Economic growth provides benefits and costs in the region in which it occurs. It has a positive impact on nearby localities if jobs, population, and wealth spill over into these communities. Alternatively, it has adverse effects on the nearby localities if growth in the core region attracts people and economic activity away from these peripheral areas. Spread refers to the situation where the positive impacts on nearby localities and labor markets exceed the adverse impacts. Backwash occurs if the adverse effects dominate and the level of economic activity in the peripheral communities declines.
The idea of backwash originated in international-trade theory in a book by Gunner Myrdal (1957). Myrdal noted that an increase in exports from a region may stimulate capital and labor flows into the region to the detriment of the localities from which the resources came. Thomas Vietorisz and Bennett Harrison (1973) later proposed that spread and backwash feedbacks between labor markets contributed to a divergence of technology levels, labor productivity, and wages in these markets. Gary Gaile (1980) used backwash concepts to describe the potential negative effects of urban growth on peripheral areas.
A renewed interest in backwash effects was stimulated by the "new economic-growth theory." An enhanced role for innovative activity and increasing returns to scale in economic development increase the competitive advantage of larger urban areas as the location for economic activity. This growth in urban (core) areas may lead to a decline in rural (peripheral) population and employment (a backwash effect) if rural-to-urban flows weaken rural economies. Five types of flows contribute to backwash: Rural funds are invested in urban areas to take advantage of entrepreneurial activities and relatively rapidly growing markets for goods and services. Spending in rural trade and service markets declines owing to increased competition from urban businesses. Rural residents move to the expanding urban areas for improved access to jobs and urban amenities. Rural firms in the innovative stage of their life cycle move to urban areas to benefit from proximity to specialized services, skilled labor, and expanding markets. And finally, political influence and government spending may shift to the more rapidly growing core areas.
The adverse rural-to-urban flows occur in conjunction with the spillover of people, jobs, and funds from the growing core to peripheral areas (spread effects). The size and geographical extent of the beneficial and adverse forces on rural areas depend on the characteristics of the rural and urban areas and the nature of rural-urban linkages. In general, the beneficial forces are stronger for rural areas near urban cores, while the adverse flows dominate in regions more peripheral to the growing urban areas. Thus, backwash is more likely in rural areas outside of the rural-to-urban commuting zones.
The policy implications of backwash are that localities distant from urban growth centers will likely be adversely affected by regional economic-development policies that focus on innovation and entrepreneurial development in urban areas. These remote regions will need to devise economic-development programs that emphasize competitive advantages specific to their economies.