Regionial Economics and Policy Wien June 3, 2005 Economic Geography and Regional Policy Albert van der Horst Steven Brakman, Harry Garretsen Joeri Gorter, Marc Schramm

Regionial Economics and Policy Wien June 3, 2005 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

Regionial Economics and Policy Wien June 3, 2005 Doubts about the efficacy of regional policy: Eastern Germany

Regionial Economics and Policy Wien June 3, 2005 Doubts about the efficacy of regional policy: North-Netherlands

Regionial Economics and Policy Wien June 3, 2005 Doubts about the efficacy of regional policy: ineffective structural funds

Regionial Economics and Policy Wien June 3, 2005 New Economic Geography (NEG): imperfect competition production of the representative firm in region 1 mill price marginal revenue total demand marginal cost average cost zero profit profit maximisation profit margin

Regionial Economics and Policy Wien June 3, 2005 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

Regionial Economics and Policy Wien June 3, 2005 NEG: linkages between regions Linkages between firms + Trade costs + Mobility of production factors = Linkages between regions NEG investigate systems of regions

Regionial Economics and Policy Wien June 3, 2005 NEG: location in the core is profitable for firms and workers at short distance Wage surplus in the core relative to proximate peripheral regions The core is not attractive: economic activity spreads ?

Regionial Economics and Policy Wien June 3, 2005 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? ? ? ?

Regionial Economics and Policy Wien June 3, 2005 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 km 2 ) over regions ► decomposable in within and between index ► calculated for European Nuts0 - Nuts3 regions

Regionial Economics and Policy Wien June 3, 2005 Core-periphery systems are local...

Regionial Economics and Policy Wien June 3, 2005 … local, and stable

Regionial Economics and Policy Wien June 3, 2005 Equation 1: spatial wage structure Are wages higher in dense regions? Wage in region r = F(Y: output in all regions D rs : distance between r and s) coefficientt-value a b

Regionial Economics and Policy Wien June 3, 2005 Spatial wage structure visualised: Shock to income in NRW

Regionial Economics and Policy Wien June 3, 2005 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

Regionial Economics and Policy Wien June 3, 2005 Equation 2: equilibrium wage of NEG Central in almost all NEG-models production of goods (wage costs) = demand for goods (labor income) coefficientt-value εsubstitution elasticity Log(T)‘iceberg’ trade costs WLS-estimate for 167 Nuts2 regions ( )

Regionial Economics and Policy Wien June 3, 2005 Theory with numbers ‘Periphery of Paris Strong interaction with Paris Outside Paris’ influence

Regionial Economics and Policy Wien June 3, 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

Regionial Economics and Policy Wien June 3, 2005 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

Regionial Economics and Policy Wien June 3, 2005 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!

Regionial Economics and Policy Wien June 3, 2005 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

Regionial Economics and Policy Wien June 3, 2005 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

Regionial Economics and Policy Wien June 3, 2005 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