Essay on Is Regional Policy Really Needed?

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Despite being one of the wealthiest areas in the world, the EU faces the growing problem of prolific inequality in wealth and competitiveness across the diverse group of countries. This is dramatically represented in the differences of income between Europe’s richest and poorest regions: inner London and Romania. Inner London’s per capita income is a staggering 290% of the EU’s average versus Romania with a per capita income of a meager 23% of the EU average. The European Union has recognized this problem and has taken action by implementing “Cohesion” policies intended to encourage economic convergence, competiveness and financial unity. To reach these goals the EU has allocated a significant part of the taxes levied on member nations to …show more content…
Simply stated, the Heckshler-Ohlin (H-O) model of neoclassical free market economics posits that laissez-fare economies, or at least those with minimal intervention, will specialize in the industry where they have relative factor abundance and allocate factors efficiently. The increased demand for the factor their industry uses abundantly will cause a migratory effect. This means mobile factors will move from areas of low demand to regions of higher demand. The migratory effect will lower prices of the heavily demanded factor leading to the “equalization of relative and absolute returns to the factors of production between regions.” (Nello, 2009, p. 81)
The European Union feels differently however, it supports the Keynesian model of market intervention. Its policies have led to the injection of Structural Fund capital into regional markets with the intention of creating demand. They theorize that injected capital will have a ripple effect across the economy multiplying the initial benefits. In theory, this economic measure would induce firms to increase the labor force, which eventually would create additional demand. This feedback effect spurs growth by causing a circular flow of the injected capital multiplying its effect on the economy (Armstrong et al, 2000). However, this theory relies on the assumption that the Structural Fund’s centralized management is able to determine where and how best to spend this capital to create

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