Exports and Regional Economic Growth Charles M. Tiebout The Journal of Political Economy, Volume 64, Issue 2 (Apr., 1956), 160-164. Stable URL: hutp//links jstor.org/sici?sict=0022. $808%28 1956049 2964%3A29%3C 160%3 ABAREG43E2.0,CO%3B2-Y ‘Your use of the ISTOR archive indicates your acceptance of JSTOR’s Terms and Conditions of Use, available at hhup:/www.jstor org/about/terms.html. JSTOR’s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the sereen or printed page of such transmission. The Journat of Political Economy is published by The University of Chicago Press. Please contact the publisher for further permissions regarding the use of this work. Publisher contact information may be obtained at hup:/www.jstor.org/journals/uepress.himl, ‘The Journat of Political Economy (©1996 The University of Chicago Press ISTOR and the ISTOR logo are trademarks of ISTOR, and are Registered in the U.S. Patent and Trademark Office For more information on ISTOR contact jstor-info@umich.edv, ©2002 JSTOR hupslwww jstor.org/ Mon Oct 7 03:15:34 2002EXPORTS AND REGIONAL ECONOMIC GROWTH CHARLES Mt. TIEROUT ‘Northwestern University "Tim tnytherganal economic ase hhas been bobbing around in the litera- ture, implicitly and explicitly, for some ‘time.! Its latest appearance comes as an ex- planatory factor in regional economi growth. In his recent article Douglass C. North has suggested that the theory of re- gional development which sees the region as passing through various stages—primary, secondary, and tertiary—is not adequate? Asa substitute, North maintains that a re- igion’s growth ‘is closely tied to the success of its exports and may take place either as ‘a result of the improved position of existing exports relative to competing areas or as a result of the development of new exports.” He further points out that it is necessary to look into location theory to explain changes in the export base. ‘The point involved is that the concept of the export base in re- gional analysis is called on as the major autonomous variable determining the level of regional income. he concept of the economic base has been developed largely in the works of city planners and other researchers interested in turban problems.‘ As such—and this is ther slur nor praise—no attempt has been made to relate this concept to the general theory of income determination as used in "See Richard B. Andeews, the Urban Eeonomie Base Vol. XXIX (1953), No.3 (continuing series), For a ‘mote explicit statement see George Hildebrand and ‘Arthur Mace, Jr, “The Employment Multiplier in an Expanding Tndustial Market: Los Angeles County, 1940-1," Review of Ezonomics ond Stax lies, XXX, No. 3 (August, 1950), 241-19. ‘Location Theory and Regional Eeonomic Growth” Journal of Palital eonomy, LXUL ‘une, 1958), 243-88 1d. p. 251, “The Mechanics of " Land Economics national income analysis This failure and the continual identification of the exports of ‘a region with the autonomous variable de- termining income have led to some errone~ us conclusions about regional income and regional development. The purpose of this note is, first, to show how the export-base concept fits within the more general theory of income determination and, second, using this setting asa frame of reference, to point out some implications for the theory of re- gional growth. 1 It is useful to begin by presenting a sim- plified version of the concept of the export base. The economic activities of a region are divided into those which produce for the ex- port market and those which produce for the local market. In defining exports allowance is made for such items as the earnings of commuters, capital flows, government trans- fers, and linked industries. Given these basic or export activities, the level of non-basic or residentiary activities follows. The ratio be- ‘tween export activities and residentiary ac- tivities, measured in income or employment, is then used as a multiplier. For example, 2 ‘one-to-one ratio would mean that an in- crease in exports will cause an equal increase in residentiary activities. Whether or not this function is constant at all levels of in- “The Mechanies of the Urban Economie Base: Historical Development of the Base Concept,” Land. Economics, -XXIX (August, 1983), 161-67; and Homer Hoyt, “Homer Hoyt on the Concept of the Beonomic Base,” Land Ezonomice, XXX (May, 1954), 182-86, #1 is interesting to note thatthe work of Hilde- brand and Mace (op. it), which deals with an ‘employment multiplier, is rarely mentioned in dis ‘susions of the economic base. North's article is & potable exception 160EXPORTS AND REGIONAL ECONOMIC GROWTH ‘come is not stated. There is no a priori rea~ son to believe it is. From here, of course, it isa simple step to the statement that the in- ‘come of the region is tied to the level of ex- ports. For a small region this may be sub- stantially correct, but for larger regions it is an oversimplification. A general theory of in- come determination at the national level rests on a knowledge of the level and sta- bility of both the dependent and the autono- ‘mous variables. These are the necessary’ in- gredients of an econometric model that forecasts income.* ‘There is no reason to assume that exports are the sole or even the most important autonomous variable determining regional income. Such other items as business invest ment, government expenditures, and the volume of residential construction may be just as autonomous with respect to regional income as are exports.’ Under the assump- tion, which may have some validity, that the autonomous variables are the dynamic fac- tors in determining the short-run level of re- sional income, these items may even be the chief source of instability. Only empirical studies will enable us to say something about their quantitative importance. ‘A further consideration will help to point up the error of identifying exports as the sole source of regional income change. In an ex- change economy one person considered in a spatial context may be entirely dependent on hisability to export hisservices. Probably this is true of a neighborhood area, except for the corner grocer. For the community as a whole, the income originating in non-ex- ports increases. In the United States econo- my, exports account for only a small part of national income. Obviously, for the world as whole, there are no exports, ‘Thus the quantitative importance of ex- ports as an explanatory factor in regional income determination depends, in part, on the size of the region under study. Tt is true See Lawrence Klein, Heowometries (Chicago Row, Peterson & Co, 1953). " North's consideration of the posible outlets of a region's indigenous savings sugets these consid- erations (opel, p. 255) 161 that for a region considered at two different time periods, a change in the volume of ex- ports may indicate a change in the level of income, but this is not enough. A region may grow with exports at a constant level, if in- ternal autonomous activities are on the up- swing. The larger the region, the more the dynamic forces causing income change be found inside its borders ‘The problem that arises because export volume is a function of regional size might be solved if it were possible to find some ‘method of determining the boundaries of a region which not only made sense but al- lowed for interregional comparisons. North hhas suggested that the boundaries ofa region should be determined by “its development around a common export base.”® This basis of classification is useful, but it is by no ‘means the only possibility. ‘Most researchers in the field of regional economics have come to the conclusion that there is no “ideal” region. Probably the closest approximation to the concept of an ‘deal region would arise in a Lésch produc- tion-oriented spatial system. In this system an over-all area is mapped out according to sites of production determined by market networks. Other conditions which are also given for equilibrium need not concern us here. In the central city all goods are pro- duced, with fewer produced in the other spatially arranged cities. If an over-all area, in this sort of orientation, could be divided into two or more identical parts, either one ‘ight be considered an ideal region.” Any statement concerning the nature of one re- gion would be applicable to any other. Un- fortunately, in the nature of market net- works even in the conceptual construct, such regions do not exist. Given this Lésch map- ping, it follows that regional boundaries are not clear-cut and any statement conceming * Did. p. 251 August Lésch, The Beonomics of Location (New Haven: Yale University Press, 1958), "Tn terms of set theory, this implies that the overall area can be partitioned into disjoint sub: sets which map one-to-one into each other.162 the importance of exports must keep this in mind. In view of our inability to construct an “ideal” region, the selection of regional boundaries rests on other criteria. Usually, the regional boundaries are suggested by the variables one chooses to study. Non-eco- nomic considerations, such as the availabili- ty of data and the location of political sions, may, of course, be the basis for the demarcation of a region. The important point is not which boundaries are chosen but the effects of this choice on the variables under study. If the researcher is aware at least of the direction of changes in the vari- ables as a function of regional boundaries, the question of boundaries is of less impor” tance. For example, increased regional size, with more internal trade, implies that the quantitative importance of exports de- Perhaps the most surprising feature of the concept of the export base of a region is that no one, to my knowledge, has attempted to integrate this concept into the traditional foreign-trade multiplier analysis. The works of Metzler, Machlup, and Stolper are con- spicuous by their omission from the discus- sions."! Usually the economic base ofa region of any size from an urban area up to several states is merely assumed to be exports. Im- plicitly, no foreign-trade multiplier feed- back is assumed. This is probably valid for smaller areas, but for larger areas the feed- back can be'an important factor. An ex ample may illustrate this point. Consider the exports of New England. Like those of any other region, its exports compete with products from’ elsewhere. ‘Thus one expects and finds that export re- ceipts fall off as a function of distance.!® Few of the region’s exports enjoy a world- wide market. The New York area would be "Lloyd A. Metaer, “Underemployment Equi librium in Intemational Trade.” Beomomarica, X (Apri, 1982), 07-112; Fete Machlyp, Tnlerntionol Trade aed the Netionol Tncome Mullin (Uhila- Adelphia: Blakiston Co., 1919); Wolfgang” Stolper, ‘the Volume of Foreign Trade and the Level of Income,” Quarterly Journal of Economics, LX (February, 1917), 285-310 CHARLES M. TIEBOUT expected to absorb a much higher percent- age of New England’s exports than would a ‘market of equal size in the Far West. Con- versely, the New England area would tend to absorb a greater percentage of New York's exports than would a more remote market, Contrast this situation with that of a mill town, Here the exports may be considered as going off into some distant space. The in- come of the mill town will be affected by the income of its market, but the income of the market will not be affected by the income of the mill town. This merely places the mill town in the same position as the competitive wheat farmer who is too small to affect the market but is affected by it. In this case there is no foreign-trade multiplier feed- back. This is not true in the regional case, is left in the uncomfortable position exports in part a function of do- rmestic income. Thus in the short run it ap- pears that the determination of regional in- ‘come depends only in part on the region’s exports. The larger the region under consid- tration, the smaller the role of exports. Other variables in the structural equations ‘must be considered if income stability is to be more fully understood, mm ‘The concept of the export base, or even the fuller concept of regional income determina- tion which includes other autonomous vari- ables, isa short-run concept. As such it may be fairly accurate. Our knowledge of con- sumer behavior and the relative ease of entry into residentiary activities, such as baking and retailing, indicate that this may bea fairly safe assumption, at least for small regions. To extend this relationship to the question of regional development, however, can be dangerous. Before we consider the question of the export base in regional development, one issue should be cleared up. It involves a dif- ‘See Walter Isard and Merton Peck, “Loca- tion Theory and Toterational and Interregional Ouartrly Journal of Economics, 1984), 7-118EXPORTS AND REGIONAL ECONOMIC GROWTH ference between regional growth and eco- nomic development in general. Suppose that we assume that general economic develop: ‘ment means raising the per capita income of some area, say North America, Further, let us define regional growth as the rate of change of per capita income in some segment of this totality, say Canada. Tt is pertinent to ask whether these should be considered as presenting the same sort of problem. If we imagine that the continent hhad developed without Westem influence, ‘but assuming capitalism, some process of primary, secondary, and tertiary evolution ight be expected to have taken place just as it did, in general, in the development of Europe. ‘True, some areas might have spe- cialized in agricultural activities; but if the ‘concept of regional balance means anything, specialized areas of manufactures would be expected. If some island economy, unknown to the rest of the world, were studied as a case of economic development, the stage concept might be quite valid. This sort of analysis should not be called on, however, to deal with questions of re- gional economic growth, which presents a different sort of problem. Ifa new peninsula ‘were formed off the New Jersey coast, it ‘would provide an ideal setting for studying regional economic growth. In this case there is no reason to expect the peninsula area to pass from the primary-subsistence to the secondary-tertiary stage as real incomes in- crease. If, as North points out, the region can develop an export base, it may develop in a variety of forms. It could become a center for truck gardens (primary); cite for ‘manufacturing (secondary); or a’ vacation area (tertiary). Note that this does not im- ply that it will develop even if it seems to have an export base, for reasons to be dis- cussed later. The important point about the New Jersey example is that we are dealing with 2 region in the neighborhood of more advanced areas. The degree of specialization and of exporting will depend on the market, ‘The higher the incomes in the neighboring areas, given the propensity to import, the higher the volume of their imports, that is, 163 the exports of the peninsula. The volume of exports and, in turn, internal growth will depend not only on the factor endowment but also on the income of the surrounding area. Tt is useful to keep this distinction in mind when contrasting regional economic growth with economic development in general.” ‘The idea that essentially theexport base is, the necessary and suflicient condition for re- gional economic growth may be, by defini tion, a true statement. Given the transport network, the size and location of markets, and factor endowments, it appears that a region will develop if it can compete with other regions in the export market. This implies an ability to produce at lower cost. With factor mobility, growth will take place only if the return to the factors is equal to, or greater than, the return to the same fac- tors in other regions. If this is what is meant by the ability to develop an export base, it is correct by definition, but it does not un- cover enough to predict growth. Ability to {ind an export base depends not only on the value of the units of output but on the cost of the inputs. These costs cannot be as- sumed to be equal for all regions. Yet, if residentiary activities are assumed to be endogenous and are not considered as a factor in regional growth, the analysis will implicitly assume that all unit factor costs ‘mong regions. Put another way, it is possible to define the necessary condi- tion for regional economic growth as the creation of an export base. But location theory, which is called on to explain its erea~ tion, will work only if factor costs are known. The determination of factor costs depends in part on the nature of the region’s residentiary activities. The development of the Paciie Northwest and the Canadian development cited. by North (ep. cit, p. 246-47) may he analogous to the New Jersey example. Both occurred after the process of industrilization was under way. Tn contrast to thie ‘ate the position ofthe eavist colonies typifies the ‘ase of general economic development, Of course, thisisa matter of degree and should not be taken a statement that exports were unimportant to the any colonies,164 An example may serve to illustrate this point. Going back to our hypothetical New Jersey peninsula, assume that a coal deposit is found some two hundred miles out on the peninsula. Will it be mined to compete in the New York market with Pennsylvania coal? Make one further assumption about the region. Assume that the rest of the area is all sand and marshland. If workers are to mine this newly found deposit, they must eat, and hence there must be imports. If the cost of these imports is high enough, no coal will be mined, and no export base’ will de- ‘velop. Contrast this with a situation in which the peninsula is rolling, fertile countryside. ‘Truck gardening and dairy farming can de- velop. Some imports will still flow in, but some local needs—vegetables and milk— will be supplied locally, that is, supplied by residentiary activities. ‘Under these condi- tions coal may be mined because of the lower cost of production, in this example lower dollar wages." Again, formally speaking, itis the ability to develop an export base which determines regional growth. Yet in terms of causation, the nature of the residentiary industries will bea key factor in any possible development. Without the ability to develop residentiary , the cost of development of export will be prohibitive The objection may be raised that this is 4 special case. No claim is made for general validity. However, if one seeks to explain the failure of certain parts of Alaska or Canada to develop, this consideration may uncover a more complete picture. Further, it is well known that cities usually develop in locations that are surrounded by good lands and not in the middle of less fertile In both cases the rea wages of the coal miners ‘would be the same, but inthe former ease, because of the high cost of living, dollar wages would be higher. Tt location theory tf the dolla cst which determines location and development. CHARLES M, TIEROUT. However, the idea of the export base is ‘more useful when applied to certain areas, such as satellite cities in the suburban fringe. Here low transport costs and prox- imity to markets insure that, even if residen- tiary activities do not develop fully, their outputs can be imported from near-by ‘areas, The larger the region under considera- tion, the less safe the assumption, ‘A‘fial point isin order concerning region- al growth and the ratio of export to residen- tiary activity. Given its population, bound- aries, transport network and costs, markets, and factor endowment, a region must divide its energies between residentiary and export activities, If too little is devoted to one or the other, the economy will not be maxi- ‘izing per capita income. Supposedly there is some optimum division. If export activi- ties are relatively too large, it will pay to ‘move resources into residentiary industries (witness the enviable position of the store- ‘keeper during the gold rush), and the re- gion’s income will increase. Here we find an example in which regional growth is possible with a reduction of exports. Vv ‘This note has tried to show that the con- cept of the export base is merely one aspect of a general theory of short-run regional in- come determination. In the case of large re- gions, other variables may play as important a role as exports, Furthermore, the concept of the export base may be useful in describ- ing regional income growth, but this need not be considered the same problem as gen- eral economic development. As an explana- tory factor in regional growth, the idea of the export base should not subsume the key role of residentiary activities in determining factor costs of possible regional exports. Finally, since a region must optimize the use of factors as between exports and residen- tiary outputs, a decline in export activity ‘may even be accompanied by rising regional