University of Thessaly Department of Planning and Regional Development Graduate Program in European Regional Development Studies Fall Semester, Course: The Geography of European Integration: Economy, Society and Institutions Lecturers: Petrakos G., Camhis M., Kotios A., Topaloglou L., Tsipouri L., Bogiazides N.

Development Patterns in the EU Border Regions 5 th December 2011, Volos UNIVERSITY OF THESSALY Department of Planning and Regional Development Polytechnic School Post Graduate Program: European Regional Development Studies Course: The Geography of European Integration: Economy, Society and Institutions Dr. Lefteris Topaloglou

Introduction  Borders in Europe are not any more rigid barriers to economic interaction and instruments of national protection policies.  Nevertheless, borders continue to divide national economic systems with different structures and price levels.  Despite the process of European integration, Europe is by no means a borderless economic space.

At the macro-spatial level  In what way and to what extent border regions participate in the process of integration?  Have borders been turned from barriers to bridges connecting the two sides or to tunnels bypassing them?  Do border regions benefit from national trade or just operate as corridors for trade flows originating from and directed to other regions?  Does geography matter?  Do ‘’initial conditions’’ rooting in the past affect the level of cross- border interaction? Critical Questions to be addressed (1)

Critical Questions to be addressed (2) At the micro-spatial level  What are the drivers of trade relations in border regions?  Are geography and proximity the main determinants?  What is the role of market size?  Are nearby destinations favoured against to more distant ones?

 Although the argument a “globalised” international economy into a “borderless” world (Ohmae, 1990), border-effects clearly remain significant, even after a substantial reduction of border obstacles (Engel and Rogers, 1996).  Trade costs would be lower without the “intermediation” of borderlines (McCallum, 1995; Helliwell, 1998; Brocker, 1998; Wei, 1996)  Borders are very often associated with the existence of different nationalities, languages, cultures and perceptions, imposing non- pecuniary obstacles to interaction (Topaloglou et al, 2005). Theory and empirical evidence 1

 An increase in the distance between countries is associated with a decrease in the volume of trade (Rauch, 1991; Kinoshita and Campos, 2003). As a result, borders and the obstacles involved with border crossing can be considered as factors increasing the distance between two markets.  The eastward enlargement has changed dramatically the geographical conditions of many borders areas (Resmini, 2003). The external borders of the “old” EU have became the “new” internal ones, while at the same time the external borders of the “new” EU have shifted eastwards. Theory and empirical evidence 2

 Two new types of border regions are emerging: the central regions and peripheral ones. Central border regions typically enjoy better market access and market potential due to their favourable location (Niebuhr and Stiller, 2002).  Evidence shows that metropolitan regions systematically do better than average while border regions experience the greatest challenges and transformations (Petrakos et al 2004).  Opening and closing borders are not symmetric actions. Closed borders truncate the geographical size of markets for firms providing goods and services and may reduce demand below the critical size required for sustainable operation (Cristaller, 1933). Theory and empirical evidence 3

Theory and empirical evidence 4  As a result, the imposition of borders distorts the urban system by discouraging firms to locate in border regions (Hansen, 1977; Hoover, 1963).  In a closed economy, border regions could be characterized as areas of low attractiveness due to their unfavourable conditions with respect to demand, which eventually affects their productive base (Dimitrov et.al., 2003)  The abolition of border barriers due to the process of integration redefines space and markets. Gains, however, may not be symmetrically allocated across the border. (Brülhart et al, 2004).

 A number of studies claim that border regions with a smaller market size tend to gain more from the process of integration (McCallum, 1995; Hanson, 1998; Hanson, 1996; Resmini, 2003).  The more advanced border regions will benefit from labor inflows, the expansion of exports and will be the origin of cross-border investment activity. Concerns in these regions will be focused on the pressures of immigration in their labor market, the dislocation of local firms and the difficulty to compete successfully with the other side in low cost sectors (Topaloglou et. al, 2005) Theory and empirical evidence 5

 The less advanced border regions will benefit from cross-border investment and low cost exports. However, skepticism exists in these regions regarding the ability of their productive base to compete in the new economic environment (Melachroinos, 2002). A conclusion so far There is not yet a comprehensive understanding of the spatial impact in border regions when barriers are removed due to economic integration. Theory and empirical evidence 6

Aspects of the new economic geography of the EU borders at NUTS III level(1) GDP per capita of European Border Regions Source: Petrakos and Topaloglou, 2008

Aspects of the new economic geography of the EU borders at NUTS III level (2) Population Density of European Border Regions Source: Petrakos and Topaloglou, 2008

Border Regions, Geography and Development  Border regions in Europe have significantly lower levels of welfare compared to average figures and core regions  Geography matters: Border regions in the ‘old’ EU are better off compared to border regions in the ‘new’ EU  Neighborhood matters: Regions bordering with more advanced neighbors are better off  External border regions have the lowest levels of development and perhaps face the greatest challenges in the new economic environment

Border regions typology Factor analysis & fuzzy cluster analysis Clusters A. Highly integrated border regions with advanced economic performance, many cultural similarities and small size. B. Border regions that enjoy agglomeration economies but need significant structural adjustments in order to deal with the increased competition. C. Highly integrated border regions that present significant economic performance, though much cultural dissimilarity. D. Border regions with high development potential due to their favorable geographic position, but with low economic performance. E. Border regions with low market potential and no prevailing positive characteristics Source: Topaloglou et. al, 2005

A survey on the EU external border regions Cross border study areas The respondents’ profile of the Research Sample Sample Size: 937 Standardized Questionnaires Source: EXLINEA Project, FP5, European Commission

Aspects of the new economic geography of the EU external borders Neighboring matters!

Definitions At the macro-geographical level: BEU:EU-15 border regions BNM:Border regions in New Members States BEX:Border regions in non-EU External Countries (BEX) At the micro-geographical level: CITNEAR:The nearest city on the other side CITLARG:The nearest larger city on the other side REGNEAR:The nearby regional markets on the other side REGFAR:The more distant regional markets on the other side CAPIT:The capital city of the country on the other side OTHER:Other countries

Cross border trade Cross Border Trade in macro and micro geographical levels (mean values) Cross Border ExportsCross Border Imports

 Cross-border exports or imports are bellow the average grade in the Likert scale (4)  Trade is higher than average only in the case of trade with other countries. Main trade partners are not the neighboring regions (or countries) but some other (perhaps distant) countries  This is an indication that border regions continue to maintain trade orientations that they developed in the pre-1989 period (path dependant pattern of trade – initial conditions matter) Local cross-border trade in the external EU borders (1)

Local cross-border trade in the external EU borders (2)  Trade relations are stronger with nearby cross-border regions rather than with distant ones, indicating that distance and accessibility play an important role in the process of cross- border interaction  The largest cities near the border compared to the nearest city attract higher export and import volumes, indicating that market size is also an important determinant of cross-border interaction  Trade off between distance and size: Dominance of distance would favor nearest border cities, dominance of size would favor the capital markets  The evidence: the level of interaction tends to be higher in places combining a critical market size with a moderate distance

Cross border investment Cross Border Investments by local firms Investments in the local economy by firms originating in the other side

Local cross-border investment in the external EU borders  Border regions are neither important origins of c-b investment, or important destinations (average grade < 4)  Investment inflows from other countries report high values compared to investment from the neighboring country. This is an indication that factor price differentials are stronger drivers of FDI than proximity and transport costs  Distance matters in cross-border investment activity, as nearby regions perform better than distant ones either as places of origin or destination  Market size also matters, as the nearest largest city appears to be the destination of more intensive cross-border investment compared to the nearest city in the borders

Conclusions (1): Border regions …weak players?  External border regions are among the weakest and less advanced regions of the European Union with relatively low economic interaction with neighboring countries.  Although East-West trade and investment in Europe have increased dramatically during the last years, border areas at the new EU frontier do not seem to participate as key players in this process.  In some cases ‘Tunnel effects’ may take place, causing further marginalization  As a result, integration based on market dynamics may not lead to higher levels of spatial cohesion in Europe.

Conclusions (2): The past matters  Despite the fact that the EU external borders have been open for more than 15 years, border regions still maintain more significant economic relations with other countries than with nearby neighboring countries.  Placing borders barriers (at some point of time) and removing them (later) are not symmetric actions in terms of expected market dynamics.  Initial conditions formed during the years of closed borders and restrictions resist a drastic geographic reorientation of trade activities based on the benefits of proximity.

Conclusions (3): Determinants of CB-interaction  Distance and market size are two important determinants of c-b trade and investment interaction.  The fact that large cities near the borders receive higher volumes of activity over nearest cities (in a short distance) and capital cities (with large markets) indicates that these two determinants interact in a non linear way  Regional capitals in border regions combining critical market size and moderate distance seem to be the winners of c-b interaction  Although the integration experience of external borders may include a variety of responses and outcomes, the evidence shows that modest polarization and marginalization effects will be present in a number of cases.

Thank you for your attention!

Development Patterns in the EU Border Regions 5 th December 2011, Volos UNIVERSITY OF THESSALY Department of Planning and Regional Development Polytechnic School Post Graduate Program: European Regional Development Studies Course: The Geography of European Integration: Economy, Society and Institutions Dr. Lefteris Topaloglou