Transcript Slide 1

Chapter 11
The policy implications of geographical economics
Issues
• government taxation and spending
• infrastructure and transport costs
• welfare implications
– p459: largely based on the core model for simplicity
– p461: "policy is typically not analyzed within the
context of geographical economics"
Six basic policy implications Ottaviano (2003)
• regional side effects
– non-regional policy has regional implications (fuel tax?)
• trade interaction effects
– initial level of trade and agglomeration relevant
• lock-in effects
– temporary policies may have permanent effects
– start policy: from one stable equilibrium to another
– end policy: no return to former situation
• selection effects
– going from spreading beyond breakpoint φ > φB any (small) policy can trigger a
selection going to full agglomeration to 1 or 2
• coordination effects
– policy can influence expectations when more equilibria are
possible: φS > φ > φB
– people go where they expect others will go
• Threshold effects
– marginal policy is ineffective unless some sustain- or breakpoint is
reached/passed
Figure 11.1 The
Tomahawk
diagram
φφSs
1
l1
0.5
φB
0
φsS
φ
0
Free-ness of trade φφ
Sustain points
Sustain
points
Stable
Stableequilibria
equilibria
Break point
Break
point
Unstable
Unstableequilibria
equilibria
Basin of
equilibrium
Basin
ofattraction
attractionfor
forspreading
spreading
equilibrium
Basin of
in region
1 1
Basin
ofattraction
attractionfor
foragglomeration
agglomeration
in region
Basin of
in region
2 2
Basin
ofattraction
attractionfor
foragglomeration
agglomeration
in region
1
Critics (more in Ch 12)
• unrealistic suggestion that politicians can
"choose" an equilibrium and know how to get
there
• unproven transfer of two-region model
conclusions to multiregional models
• strong bias of "bang-bang" behaviour in the tworegion model
• multiregional model behaves more moderate ->
less "catastrophic" agglomeration
Urban Herfindahl Index for a line with
increasing size
12
CP1
FE1
CP2
FE2
10
8
6
4
2
0
0
10
20
30
40
50
60
70
80
Num ber of regions
line-size stability: a minimum of 30 regions seems necessary
90
Urban Herfindahl Index for a square grid with
increasing size
350
CP1
FE1
CP2
FE2
300
250
200
150
100
50
0
9
16
25
36 49
64
81 100 121 144 169 196 225 256 289 324 361 400 441 484 529 576 625 676 729 784 841 900
Number of regions
square-size stability: a minimum of 100 regions seems necessary
Government taxation and spending
• standard view: increased capital mobility reduces tax
burden on capital
– "race to the bottom"
• Baldwin & Forslid (2002): not if tax revenues are spent
on public goods that benefit the mobile production factor
• Baldwin & Krugman (2004): agglomeration rent can
offset higher taxes (see the Wiggle diagram, fig 11.3)
• in general for the mobile factor:
– taxes stimulate spreading
– spending stimulates agglomeration
Figure 11.2 Effective average tax rate and Golub index (barriers to FDI)
a. Effective average tax rate, 19 OECD countries
0.6
0.15
effective average tax rate
maximum; Germany (left scale)
standard deviation
(right scale)
0.4
0.10
average
(left scale)
Japan
0.2
0.05
minimum; Ireland (left scale)
0.0
1980
0.00
1985
1990
year
1995
2000
Figure 11.2 Effective average tax rate and Golub index (barriers to FDI)
b. Golub index (barriers to FDI), 19 OECD countries
CAN
AUS
AUT
JAP
NOR
FIN
SWI
USA
SPA
POR
SWE
GRE
FRA
ITA
BEL
GER
NET
2000
IRE
1981
UK
0
0.1
0.2
0.3
0.4
0.5
0.6
Figure 11.3 The Wiggle Diagram
rN/rS
(iii) standard tax competition
(ii) geo ec. high trade costs
B
tN-tS
D
A
0
C
(i) geo ec. intermediate trade costs
share of firms in North 1
Box 11.2 International transfers
• can be simply modelled by some exogenous
change of Λ = {λ1, λ2, ... , λn}
• may or may not have permanent effects after
ending (shift of equilibriuim or return to old
equilibrium)
• as always in geographical economics: effects
depends on the inital distribution (history) and
phase of integration (transport costs)
• see figure 11.5
Figure 11.5 Change in real wage rate of bystander (intermediate transport costs)
Impact of transfer on bystander real wage rate
country 2
falling
equal
rising
centre
falling
equal
rising
country 1
country 3
Baldwin & Krugman (2004)
• use the Forslid & Ottaviano model of 4.8
extended with government spending
• production function becomes
– fj (Zj) [ rj + β xj ]
(parameter normalization β = 1-1/ε or β = (ε -1)/ε
in the book equation 11.1 mentions σ in stead of ε)
– f is efficiency function for government good Z:
f (0)= 1 ; f' <0
– competition of human capital resources between K
and Z: nj = (Kj - Zj) / fj (zj)
• Z reduces n; fig 11.6: more agglomeration
tendency
ε
4

break decreases
3
Figure 11.6
Marginal impact of
introducing public
goods on breakpoint
increases
break

break
2
No-black hole condition not satisfied
1
0
0
δ
1
Infrastructure
• changing Drs -> changing TDrs
• example section 11.4: change a neutral
geography without history into a non-neutral
geography
• assignment: changing a non-neutral geography
with history
Figure 11.7
The pancake
economy
a. No links; equivalent to racetrack economy
2
3
4
5
6
1
7
12
11
10
9
8
4
5
6
b. Link between city 2 and city 12
2
3
1
7
12
11
10
9
8
4
5
6
c. Link between city 3 and city 11
2
3
1
7
12
11
10
9
8
4
5
6
d. Link between city 4 and city 10
2
3
1
7
12
11
10
9
8
Figure 11.8 Impact of building a bridge on spatial distribution
size
Base scenario; pancake economy
1
3
5
7
9
city
link 2-12
link 3-11
link 4-10
11
Figure 11.9 Impact of transport costs; bridge between 4 and 10
1
2
3
4
Size
City size; pancake economy, link 4-10
1
1,2
1,4
1,6
Transport costs T
1,8
2
Welfare implications
• simple definition: ∑j yj with real income y=YI-δ
Link 2-12
link 3-11
link 4-10
average change in real income (%)
0.9
1.9
2.2
average change in real farm income (%)
-0.3
0.2
0.2
average change in real manufacturing
income (%)
1.6
2.8
3.5
Figure 11.10 Real income and welfare changes; link 4-10
a. Increase in welfare per capita (% ); link 2-12
10
5
0
1
3
5
7
9
-5
-10
city
farmers
manufacturing workers
11
Figure 11.10 Real income and welfare changes; link 4-10
b. Increase in welfare per capita (%); link 3-11
10
5
0
-5
1
3
5
7
9
-10
city
farmers
manufacturing workers
11
Figure 11.10 Real income and welfare changes; link 4-10
c. Increase in welfare per capita (%); link 4-10
9
0
1
3
5
7
9
-9
city
farmers
manufacturing workers
11
Chapter 12
• Critics and evaluation
• GE can be thought of as an attempt to unify
international and regional economics (Ohlin,
1933)
• Comments from
– Regional and urban economics
– International economics
– Economic geography
Nijkamp (2000)
• Critics from regional/urban economics
– Neglect of work by forerunners
– Too narrow view on geography with iceberg transport
costs
– No attention to spatial competition between firms, no
well developed theory of the firm
– No attention for the role of institutions
– Rely heavily on simulations, poor empirical basis
Neary (2001)
• Critics from international economics
– No strategic interaction between firms
– To simple transport costs and too simple (onedimensional) geographies
– Reliance of specific functional forms and simulations
– Lack of empirical evidence
Comment from geography
•
•
Outright rejection
Interested critics (Martin/Storper)
Serious gap between GE and EG; Storper(2003):
–
–
Economists are the kings and queens of generality (deductive/
theoretical/analytical)
Geographers are the kings and queens of specificity and
particularity (inductive/empirical/descriptive)
See also Box 12.2 and Appendix NEG versus PEG
Martin (1999)
• Critics from geography
– Neglect in GE of more recent work
– General equilibrium framework unable to deal with the
role of institutions
– NEG is neither new (just a restatement of outdated
earlier insights of EG) nor geographical because
there is no place for real-world geography
– Spatial policy is far to complex for the simple NEG
framework
Evaluation of critics
• yes / no longer / no
– Reliance on simulations remains a problem
– Iceberg specification too simple
– More complex and less simple models have evolved
recently
– More empirical content on the way
– Real novelty 1) in the way it tackles the relation
between econoics and geography 2) agglomeration is
an outcome of the model
Future directions
•
•
•
•
integration with growth theory
spatial scales
differentiated sectors
"richer menu" of agglomeration and spreading
forces
• as in other fields: no "one size fits all"
• other functional forms
• more empirical content