Chapter 10 Dynamics, growth and geography. Long term equilibrium adjustment: dλ i /λ i = η(w i...

Chapter 10

• Dynamics, growth and geography

• Long term equilibrium adjustment:

• dλi/λi = η(wi – ω)

• Value of η sets the speed of adjustment but in general does not have an effect on the outcome

• Exceptions:– overshooting– unstable equilibrium– not the “nearest” equilibrium is reached

Figure 10.1 Regular adjustment dynamics

a. 2-region base scenario

0.97

1

1.03

0 1

lambda 1

w1

/w2

A

D

CB

E

0.3


b. Share of manufacturing workers in 1; eta = 2

0

0.5

1

0 50 100 150 200

Reallocation


c. Number of reallocations towards spreading

0

50

100

150

200

250

0 20 40 60 80 100 120 140

eta

Figure 10.2 Special adjustment dynamics(along vertical axis, ; horizontal axis, number of reallocations)

a. eta = 200; cycles

0

0.5

1

0 500 1000

b. eta = 200; cycles, detail

0

0.5

1

100 130


c. eta = 332; converge to unstable equilibrium

0

0.5

1

1 5 9 13


d. eta = 335; agglomerate in 1

0

0.5

1

1 5 9 13

e. eta = 340; agglomerate in 2

0

0.5

1

1 3 5 7

Can growth periods be simulated?

• Convergence/divergence• Different for countries/regions• Convergence/divergence speed different in

different periods

Figure 10.3 Histogram of per capita income, selected years

a. His togram of ln(incom e per capita)

0

5

10

15

20

25

5.7 6.6 7.5 8.4 9.3 10.2 11.1ln(income per capita)

num

ber

of c

ount

ries

1950

QatarKuw ait

Guinea Bissau

b. His togram of ln(incom e per capita)

0

5

10

15

20

25


num

ber

of c

ount

ries

1968

Qatar

Malaw iBurundi

ChadGuinea

Figure 10.3 Histogram of per capita income, selected years

c. His togram of ln(incom e per capita)

0

5

10

15

20

25


num

ber

of c

ount

ries

1986

USA

TanzaniaChad

Guinea

d. His togram of ln(incom e per capita)

0

5

10

15

20

25


num

ber

of c

ount

ries

2003

USAZaire

Figure 10.4 Regional convergence in the EU, speed of convergence estimates

Regional convergence in the EU

0

0.01

0.02

0.03

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

midyear of estimate period

estim

ated

spe

ed o

f co

nver

genc

e

BS1991

BS1995

A1995a

A1995b

EC1997

BP1999

fit

Figure 10.5 Regional income inequality in the EU: Lorenz curves

EU regional income inequality; Lorenzcurves 1995 and 2004

0

1

0 1cumulative share of population

cum

ulat

ive

shar

e of

inco

me

19952004

diagonal

Nuts2 1995

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Gini coefficient: 0.1561

EU 1995-2001

Nuts2 2001

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1


EU 1995-2001

Nuts3 1995

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0


EU 1995-2001

Nuts 3 2001

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0


EU 1995-2001

• Between-country inequality– Assuming equal gdp/cap inside each country

• Within-country inequality– Assuming equal national gdp/cap worldwide

Figure 10.6 Regional income inequality in the EU: Theil index and Gini coefficient

EU regional income inequality: Theil index and Gini coefficient

0.02

0.03

0.04

0.05

0.06

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0.08

0.12

0.16

0.20

0.24

Theil within countries (left hand scale)

Theil between countries (left hand scale)

Gini coefficient (right hand scale)

Figure 10.7 Leaders and laggards in the world economy, 1-2003

10001 1500 1600 18001700 200019000

100

200

300

500

400

income per capita (% of world average)

year

Italy

IraqIran

Netherlands

UK

Australia

USA

Switzerland

IndiaChina

oAfricaW Offshoots

New Zealand

AustraliaMany Many

Italy

To be explained

1. For almost all countries even increasing level of income

2. Differences between countries may persist for a long time

3. Long periods of stagnation can be followed by long periodes of growth

4. Frequent changes in economic ranking (leap-frogging)

Theories

• Endogenous growth Y = A f (K,L)

• Total factor productivity A as a function of K or L can explain (1)

• In a closed model A can be structurally different per country: can explain (2)

• (3) and (4) cannot be explained by endogenous growth theory

• Need for geographical economics

T0

1

0,5

λ1

Fig 4.10 The bell-shaped curve

Unstable equilibria

Stable equilibria

VL model: with lowering T from dispersion to agglomeration to dispersionVery simple explanation of (3)

Recall Krugman & Venables (1995)

Simulations of (3) and (4)

• Using the 24 region racetrack model with congestion, unchanged ε=5, δ=0.6, τ=0.05

• Simulating a change in transport costs over time• Some random initial distribution (history)• Find long term equilibirum with T=3, then

decreasing

• Herfindahl index H=Σλi2

Figure 10.8 Distribution of manufacturing and Herfindahl index

Herfindahl index for 2 regions

0

1

0 1

share in region 1

Figure 10.9 Evolution of agglomeration, the Herfindahl index

Herfindahl index

0

0.1

0.2

0.3

0.4

0.5

0 200 400 600 800

reallocation

Figure 10.10 Several phases of the reallocation process

1

2

3

4

5

6

7

8

9

10

11

12

T=2.2 T=2.1a

b T=2

1

2

3

4

5

6

7

8

9

10

11

12


c T=1.9

1

2

3

4

5

6

7

8

9

10

11

12

d T=1.7

1

2

3

4

5

6

7

8

9

10

11

12


e T=1.5

1

2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

5

6

7

8

9

10

11

12

T=1.2 T=1.1f

H does not tell anything about “spikes”

Figure 10.11 Dynamics of regional size; regions 3, 6, and 9

Evolution of share of manufacturing

0

0,1

0,2

0,3

0,4

0,5

0 200 400 600 800

reallocation

36

9

Combine agglomeration and growth

• Baldwin & Forslid (2000)• Extend the CP model with capital K produced by sector

In (investment sector)• With global knowledge spill-overs location of In does not

matter• With local knowledge spill-overs location of In does

matter• High policy relevance: many governments stimulate

knowledge flows to periphery with universities/high-tech industrial parks etc.

Baldwin & Martin (2004)

• Cost function M sector: R + Wβxi

• K is produced under perfect competition with only variable labor αI under knowledge spill-overs: αI falls with rising outputQk=LI / αI

αI = 1 / [ K-1 + κ K*-1 ]

WithQk = flow of new capital

LI = employment in investment sectorK = stock of knowledge (*= other region)κ = parameter degree of spillovers(capital depreciates in one period)

Intertemporal utility

• U = Σt (1/1+θ)t [ln (Ft1-δMt

δ)]

• See box 10.1• Mobility related to difference in present value of

real wages in each region

Main results

• For two region model only spreading and complete agglomeration into one region are stable long-term equilibria

• -> same as in CP model• with increasing κ more stable equilibria possible

Figure 10.12 Stability in the Baldwin-Forslid economic growth model

0.2 0.4 0.6 0.80 1

1.5 1.26 1.14 1.06 1

Freenessof trade

Knowledgespillovers

Implied T

1

Agglomeration stable; spreading unstable

Agglomeration stable; spreading stable

Agglomeration unstable; spreading stable

"deep determinants of growth"

• growth different because A is localized, but:• why is A localized?• institutions (table 10.4) relevant• again the discussion on first nature returns

– climate, land-locked– tropical diseases (Sachs)

• missing: second nature: the role of geography relative to other geographies– spatial autocorrelation (first block of the course by Paul Elhorst)– spatial autocorrelation of institutions?

Figure 10.13 Scatterplot of own and neighboring institutions

Rule of Law and neighbours

-2.5

2.5

-2.5 2.5

Rule of Law

Nei

ghbo

ur's

Rul

e of

Law

diagonal

linear prediction

Philippines

Hong Kong

Chile

Kuwait

Yemen

Iraq

Conclusions (p451)

• Integrated endogenous growth/geographical economic models can deal with (1)-(4) but– do not pay attention to deep determinants of differentiated

growth

• models that do take account of deep determinants ignore second nature/spatial interdependence

• long term history and path-dependence (box 10.2)– country borders change over time– cities do not: research more promising

• needed: integration of deep determinants, history and second nature geography

Chapter 10 Dynamics, growth and geography. Long term equilibrium adjustment: dλ i /λ i = η(w i...

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