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Neither easy nor impossible: Local development economics and policy

Seravalli, Gilberto (2011): Neither easy nor impossible: Local development economics and policy.

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Abstract

This assai leads the reader on an analytical path to development, with institutions as its central focus. While its main emphasis is on the problematic nature of development in lagging or backward regions, contributions from the literature on developing countries have also been taken into account, and European countries, Italy and the South of Italy (the Mezzogiorno) also feature in the debate. There is no doubt that lagging regions in advanced countries are very different from backward regions in poor countries. I think that there are two basic assumptions that hold for both. First, the most important constraints on development are internal; second, in order to combat underdevelopment strong actions that break with tradition are needed. These two assumptions are often ignored by development literature. These studies may be well written, fun to read and able to communicate faithfully their authors views on social and economic life, but their perspective is necessarily different from that of people who are actively involved in social and economic development efforts or tackling underdevelopment. The assai offers some interpretative starting points. The path distances itself from five concepts that are widely held but superficial. The first is that economic development in a backward or lagging area depends on growth in advanced areas, given that capital will flow where there is an abundant supply of labour and because technical progress is easier for latecomers than for innovators. The common view is that there is spontaneous economic convergence simply because capital has low returns in advanced areas and high returns in backward areas. In advanced areas, moreover, already on the threshold of improved technology, technical progress is more of a struggle, whereas in backward areas all that is needed is to imitate others. Since this idea has no real empirical basis, those who hold this view claim that the differences between regions persist because markets work badly, segmented as they are by rules and behaviour that allow unjustified returns. Without these artificial distortions, they argue, resources would be spontaneously used where they were most productive. In this view, the most relevant development policy (and for many, the only possible policy) is to reduce curbs to maximum competition in all sectors and in all walks of life. There are many reasons for thinking that this is irrelevant. Many crucial resources are in fact attracted to advanced areas, not because there is over-regulation. If anything, the opposite. Opening up markets that work well would therefore seem to be a result of development rather than a way to achieve it. In order to achieve development what is needed is more intentional public intervention: more State, not less. The path undertaken to reach this conclusion is arduous, however. Not many people today share the view that the State can play a relevant role. The path requires a critical reappraisal of four other common views. The second widespread view that we need to demolish, then, is the idea that -. even if we accept that economic development in a backward area is impeded by the fact that resources are attracted to advanced areas - there will always be immobile resources that can spontaneously trigger development and sustain it. This view is supported by the limits on mobility of resources. Taking into account that important resources such as the environmental, historical, cultural heritage of a region are substantially immobile, those who hold this view believe that these resources cannot be lost as a result of the capacity for attraction of an advanced area. They believe that these immobile resources sooner or later will stimulate those who know how to exploit them effectively and profitably. The reason why this view is unhelpful is that existing immobile resources can and often do remain inaccessible. Potentially profitable resources never actually become useful for development because the conditions for exploiting them have not been achieved, or nobody has ever thought of using them. A case study illustrating how this can happen is presented in the Appendix of Chapter Three. Proceeding along our path, a third commonly held view must be set aside. Even if they accept that the process of valorising immobile resources is not always so easy, economists often say that this is not a problem if in the backward area the cost of labour is very low. The objection is that the difficulty of valorising immobile resources is made up for by a particularly advantageous condition of low labour costs. If there were no institutions keeping wages artificially high, unemployment or under-employment would be solved by salaries so low that the labour cost per production unit would be advantageous even in situations of low productivity. This, people claim, would help overcome other curbs on development. This approach is on the surface quite correct, but it neglects to take into account one feature. Low labour costs could well get an area out of underdevelopment, but there are no guarantees that if will keep that area out. It is thus necessary to deal with the fourth widely help view. Admitting, at this point, that underdevelopment in a backward area cannot be overcome spontaneously, even where there are low labour costs, and accepting that development needs an action that breaks with tradition, then, it is claimed, bottom-up collective action on the part of civil society can provide precisely this break. Those who hold this view believe that in order to trigger and sustain a development process collective goods such as, for example, material and immaterial infrastructures, insurance, training, and promotional services, are essential. They do not feel, however, that corresponding public action is needed. They are convinced that, collectively, civil society can achieve the goods and services needed. This idea ignores the serious difficulties that bottom-up collective action meets with if it is not supported by public action, as Chapter Three illustrates. This brings us to the fifth and final point of view that we need to deal with. Admitting that bottom-up collective action is unsuccessful, a break with tradition can be guaranteed simply by decentralising institutions, providing local authorities with the sufficient skills and resources to take care of their own needs. We argue that decentralizing on its own is not a solution. Development policies require State intervention to be organized in a complex institutional framework, as Chapter Five shows.

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