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7 (New Economic Geography, Krugman Home Market effect, Gravity trade model…
7
New Economic Geography
increasing returns, economies of scale and imperfect information - insights into concentration of activity
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in long run, spatial equilibrium occurs when workers have no incentive to move
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criticisms:
- not new consept
- not geography - assumes featureless plane
- ignores culture and institutions
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effects:
- skilled workers migrate and drives up demand in host region - increases nominal wages
- new firms in region - varieties increase - prices decrease
Black hole condition - when variety is so different that firms are insensitive to costs and always agglomerate in core
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concentration indexes
Criteria:
- comparable across industries
- comparable cars spatial scales
- unbiased to borders
- unbiased to ndustrial classifcation
- well-established benchmark
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Location quotient - measure whether industry is overrepresented in region
regional concentration / national concentration
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Spatial concentration
spatial competition can be used to differentiate goods - firms have more power over people in vicinity
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institutions
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formal - laws, political stability, governments
informal - culture, trust, cooperation,
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Farole: how institution shape development:
- microeconomic exchange - cooperation and info flows, investments etc.
- rate of innovation and change - risk taking, social networks, protection of property rights
- indirect effects via governance and politics
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development not just economic - politics influences which projects are undertaken - London developed in 80s due to support
Luca - electoral politics can influence regional outcomes.
Economic development greater in swing seat regions - government favour
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Regional inequality
Economics
NEG approach: spatial inequality is the price to pay for national productivity - should focus on moving people to opportunities e.g. Glaeser, World development report
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McCan - city size not linearly related to prosperity, but other factors knowledge, innovation, institutions
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Market failures in spatial equilibrium that justify place based policies:
- worker's credit restraints and birthplace effects
- insufficient supply of public goods
- lack of agglomeration economy
- Pre existing distortions e.g. taxes
- immobility
ideal policy simply raises wages in lagging regmionsbut induces no mobility e.g. Empowerment Zones offered wage credits contingent on employment of locals
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development - quality and risk improvements that put economy on higher growth trajectory - expanding capabilities and opportunities - requires institutions
Place based policies - target depressed areas to transfer resources and stimulate local economic growth
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if provided with correct endowments, lagging regions can prosper
Distributed development - need for agglomeration to occur in many regions
target all areas but sensitive to individual needs
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UK policy
Highest regional inequality in OECD, long history of regional intervention
London recovered strongly and invested in finance and services
North maintained focus on old industries
McCan - drivers of UK spatial inequality
- Globalisation shocks
- geography of new trade links
- governance centralised
London, Bristol, Bath gaining graduates, small cities losing
era 1: spatial Keynesianism (demand push)
- Barlow Report - agglomeration in London draining country and causing inflation
- encouraged demand increases in depressed regions
- industrial development certificates - controls on industry location
demand side - focus on people
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Era 2: Thatcher
- cuts in regional policy - shift to urban policy
- selective grants
- financial investment in London
- supply side - focus on firms
Era 3: New Labour
- combined state intervention and market approaches
- endogenous graoth theories - strengthen all regions
- maintained focus on firms - supply side
- regional development agencies - seen as successful in preventing division but did not close gaps
2010s:
- no main economic model
- rebalancing mantra
- LEPs - smaller funding and powers than RDAs
- Towns funds
- decentralisation - first mayoral authority
Current labour gov: Cambridge Oxford link, devolution
Problems:
- back of commitment
- insufficient funding
- inadequate regional policy support and institutions
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infrastructure policy
politically popular, direct job creation undersupplied by market
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neoclassical view - the higher the stock of instractucture/public capital, the higher the productivity of firms
- output function of labour and capital
19th century railway expansion reduced time to London
- allowed towns near railway to grow
1960s - Beching axe cut railways - 2000 stations cut
Road construction in Turkey - Cosar 2016
roads improved foreign market access in previously remote regions
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China motorway expansion (Faber, 2014) - periphery regions on routes saw relatively less growth than core regions on route
connectivity enabled more movement to core
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HS2 would have increased London connectivity.
should have been complimented with regional connectivity
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Equity
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Chetty (2014) where you are born significantly impact upward mobility
children who move to prosperous regions young have more chance of obtaining higher education
Birthplace effects
- community socialisation
- public services and schooling
- networks
- spatial mismatch
Polices that direct resources from rich to poor increase overall welfare even if not economically efficient
Political discontent
populism always existed, but now large enough to have a voice
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Rural urban divide - democrat voters in large cities, even after controlling for income, ethnicity and age
rural areas lower satisfaction with democracy
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EU policy
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Cohesion policy
rationale:
equity - all regions should have same provisions and opportunities
Efficiency - untapped potential in lagging regions
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all countries contribute, funding allocated to regions
UK impact:
short term positive effect in South Yorkshire - effect died once not eligible
need long term development nit temporary support
UK after Brexit:
- norther counties wrestle more integrated in funding e.g. Lancashire
- opportunity or UK to innovate policy?
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UK was net contributor before Brexit, but still received $6bn annually
following additional membership in 2004, funding to UK dropped to 0.1% of GDP
subsequent national policies insufficient
effectiveness:
- regional characteristics mediate success - absorptive capacity and human capital
- policy least effective where needed most!
- positive effect in Germany, negative in areas go Italy
there are underlying institutional and economic challenges that prevent absorption of funding
early strategic decisions matter e.g. investment in high tech manufacturing in Germany
Trends
- new geography of jobs (Moretti) - shift to knowledge economy more concentrated in core for high skilled
- industrial decline
- mountainsin a flat world
Moretti - differances in employment rates, incomes, education etc are persistent
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US regional policy
- biden launched large scale policies worth $3trillion
- $80bn place based
- goal to revive left behind places through place based industry
- innovation cluster e.g. hydrogen hubs
- does not support early-stage development - only those areas with existing networks and firms
- no policies for rural regions with lacking connectivity
- competitive funding allocation
Ron Martin lecture
Commentry
attracting skilled to metropolis will always see organisations centre in metropolis and drain rest of country - Mackinder 1919
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Recent change?
- labour to expand number of combined authorities and fiscal powers
- devolution white paper not detailed enough
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financialisation
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lobbying to abolish cash isa and encourage investment in stocks and shares - in which London benefits
Austerity
- London no cut in local government spending
- Great Yarmouth 50% cut
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why UK inequality?
- systematic stocks affecting all advanced economies - deindustrialisation etc
- over-centralisation in Lodon
London benefits other regions?
London disbenefits to other regions:
- Nicholas Shaxon - financial curse making other regions poorer
- sucking human and financial capital
- inflation
Thames water £16 billion in debt, yet pays shareholder extortionate sums from big payers, who are stuck in natural monopoly with poor water quality
Deolvution
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Britain
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4 pillars of the new model of development: (Martin et al, 2016)
- institutionalising spatial rebalence - made policy objective
- decentralise financial system - banks are centralised in London - need regionally focused investment
- devolve political and administrative powers - civil service currently based in LDN
- fiscal devolution - capacity to raise and spend taxes
Drawbacks from devolution (Rodruigez-pose):
- inequality - strong regions able to use powers better, poorer regions lower fiscal capacity
- efficiency - lower tax base in poorer regions
- institutional burden - duplication of functions, unclear responsibilities + grey areas
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hard to define areas - differences between administrative and functional regions.
different function have different areas.
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types
- political
- administrative
- fiscal
Social capital
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Wolfe - features of social organisation e.g. shared norms and values that facilitate cooperation and coordination - creating community
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need policy that is piecemeal in terms of being devolved, but coordinated nationally