Agglomeration Facts and theories about agglomeration

Agglomeration Concentration of economic activity Core and periphery in Europe Economic development is unevenly distributed in space Should we worry about agglomeration?

Agglomeration in Europe.html 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 2011

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

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

Employment rate

Agglomeration And low per capita income regions are often regions with lower rates of employment and higher rates of unemployment

Employment rate

Unemployment rate

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, specially in the European Union

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 United States17,981,8-0,3-2,82,51,62,32,2 EU2817,003,10,5-4,42,11,7-0,40 Belgium14,6731-2,62,51,60,10,3 Bulgaria49,516,95,8-50,720,51,1 Czech Republic39,715,52,7-4,82,32-0,8-0,7 Denmark12,410,8-0,7-5,11,61,2-0,7-0,5 Germany10,983,31,1-5,64,13,60,40,1 Estonia72,087,9-5,3-14,72,58,34,71,6 Ireland44,244,9-2,6-6,4-0,32,8-0,30,2 Greece35,343,5-0,4-4,4-5,4-8,9-6,6-3,9 Spain29,273,81,1-3,60-0,6-2,1-1,2 France14,872,40,2-2,922,10,3 Croatia-5,22,1-7,4-1,7-0,3-2,2-0,9 Italy10,331,5-5,51,70,6-2,3-1,9 Cyprus31,834,93,6-21,40,3-2,4-5,4

Real GDP growth rate - % change on previous year geo\time Latvia92,189,8-3,2-14,2-2,954,84,2 Lithuania56,611,12,6-14,81,66,13,83,3 Luxembourg29,56,50,5-5,35,12,6-0,22 Hungary24,90,50,9-6,60,81,8-1,51,5 Malta11,743,3-2,53,52,22,5 Netherlands13,84,22,1-3,31,11,7-1,6-0,7 Austria15,93,61,5-3,81,93,10,90,2 Poland28,47,23,92,63,74,81,81,7 Portugal8,12,50,2-31,9-1,8-3,3-1,4 Romania42,96,98,5-7,1-0,81,10,63,4 Slovenia30,76,93,3-7,81,20,6-2,6 Slovakia43,510,75,4-5,34,82,71,61,4 Finland22,85,20,7-8,332,6-1,4-1,3 Sweden21,13,4-0,6-5,262,7-0,31,3 United Kingdom20,52,6-0,3-4,31,91,60,71,7

Agglomeration Dramatic changes occurred in the last ten years in the GDP per capita Italy and Greece emerge as the two countries with the slowest growth in the long run and the two most heavily hit by the economic crisis

GDP per capita %2013/ Other country /Italy 2013 Other country /Italy Country Australia 20,42 109,22 140,81 Austria 14,32 113,51 138,94 Belgium 9,28 107,46 125,73 Canada 12,13 115,93 139,18 Chile 52,98 37,20 60,92 Czech Republic 34,18 63,40 91,08 Denmark 1,90 112,28 122,50 Estonia 69,99 39,35 71,62 Finland 12,47 99,23 119,48 France 7,02 100,77 115,46 Germany 13,96 108,76 132,70 Greece -3,20 73,35 76,02 Hungary 28,25 48,01 65,92 Iceland 21,41 107,29 139,47 Ireland 8,25 120,46 139,60 Israel 20,50 84,66 109,22 Italy -6,60 100,00 Japan 10,18 100,26 118,28

GDP per capita %2013/ Other country /Italy 2013 Other country /Italy Korea 57,58 68,29 115,22 Luxembourg 8,91 213,00 248,35 Mexico 12,28 41,45 49,83 Netherlands 7,79 123,92 143,01 New Zealand 19,59 78,05 99,93 Norway 7,44 152,58 175,51 Poland 56,95 41,29 69,38 Portugal -0,82 74,87 79,51 Slovak Republic 69,39 44,74 81,13 Slovenia 21,75 69,85 91,05 Spain 3,44 88,73 98,27 Sweden 18,01 106,48 134,54 Switzerland 13,40 130,11 157,97 Turkey 43,37 33,77 51,83 United Kingdom 13,48 106,33 129,19 United States 11,62 141,94 169,63 European Union (15 countries) 7,25 102,48 117,67 OECD - Europe 8,58 93,74 108,97 OECD - Total 13,19 97,88 118,62 OECD - FORMER TOTAL 11,75 102,07 122,13

GDP per capita %2013/ Other country /Italy 2013 Other country /Italy Non-OECD Member Economies China (People s Republic of) 178,60 11,27 31,91 Colombia India Indonesia Russia 79,73 29,82 57,38 South Africa 31,42 29,37 41,33

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 model The 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 East Both Both West West East only Fixed 484 Transportation 307 Total 7811 Fifty-fifty split Fixed 484 Transportation 505 Total 989 West only Fixed 484 Transportation 703 F=4 t=1 %40 Total 1187

Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 6126 Transportation 307 Total Fifty-fifty split Fixed 6126 Transportation 505 Total West only Fixed 6126 Transportation 703 F=6 t=1 %40 Total 13129

Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 484 Transportation ,5 Total 8,5814,5 Fifty-fifty split Fixed 484 Transportation 7,50 Total 11,58 West only Fixed 484 Transportation 10,504,5 F=4 t=1,5 %40 Total 14,588,5

Krugman Distribution of manufacturing employment Cost of typical firm if it produces in East East Both Both West West East only Fixed 484 Transportation 4,505,5 Total 8,589,5 Fifty-fifty split Fixed 484 Transportation 505 Total 989 West only Fixed 484 Transportation 5,504,5 F=4 t=1 %10 Total 9,588,5

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

The new geography of jobs The causes of the fall in the employment share of manufacturing – Globalization – Technical progress

The new geography of jobs A new contribution to the theory of agglomeration: the New Geography of jobs by Enrico Moretti The background of the book: the big fall of manufacturing employment in the U.S. since the eighties

The new geography of jobs Reasons of the fall in manufacturing employment: – Globalization – Technical progress The shift in comparative advantage from manufacturing to innovative activities

The new geography of jobs Innovative activities have become crucial for different reasons First because they are the activities with the fastest growth of productivity and of world demand Second because they give a significant contribution to create employment

The new geography of jobs They create employment directly in the innovative sector itself and indirectly in all traditional sectors that are complementary to the innovative sectors. But innovative activities have a tendency to concentrate in specific territories and to distribute very unevenly in space

The new geography of jobs What are the forces of agglomeration of innovative activities? – Thick labour markets – Ecosystems and venture capital – Human capital spillovers

The new geography of jobs This is at the origin of what Moretti calls the Great Divergence between places of agglomeration of innovative economic activity and places of outward migration of brain drain and of economic and social decline

The new geography of jobs A vexed issue: is it possible to create agglomerations by means of public policies?

Agglomeration and integration Agglomeration and European economic integration Expected positive effects of European economic integration – Specialization – Increasing returns – More competitive markets

Agglomeration and integration Potential spatial asymmetric effects of European economic 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 – It opens to competition economically weak areas

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