agglomeration facts and theories about agglomeration
TRANSCRIPT
Agglomeration
Facts and theories about agglomeration
Agglomeration
Concentration of economic activityCore and peripheryEconomic development is unevenly
distributed in spaceShould we worry about agglomeration?
Agglomeration
http://www.savethenight.eu/Lights in Europe.html
Agglomeration
Concentration of economic activity is associated with strong disparities in income per capita
Income per capita is a good proxy for standard of living and people well being
Large disparities in income per capita in Europe at national level
National GDP per capita in PPS 2010
Agglomeration
There are important differences within the advanced and the backward countries
Agglomeration of economic activity does not coincide with national boundaries
In Europe important gaps in income per capita at regional and at sub regional level
The territorial shape of unbalances is different in each country
Regional GDP per capita in PPS - 2010
Agglomeration
Differences in income per capita are often associated with differences in the variables related to the labour market
Low income per capita countries are often countries with higher rates of unemployment, and of lower rates of employment
Unemployment rate - 2010
Unemployment rate 2010, age group 15-64
Employment rate of the age group 20-64 - 2012
Agglomeration
And low per capita income regions are often regions with lower rates of employment and higher rates of unemployment
Employment rate of the age group 20-64 - 2012
Unemployment rate - 2010
Unemployment rate 2010, age group 15-64
Agglomeration
But keep in mind that this relation is far from being perfect because…
Labour markets have strong national specificities due to the national institutional context and regulations and because …...
the employment content of economic growth can vary
Agglomeration
Spatial unbalances in economic activity are also associated with unbalances in the endowment or availability of other important public goods (again with important exceptions) which affect the well being of people
Yes, there are good reasons why we should worry about agglomeration
Agglomeration
Is there any long run tendency towards convergence of levels of income per capita?
It is difficult to answer. At global level and in the long run the answer is probably positive. Look at the video which shows the long run correlation between health and GDP per capita at global level.
Agglomeration
Lecture by Hans Rosling
Agglomeration
At European level, a tendency towards convergence after the second world war can be detected at national level
Looking at the last decade, some backward European countries have grown very fast and narrowed dramatically the gap with the advanced countries
Agglomeration
Growth however in these countries has often been spatially very unbalanced
Backward regions in the backward countries have grown more than all regions in advanced countries but much less than advanced regions of their own countries
Agglomeration
The impact of the present economic crisis has been felt by all countries
However it hit different countries in different ways
It is very difficult to forecast how and when the various countries will emerge from the present crisis
Real GDP growth rate - % change on previous year
geo\time 00-07 2007 2008 2009 2010 2011 2012 2013
EU (27 countries) 17,00 3,2 0,3 -4,5 2,0 1,7 -0,4
United States 17,98 1,9 -0,3 -2,8 3,0 1,8 2,8 1,9
Belgium 14,67 2,9 1 -2,8 2,3 1,8 0,1
Bulgaria 49,51 6,4 6,2 -5,5 0,4 1,8 0,8
Czech Republic 39,71 5,7 3,1 -4,7 2,5 1,8 -1,0
Denmark 12,41 1,6 -0,8 -5,8 1,4 1,1 -0,4
Germany 10,98 3,3 1,1 -5,1 4,0 3,3 0,7 0,4
Estonia 72,08 7,5 -3,7 -14,3 2,6 9,6 3,9
Ireland 44,24 5,2 -3 -7 -1,1 2,2 0,2
Greece 35,34 3 -0,2 -3,3 -4,9 -7,1 -6,4
Spain 29,27 3,5 0,9 -3,7 -0,2 0,1 -1,6
France 14,87 2,3 -0,1 -2,7 1,7 2,0 0,0
Italy 10,33 1,7 -1,2 -5,1 1,5 0,5 -2,5
Cyprus 31,83 5,1 3,6 -1,9 1,3 0,4 -2,4
Latvia 92,18 9,6 -3,3 -17,7 -1,3 5,3 5,2
Real GDP growth rate - % change on previous year
geo\time 00-07 2007 2008 2009 2010 2011 2012 2013EU (27 countries) 17,00 3,2 0,3 -4,5 2,0 1,7 -0,4
United States 17,98 1,9 -0,3 -2,8 3,0 1,8 2,8 1,9
Lithuania 56,6 9,8 2,9 -14,8 1,6 6,0 3,7
Luxembourg 29,5 6,6 0,8 -5,3 3,1 1,9 -0,2
Hungary 24,9 0,1 0,9 -6,8 1,1 1,6 -1,7
Malta 11,7 4,3 4,3 -2,6 3,3 1,7 0,9
Netherlands 13,8 3,9 1,8 -3,5 1,5 0,9 -1,2
Austria 15,9 3,7 1,4 -3,8 1,8 2,8 0,9
Poland 28,4 6,8 5,1 1,6 3,9 4,5 1,9
Portugal 8,1 2,4 0 -2,9 1,9 -1,3 -3,2
Romania 42,9 6,3 7,3 -6,6 -1,1 2,2 0,7
Slovenia 30,7 6,9 3,6 -8 1,3 0,7 -2,5
Slovakia 43,5 10,5 5,9 -4,9 4,4 3,0 1,8
Finland 22,8 5,3 1 -8,2 3,4 2,8 -1,0
Sweden 21,1 3,3 -0,6 -5,2 6,6 2,9 0,9
United Kingdom 20,5 3,5 -1,1 -4,4 1,7 1,1 0,3 1,9
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Agglomeration
There are various theories to explain why economic development produces inherently spatial economic unbalances
One of the most recent and debated theories is the New Economic Geography
The first contribution of this school of thought is due to Paul Krugman in 1991
Agglomeration
The issue of the Neg is to explain the formation of a large variety of economic agglomerations in the geographical space
The novelty of the Neg is to explain agglomeration within a framework of general economic equilibrium, that is to explain agglomeration and dispersion within the same model
Agglomeration
The model analyses simultaneously the centripetal and the centrifugal forces of economic activity
Three key hypotheses of the model:– positive transport costs– increasing returns to scale and monopolistic
competition– factor mobility
Agglomeration
The Neg shows that the interaction between economies of scale, transport costs and factor mobility may produce concentration of economic activity
The higher are increasing returns to scale, the lower transports costs and the higher the share of mobile factors of production, the higher the probability of agglomeration
Agglomeration
The model is circular: once the process of agglomeration has started, it tends to reproduce and to reinforce
The sketch of the modelThe firm must decide where to localize its
plant on the basis of three parameters: fixed cost of setting a new plant, transport cost and share of immobile resources
Agglomeration
Basic assumptions– Two regions: East and West– Two sectors: agriculture and manufacturing– Firms and workers in the agriculture sectors
cannot move– Firms and workers in the manufacturing sector
can move
Agglomeration
– Manufactured goods can be produced in either or both locations
– There is a positive set up cost for each manufacturing plant
– If a manufactured good is produced in only one location, trade costs must be incurred to serve the other market
Agglomeration
If a manufactured good is produced in two locations, the set up cost doubles
Agglomeration
A numerical example
Krugman
Assumptions– Manufacturing labour force in each location is
proportional to the share of manufacturing of that location
– Demand is strictly proportional to the labour force
– Total demand for manufacturing is 10– Labour force in agriculture 60%, in
manufacturing 40%
Krugman
Therefore total demand for manufacturing is 10 of which 6 from workers in agriculture (always 3 for each location) and 4 from manufacturing workers (from either or both locations)
The cost of transport per unit of production (t) is 1
The set up cost is 4 for each plant
Krugman
Distribution of manufacturing employment
Cost of typical firm if it produces in
East Both West
East only Fixed 4 8 4
Transportation
3 0 7
Total 7 8 11
Fifty-fifty split
Fixed 4 8 4
Transportation
5 0 5
Total 9 8 9
West only Fixed 4 8 4
Transportation
7 0 3
F=4 t=1 %40
Total 11 8 7
Krugman
Distribution of manufacturing employment
Cost of typical firm if it produces in
East Both West
East only Fixed 6 12 6
Transportation
3 0 7
Total 9 12 13
Fifty-fifty split
Fixed 6 12 6
Transportation
5 0 5
Total 11 12 11
West only Fixed 6 12 6
Transportation
7 0 3
F=6 t=1 %40
Total 13 12 9
Krugman
Distribution of manufacturing employment
Cost of typical firm if it produces in
East Both West
East only Fixed 4 8 4
Transportation
4.5 0 10,5
Total 8,5 8 14,5
Fifty-fifty split Fixed 4 8 4
Transportation
7,5 0 7,5
Total 11,5 8 11,5
West only Fixed 4 8 4
Transportation
10,5 0 4,5
F=4 t=1,5 %40
Total 14,5 8 8,5
Krugman
Distribution of manufacturing employment
Cost of typical firm if it produces in
East Both West
East only Fixed 4 8 4
Transportation
4,5 0 5,5
Total 8,5 8 9,5
Fifty-fifty split
Fixed 4 8 4
Transportation
5 0 5
Total 9 8 9
West only Fixed 4 8 4
Transportation
5,5 0 4,5
F=4 t=1 %10
Total 9,5 8 8,5
Agglomeration
Main conclusions of the model– The choice of location of a firm will depend on
the location of other firms– Other things being equal, the firm has the
convenience to locate in the bigger market to exploit increasing returns and save transport costs.
Agglomeration
– The choice of the firm to locate in the bigger market, will make that market bigger, and a bigger market will attract new firms starting a circular process towards the concentration.
Agglomeration
– Agglomeration is only a possibility. Whether agglomeration will take place or not depends on the relative values of transport costs, fixed costs, share of immobile population. High transport costs and an high share of immobile population are an obstacle for agglomeration while high fixed costs are an incentive for agglomeration
Agglomeration
– There are then multiple equilibria. You can find equilibrium producing manufacturing entirely in West, entirely at East or with two plants both at west and at east
Agglomeration
– You can also appreciate that when t=0 (no transport cost) the solution of one plant is always convenient. The world is flat. Spatial distance is irrelevant and the firm can locate the plant indifferently everywhere.
Agglomeration
Other centripetal and centrifugal forces play a role in the agglomeration and dispersion processes
Other centripetal forces:– Backward and forward linkages– External economies
Specialised providers of inputs Pooling of specialised labour force
Agglomeration
Complete and rapid flows of information and knowledge
Other features of the context: institutions, social cohesion, social capital, environment, public goods
Agglomeration
Centrifugal forces– Price effect– Congestion costs and diseconomies of scale– Share of immobile factors
Agglomeration and integration
Agglomeration and European economic integration
Expected positive effects of European economic integration
Cohesion policies, single market and European monetary Union
Potential spatial asymmetric effects of European economic integration
Agglomeration and integration
Integration may favour agglomeration because– It lowers trade costs– It increases the scope for increasing returns– It increases the mobility of factors of
production
Agglomeration and integration
The potential asymmetric effects of integration as a strong motivation for European cohesion policies
The historical link between cohesion policy on one side and single market and monetary unification on the other
Compatibility and complementarity between single market and cohesion policy at the heart of the European social model