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Defining characteristics of rural regions

Rural regions have common characteristics of low density, long distances and lack of critical mass. Given the marked differences in capital endowments, available resources and areas of competitive advantages, it is important that national development strategies are sensitive to, and take into account, these regional differences. In particular, rural regions have different characteristics - low density, long distances and lack of critical mass - than urban regions and will therefore face different challenges in their stages of development:

  • 1. Rural regions have widely dispersed populations that limit the easy interactions that take place in cities that lead to important agglomeration effects.
  • 2. Long distances increase the role of transport costs in all rural interactions, both within the region and outside the region.
  • 3. Finally, small populations lead to small specialised economies that find it difficult to achieve the minimum size of operation to be efficient producers. This lack of scale is also true for the local or home market of a rural region, which is also too small to absorb much local production.

As a result of these characteristics, the economic base of rural regions tends to be small, specialised and export oriented. But low density, long distances and lack of critical mass do not necessarily represent bottlenecks for development in rural regions. Indeed, many OECD rural regions are highly competitive (see Chapter 1). Rather, they differentiate economic activities in distinct ways when compared to urban regions. Due to a smaller labour force and the small size of local markets, only a few firms can be large enough to achieve minimum efficient scale in production, and these firms have to be export focused. Furthermore, given the steeper transport costs faced by firms in rural regions to reach export markets, they have to be highly efficient and productive to be competitive. These conditions preclude certain industrial specialisations in rural areas, in particular advanced services that rely on easy interactions among firms and large home markets. So, too, are many forms of manufacturing that require large labour forces or nearby suppliers. Despite these challenges, it is relatively easy to find highly competitive firms in rural regions and highly productive rural regions.

The provision of goods and services in rural areas is more costly than in urban areas, since settlements in rural regions are inherently small with low populations compared to more urbanised regions. The lower critical mass in rural areas leads to fewer scale economies, thereby increasing the unit cost of the provision of public goods and services, whether delivered by government or by private firms. Finally, in terms of the urban hierarchy, the small cities in rural regions offer only lower level goods and services compared to the greater variety available in large centres.

Past views regarded rural regions and policies as impediments to development. Because of these challenges, some governments have assumed that efforts to develop rural regions are difficult to justify and offer low returns on any investment. As a result, rural policy can become framed as subsidy or welfare policy that is offed for equalization and not investment purposes, and is designed to ensure that rural citizens receive some minimal standard of well-being. From this perspective, rural regions and rural policy are impediments to development.

In reality, there is a catching-up potential in rural regions with important implications for aggregate growth. Although there are many rural regions from OECD member countries with lower levels and rates of economic growth than urban regions, there is a significant number of rural regions that perform at higher levels than most of the more urban regions. This demonstrates that rural regions can make positive contributions to national growth, which individually might not matter significantly, but the combined contribution is quite important for aggregate performance (see Box 1.5). The challenge is to identify policies that enable this to happen.

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