Economic GeographyandRegional Policy Albert van der Horst Steven Brakman, Harry Garretsen Joeri Gorter, Marc Schramm
Outline • Observation: the economic geography of Europe is local and stable • patchwork of core regions linked with sparse surrounding regions • Explanation: the advantage for location in the core regions are huge • Implication: the scope of regional policy is limited
Doubts about the efficacy of regional policy: North-Netherlands
Doubts about the efficacy of regional policy: ineffective structural funds
New Economic Geography (NEG): imperfect competition mill price zero profit profitmargin profit maximisation average cost marginal cost total demand marginal revenue production of the representative firm in region 1
NEG: circular causality • Firms’ location decision is based on the balance of costs and benefits • Costs and benefits depend on the presence of other firms • Firms want to be where other firms are; Firms want to go where other firms go to • Circular causality → agglomeration
NEG: linkages between regions Linkages between firms + Trade costs + Mobility of production factors = Linkages between regions • NEG investigate systems of regions
NEG: location in the core is profitablefor firms and workersat short distance Wage surplus in the core relative to proximate peripheral regions The core is not attractive: economic activity spreads ?
? • Only at is economic activity malleable! • At short distance comes circular causality into play, such that production and employment concentrate in a core region is the break point of NEG is the quest of this study • At what distance do regions interact? ? ?
Two statistics • Moran’s I: interaction between proximate regions • measures spatial autocorrelation • density of employment (per square km.) • takes distance into account • calculated for European Nuts3 regions (provinces) • Theil: dispersion of economic activity • distribution of employment (per km2) over regions • decomposable in within and between index • calculated for European Nuts0 - Nuts3 regions
Equation 1: spatial wage structure • Are wages higher in dense regions? • Wage in region r = F(Y: output in all regions Drs: distance between r and s)
Equation 2: equilibrium wage of NEG • Central in almost all NEG-models production of goods (wage costs) = demand for goods (labor income) • W: nominal wage in region r • Y: value added in region s • I: price index in region r (proxy) • ø: freeness of trade • T: iceberg transport costs • D: distance between region r and s
Equation 2: equilibrium wage of NEG • Central in almost all NEG-models production of goods (wage costs) = demand for goods (labor income)
Theory with numbers Strong interaction with Paris ‘Periphery of Paris Outside Paris’ influence
.. and stable • Brakman et al. (2004): the majority of West-German cities returned to their pre-war levels • cf. Davis and Weinstein (2002): similar observation for Japan
Regional Policy • The European economic geography consists of a network of local and stable core periphery systems. • Factor remuneration tends to be relatively high in the core. • The scope of regional policy in reducing regional disparities by enticing business activity to the periphery is limited. • policy should take the core-periphery structure at NUTS 2&3 level as given
Regional policy: infrastructure • Infrastructure improves the interaction between regions • Firms in core: • better access to (consumer) market in peripheral region • Firms in periphery • better access to market (for intermediate inputs) in the core • Who benefits more: … ? • Infrastructure might make location in the core even more attractive!
Regional policy • Stimulate growth by targeting regional policy to regions with ‘sufficient’ potential to locate firms • solve infrastructure bottlenecks • Reduce inequity by directly supporting immobile workers • immobile workers in the periphery are likely to be the least prosperous citizens
Recall • Observation: the economic geography of Europe is local and stable • patchwork of core regions linked with sparse surrounding regions • Explanation: the advantage for location in the core regions are huge • Implication: the scope of regional policy is limited
Location, growth and policy • Empirical research reveals: • There exist a core-periphery structure at the Nuts 2&3 level • FDI is concentrated in high-production areas • Clustering might stimulate growth • “Agglomeration can be thought as the territorial counterpart of economic growth” (Fujita and Thisse, 2002) • NEG theory on agglomeration and growth • Knowledge spillovers • Incentives for innovations increase • Implication: cohesion and competitiveness are often conflicting goals of regional policy • In particular at the Nuts 2&3 level