Regional Inequality In Canada Among Worst In Developed World: OECD

Define regional disparity

width="290"THE differences between countries are often not as great as the disparities within them: each nation is divided by a common economy. An analysis by The Economist suggests that the gap between poorer and richer regions increased during the downturn in some developed economies. And the income gap between richer and poorer areas is likely to widen further as government-spending cuts disproportionately hurt less prosperous parts.

Regional data come with various health warnings attached. Comparing regions in different countries is tricky, because their size varies hugely. We mainly use the OECD definition of “small areas” (Britain is broken into more than 100 regions), except for America where data are available only on a state-by-state basis. Crude income numbers also ignore the fact that the cost of living is cheaper in rural parts than in big cities, which has the effect of exaggerating inequality. Urban areas are always likely to be wealthier than rural ones because of their higher productivity and their greater ability to attract companies and employees.

Still, the extent of regional income inequality is striking in many countries. Chart one compares the ratios of GDP per head in the poorest and richest regions relative to the national average (a method often used by the OECD). Britain has the widest disparities, with average GDP per head in central London more than nine times larger than in parts of Wales. Central London's income per head is inflated by commuters who work in the city but do not live there, but even adjusting for this Britain has a big regional spread. So does America: the District of Columbia is five times as rich as Mississippi. Italy and Germany have the smallest regional spread, yet incomes in their most affluent areas are still almost three times those of the poorest.

width="268"In several places regional disparities have worsened over time. Start with America. Between 2007 and 2009 real GDP per head in the five richest states actually rose by an average of 2%, but fell by 3% in the five poorest. Both groups outperformed the national average, a fall of more than 4%. (The biggest slumps, both by more than 10%, were in Michigan, the eighth-poorest state, and in Nevada, site of the biggest house-price crash.) But in general richer regions fared better.

That continues a longstanding trend. Since 1990 the ratio of GDP per head in the District of Columbia compared with that in Mississippi has risen by almost a fifth (see chart 2, which, America aside, looks at figures for bigger regions than chart 1 because the data are more timely). The change is less pronounced if you average GDP per head in the five richest and five poorest states, but it still holds. That is largely due to the dependence of poorer states on manufacturing, which has suffered big job cuts over the past decade. In 2000 the share of manufacturing in GDP was three times bigger on average in the five poorest states than in the five richest.

Regional inequality has also widened in Britain. The ratio of GDP per head in the three richest regions to the three poorest increased by almost a tenth between 1990 and 2009. The recession exacerbated things. Real GDP per head fell by 6% during 2007-09 in poorer areas, such as Yorkshire, the Midlands and Northern Ireland, twice as much as in London. In France, too, the income gap has widened: during the recession real GDP per head fell by twice as much in the five poorest states as in the Ile-de-France region around Paris.

The story in Germany is rather different. GDP per head in Germany's five poorest states (all in the east) fell by slightly less during the downturn than in the five richest. This continues the dramatic convergence of the past two decades, thanks partly to huge national and European Union funds for infrastructure, R&D and education, as well as the transfer of some manufacturing jobs from factories in the western states to the east. In 1991, just after unification, Hamburg was five times richer than the poorest eastern region; now it is only 2.3 times richer. In Italy, too, the gap between Italy's wealthy north and the lagging Mezzogiorno in the south has also narrowed over time, thanks in part to large fiscal transfers.