Exports and Regional Economic Growth: A Reply

Author(s): Douglass C. North

Source: Journal of Political Economy, Vol. 64, No. 2 (Apr., 1956), pp. 165-168
Published by: University of Chicago Press
Stable URL: http://www.jstor.org/stable/1826832
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 A REPLY
DOUGLASS C. NORTH1
Universityof Washington

PROFESSOR TIEBOUT 's is a wel- the area. Not onlyhas therebeen mobility
comment
come addition to the literatureon of productivefactorswithinthe American
regionaleconomicgrowth.The role of the economy,but also during a substantial
export base in regionaldevelopmentre- periodof our growththerehas been inter-
quires furtheranalysis,and Tiebout has nationalmobilityof capital and labor for
raisedsomeimportant questionsthatmerit the entire Atlantic economy. Therefore,
discussion. whilethe studyof short-run incomedeter-
The bulk of his criticismof the role of minationhas been concernedwiththe rate
the exportbase in regionalgrowthhinges of utilizationof productivefactors,the
on one criticalpoint at issue betweenus. studyoflong-run growthhas dealtwiththe
His is a short-runanalysis,in whichthe ex- determinants ofchangingefficiency and the
portbase is conceivedto be only one of a immigration of labor and capital into an
numberof importantfactorsin incomede- area. The variablesused in incomeanalysis
termination. I have no quarrelwith this are of limiteduse in the studyof long-run
position,but it has littlerelevanceformy growth.Indeed,theaggregatesused tendto
article, which was explicitlyconcerned obscureratherthan to illuminethe factors
with long-run economic growth. Short- generating secularexpansion.An examina-
periodincomedetermination and long-run tion of Tiebout'smajor pointswill further
economicgrowthare notthesame thing.In clarifythis distinctionand highlightsome
the formercase the analysis is concerned important problemsforfurther research.
withchangesinthelevelofemployment and
the variables that will affectthe rate of I
of
utilization productive factors. In this Tiebout and I are in agreementthat
case increasedbusinessinvestment will re- thereis no "ideal" region.Sincehe concedes
sultin expandedemployment and incomein that the questionof boundariesis of less
periodsof less thanfullemployment. Such importanceiftheresearcher is awareof the
analysis,however,has littlerelevancefor significance of increasedregionalsize,there
long-run economicgrowth, wheretheobjec- is no apparentdifference inourposition.Yet
tiveis to determine thefactorsthatwillaf- one pointrequiresemphasis.The usefulness
fect the decade-to-decadechanges in the of a regionas an economicunitof analysis
real aggregateand per capita incomeof an restsupon its specialization.It is thisgeo-
area underconditionsof fullemployment. graphicdivisionoflabor,withdifferent areas
In the lattercase secularexpansioncomes having special factor endowmentsand
about becauseof increasedoutputper unit transfer costs,whichmakes the conceptof
of resourcesor an increasein the supplyof the regionvaluable in economicanalysis.
productivefactors,or both. Historically, The region'ssignificance lies in its beinga
thisincreasein labor and capital has come specializedpart of the whole.If the size of
about as a resultof long-runexpansionof the regionis to be limitedby its individual
the demand forproductivefactorswithin economiccharacteristics, then the concept
of a geographicallycontiguousarea held
1I am indebted to my colleagues Philip Cart-
wrightand Donald Gordon for suggestionswhich
togetherby its development arounda com-
have clarifiedsome of the pointsat issue in this dis- mon exportbase is a useful(thoughcer-
cussion. tainlynot the only) basis of classification.
165

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166 DOUGLASS C. NORTH

It has the added advantagethat,in terms income receivedfromoutside the region,

of the long-rungrowthof differentareas in and, correspondingly, expanded employ-
America,the exportbase has been influ- mentin locallyorientedindustry, trade,and
entialin shapinga good deal of the history servicesprimarily reflectslong-runchanges
oftheregion.'Sucha classification
necessari- in incomereceivedfromthe exportbase.4
lylimitsthesizeoftheregionand minimizes The qualifications to thisargumentrequire
theproblemsraisedby Tiebout. examination in orderthatthesignificance of
theexportbase in regionalgrowthmay be
II properlyevaluated.
Given the regionas defined,the role of 1. Disproportionate federalgovernment
theexportbase in regionalgrowthmaynow expenditures in a region(as comparedwith
be morepreciselydelineated.Tieboutand I tax withdrawals) can serveand have served
are in agreementthat it is not the sole as a cause of regionalexpansion.Not only
sourceof regionalgrowth,'but we are in may the characterand amountof federal
disagreement when he states that it may expenditurein a regionbe expansive,but
not even be the most importantfactorin also investment in social overheadfacilities
regionalexpansion.An examinationof the in a newarea mayalteritscompetitive posi-
differentialrates of growth of regions tionwithotherregions.
throughoutAmerica'sdevelopmentinevi- 2. Migrationfor non-economicreasons
tably focuseson the ability of areas to maylead to expansionofresidentiary activ-
attractproductivefactors.Initiallyit was ity withoutany expansionof the export
the rich land and resourcescapable of base. In a high-income societysuch as ours
producingextractivegoods in demand in the lure of pleasant living conditions-
existingmarketswhichwere the primary "amenities," to use ProfessorUllman's
attractions.At a laterdate, withchanging term'-has been a forceattractingimmi-
factorcombinationsand technologicalde- grants (with capital) into Californiaand
velopments,it was frequentlythe oppor- otherareas and leadingto an expansionof
tunitiesin manufacturing for the United residentiary activities.
States marketwhichled to immigration of 3. The relationship betweenresidentiary
labor and capital into a region.The im- activityand importschangesin the course
portantpointis that the pull of economic ofregionaldevelopment. Withthe opening-
opportunity as a resultofa comparativead- up of a new area, almosteverything must
vantagein producinggoodsand servicesin initiallybe imported.Gradually,residenti-
demandin existingmarketswas the princi- aryactivityincreasesuntillocationalfactors
pal factorin thedifferentialratesofgrowth
4 The employmentmultiplierhas been conceived
of regions. by :Iildebrand and Mace ("The Employment
Since residentiary industrydepends on Multiplierin an Expanding IndustrialMarket: Los
incomewithinthe region,the expansionof AngelesCounty,1940-47," ReviewofEconomicsand
such activitymust have been inducedby Statistics,Vol. XXXII, No. 3 [August, 1950]) to
the increasedincome of the region's in- be primarilyof use in short-runanalysis. However,
the study by the Federal Reserve Bank of Kansas
habitants.Therefore, increasedinvestment City of "The EmploymentMultiplierin Wichita"
in residentiaryactivity is primarilyin- (Monthly Review, Tenth Federal Reserve District,
duced investmentas a resultof expanded Vol. XXXVII, No. 9 [September 30, 1952])
stronglysuggeststhat residentiary
employmentdoes
2 A briefaccount of the role of the exportbase in not adjust to short-runchanges in employmentin
shaping the character of a region's economy is export industriesbut does reflectlong-runmove-
givenin myarticle,"Location Theoryand Regional mentsin exportemployment.
Economic Growth,"Journal of Political Economy, 5Edward Ullman, "A New Force in Regional
LXIII (June,1955), 249-51. Growth,"Proceedingsof theWesternArea Develop-
3See thequalificationsin myarticle,ibid.,p. 250, ment Conference,November17, 1954 (Palo Alto,
n. 34. Calif.: StanfordResearchInstitute,1955).

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 A REPLY 167

effecta balancebetweenimportsand local- exceptionalin character,while the third,

ly orientedeconomicactivityat a given thoughmore important,is clearly not a
leveloftechnology and transfercosts.Since primarydeterminant of growthbut rather
techniquesand transportation have under- a factorthatwillexertsomeinfluence upon
gone radical changesover time,this rela- a region'srate of growth.7 Any analysisof
tionshiphas been subject to important the seculargrowthof a regionmustbe pri-
changes.Moreover,as a region'spopulation marilyfocusedon the successof its export
and incomegrow,its regionalmarketwill base, and Tiebout's contribution here has
becomelargeenoughto make it feasibleto been to pointout some of the factorsthat
produce some goods and services locally must be considered.8 However,his discus-
whichhad previouslybeenimported.6 sion of short-run factorsin incomedeter-
Clearly,therefore, residentiaryactivity mination,significant thoughthese may be
doesnotplaya purelypassiverolein region- in determining thelevel of employment (or
al growth. Tiebout'spointaboutfactorcosts effecting a shiftin resourcesin the case of
is a goodone.Boththenatureofthesupply full employment),is irrelevantto the
curveoflaborand theleveloftransfer costs analysis of long-run regional economic
are importantdeterminants of the ability growth.
of a regionto produceexportcommodities.
Typically,newregionshave beenopenedup III
and developed because they had such a Tiebout's distinctionbetween regional
tremendousadvantage in natural-resourcegrowthand economicdevelopmentin gen-
endowments that they could produceand eral is surelya spuriousone. It is hard to
markettheirexportcommodities at a cost conceive of the economicgrowthof one
competitive withotherareasdespitethisdis- regionwhich would not favorablyaffect
advantagein labor and transfer costs (and the per capita incomeof the nation as a
in the case of the earlierdevelopmentof whole (even thoughit mighthave adverse
Americanregions,when institutionsfor effectsupon another region). In fact,
financialmediation were immatureand America'sentiredevelopment has illustrated
capitalwas less mobile,highercapitalcosts this relationship.Growthhas been gener-
as well). The subsequentinflowof capital ated inparticulargeographic areaswhich,as
and labor and the developmentof social a resultoffavorablefactorendowments and
overheadfacilitiestypicallyreducedthese transfercosts,could producegoods in de-
cost disadvantagesand made it possibleto mand in existingmarkets.Whetherit was
produce other export commoditieswhose the opening-upand developmentof a new
comparative resource advantages were regionin the West capable of producing
somewhatless pronounced. However,when wheatforthe worldmarketor thedevelop-
the growth of residentiaryindustryis mentof an industrialregionin the eastern
"stunted"and transfercosts remainhigh, and centralstatesproducingmanufactured
thentheexportbase willnotexpandin this goodsforthedomesticmarket,theresultin
manner.Alaskais an excellentcase in point. each case was to attractlabor and capital
Thisexamination ofthemajoralternative (fromEuropeas wellas internally) notonly
sourcesof regionalgrowthclearlyindicates
7Tiebout's finalpoint deals with the possibility
their secondaryimportanceas compared of regionalgrowthwith a decline in exports.This
withthe exportbase in long-runregional is conceivablebut fliesin the face of the experience
growth.The firsttwo qualificationsare of growingnations,where internationaltrade has
6 The changingcharacterof residentiary
activity typicallyincreasedwith risingincomesratherthan
the reverse.
withregionalgrowthrequiresfurtherresearchboth
in expandingregionalmarketsand in the historical 8
In this regardthe changingtermsof trade of a
developmentof regionswhere changingtechnology regionhave been important.Regions whose export
and transfercosts have changed the character of base consistsprimarilyof agriculturalcommodities
goods and services.
residentiary have been particularlyaffected.

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168 DOUGLASS C. NORTH
intotheexpandingexportindustrybut also and thePacificNorthwest, whentherewere
intoa widevarietyofresidentiary activities well-developedmarkets,and the case of
to meettheexpandingneedsof the region's generaleconomicdevelopmentwhichtypi-
population.The process of urbanization, fiedthe Americancoloniesis, to the bestof
whichwas an integralpartof thegrowthof my knowledge,likewiseincorrect.America
manufacturing regions,was as expansivein was settledpartlyforthe explicitpurpose
its effectsas was the opening-upof new of producinggoods in demand in the ex-
regions,theirdevelopment,and their as- pandingEuropeanmarket.The prosperity
similationintothe economy.In both cases ofthecoloniesdid notrestuponsubsistence
the expansionof the regionrequireda vast farmsbut resultedfromthe richland and
increasein importsfromoutsidethe area. resourcesof the New World,whichcould
The result was to induce investment produce tobacco, rice, indigo,ships, fish,
throughoutthe rest of the economy.The cereals,and other productsthat were in
multiplier-acceleration processthatresulted growingdemandin England,Europe, and
was an essentialpartofAmerica'seconomic theWestIndies.The wholedevelopment of
growth.9 theNew Worldhas beenwithinthecontext
Tiebout's footnoteabout the differenceoftherapidlyexpandingWesternworld,and
betweenthe later developmentof Canada the prosperity of the colonistsreflected
the
growthof income throughoutthe North
9 JamesS. Dusenberryhas an excellentaccount Atlantic economy,which resulted in an
of this entireprocessin his article,"Some Aspects expandingdemandfortheirservices(par-
of the TheoryofEconomicDevelopment,"Explora-
tions in EntreprenurialHistory, Vol. III, No. 2 ticularlyimportant
in the case of New
(December, 1950). England) and commodities.

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