Transcript Regional Economics - BME Department of Environmental Economics

Regional Economics
George Horváth
Department of Environmental Economics
[email protected]
The theory of regional development
(regional macroeconomics)
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So far we have generally looked at the location and
behaviour of microeconomic actors in space.
Even when these formed a part of a system (such as in
the Theory of Central Places), their behaviours could be
explained using the toolkit of microeconomics.
Hereon, we will look at the development of whole
regions and the factors that contribute to this. This is
known as the macroeconomics of regional economics.
But what exactly are regions?
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Regions – homogenous regions
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Homogenous regions are smaller territories which,
together with their neighbours constitute a larger
territory, and which share similar properties
(geographic, economic, historical, political, etc.)
Advantages: we can investigate and research the effects
of government interventions.
Disadvantages: the homogenous traits may disappear
over time, and the region may not be functional as a
unit of government
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Regions – functional or nodal regions
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Functional or nodal regions usually comprise a large city
and their wider environs
Advantages: it is ‘self-contained’, the city and rural areas
complement each other, its internal cohesion is strong,
suitable as an administrative unit, it can carry out
functions efficiently
Disadvantage: tensions and problems may arise between
city and rural countryside
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Regions – planning or programming regions
Planning regions need to conform to some requirements:
• Adequate size and scale
• Ideally, resultant regions should be of equal size
• They should be created by joining together previously
existing smaller regions (no splitting allowed)
• All required data should be available
• Region must fall under the management of a single
directing authority (which does not have to be a
government administrative unit)
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Theories of regional economic growth
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There is a distinction between regional development
and regional growth.
Regional development is a broader context, while
regional growth is a much narrower one, but only this
latter one can be quantified.
Quantification can be done by several methods
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Theory of Phases of Development
Structural analyses (shift-share analyses)
Centre-periphery analyses
Export base model
Importing region model (Harrod-Domar model)
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Theory of Phases of Development
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Developed by J. G. Williamson
As regions go through various stages of development,
their economies grow and the regions become richer.
He noticed that regional economic development starts
at the centre of the region.
Therefore, differences within and between regions first
increase, and then they decrease.
Development in some remote areas only begins after
reaching a certain level of national development.
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Reasons for growing differences
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Better-trained workers will move from less developed
to more developed
Capital investments are generally made in the more
developed areas (since demand is greater, infrastructure
and services are better)
State investments are also more likely to happen in
more developed regions
Limited inter-regional trade, which means that richer
regions will not have development effects on poorer
regions
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Phases of development
1. Autarchy: consumption of locally produced goods is
dominant
2. Specialisation: as soon as transportation networks are
established, regions will specialise in producing certain
goods
3. Transformation: agriculture is superseded by industry
4. Diversification: development of the industry provides a
more diverse economic structure and specialised skills
5. Tertierisation: services become the dominant driving
force ahead of agriculture and industry in providing jobs
and goods
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Critiques of the phases of development
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The increase in differences in development between
and within regions is always certain, whether other
areas catch up with the centre is more uncertain.
We need additional measures to overcome differences:
– Job creation in less developed regions
– Shifting of state development programmes to poorer
areas
– More developed regions will get saturated, their costs
will increase and its advantages will gradually turn into
disadvantages
– Richer regions need to be encouraged to help develop
poorer regions
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Structural (shift-share) analyses
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A region’s development is largely defined by its
economic structure, the share of sectors (agriculture,
industry, services) in employment and in GDP.
The dynamics of a sector may be different between
regions, as a consequence of demand, particularities and
differences in productivity.
We need to differentiate between growth effects arising
from structural and other factors.
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MIX and DIF effects
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MIX effects are those that arise from the composition
of the economy (or the ‘mix’ of sectors) in the region
DIF effects are those arising from differences in
competitiveness
If E denotes the employment in a sector/region, i is the
industry (sector), n denotes the country and r denotes
the region, then
n
Eir0  Ein1 E n1 
Eir0  Eir1 Ein1 
MIX   0  0  0  DIF   0  0  0 
Ein 
En 
i 1 E r  Eir
i 1 E r  Ein
n
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What this tells us
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MIX shows us how quickly (or slowly) an industry i is
growing compared to the national economic growth,
multiplied by the share of that industry in the regional
economy.
This is called a MIX effect.
DIF shows us how quickly an industry i is growing in a
region compared to the national growth rate, multiplied
by the share of that industry in the regional economy.
This is what we call competitveness or differential
effects.
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Representing findings
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Shift-Share analyses may be represented in a coordinate
system, where national data are represented on the Xaxis, and regional data on the Y-axis.
Each industry will be marked by a dot, showing national
and regional growth rates.
A straight line at a 45° angle shows the deviance
between national and regional data.
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Graphic representation
Average national
growth rate
Regional
sectoral
growth
rate
A
D
Average
regional
growth rate
B
E
C
F
G
Sectors in
Dynamic sectors
crisis
National
sectoral
growth rate
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Centre-Periphery approach
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The Centre-Periphery approach takes the distance from
the centre as a factor of development.
This method was first applied by Walter Isard, the
creator of regional economics.
His observations are correct, as development is
hindered by the greater transportation costs of final
and intermediate products on the peripheries.
The Centre-Periphery approach can be applied well to
Europe, where such a centre does exist, in a pentagon
bounded by London-Hamburg-Munich-Milan-Paris.
This central area covers 15% of Europe’s territory,
houses 35% of Europeans, and produces 55% of
Europe’s GDP.
This model is poorly applicable to other countries (e.g.:
the United States), where the peripheries are more
developed, and the centre is largely underdeveloped. 15
Other approaches: export based models
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Generally, these methods focus on the (export) demand
for a region’s products.
A small country or region cannot develop every
industry, therefore they must become a part of the
international system of division of labour.
This external demand is what drives the dynamics of
growth.
The region must be able to produce a specialised
product which can be exported.
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Other approaches: Homer Hoyt’s model
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In 1930, Homer Hoyt was commissioned by the United
States Federal Housing Administration to devise a simple
model which can predict population growth in large cities.
According to Hoyt, the working population (Lt) of a city
consists of two groups:
– A base population Lb producing goods for export
– A population Ls providing goods and services to the whole
domestic population
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The population providing services can be expressed as a
fraction of the total population: Ls = a Lt
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Total working population
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1
Lt 
L
1 a b
Total population as a multiple of working population
f
P
Lb
1 a
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Harrod-Domar model of importing regions
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An underdeveloped region will not be able to export at
first: it will have to import, defining its development
trajectory.
Capital imports are the driving force behind growth:
yi = s/v , where s is the proportion of savings, and v is the
ratio of capital needed for the creation of an additional
unit of wealth
In the beginning, a lot of capital investments are needed,
which decrease later on.
An equivalent s may induce different rates of growth
based on the capital intensity of the investment.
It maintains a better balance than export does, provided
that ultimately the importing region also becomes an
exporting region (after a while, at least)
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Resource endowment and regional growth
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Previously we’ve considered exports to be the driving
force behind economic growth.
What do exports and export potentials arise from?
An exporting state is endowed with better or cheaper
factors of production than an importing state.
An export-based growth depends on a sufficient
quantity and quality of production factors.
Exports may consist of
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Factors of production (capital and labour) exported
Products are exported (theory of international trade,
Ricardo and Heckscher & Ohlin)
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Neoclassical model of flow of resources
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We will now consider a single sector: there is only one
product and one perfect market.
The factors of production (capital and labour) are also
exchanged on a perfect market, i.e. they are completely
exploited and are priced at marginal values.
Products and factors of production are perfectly mobile
If there exists a poorer and a richer region, with the
richer region posessing more capital, and the poorer
one more labour…
…the outcome will be optimal if some of the workers
in the poorer region migrate to the richer region, and
the surplus capital moves to the poorer region.
This exchange contributes to the greater efficiency and
increased incomes in both regions
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Graphically
Capital
Poor region
– capital
+ labour
at first
Rich region
+ capital
– labour
at first
Labour
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The model in practice
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Contrary to the theoretical model, experience shows
us that both capital and labour will flow in the same
direction.
Two-sector model: both regions have two sectors, e.g.
industry and agriculture. One produces for export, the
other for domestic consumption. Capital is only used by
the industrial sector.
Hypothesis: the external demand for one region’s
industrial products will increase
The demand for labour will also increase. The industrial
sector’s growth will trigger an increased demand for
agriculture in this region.
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Graphically
Capital
Region
where
demand for
exported
goods
increased
Poor region
Labour
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Specialisation and comparative advantages
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David Ricardo (1772-1823) formulates the theory of
comparative advantages. Free competition is idealised,
the system of tariffs is debated in England.
Division of labour is mutually beneficial for all parties.
A pre-requisite of division of labour is that everybody
produces where their comparative advantages are
greater, or disadvantages smaller.
Example: England and Portugal
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Autarchy vs. Trade in Ricardo’s analysis
1. Autarch economy
Region 1
Input
Good 1
90 units
Good 2
80 units
170 units
2. Foreign trade
Region 1
Input
Good 1
Good 2
170 units
170 units
Output
1
1
2
Region 2
Intput
100 units
120 units
220 units
Output
2,125
2,125
Region 2
Input
220 units
220 units
Output
1
1
2
Total
Input
190 units
200 units
390 units
Output
2
2
4
Output
2,2
2,2
Total
Input
220 units
170 units
390 units
Output
2,2
2,125
4,324
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Criticism of theory of comparative advantages
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There are sectors which grow dynamically, and there
are sectors which grow more slowly, or not at all.
If a region has a comparative advantage in a stagnating
or slowly growing sector, it will develop more slowly
and lag behind.
It isn’t only labour that defines comparative advantages.
The spatial dimension is completely absent from this
theory.
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Heckscher-Ohlin Model
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Comparative advantages are determined by the relative
endowment of factors of production.
These differences are counteracted by foreign trade,
and not by migration.
As prices of factors of production come to an
equilibrium, differences in development are reduced.
The model is only partially backed up by real-life
evidence: a number of countries show very different
trajectories.
Leontieff-paradox: the export and import trends in the
United States do not behave like the model suggests it.
Instead of exporting capital-intensive goods, the US
exports labour-intensive goods.
Trade between the Italian North and South also does
not back up this model.
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Theory and spatial effects of customs unions
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Customs unions break down economic and institutional
obstacles between countries and regions, therefore they
have positive economic effects:
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Competition between markets increases.
Economies of scale achieved in production and on markets.
Additional investments in anticipation of growing demand
Greater variety of products
Technology and knowledge transfer to poorer regions
All but the last effect benefit more developed regions.
New stores and shopping centres are established by
developed countries.
Increased trade in border regions and capital area only.
Shopping centres do not generate new demand, but funnel
existing demand away from local producers and vendors
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Theory of Poles of Growth
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So far we supposed that regions were homogenous
internally, i.e. the whole region has the same properties
internally
In the following models, regions are diverse internally too
Internal development of regions is affected by:
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Exogenous factors, e.g.:
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Endogenous factors, e.g.:
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a large multinational company appears,
technology transfer to the region,
large-scale infrastructure development by outside decision
the willingness to enterprise,
availability of factors of production (capital and labour),
willingness and ability to study, firm local governance.
These collectively form the conditions of Poles of Growth
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Theory of Poles of Growth
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This model was first formulated by François Perroux in
1955.
He observed that development didn’t occur simultaneously
everywhere.
First, it occurs in nodes or poles with varying intensity, and
then it is channeled outward to the rest of the economy,
causing various effects.
Essentially, the theory of local economies arose at the same
time as the theory of Poles of Growth.
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What sort of poles might there be?
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There exists a dominant company, which triggers
development, and causes certain effects:
– Keynesian multiplicator effect, through the workers and the
consumption of the increased number of workers.
– Leontieff multiplicator effect, through intersectoral relations
– Accelerator effect, through additional investments
– Polarising effect, through new plants established or moved
nearer the pole
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From Perroux to Boudeville
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According to Perroux, multiplicator effects propagate
through sectoral input/output connections, and may spread
over large distances.
His student, Jacques-Robert Boudeville developed Perroux’s
model to a theory of space.
According to Boudeville, propagating effects can be
1. Effects within the factory/plant and the immediate cluster
surrounding it
2. Effects in the city where the company generating the driving
force is
3. Effects in the closest local economy
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Boudeville’s most important finding was that propagating
effects don’t need sectoral input/output connections.
Geographic proximity can have an effect in numerous other
ways (including education, aid, assistance, cooperation, joint
institutions, etc.)
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The multiplier effect
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Catering for each new factory worker and their family at
the factory and their homes generates m new jobs (m < 1).
The sum of propagating multiplier effects is
1 + m + m2 + m3 … + mn ….∞ = 1/1-m
Local multiplier Lm will be dependent on how much of the
demand will be satisfied locally or from the vicinity.
It is also possible that the development of a nearby city has
more influence on the development of our own city, as the
nearby city may have a greater regional multiplier.
Correctly choosing poles of growth is therefore crucial.
Perroux has made a distinction between push and pull
effects.
Hirschman and Myrdal described spread and backwash
effects.
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Spread and Backwash effects
Positive spread
effects
time
Negative
backwash effects
time
Net spillover
effects
time
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The spread of innovation in space
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In the beginning, researchers took it for granted that
innovation is uniformly and simultaneously available for
everybody.
Instead, Torsten Hägerstrand reviewed this claim, and found
that innovations spread, in certain directions, at a certain
pace.
According to Hägerstrand, three phases of spread exist:
1. Adoption, when innovation spreads out from the core city
along the network hierarchy of cities (see: Christaller’s
model)
2. Diffusion, when innovations already go beyond the network
hierarchy, and spread out in space (i.e. to smaller towns and
settlements between the cities)
3. Saturation, when an innovation can be found everywhere.
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These effects are called „spread along geographic space”
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The spread of innovation in space
Total
number of
users
Saturation
point
Innovation,
discovery
Time
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The spread of innovation in space
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Zvi Griliches & Edwin Mansfield: economic distance
Innovations do not propagate at the same speed in every
region.
The speed of propagation depends on the number, density,
preparedness and receiving capalbility of potential users.
Examples:
– Hybrid cereals – propagation depends on geographic
distance
– Mobile phones – propagation depends on socio-economic
factors, rather than geographic factors
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Alfred Marshall’s industrial districts
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In the previous models, space and location were important
factors of production, but they did not predestine the fate
and economic performance of an enterprise.
In his work “The Principles of Economy” (1890), Alfred
Marshall writes about industrial districts having more of an
effect on the performance of corporations than other
factors of production, including raw materials and labour
force.
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Alfred Marshall’s industrial districts
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An industrial district is a concentration of small businesses
in a given location, which have very important social
connections.
Properties:
– Spatial proximity, geographic continuity
– Social proximity: institutions, codes and practices, rules are
homogenous throughout the area, which triggers
cooperation
– Concentration of small firms, which are capable of speedy
adaptation to changing conditions and demands
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Such areas are known today as clusters.
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Benefits of district economies
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Lower production costs: intermediate products, parts, etc.
do not need to be transported, work force is more flexible
and adaptable
Lower transaction costs: management and organisation is
much simpler because of the shared values
Higher efficiency of factors of production
Example: Northeastern Italy’s Veneto and Emilia-Romagna
regions
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Myrdal and Kaldor’s circular processes
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Gunnar Myrdal and Nicholas Kaldor worked on a new
model of regional development.
According to them, economic processes are self-enforcing,
cyclical events, regardless of being positive or negative.
There are virtuous circles and vicious circles.
Virtuous circles are driven by increasing returns to scale
(compare this to the mainstream concept of diminishing
returns to scale)
The other driving force behind virtuous circles is the
accelerator effect.
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Myrdal and Kaldor’s circular processes
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Gunnar Myrdal and Nicholas Kaldor worked on a new
model of regional development.
According to them, economic processes are self-enforcing,
cyclical events, regardless of being positive or negative.
There are virtuous circles and vicious circles.
Virtuous circles are driven by increasing returns to scale
(compare this to the mainstream concept of diminishing
returns to scale)
The other driving force behind virtuous circles is the
accelerator effect.
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Paul Krugman’s New Economic Geography
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Towards the end of the 20th Century, the geographic
dimension of the economy was fading from view
Paul Krugman’s greatest merit is the bringback of the
economic dimension into mainstream economics.
Krugman’s works had a profound and detrimental effect on
the one-point economy that was (and still is) dominant in
economics.
His starting points were the same as Weber’s.
He began investigating factors of production in light of
transportation, work force and economies of scale, but he
comes to a radically different conclusion than Weber does.
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Paul Krugman’s New Economic Geography
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To start out, he rejects the principle of diminishing returns
in the case of economic concentration: let us not forget
that the entire classical economic theory rested on this
principle.
Why does the principle of diminishing returns not hold in
larger agglomerations?
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Weber and Lösch’s theorems on having to serve increasingly distant
consumers with ever increasing transportation costs do not hold,
because as production concentrates, so do consumers.
Transportation costs do not increase (as dramatically) because of
the improving transportation technology and the information
revolution
Large agglomerations permit mutual specialisation of economic
activities, strong interdependences form, and a dramatic increase is
achieved in efficiency.
The use of tacit knowledge is only possible in geographic proximity.
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Paul Krugman’s New Economic Geography
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According to Krugman, failing to start development in time
has permanent detrimental effect on late starters.
He found that if a progression towards greater
concentration and efficiency begins in a point in space, this
will be unstoppable, and this will present an advantage (and
a disadvantage for competitors, who will not be able to
catch up with it).
This sends a very pessimistic message to developing
regions.
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