Underdevelopment through productivity improvement measures in an advanced region

Abstract

Purpose: This paper analyzes how increasing economies of scale, higher productivity, and falling costs in an advanced region can lead to a relative reduction in progressiveness in an economically weaker region. Design/Methodology/Approach: The author uses the core-peripheral model as a basis for this framework. The regional development model thus, consists of two sectors. Technological progress favors either the advanced or lagging regions. Findings: Thus, optimization measures taken in the advanced region will lead to a steady slowdown in development. The effects of increasing economies of scale are reflected in falling marginal and fixed costs. This reduces costs and makes production more effective. The productivity of the advanced region increases. This increase in volume, however, means that agricultural production becomes more valuable. The relative price of industrial goods falls, and, as a result, the relative income differences decrease—the utility of both regions increases. However, the increasing economies of scale in the advanced region mean that the underdeveloped region's utility increases more strongly and reduces inequality. Practical Implications: The analysis shows that optimization measures in an advanced region weaken the region as they lead to loss of development benefits. Originality: The author analyzes the influence of rising economies of scale and declining costs on developing the advanced region and the underdeveloped region and relative inequality.