The policy implications of geographical economics

1
Chapter 11

• The policy implications of geographical economics

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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"

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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 f gt fB 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 fS gt f gt fB
• people go where they expect others will go
• Threshold effects
• marginal policy is ineffective unless some
  sustain- or breakpoint is reached/passed

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Figure 11.1 The Tomahawk diagram

fs
1
1
l
l
1
1
0.5
0.5
0
0
fs
0
0
Free
-
ness of trade
Free
-
ness of trade f
Sustain points
Stable equilibria
Sustain points
Stable equilibria
Break point
Unstable equilibria
Break point
Unstable equilibria
Basin of attraction for spreading equilibrium
Basin of attraction for spreading equilibrium
Basin of attraction for agglomeration in region 1
Basin of attraction for agglomeration in region 1
Basin of attraction for agglomeration in region 2
Basin of attraction for agglomeration in region 2
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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
  two-region model
• multiregional model behaves more moderate -gt less
  "catastrophic" agglomeration

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Urban Herfindahl Index for a line with increasing
size
line-size stability a minimum of 30 regions
seems necessary
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Urban Herfindahl Index for a square grid with
increasing size
square-size stability a minimum of 100 regions
seems necessary
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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

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Figure 11.2 Effective average tax rate and Golub
index (barriers to FDI)
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Figure 11.2 Effective average tax rate and Golub
index (barriers to FDI)
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Figure 11.3 The Wiggle Diagram

r
/r
r
/r
N
S
N
S
(iii) standard tax competition
(iii) standard tax competition
(ii) geo ec. high trade costs
(ii) geo ec. high trade costs
D
D
B
B
t
-
t
t
-
t
N
S
N
S
A
A
0
1
C
0
1
C
share of firms in North
(i) geo ec. intermediate trade costs
(i) geo ec. intermediate trade costs
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Box 11.2 International transfers

• can be simply modelled by some exogenous change
  of ? ?1, ?2, ... , ?n
• 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

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Figure 11.5 Change in real wage rate of bystander
(intermediate transport costs)
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Baldwin Krugman (2004)

• use the Forslid Ottaviano model of 4.8 extended
  with government spending
• production function becomes
• fj (Zj) rj ß xj
• (parameter normalization ß 1-1/e or ß (e
  -1)/e
• in the book equation 11.1 mentions s in stead of
  e)
• f is efficiency function for government good Z
• f (0) 1 f' lt0
• competition of human capital resources between K
  and Z nj (Kj - Zj) / fj (zj)
• Z reduces n fig 11.6 more agglomeration
  tendency

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4
e
3
Figure 11.6 Marginal impact of introducing public
goods on break-point
2
1
0
0
1
0
d
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Infrastructure

• changing Drs -gt 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

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Figure 11.7 The pancake economy
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Figure 11.8 Impact of building a bridge on
spatial distribution
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Figure 11.9 Impact of transport costs bridge
between 4 and 10
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Welfare implications

• simple definition ?j yj with real income
  yYI-d

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
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Figure 11.10 Real income and welfare changes
link 4-10
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Figure 11.10 Real income and welfare changes
link 4-10
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Figure 11.10 Real income and welfare changes
link 4-10
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Chapter 12

• Critics and evaluation

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• 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

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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

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Neary (2001)

• Critics from international economics
• No strategic interaction between firms
• To simple transport costs and too simple
  (one-dimensional) geographies
• Reliance of specific functional forms and
  simulations
• Lack of empirical evidence

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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

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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

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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

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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