Regional policy and rent seeking: Targeted versus broad based policies

Policies aimed at promoting regional development have often had disappointing results. The present paper offers an explanation for why such policies may fail, and, more importantly, analyses how policies may be designed to create regional growth. Our main argument is that broad based policies should be chosen in regions with weak institutions. In regions with stronger institutions, policies targeted at promoting investment in specific firms or industries may be more efficient. The basis for this policy recommendation is the hypothesis that in countries with weak institutions, targeted policies create rents that attract rent seekers. Broad based policies, on the other hand, create a balanced process of industrialization, which educes the scope for rent seeking.