Transcript Economic geography and regional policy

Location Effects,
Economic Geography and
Regional Policy
Jan Fidrmuc
Brunel University
Europe’s regions

Concern for Europe’s disadvantaged regions has
always been part of EU priorities.


Pre-1986, most spending on regions was at the
national level


Rural electrification, phones, roads, etc.
Entry of Spain & Portugal created a voting block in
the Council (with Ireland and Greece) that induced
a major shift in EU spending priorities


Treaty of Rome: preamble.
Away from CAP towards poor-regions.
“Structural spending” now about 1/3 EU budget.
Europe’s Economic Geography: Facts


Europe highly centralised
in terms of economic
activity.
 Western Germany,
Benelux, N.E. France
and S. England: 1/7
land, 1/3 of pop. and ½
GDP.
Periphery has lower
standard of living.
 More unemployment.

More youth unemployment.

More poverty.
Centrality of EU25
Regions
Periphery
Intermediate
Core
Geographic income inequality



Income distribution
even more uneven at
regional level.
Within nations,
economic activity is
very unevenly
distributed
Income distribution
has become:
 More even in EU as
a whole
 Less even within
EU nations (across
regions)
Index, EU-25 = 100
< 30
Canarias (E)
30 - 50
50 - 75
75 - 100
Guadeloupe Martinique
(F)
100 - 125
>= 125
(F)
RÈ
union
(F)
Guyane (F)
AÁ
ores (P)
Madeira
(P)
Kypros
SIG16
GDP per head by region (PPS), 1998
EU-wide Income Differentials


Very uneven income
distribution.
2002 GDP per capita:


Luxembourg: 207%
of EU average.
Bulgaria: 29% of EU
average.
Lux.
DK
Ireland
NL
Austria
Belgium
German
Sweden
UK
Finland
Italy
France
Spain
Cyprus
Portugal
Slovenia
Greece
Czechia
Hungry
Slovakia
Poland
Estonia
Latvia
Lithuania
Romania
Bulgaria
0
50
100
EU26=100
150
200
250
National Income Differentials

Example: UK
Geographic Specialisation

Krugman index of specialisation


Measures what fraction of manufacturing has to change
sector to make a nation’s sector-shares same as EU
average
Most EU nations becoming more specialised.
Geographic Specialisation
Theory




2 major approaches linking economic integration to
change in geographic location of economic activity.
Comparative advantage suggests nations specialise in
sectors in which they have a comparative advantage.
New Economic Geography suggests that integration
tends to concentrate economic activity spatially.
General idea:


Theory of comparative advantage explains international
division of labor.
NEG explains intra-national distribution.
Comparative Advantage and
Specialisation
Low-education labour
Portugal
Spain
Italy
Greece
Ireland
UK
Belgium
France
Netherlands
Finland
Austria
Sweden
Denmark
Germany
Medium-education labour
High-education labour
83%
58%
44%
25%
15%
13%
-4%
-9%
-16%
-30%
-35%
-42%
-50%
-52%
-80% -60% -40% -20%
0%
20%
40%
60%
80%
100%
Comparative Advantage and
Specialization




Countries posses different factor endowments (e.g.
skilled vs unskilled labor, raw materials, climate)
Factors that are relatively abundant are cheaper
locally: comparative advantage
With free trade, countries can specialize in
producing goods for which they have a comparative
advantage and import the remaining goods
Result: integration leads to increased national
specialization.
Agglomeration & NEG



When productive factors (capital and labor) are
mobile (internationally or inter-regionally),
integration may have different effects.
Scale economies & trade costs encourage
geographic clustering of economic activity.
Two possibilities:


"Overall clustering“ = some areas with lots of
economic activity, others empty  “core-periphery”.
"Sectoral clustering"  each sector clusters in one
region, most regions get a cluster.
Agglomeration & Dispersion Forces

Lower trade costs cause


Agglomeration forces: industry clusters
geographically.
Dispersion forces: industry disperses
geographically.
Agglomeration Forces

Many agglomeration forces:



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
Technological spillovers (e.g. Silicon Valley),
Labor-market pooling (e.g. City of London),
Demand linkages (a.k.a. backward linkages):
locating close to final market,
Supply linkages (a.k.a. forward linkages): locating
close to suppliers etc.
NEG focuses on demand & supply links since
they are clearly affected by economic
integration (lower trade costs).
Circular Causality & Demand
Linkages
1. If some industry moves to big region
4. Production Shifting
Due to trade costs, firms prefer to locate in big market.
More industry moves to big region
2. Expenditure Shifting
workers spend incomes in big region
instead of in small region
3. Market Size Effects:
big market gets bigger, small market gets smaller
Circular Causality & Supply Linkages
1. If some industry moves to big region
4. Production
Shifting
Some more firms move from small market to big
market, attracted by lower costs
2. Production Shifting
Migrated firms’ output now
cheaper in big region & dearer in
small region (trade costs)
3. Cost Shifting
Availability of wider range of locally available intermediate goods
makes big region cheaper place to produce
Dispersion Forces

Dispersion forces counter the tendency towards
agglomerations of economic activity:




Rents and land prices,
High cost of non-traded services,
Competition with other firms.
The NEG focuses on “local competition”

As trade costs fall, distance provides less protection
from distant competitors.
Agglomeration vs Dispersion

Simplified framework:


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Agglomeration force: demand effect only, firms have
incentive to locate close to markets
Dispersion force: local competition effect only
2 regions: North and South; North is bigger
Equilibrium w/o trade: share of firms in North
between ½ and 1
Trade liberalization: locating in South no longer
protects firms from competition
Agglomeration in North increases
Comp. Advantage and NEG


Factors of production more mobile nationally
than internationally (especially labor)
Countries specialize according to their
comparative advantage


Agglomeration of economic activity within
countries


Income convergence across countries
Rising inequality within countries
This helps explain the pattern of regional
income inequality observed in Europe
EU Regional Policy




EU always had poor regions (e.g. Mezzogiorno, etc.).
Much spending on poor EU regions by national governments but
very little by EU (pre 1986).
1973, Ireland (poor at the time joined); 1981, Greece joined but no
major reorientation of EU spending priorities.
In 1986, Iberian enlargement shifted power in Council and spending
priorities changed.
EU Regional Policy

For historical reasons, EU has five “Funds”,

Four “Structural Funds”,


“Cohesion Fund”.

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Spending in any qualified region.
Spening only in poor-4 (Spain, Portugal, Greece and
Ireland).
5 Funds work together under overall
strategy.
Many programs, initiatives, and objectives,
BUT over 90% is spent on three priority
“objectives.”
Objectives

Convergence: 80% of regional aid


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Regional competitiveness and employment

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Aimed at reducing income disparities between regions
Eligibility: less than 75% of average EU income, and ‘phasing out
regions’
Cohesion Fund: money allocated to countries (rather than
regions) with below 90% of EU27 average income
Aimed at strengthening competitiveness and employment
Eligibility: all non-convergence regions
Development projects to encourage innovation, entrepreneurship,
etc.
European Territorial Co-operation

Aimed to reinforce cross-border, transnational co-operation

Only 2% of regional aid
Convergence and Competitiveness
Objective Regions: 2007-2013
convergence
competitiveness