GEOGRAPHICAL ECONOMICS B - tankonyvtar.hu...ELTE Faculty of Social Sciences, Department of Economics...

GEOGRAPHICAL ECONOMICS

B

ELTE Faculty of Social Sciences, Department of Economics

Geographical Economics

"B"

week 11GEOGRAPHICAL ECONOMICS AND POLICY IMPLICATIONS

Authors: Gábor Békés, Sarolta RózsásSupervised by Gábor Békés

June 2011

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Békés - Rózsás

GeographicalEconomics andPolicy

The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c

Outline

1 Geographical Economics and PolicyThe potential of policy instrumentsPolicy implicationsTaxation and agglomerationTransportation and tra�c

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Policy

Agglomeration � development � growth

Regional development

BGM beginning of Ch 11

Topics for today

The potential of policy instruments

Policy implications

Taxation and agglomeration

Transportation and tra�c

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The purpose of policy analysis

What kind of policy? � an issue

Is regional development worth doing? � welfare consequencesof inequalityEconomic integration � EU/EMUDevelopment within the country � North vs South ItalyMegapolis

What kind of policy? � intervention

TaxationTransportation infrastructureTari�s, regulation

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The use of policy analysis

Can we use the predictions of the model?

Yes:

important implicationsthere are supporting empirical resultsthere is a demand for itSuggestions, e.g. Ottaviano, G. I. P. (2003), Regional policyin the global economy: insights from the New EconomicGeography, Regional Studies, 37: 665�73.

No:

di�erent models contradict each otherHME � empirical results are not clearpolicy recommendation is toughCritique: Neary, J. P. (2001), Of hype and hyperbolas:introducing the new economic geography, Journal ofEconomic Literature, 39: 536�61.

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Models and policy implications

Model: Tomahawk diagram/bell-shaped curve,

Important implications:

1 Regional side e�ects

2 Regional e�ects � a question of trade interactions

3 �Lock-in e�ects� � short-run intervention � permanent e�ect

4 Regional selection � the potential of policy interventions ofcausing a great e�ect

5 Expectations and coordination

6 Threshold-e�ect � critical mass

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Policy implications 1

1. Regional side e�ects

�non-regional� policies' regional consequences (trade,taxation, competition, income redistribution, FDI subsidy,etc.)→ Regional side e�ects

they determine the relationship between core (highagglomeration) and periphery (low agglomeration)

Example: tax reduction for high-income earners. If they areresiding concentrated in one region (e.g. Budapest), then thedisposable income in that region relatively grows and itreinforces the agglomeration e�ect. In an extreme situation itcan lead to great di�erences.

Further examples?

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2. Regional e�ect � a question of trade interactions

Lets consider those policy issues, which aims to a�ect thespatial allocation of economic activities.

Their e�ect depends on the extent of openness of the givencountry/region, on the nature of trade interactions

The result depends on where the economy stands comparedto S and B points, how large is T

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3. "Lock-in e�ect" � short-run intervention � permanent

e�ect

A temporary short-run intervention can have permanente�ects as well.

Region A eastablishes a new tax and as a result the economicactivity shifts from the spreading equilibrium to region B

Under proper parameters the economy shifts from an unstableequilibrium

It does not matter whether the tax is canceled later, theeconomy would not return to the spreading equilibrium

Example?

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4. Regional selection: The potential of policy instruments

If (i) the economy is in spreading equilibrium, or (ii)transportation costs vary, then the question which region�loses� and which �wins� can be the result of policy decisions.

Example: FDI subsidy to a large factory. If plenty of suppliersand laborers have already been located there, the subsidycould be recalled, the agglomeration would not change.

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5. Expectations and coordination

If there can be more than one equilibrium, the expectationsbecome important

E.g. migration of laborers � wages � in fact that is thesequence of future wages that really matters, if migration iscostly

The government can in�uence expectations, e.g. viasubsidies. In this case it is the expectations of economicactors what matters not the subsidy itself.

Example: real estate boom/bubble

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6. Threshold-e�ect � critical mass

Because of the non-linear e�ect, there may be plenty of policyinterventions which do not have any e�ect.

In most cases, the targeted e�ect can only be achieved if theintervention is strong enough (there is a critical mass) toswitch the system to another equilibrium

The critical mass depends on where the system currently is(how large is T , where are B and S)

Sometimes a small step is enough . . .

Example: Lots of EU intervention in South Italy, minimale�ect

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Applications

Taxation

Transportation

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Tax competition models � several countries (regions)determine a certain tax level, the economic factors/actors aremobile and they react. In this model

country A cuts o� taxes, attract capital, its tax revenues arerising; in country B revenues are fallingFor this reason country B also cuts o� taxes, capital �owsback, revenues are rising, etc.Tax competition results in lower and lower taxes (Race to thebottom)

Geographical economics (e.g. Baldwin-Krugman, EER 2004)shows, that agglomeration e�ects counteract tax competition

Agglomeration rents can be taxated � if there areagglomeration externalities, then it is not worth leavingdespite of higher taxes � for a while

EU today . . .

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EU corporate tax rates

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Taxation and agglomerationo

Switzerland � empirical tests

(1) Is it true that companies do not bother much about taxesif there are agglomeration advantages? Brulhart, Jametti andSchmidheiny (2009), �Do Agglomeration Economies Reducethe Sensitivity of Firm Location to Tax Di�erentials?�

(2) Do local authorities levy higher taxes in the presence ofagglomeration? Luthi - Schmidheiny (2011), �The E�ect ofAgglomeration Size on Local Taxes�

Results

Companies care about local taxes if the concentration of localindustry is low.

Agglomerated regions (cities) can levy higher taxes

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Transportation and tra�c

Transportation cost is just one element of T

It can be in�uenced by

Freeways (e.g. Budapest-Nyíregyháza)TGV high-speed rail (Madrid-Sevilla)Bridge (Copenhagen-Malmo)

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Oresund Bridge

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High-speed rail

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High-speed rail 2

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High-speed rail 3

Madrid-Sevilla

Plane

Access to airport 30mEntry 10m + Check-in45m + Boarding 10mJourney: 1 hourDisembarking: 10m +Getting the lagguage 15mLeaving the airport 5mAccess to downtown 15m

Total: 3h 20m

Rail

Access to railway station:10mEntrance: 2m +'Check-in': 5mJourney: 2h 30mDisembarking: 2mAccess to downtown: 10m

Total: 2h 59m

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Freeway

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