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Agglomeration. Facts and theories about agglomeration. Agglomeration. Concentration of economic activity Core and periphery Economic development is unevenly distributed in space Should we worry about agglomeration?. Agglomeration. http://www.savethenight.eu/Lights in Europe.html.

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agglomeration
Agglomeration

Facts and theories about agglomeration

agglomeration1
Agglomeration

Concentration of economic activity

Core and periphery

Economic development is unevenly distributed in space

Should we worry about agglomeration?

agglomeration2
Agglomeration

http://www.savethenight.eu/Lights in Europe.html

agglomeration3
Agglomeration

Concentration of economic activity is associated with strong disparities in income per capita

Income per capita is a good proxy for standard of living and people well being

Large disparities in income per capita in Europe at national level

agglomeration4
Agglomeration

There are important differences within the advanced and the backward countries

Agglomeration of economic activity does not coincide with national boundaries

In Europe important gaps in income per capita at regional and at sub regional level

The territorial shape of unbalances is different in each country

agglomeration5
Agglomeration

Differences in income per capita are often associated with differences in the variables related to the labour market

Low income per capita countries are often countries with higher rates of unemployment, and of lower rates of employment

agglomeration6
Agglomeration

And low per capita income regions are often regions with lower rates of employment and higher rates of unemployment

agglomeration7
Agglomeration

But keep in mind that this relation is far from being perfect because…

Labour markets have strong national specificities due to the national institutional context and regulations and because …...

the employment content of economic growth can vary

agglomeration8
Agglomeration

Spatial unbalances in economic activity are also associated with unbalances in the endowment or availability of other important public goods (again with important exceptions) which affect the well being of people

Yes, there are good reasons why we should worry about agglomeration

agglomeration9
Agglomeration

Is there any long run tendency towards convergence of levels of income per capita?

It is difficult to answer. At global level and in the long run the answer is probably positive. Look at the video which shows the long run correlation between health and GDP per capita at global level.

agglomeration10
Agglomeration

Lecture by Hans Rosling

agglomeration11
Agglomeration

At European level, a tendency towards convergence after the second world war can be detected at national level

Looking at the last decade, some backward European countries have grown very fast and narrowed dramatically the gap with the advanced countries

agglomeration12
Agglomeration

Growth however in these countries has often been spatially very unbalanced

Backward regions in the backward countries have grown more than all regions in advanced countries but much less than advanced regions of their own countries

agglomeration13
Agglomeration

The impact of the present economic crisis has been felt by all countries

However it hit different countries in different ways

It is very difficult to forecast how and when the various countries will emerge from the present crisis

agglomeration14
Agglomeration

There are various theories to explain why economic development produces inherently spatial economic unbalances

One of the most recent and debated theories is the New Economic Geography

The first contribution of this school of thought is due to Paul Krugman in 1991

agglomeration15
Agglomeration

The issue of the Neg is to explain the formation of a large variety of economic agglomerations in the geographical space

The novelty of the Neg is to explain agglomeration within a framework of general economic equilibrium, that is to explain agglomeration and dispersion within the same model

agglomeration16
Agglomeration
  • The model analyses simultaneously the centripetal and the centrifugal forces of economic activity
  • Three key hypotheses of the model:
    • positive transport costs
    • increasing returns to scale and monopolistic competition
    • factor mobility
agglomeration17
Agglomeration

The Neg shows that the interaction between economies of scale, transport costs and factor mobility may produce concentration of economic activity

The higher are increasing returns to scale, the lower transports costs and the higher the share of mobile factors of production, the higher the probability of agglomeration

agglomeration18
Agglomeration

The model is circular: once the process of agglomeration has started, it tends to reproduce and to reinforce

The sketch of the model

The firm must decide where to localize its plant on the basis of three parameters: fixed cost of setting a new plant, transport cost and share of immobile resources

agglomeration19
Agglomeration
  • Basic assumptions
    • Two regions: East and West
    • Two sectors: agriculture and manufacturing
    • Firms and workers in the agriculture sectors cannot move
    • Firms and workers in the manufacturing sector can move
agglomeration20
Agglomeration
  • Manufactured goods can be produced in either or both locations
  • There is a positive set up cost for each manufacturing plant
  • If a manufactured good is produced in only one location, trade costs must be incurred to serve the other market
agglomeration21
Agglomeration

If a manufactured good is produced in two locations, the set up cost doubles

agglomeration22
Agglomeration

A numerical example

krugman
Krugman
  • Assumptions
    • Manufacturing labour force in each location is proportional to the share of manufacturing of that location
    • Demand is strictly proportional to the labour force
    • Total demand for manufacturing is 10
    • Labour force in agriculture 60%, in manufacturing 40%
krugman1
Krugman

Therefore total demand for manufacturing is 10 of which 6 from workers in agriculture (always 3 for each location) and 4 from manufacturing workers (from either or both locations)

The cost of transport per unit of production (t) is 1

The set up cost is 4 for each plant

agglomeration23
Agglomeration
  • Main conclusions of the model
    • The choice of location of a firm will depend on the location of other firms
    • Other things being equal, the firm has the convenience to locate in the bigger market to exploit increasing returns and save transport costs.
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Agglomeration
  • The choice of the firm to locate in the bigger market, will make that market bigger, and a bigger market will attract new firms starting a circular process towards the concentration.
agglomeration25
Agglomeration
  • Agglomeration is only a possibility. Whether agglomeration will take place or not depends on the relative values of transport costs, fixed costs, share of immobile population. High transport costs and an high share of immobile population are an obstacle for agglomeration while high fixed costs are an incentive for agglomeration
agglomeration26
Agglomeration
  • There are then multiple equilibria. You can find equilibrium producing manufacturing entirely in West, entirely at East or with two plants both at west and at east
agglomeration27
Agglomeration
  • You can also appreciate that when t=0 (no transport cost) the solution of one plant is always convenient. The world is flat. Spatial distance is irrelevant and the firm can locate the plant indifferently everywhere.
agglomeration28
Agglomeration
  • Other centripetal and centrifugal forces play a role in the agglomeration and dispersion processes
  • Other centripetal forces:
    • Backward and forward linkages
    • External economies
      • Specialised providers of inputs
      • Pooling of specialised labour force
agglomeration29
Agglomeration
      • Complete and rapid flows of information and knowledge
  • Other features of the context: institutions, social cohesion, social capital, environment, public goods
agglomeration30
Agglomeration
  • Centrifugal forces
    • Price effect
    • Congestion costs and diseconomies of scale
    • Share of immobile factors
agglomeration and integration
Agglomeration and integration

Agglomeration and European economic integration

Expected positive effects of European economic integration

Cohesion policies, single market and European monetary Union

Potential spatial asymmetric effects of European economic integration

agglomeration and integration1
Agglomeration and integration
  • Integration may favour agglomeration because
    • It lowers trade costs
    • It increases the scope for increasing returns
    • It increases the mobility of factors of production
agglomeration and integration2
Agglomeration and integration

The potential asymmetric effects of integration as a strong motivation for European cohesion policies

The historical link between cohesion policy on one side and single market and monetary unification on the other

Compatibility and complementarity between single market and cohesion policy at the heart of the European social model