Prioritizing Provincial Investment Policies Based on the Regional Development Trap and Provincial Per Capita Income

Extended Abstract
 
Introduction and Objectives: Unregulated markets exacerbate regional inequality, and reducing such inequality requires government policy intervention. One such policy is investment in production. Policymaking, however, necessitates answering the question of which regions should be targeted. To address this, regions must be classified, and such classification is essential for several reasons. First, not all regions of a country share identical characteristics; nevertheless, there are categories under which regions exhibit similar features. Second, the normative justifications for implementing policies, as well as their importance and priority, differ across categories. Third, the type of policies appropriate for each category varies. Hence, one objective of this study is to classify Iran’s provinces.
On the other hand, prioritising among these categories is necessary to achieve regional justice, because progress without justice is inconsistent with Islamic norms. According to the view of Shahīd Ṣadr, social security in Islam is realised in two stages. In the first stage, the government provides employment opportunities for all individuals so that they can meet their needs with dignity through their own market activities. In the second stage, the government provides financial support to those who remain poor due to unemployment or low income. Therefore, to achieve regional justice, attention to two Islamic normative criteria—poverty alleviation and the provision of employment opportunities—is essential.
Methodology: This study employs an analytical-descriptive method to prioritise Iran’s provinces based on data from 2011 to 2021 (1390–1400 SH), using two criteria: the Regional Development Trap and provincial per capita income. The regional development trap refers to a situation where a region fails to maintain its economic dynamism relative to its own past or relative to the national scale. To calculate the regional development trap, three indicators are used: regional per capita income, regional employment ratio, and regional labour productivity.
Furthermore, based on the provincial per capita income index, provinces are divided into three groups: high-income (above the national average), middle-income (between 75% and 100% of the national average), and low-income (below 75% of the national average). Each province that falls within one group for at least six years during the period 2011–2021 is assigned to that group.
Low-income provinces face a higher probability of poverty. Meanwhile, production and employment decline in provinces that are trapped in or exposed to the regional development trap. Thus, the combination of the two criteria—regional development trap and provincial per capita income—aligns with the two Islamic normative criteria (poverty alleviation and employment generation). Moreover, poverty alleviation, due to its immediate tangible effects, takes higher policy priority than the development trap. Based on these considerations, provinces are classified into five priority categories:

First priority: Low-income provinces trapped in the development trap.
Second priority: Low-income provinces without the development trap.
Third priority: Middle-income provinces trapped in the development trap.
Fourth priority: High-income provinces trapped in the development trap or middle-income provinces without the trap.
Fifth priority: High-income provinces without the development trap.

Results: Based on data including oil, eight provinces are identified as trapped in or exposed to the regional development trap; based on data excluding oil, this number rises to fourteen provinces. Between these two calculation methods, the excluding-oil approach is more accurate because when the country’s oil revenues decline, calculations that include oil may conceal the development trap of some provinces. When national oil revenues are in severe decline, the situation where a province performs worse than the national average—which is an indicator of the trap—can remain hidden in calculations. For a correct comparison between the provincial and national scales, the same conditions must be considered at both levels; that is, provinces without oil should be compared with the national excluding-oil situation. Even for oil-producing provinces, the oil share must be deducted, and then the province’s condition should be compared with the national excluding-oil situation, because most provincial oil revenues are not actually provincial income but are deposited into the national treasury. Therefore, excluding-oil data should be used for all provinces.
By combining the two criteria—regional development trap and provincial per capita income (based on excluding-oil data)—the five fold provincial prioritisation is obtained as follows:

First priority: Īlām, Chahārmaḥāl o Bakhtīārī, Sīstān o Balūchestān, and Qom.
Second priority: Āz̄arbāyjān e Gharbī, Ardabīl, Khorāsān e Janūbī, Khorāsān e Rażavī, Khorāsān e Shomālī, Kordestān, Golestān, and Lorestān.
Fifth priority: Yazd, Semnān, and Zanjān.

It should be noted that Sīstān o Balūchestān is technically low income without the trap, thus falling under the second priority; however, we have placed it in the first priority because its 11 year average per capita income (at constant 2021 prices) is roughly one third of the national average over this period, indicating its severely disadvantaged condition.
Discussion and Conclusion: According to the above prioritisation, different policy recommendations are proposed for the five categories:

For the first two priority categories, investment policies should focus on the adoption of existing technologies from other regions.
For the third and fourth priority categories, policies should aim at innovation at the technological frontier.

Additionally, for the first two priority categories, it is recommended that the government encourage private sector investment through measures such as providing spatial planning information, offering tax discounts to investors, and implementing a regional minimum wage law. Of course, evaluating the success of this policy package requires case studies and place based research.
Furthermore, to achieve regional justice, it is proposed that bank financing mechanisms be directed in accordance with the five fold priorities, because under Article 2 of the Central Bank Act, one of the Central Bank’s objectives is to realise the economic goals set forth in the Constitution (including Articles 43 and 48). Hence, the Central Bank is obliged to manage banking facilities in a way that ensures regional justice in financing.
An evaluation of the banking system’s performance during 2011–2021 shows that banks’ operations were not aligned with the above five fold prioritisation; rather, they were largely driven by market mechanisms that exacerbate regional inequality. Indicators such as the facilities to deposits ratio and per capita facilities are higher in some fourth  and fifth priority provinces than in first  and second priority ones. Even if these two indicators were equalised across all provinces, regional inequality would not necessarily decrease; self reinforcing cycles of regional inequality would persist because population also matters. Therefore, in allocating banking facilities, the absolute facilities indicator must also be taken into account.