5/17/2005

Annual Conference of Israel Regional Science Association –

June 21st, 2005, Haifa University 1

Regional Inequalities Regional Inequalities in Small Countries – in Small Countries – Determinants and Determinants and

MeasurementMeasurement

Boris A. Portnov* & Daniel Boris A. Portnov* & Daniel Felsenstein**Felsenstein**

* Haifa University; **Hebrew * Haifa University; **Hebrew University of JerusalemUniversity of Jerusalem

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Research questions:Research questions:

• Can we expect small countries to Can we expect small countries to have smaller regional disparities?have smaller regional disparities?

• What are the main factors affecting What are the main factors affecting the extent of regional disparities in the extent of regional disparities in small countries?small countries?

• Lastly, do small countries require Lastly, do small countries require specific inequality measurement, as specific inequality measurement, as opposed to their larger counterparts?opposed to their larger counterparts?

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Popular beliefPopular belief““small states … succeeded in spreading small states … succeeded in spreading the the fruits of economic growth more widely of economic growth more widely ... than the larger states at comparable ... than the larger states at comparable levels of income per capitalevels of income per capita” ”

Simon Kuznets (1960)Simon Kuznets (1960) Simon Kuznets (1960)Simon Kuznets (1960) “…“…income is distributed more equally income is distributed more equally … in the Scandinavian countries and … in the Scandinavian countries and Switzerland than say in France, Switzerland than say in France, Germany or even the United States…. Germany or even the United States…. These smaller countries have no …These smaller countries have no …large regions like our South with a per large regions like our South with a per capita income distinctly lower than the capita income distinctly lower than the rest of the country”rest of the country” (ibid.)(ibid.)

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“…“…in small developed countries there seems in small developed countries there seems to be less inequality in income distribution to be less inequality in income distribution than in large onesthan in large ones” (Streeten, 1993) ” (Streeten, 1993)

“…“…if inequality between regions in a country if inequality between regions in a country is a major source of inequality between is a major source of inequality between householdhouseholdss, then one would expect large , then one would expect large countries to have greater regional diversity countries to have greater regional diversity and hence higher levels of inequality” and hence higher levels of inequality” (Perkins and Syrquin, 1989)(Perkins and Syrquin, 1989)

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Regional growth theoriesRegional growth theories• Neo-classical growth theory (NGT):Neo-classical growth theory (NGT):

competitive forces and interregional competitive forces and interregional migration equalize differences and factor migration equalize differences and factor prices across regions and lead to more even prices across regions and lead to more even regional development, specifically in a small regional development, specifically in a small country (CONVERGENCE);country (CONVERGENCE);

• New economic geography (NEG):New economic geography (NEG): the the uneven concentration of production is uneven concentration of production is sustained by circular production linkages sustained by circular production linkages and may become increasingly entrenched and may become increasingly entrenched over time (DIVERGENCE).over time (DIVERGENCE).

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Empirical evidenceEmpirical evidence

Much of the evidence, in both Much of the evidence, in both directions, is based on large directions, is based on large countries such as the U.S.A. and countries such as the U.S.A. and U.K. or areas within a supra-U.K. or areas within a supra-national economy such as the EU national economy such as the EU (Armstrong 1995, Le Gallo and (Armstrong 1995, Le Gallo and Ertur 2003, Tsionas 2000 etc)Ertur 2003, Tsionas 2000 etc)

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Defining a Country as Defining a Country as SmallSmall

• PopulationPopulation• Land areaLand area• Economy (problematic)Economy (problematic)

3m population cut-off (Armstrong and Read 1995; Armstrong et al. 1998);

5m cut-off (Brautigam and Woolcock 2001),

10-15m population break (Robinson 1960)

Land area of 65,000 km2 (Jalan 1982)

Arbitrary or “natural” break in the “rank-size” distribution

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1,000

10,000

100,000

1,000,000

10,000,000

100,000,000

1,000,000,000

10,000,000,000

1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191

country rank

po

pu

lati

on

log

[re

sid

en

ts]

Rank-size distribution of Rank-size distribution of countriescountries

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Attributes of small Attributes of small countriescountries

• Limited natural resourcesLimited natural resources• Small variation of climatic conditions and Small variation of climatic conditions and

agricultural productivityagricultural productivity• High population densityHigh population density

• Openness to the global economyOpenness to the global economy• Centralized governmental structureCentralized governmental structure

• Short distances Short distances • Small Number of RegionsSmall Number of Regions

• Small Size of RegionsSmall Size of Regions

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Limited natural resourcesLimited natural resources

Convergence Divergence

More even regional development due to the

absence of initial advantage in regional resource endowment

Specialization in tertiary industries and services

leading to greater concentration of regional

development

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High population densityHigh population density

Convergence Divergence

Long-distance commuting substitutes for interregional

migration; scale diseconomies spread over

most national territory

Severe diseconomies of scale, specifically in overpopulated core

regions, leading to growth spillover

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Openness to the global Openness to the global economyeconomy

Convergence Divergence

Direct representation of regions in the international

markets; direct international investment in

regional economies; advantages of both core and border regions for

international trade

Less independence in setting social and regional

priorities; pronounced concentration of

development in few “global cities” and around

major transport hubs

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Centralized governmental Centralized governmental structurestructure

Convergence Divergence

Fewer constraints on the implementation of regional development policies and

programs

Stronger unitary governance; less regional

budgeting

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Short distances Short distances Convergence Divergence

High level of social cohesion and development

interdependency; low transportation costs for

local suppliers and service providers; possibility of

daily interregional commuting; greater factor

mobility; more development spillover

Functional domination (“shadow effect”) of major

population centres (e.g., via jobs and service provision) over most

national territory

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Preliminary conclusionPreliminary conclusion

• There is no reason to expect There is no reason to expect a priorya priory that that small countries may exhibit smaller regional small countries may exhibit smaller regional disparities than their larger counterparts. disparities than their larger counterparts. Depending on the local setting (e.g., Depending on the local setting (e.g., agglomeration economies, openness to agglomeration economies, openness to external trade, government structure, and external trade, government structure, and practicability of daily commuting), the practicability of daily commuting), the outcome of regional development may be outcome of regional development may be indeterminate, leading in either direction - indeterminate, leading in either direction - both towards regional divergence and both towards regional divergence and convergence. convergence.

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Empirical testEmpirical test• Dependent variablesDependent variables - - the population weighted the population weighted

coefficient of variation of regional GDPpc, or coefficient of variation of regional GDPpc, or Williamson Index (WI) and ratio of regional Williamson Index (WI) and ratio of regional GDPpc (max/min);GDPpc (max/min);

• Explanatory variablesExplanatory variables - Land area in 1,000 km2 - Land area in 1,000 km2 (Land); GDPpc, $1000 US in PPS terms (GDP); (Land); GDPpc, $1000 US in PPS terms (GDP); the coefficient of variation of the population sizes the coefficient of variation of the population sizes of a country's regions (Pop_Distrib); population of a country's regions (Pop_Distrib); population size of a country, million residents (Pop); : a size of a country, million residents (Pop); : a country-size dummy (1 for a small country, and 0 country-size dummy (1 for a small country, and 0 otherwise (Smallness);otherwise (Smallness);

• SampleSample – 22 European countries of different size – 22 European countries of different size (NUTS II regions or their equivalents)(NUTS II regions or their equivalents)

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Country listCountry listCountry Land Area,

km2Population (Mill.)

Country Land Area, km2

Population (Mill.)

Austria 83,000 8.1 Bulgaria 110,994 8.9

Belgium 30,200 10.2 Finland 305,000 5.2

Czech Rep 77,200 10.2 France 543,964 58.5

Denmark 42,300 5.3 Germany 357,027 82.5

Hungary 92,300 10.0 Greece 130,800 10.6

Ireland 69,000 3.9 Italy 301,200 59.7

Israel 21,000 6.5 Norway 307,800 4.5

Netherlands 33,800 16.0 Poland 120,786 38.6

Portugal 92,000 10.1 Romania 238,391 22.4

Slovakia 48,800 5.4 Spain 499,500 40.0

Switzerland 39,700 7.2 Sweden 410,900 8.9

     United Kingdom

243,602 56.6

Small Large

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ModelsModels  WI of GDPpc Ratio of GDPpc

(Constant) 0.152 1.852

(0.936) (1.505)

Pop Distrib (CV) -0.18 -1.296

(-3.041**) (-2.894**)

Smallness 0.116 0.147

(1.958*) (0.329)

Land Area (log) 0.046 -0.02

(1.494) (-0.085)

GDP (log) -0.035 0.159

(-0.456) (0.581)

Pop (log) 0.022 0.306

(1.225) (2.215**)

R2 0.562 0.484

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ConclusionConclusion

• In general, the analysis supports our In general, the analysis supports our initial assumption that small initial assumption that small countries countries do notdo not necessarily have necessarily have smaller regional gaps than their smaller regional gaps than their larger counterparts. To the contrary, larger counterparts. To the contrary, smallness (i.e. the combination of smallness (i.e. the combination of small population size and small land small population size and small land area) tends to result, area) tends to result, ceteris paribus,ceteris paribus, in larger regional gaps.in larger regional gaps.

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Measurement issuesMeasurement issues

• The commonly used inequality The commonly used inequality indices (WI, GINI, etc.) are abstract indices (WI, GINI, etc.) are abstract mathematical formulas. Therefore, mathematical formulas. Therefore, one can assume that they can be one can assume that they can be applied to both large and small applied to both large and small countries alike. countries alike.

• Is this assumption correct? Is this assumption correct?

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Characteristic features of Characteristic features of small countries:small countries:

• Smaller number of regionsSmaller number of regions than a than a large and more populous nation (e.g., large and more populous nation (e.g., 47 prefectures in Japan vs. 6 districts 47 prefectures in Japan vs. 6 districts in Israel);in Israel);

• Varying population sizes of regionsVarying population sizes of regions (small countries are often mono-centric (small countries are often mono-centric with a clearly emphasized urban core);with a clearly emphasized urban core);

• Possibility of rapid changePossibility of rapid change in the in the parameter distributionparameter distribution

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TestingTesting

10,00010,00010,00010,00010,00010,00010,00010,000

10,00010,00010,00010,00010,00020,00020,00010,000

10,00010,00010,00010,00010,00020,00020,00010,000

10,00010,00010,00010,00010,00010,00010,00010,000

Population sizeAverage income

10,00010,00010,00010,00010,00010,00010,00010,000

10,00010,00010,00010,00010,00020,00020,00010,000

10,00010,00010,00010,00010,00020,00020,00010,000

10,00010,00010,00010,00010,00010,00010,00010,000

Population sizeAverage income

10,00010,00010,00010,000

10,00010,00020,00010,000

10,00010,00020,00010,000

10,00010,00010,00010,000

Population sizeAverage income

10,00010,00010,00010,000

10,00010,00020,00010,000

10,00010,00020,00010,000

10,00010,00010,00010,000

Population sizeAverage income

5,0005,0005,0005,00010,00010,00010,00010,000

5,00025,00025,0005,00010,00020,00020,00010,000

5,00025,00025,0005,00010,00020,00020,00010,000

5,0005,0005,0005,00010,00010,00010,00010,000

Population sizeAverage income

5,0005,0005,0005,00010,00010,00010,00010,000

5,00025,00025,0005,00010,00020,00020,00010,000

5,00025,00025,0005,00010,00020,00020,00010,000

5,0005,0005,0005,00010,00010,00010,00010,000

Population sizeAverage income

10,00010,00010,00010,00020,00010,00010,00020,000

10,00010,00010,00010,00010,00010,00010,00010,000

10,00010,00010,00010,00010,00010,00010,00010,000

10,00010,00010,00010,00020,00010,00010,00020,000

Population sizeAverage income

10,00010,00010,00010,00020,00010,00010,00020,000

10,00010,00010,00010,00010,00010,00010,00010,000

10,00010,00010,00010,00010,00010,00010,00010,000

10,00010,00010,00010,00020,00010,00010,00020,000

Population sizeAverage income

Reference Reference distributiondistribution

Test 2 (Population distribution)Test 2 (Population distribution)

Test 1 (number of regions)

Test 3 (District ranking)Test 3 (District ranking)

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Measurement IndicesMeasurement Indices• Coefficient of variation (CV) (unweighted)Coefficient of variation (CV) (unweighted)

• Population weighted coefficient of Population weighted coefficient of variation (Williamson index (WI))variation (Williamson index (WI))

• Theil index (TE(0))Theil index (TE(0))• Atkinson index (AT)Atkinson index (AT)

• Hoover coefficient (HC)Hoover coefficient (HC)• Coulter coefficient (CC)Coulter coefficient (CC)• Gini (U) (unweighted)Gini (U) (unweighted)

• Gini (W) (population weighted)Gini (W) (population weighted)

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Test resultsTest resultsInequality

indexReference

distributionTest 1 Test 2

(Population distribution)

Test 3

(Number of regions)

(District ranking)

CV 0.346 0.346 0.353 0.346

WI 0.346 0.346 0.298 0.346

TE 0.022 0.022 0.136 0.022

AT 0.026 0.026 0.251 0.026

HC 0.150 0.150 0.144 0.150

CC 0.061 0.087 0.059 0.061

Gini (U) 0.075 0.075 0.058 0.075

Gini (W) 0.075 0.075 0.072 0.075

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Permutation test Permutation test (unrestricted)(unrestricted)

0.01

0.10

1.00

1 101 201 301 401 501 601 701 801 901

Permutation #

Val

ue (

log)

CV GINI (U) AT TE(0)

0.20

0.25

0.30

0.35

0.40

0.45

1 101 201 301 401 501 601 701 801 901

Permutation #W

I

CV; GINI (U); AT and TE(0)WI: GINI (W) and CC

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Permutation test Permutation test (restricted)(restricted)

0.00

0.10

0.20

0.30

0.40

0.50

1 101 201 301 401 501 601 701 801 901

Permutation #

Valu

e

WI HC GINI (U)

0.390

0.392

0.394

0.396

0.398

0.400

1 101 201 301 401 501 601 701 801 901

Permutation #C

C

ALL OTHERS CC

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ConclusionsConclusions

• First, it is likely to have a relatively small First, it is likely to have a relatively small number of regional divisions. number of regional divisions.

• Second, its regional divisions are likely Second, its regional divisions are likely to vary considerably in their population to vary considerably in their population sizes. sizes.

• Lastly, regions of a small country may Lastly, regions of a small country may rapidly change rank-order positions in rapidly change rank-order positions in the country-wide hierarchy, by changing the country-wide hierarchy, by changing their attributes (e.g., population and their attributes (e.g., population and incomes). incomes).

A small country may differ from a A small country may differ from a country of larger size in three country of larger size in three fundamental features:fundamental features:

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• In order to formalize these distinctions, we In order to formalize these distinctions, we designed a number of simple empirical designed a number of simple empirical tests, in which income and population tests, in which income and population distributions, presumably characteristic for distributions, presumably characteristic for small countries, were compared with the small countries, were compared with the “reference” distribution, assumed to fit “reference” distribution, assumed to fit better a country of a larger size. In the better a country of a larger size. In the latter (reference) distribution, the latter (reference) distribution, the population was distributed evenly across population was distributed evenly across regional divisions and assumed to be static. regional divisions and assumed to be static.

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• Somewhat surprisingly, none of the Somewhat surprisingly, none of the indices we tested appeared to pass all the indices we tested appeared to pass all the tests, meaning that they may produce (at tests, meaning that they may produce (at least theoretically) misleading estimates if least theoretically) misleading estimates if used for small countries and compared to used for small countries and compared to countries of bigger size. countries of bigger size.

• Although further studies on the Although further studies on the performance of different inequality indices performance of different inequality indices may be needed to verify the generality of may be needed to verify the generality of our observations, the present analysis our observations, the present analysis clearly cautions against indiscriminate use clearly cautions against indiscriminate use of inequality indices for regional analysis of inequality indices for regional analysis and comparison.and comparison.

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Catch-22Catch-22

• There are big and small countries:There are big and small countries:• Small countries are like big Small countries are like big

countries, but smaller;countries, but smaller;• Everything is small in small Everything is small in small

countries, but inequalities…countries, but inequalities…