the new geographical economics

8/8/2019 The New Geographical Economics

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THE NEW GEOGRAPHICALTHE NEW GEOGRAPHICAL

ECONOMICSECONOMICSCHAPTER 11:

THE POLICY IMPLICATIONS OFGEOGRAPHICAL ECONOMICS

Sara Lemes BritoEva Bjar Gonzlez


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AgendaAgenda

Introduction.

Six basics policy implications of the coremodel.

Agglomeration rents, public policy, andpolicy competition.

Building a bridge.

Welfare implications.

Conclusions.


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1. INTRODUCTION1. INTRODUCTION


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Policy implications of the core modelPolicy implications of the core model

of the geographical economicsof the geographical economics


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Tomahawk diagramTomahawk diagram


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3. Agglomeration rents, public3. Agglomeration rents, publicpolicy, and policy competitionspolicy, and policy competitions

- Corporate income taxation and the raceto the bottom:

- Government spending.

The standard view

Agglomeration rents


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3.1 The standard view3.1 The standard view

Race to the bottom


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Under- provision of public goods


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Race to the bottom is not anRace to the bottom is not aninevitable outcome wheninevitable outcome when

reasing foreign ownership offers the possibility of increasing tax rat


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The main contribution from

geographical economics inthis topic is:

f exogenous differences in country size, but may very well be the endogen


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3.2 Agglomerations rents3.2 Agglomerations rents

In the core regionthe mobile factorsof productionreceives

- Tomahawk diagram

Freeness of

trade

Equilibrium Agglomeration

rents s< < 1 stable strictly positive

s not stable zero or negative = 1 not stable zero


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As long as the agglomeration rents exceeds the taxdifferential


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Model North- SouthModel North- South(Baldwin and Krugman)(Baldwin and Krugman)

- Costs function (i):

+r Wax xi

r wage forK W wage for L

- Capital moves to the region with the highest real wage after tax.- Let s k , (be the share of capital in North the resulting equilibria stable

) :or unstable can bes k = s k=


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The wiggle diagramThe wiggle diagram


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3.3 Government spending3.3 Government spending

The government spending is an instrument oflocational competition between governments in their

attempt to attract mobile production factors

- When the effects of agglomeration are important:


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Locations decisions can be affectedby regional government spending and

not just be the level of taxation


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The role of nationalThe role of nationalgovernment spendinggovernment spending

( the Forslid- Ottaviano model)

- The costs of producing X units of a manufacturing variety in region jareequal to:

f (Zj)[ rj + [ ( 1) / ] ]- f (Zj) fficiencyfunction

(measures the reduction in costs and where (Zj)represents the level of goverment spending)

- rj eturn to human capital inegion jGoverment production competes with privates production Optimal size of the governme


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- Market clearing for human capital in regionjallows the determination of the number of varietiesproduced in regionj:

- nj = (Kj Zj) / fj (Zj)

Private and public sector compete with each other on the labor market

- Equilibrium in the public sector requires thatpublic spending be fully paid by taxes :

- rjZ j = tjYj ( t j uniform income tax ratethat applies to labor and)human capital

Public sector has to pay competing wages in order to attract human capital


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THE RELATIONSHIP BETWEEN THEFREENESS OF TRADE AND THE DEGREE OF

AGGLOMERATION

( to know if agglomeration becomes more likely or not )

wide range of parameter values tending to reduce the stability of the spreading equilibrium


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4. Building a bridge (policy-4. Building a bridge (policy-inspired experiment)inspired experiment)

How policy interventions that

somehow alter transport costs mightchange the spatial allocation ofeconomic activity


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4.1 The pancake economy4.1 The pancake economy

Core model with congestion

Circle of racetrack economy with 12 cities

Workforce uniformly distributed

Each city produces 1/12 of the economys total

symmetric structure => long-run equilibrium or flat

earth equilibrium(Fujita , Krugmanand Venables1999)

Characteristics


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The pancake economy


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City No links Link 2-12

Link 3-11

Link 4-101 3 3.00 3.00 3.00

2 3 2.58 2.67 2.753 3 2.67 2.08 2.334 3 2.75 2.33 1.925 3 2.83 2.58 2.336 3 2.92 2.83 2.75Average 3 2.79 2.58 2.51

Average distance, pancake economy

ities 1 and 7

Link 4-10Linked cities


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4 2 B id d th4 2 Bridges and the


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4.2 Bridges and the4.2 Bridges and theequilibrium spatialequilibrium spatial

distribution.distribution.Uniform initial distribution=> stable flat earth equilibriumfor the base scenario parameter setting:

Share of income spent on manufacturing = 0.6Elasticity of substitution = 5

Transport costs T = 1.2

Congestion parameter = 0.1


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Building a bridge has a large impact onthe distribution of manufacturing

production, and leads toconsiderable agglomeration ofeconomic activity.

City Link 2-12 Link 3-11 Link 4-101 8.20 4.1 2.7

2 16.4 7.0 3.8

3 10.3 20.7 8.5

4 7.1 9.8 22.85 5.4 5.3 8.5

6 4.6 3.5 3.8

7 4.3 3.0 2.7

Impact of buiding a bridge on spatialImpact of buiding a bridge on spatial


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Impact of buiding a bridge on spatialImpact of buiding a bridge on spatialdistributiondistribution


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Effects of parameter changes withEffects of parameter changes witha bridge between cities 4 and 10a bridge between cities 4 and 10

Determine the long-

run equilibrium

Determines theresponsiveness toreal wagedifferences

T


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Changing transport costsChanging transport costs(the most important parameter)(the most important parameter)


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Changing spending on manufacturesChanging spending on manufactures


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Changing elasticity of substitutionChanging elasticity of substitution


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Changing congestion costsChanging congestion costs


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Changing adjustment speedChanging adjustment speed


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Adjustment speed and long-runAdjustment speed and long-runequilibriumequilibrium


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5. Welfare implications5. Welfare implications

of the core model of geographical economics

For example :

Agglomeration inregion 1

Mobile workforce increases welfare level

Immobile workforce in region 2 is worseoff compared to the spreadingequilibrium

So we have to weight the importance of various groups,using their size as weight


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To determine the welfare level for both types of workers:

Total income in region i

Correct for the price level

Welfare


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Welfare implications of a bridgeWelfare implications of a bridgein the pancake economyin the pancake economy

Building a bridge=> unevendistribution of the reduction inaverage distance =>inhabitants indifferent cities enjoy differentwelfare effects =>migration=>economic agglomeration

13 economic agents:Manufacturing

workers

Farmworkers inregion 1




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Overview of welfare effects:Overview of welfare effects:

long-run equilibriumlong-run equilibrium

Link

2-12

Link 3-

11

Link 4-

10Average change in realincome

0.9 1.9 2.2

Average change in realfarm income

- 0.3 0.2 0.2

Average change in real

manufactuing income

1.6 2.8 3.5


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on the welfare of the average farm worker ison the welfare of the average farm worker isa poor indicator of what happens to aa poor indicator of what happens to aparticular farm workerparticular farm worker


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6. CONCLUSIONS6. CONCLUSIONS

THE WORLD DEVELOPMENT REPORT, 2009(WORLD BANK)

- Solutions to problems of economic integration and itsrelation to policy decisions.

- The main idea: while economic growth tends to beunbalanced from the standpoint of geographic,development can be achieved throughout the country.

- How to achieve both the immediate benefits of theconcentration of production along with long- termbenefits of the convergence of living standars betweendifferent geographical areas is the economicintegration.


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WDR puts forward solutions to the

problem of economic integration: When politicians make their decisions

they must take into account theeconomic geography of their country.

They should avoid focusing only onincentives or targeted interventionsin lagging regions and should use all

instruments, like linking institutions, infrastructure

linking, targeted interventions


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the new geographical economics

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