Promoting Sustainability in Peripheral Regions: A Regional Economic Development (RED) Model

The growing concentration of innovation-driven economic activity in core metropolitan areas threatens the sustainable development of peripheral regions. Conventional aid programs are giving way to place-based strategies that harness endogenous regional resources. Yet most computable general-equilibrium (CGE) models—the standard tools for policy appraisal—operate at the national scale and generally treat regions as passive recipients. This study adopts the regional system (RS) approach and contributes a step towards its practical implementation with the introduction of a Regional Economic Development (RED) model—a CGE framework that embeds the region as an explicit behavioral block inside a national system. The model comprises four interlinked modules and makes a key distinction, often overlooked in the RS literature, between a region’s domestic product (output generated within the territory) and its regional product (income earned by resident labor and capital, irrespective of where those factors are employed). This distinction captures income leakages and interregional spill-overs—factors that are critical for peripheral economies. Scenario analysis couples exogenous policy levers—tax incentives, infrastructure upgrades, human-capital investment—with endogenous outcomes such as employment, income, and structural change. By disentangling internal production capacity from external income opportunities, the RED model lets policymakers compare strategies that prioritize local output with those that maximize household welfare. Iterative simulations reveal feasible development targets, the policy mixes required to achieve them, and the structural implications of each trajectory.