FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM FINANCING CITIES IN THE GLOBAL ECONOMY LOCATION AND GEOGRAPHICAL ECONOMICS Presentation Chapter 5 Liga Mieze Denis Assimwe Kangere Bizuneh Gultu Lakew Camilo Mendoza May 2005 IHS- Rotterdam

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Introduction Target –to asses the empirical relevance of geographical economics –testing the models The main topics –concentration, specialisation and agglomeration –Economic theories –Home-market effect and spatial wage structure –conclusions

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Distinguishing among concentration and agglomeration What they have common? Both deal with the location of economic activities What is the difference? Concentration – analyzes the location across space of a few well-defined sectors (notable in industry) Agglomeration – analyzes the location across space of a much larger part of activity (manufacturing sector as whole)

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Distinguishing speciali. from concent. & agglom. Specialisation means concentration of activity in one specific field

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Different levels of concent., agglom. & special. Neither specialisation nor concentration Specialisation;concentration at contry level Specialisation;concentration at regional level Specialisation;concentration and aglomeration at contry level

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Location Firms tend to locate in or near regions where demand is relatively high (reinforcing a process of agglomeration) Regions with a relatively high GDP per capita tend to be located close to each other, as do regions with low levels of GDP per capita. New approach within countries – urban area or cities are regions in national space

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM How to measure? Elison-Glaeser index measures the degree of geograpchical concentration to which industry i is geographically concentrated (in terms of employment) in location s at time t.

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM How to measure? Krugman specialization index – definied as the absolute value of a country’s (in case of EU) share in the production of industry k minus the share of other (EU) countries in the production k, summed over all industries. IF k=0 the country have industrial structure that is identical to the rest of EU

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM How to measure? Krugman specialization index in the EU

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM How to measure? Agglomeration in case of EU manufacturing can be measured by using a country’s share in total EU manufacturing activity. Concentration is measured as the relative production share across countries for a given industry

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM How to measure? Agglomeration of manufacturing in the EU

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Economic theories Glaeser theory: –can be explained by neo-classical model Ellison and Glaeser: –Natural advantages of location (first nature) or location of spill-overs (second-nature)

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM The Home-market effect New trade models without transport costs imply that trade leads to specialization (neo-classical trade model). Home-market effect: if local high demand for cars, then it will export cars. THEN LOCAL DEMAND PRODUCTION More than proportional EXPORT

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM The Home-market effect Idiosyncratic changes matters? Davis and Weinstein: the output of a good g in a certain industry n in a certain country r is proportional to the IDIO syncratic DEM and ~ IDIODEM: difference between the demand for good g in the industry n in country r, and the demand for that good in the rest of the countries. IDIODEM represents home-market effect.

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM A spatial wage structure Increasing of production, because of increasing of demand (within a region) depends on the elasticity of labor supply. When labor supply is not elastic the increased demand lead to an increase in the production AND to higher wages in that region. ECONOMIC CORE WAGES

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM A spatial wage structure Mexico City Veracruz Puebla Acapulco Merida Guadalajara Leon Tampico Chihuahua Torreon Mexicali Ciudad Juarez Monterrey Mexico There are differences in GDP between North and South of Mexico

FINANCING CITIES IN THE GLOBAL ECONOMY – GEOGRAPHICAL ECONOMICSROTTERDAM Conclusions The variables aren’t independent Without knowledge of initial conditions is difficult to test the model Geographical concentration of industries is the rule Home-market effect and existence of a spatial wage structure are confirmed. Unclear what geographical economics adds empirically to the understanding of the relationships between location and economic activity.