European Economy
Lecture 10
Location Effects, Regional and Industrial Policy
Stephen Kinsella
Dept. Economics,
University of Limerick.
[email protected]
November 8, 2010
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Today
1
EU’s Regional disparities wrt factors of production
2
Location Theory
3
New Economic Geography
4
Policy implementation & future challenges
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Part I
Regional Disparities
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The Problem
1/4 of EU citizens live Objective 1 regions;
and so are eligible to receive assistance from Structural Funds
Not good. The criterion for eligibility is GDP/per capita below 75%
of EU average.
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Why care about Space?
Transport costs (can be integrated relatively easily)
Agglomeration externalities (require a different approach)
Policy Relevance
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Recall: Significant disparity in Regional unemployment
10 regions with highest unemployment rates had twice the EU average
unemployment rate.
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Europe’s Factors of Production
Natural Resources
Europe has many different types of natural resources.
The Northern European Plain has fertile soil called chernozem. This
land is good for farming.
The Ruhr and Po Valleys have deposits of iron ore and coal.
Some parts of Europe have forests such as Norway and Sweden.
There are large deposits of oil on the floor of the North Sea.
Mountainous areas have mineral resources.
The countries of Europe have advanced farming techniques, high crop
yields, and fertile soil called chernozem.
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Legal Framework
Article 2 of the EC Treaty
to promote a harmonious, balanced and sustainable development of
economic activities;
convergence of economic performance
economic and social cohesion and solidarity between member states.
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Environmental Issues
Several areas in Europe are facing severe pollution problems:
Black Forest - Acid Rain
Venice - Water Pollution
Rhine, Danube, and Seine Rivers - Water Pollution
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Europe’s Factors of Production
Highly skilled but diverse and relatively immobile labour sources overall.
(Beware, this is a crass generalisation). See ?.
World class capital infrastructure, but average level conceals huge
disparities. (Tipperary vs. Aalborg). See ?
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Part II
Location Theory
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Location Theory
Location of factors of production in space
Economic development and underdevelopment is one aspect of the
uneven spatial distribution of economic activities.
Why do spatial inequalities (population or income) exist?
Why do economic units choose to locate close to each other?
What are the consequences of being outside existing centres?
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Basic Concepts
Median Location. Hotelling:
1
Assume even distribution of consumers,
2
Sheltering effect
3
Applicable to other market spaces, including political
4
Equilibrium outcome is not socially optimal
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Concept of Industry Orientation
Transfer-Oriented. Material-Oriented—Materials are bulky,expensive
to transport, or weight-losing
Market-Oriented. Output uses a ubiquitous input (e.g. water) or is
expensive to transport (fragile, limited shelf life)
Input-Oriented. Labour/Electricity/Amenities
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So-Called Weber Definitions
Ubiquities. Resource available everywhere.
Localized Materials. Resource available in specific locations
Pure Material. Entire weight enters product
Gross Material. Weight-losing material]
Material Index = weight of localized inputs/weight of final product
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Spatial Margins of Profitability
Weber emphasizes minimum transport cost.
Could be extended to minimum total cost
But there may also be spatial variation in revenue!
Profitability (TR-TC) also varies over space
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Part III
Comparative advantage and the new economic
geography
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Ricardo’s Big Idea
Comparative Advantage
Nations specialise in sectors in which they have a comparative advantage.
French→wine, Irish→bitterness, etc.
Problem with CA
Didn’t explain location/specialisation decision within a country.
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One more Big Idea: Krugman (1991)
Why does manufacturing become concentrated in a few regions,
leaving others relatively under-developed?
Three keys to convergence or divergence of regions
µ : share of nominal income spent on manufacturing
σ > 1 : elasticity of substitution among the products
τ < 1: an inverse index of transportation costs
Big paper in this area is ?, which won PK the Nobel Prize.
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Example
One example of wage convergence between two regions depen
between two regions
depending
the share
of interna
onWage
the convergence
share of manufacturing
labor
force inonregion
1 and
manufacturing
labor
force
in
region
1
and
internal
transportation
costs .
transportation costs (Krugman, 1991):
Stephen Kinsella (University of Limerick)
Figure: Wage
convergence.
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Centripetal and Centrifugal Forces
Other Centripetal and Centrifugal Forces
Pecuniary and non-pecuniary externalities
Congestion
Knowledge spillovers
(Skilled) Labor pooling
Empirical evidence exists to back this up: The toughness of competition in
a market significantly affects low-productivity plant exits, productivity
distribution (truncation from below) and (tighter) price bounds. Direct
link to DELL case. See ?
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More Evidence
Figure: Specialisation by region/country
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Krugman index of specialisation
This shows most EU nations becoming more specialised EU economies seem to be
specialising more in their comparative advantages
Figure: Krugman Index
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Agglomeration
When productive factors can cross borders (international or
inter-regional) integration may have very different effects
Scale economies and trade costs generate forces that encourage
geographic clustering of economic activity.
“Overall clustering” = some areas with lots of economic activity,
others empty ‘core-periphery’
“Sectoral clustering”s = each sector clusters in one region, but most
regions get a cluster
Agglomeration/Dispersion
Basic idea is that lowering trade costs affect both. Agglomeration forces.
Tend to lead industry to cluster geographically Dispersion forces. Tent to
encourage industry to disperse geographically
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Agglomeration Forces
Many agglomeration forces
Technological spillovers (e.g. silicon valley)
Labour market pooling (e.g. City of London)
Demand linkages (a.k.a backward linkages)
Supply linkages (a.k.a foreward linkages)
NEG forces on demand and supply links since they are clearly affected
by economic integration (lower trade costs)
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1
Many forces lead to a tendency of firms to avoid agglomerations of
economic activity
2
Rents and land prices
3
High cost of other non-traded services
4
Competition with other firms
5
The NEG focuses on the last one “local competition” since it is
clearly related to trade costs
6
As trade costs fall, distance provides less protection from distant
competitors
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Handout
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Part IV
3 policy objectives
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Regional Policy
EU always had poor regions (Mezzogiorno, etc.)
much spending on poor EU regions, 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
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Policy Objectives
1
Objective 1. (about 70% of structural spending).
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2
Objective 2. (about 10% of structural spending).
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3
spending on basic infrastructure and production subsidies in less
developed regions: regions with incomes less than 75% of the EU
average.
Nordic exceptions (low population density)
There are about 50 objective 1 regions; they have about 20% of the
EU population.
projects in regions whose economies are specialised in declining coal
mining, fishing, steel production, etc.
spending should support economic and social conversion
About 18
Objective 3 (about 10% of the funding).
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measure to modernise national systems of training and employment
promotion.
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Next Time
Along with a recap, of course!
International Trade, Tariffs, and Globalization. The EU is the largest
trading bloc in the world. What are the effects one might expect from a
economic entity as large as the EU changing its trade-tariff policies?
Baldwin & Wyplosz, Chapter 15.
* Stiglitz, J.E., and Greenwald, B. Helping Infant Economies Grow:
Foundations of Trade Policies for Developing Countries, American
Economic Review, Papers and Proceedings, May 2006.
Shaikh, Anwar, Globalization and the Myth of Free Trade.(2003)
Prepared for the Conference on Globalization and the Myths of Free
Trade, New School, NYC.
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