higher and high-paying jobs are less available for
low-skilled workers in wealthy regions. For example, over the last decade, our
estimates suggest that the net benefits to move to higher income regions have
fallen by 25 to 35 percent in Spain and in the United States for low-income
households.
Fiscal Policy Has Some Answers
A wide range of options can help tackle regional inequality. For
example, policymakers could increase income redistribution through taxes and
transfer payments. Growth-friendly policies to improve education, healthcare,
infrastructure, and affordable housing can make it easier for less-skilled,
low-income people to find work elsewhere.
Our paper provides options for policymakers
trying to decide whether, when, and for who to use targeted, place-based
policies to tackle regional inequality. Those policies target individuals and
firms in selected regions through subsidies, grants, or public investment.
Examples include the European structural and investment funds or
enterprises zones in the United States.
Geographically-targeted policies can complement existing social
transfers such as unemployment insurance. This is more successful if
recipients are highly concentrated in lagging regions of a country, such as in
Mexico and the United States, and/or if countries find it hard to target
selected individuals nationwide, such as through means-testing. Under these
circumstances, geographically-targeted policies such as those promoting jobs in
lagging regions can have a stronger impact and can complement existing
measures.
Who's in charge?
Each country needs to decide which is the appropriate level of
government, be it local, state or federal, to carry out the strategies. The
level of fiscal autonomy in part depends on whether the country has a federal
or unitary system and, more broadly, on the nature of intergovernmental fiscal
arrangements.
For example, a high degree of revenue and spending decentralization
could imply that subnational governments have more control and capacity to
design and implement the geographically-targeted policies. Coordination is key
among government levels given shared responsibilities.
As a general principle, the central government usually takes the lead on
policy design, while subnational governments are more involved in the
implementation, as they know best the local needs and preferences. In federal
or highly decentralized countries such as in the United States, subnational
governments have greater autonomy to determine the income and property tax
rates and spending on education and healthcare. Other considerations would
include the existing system of intergovernmental transfers and the technical
capacity of subnational governments.
Regional dimensions are key elements when considering the facts and
policies on income inequality. In any country, policies that target specific
regions can complement conventional social transfers to mitigate inequality
between regions.
You can read more about the rise of inequality within countries in
this blog based on the latest World Economic
Outlook.
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