1. Chapter 11 The policy implications of geographical economics

2. Issues government taxation and spending infrastructure and transport costs welfare implications –p459: largely based on the core model for simplicity –p461: "policy is typically not analyzed within the context of geographical economics"

3. Six basic policy implications Ottaviano (2003) regional side effects –non-regional policy has regional implications (fuel tax?) trade interaction effects –initial level of trade and agglomeration relevant lock-in effects –temporary policies may have permanent effects –start policy: from one stable equilibrium to another –end policy: no return to former situation selection effects –going from spreading beyond breakpoint φ > φ B any (small) policy can trigger a selection going to full agglomeration to 1 or 2 coordination effects –policy can influence expectations when more equilibria are possible: φ S > φ > φ B –people go where they expect others will go Threshold effects –marginal policy is ineffective unless some sustain- or breakpoint is reached/passed

4. Figure 11.1 The Tomahawk diagram Sustain points Break point Free-ness of trade 0 0 1 1 0.5 Stable equilibria Unstable equilibria Basin of attraction for spreading equilibrium Basin of attraction for agglomeration in region 1 Basin of attraction for agglomeration in region 2 Sustain points Break point Free-ness of trade φ 0 0 1 1 0.5 Stable equilibria Unstable equilibria Basin of attraction for spreading equilibrium Basin of attraction for agglomeration in region 1 Basin of attraction for agglomeration in region 2 φsφs φsφs

5. Critics (more in Ch 12) unrealistic suggestion that politicians can "choose" an equilibrium and know how to get there unproven transfer of two-region model conclusions to multiregional models strong bias of "bang-bang" behaviour in the two- region model multiregional model behaves more moderate -> less "catastrophic" agglomeration

6. Urban Herfindahl Index for a line with increasing size line-size stability: a minimum of 30 regions seems necessary

7. Urban Herfindahl Index for a square grid with increasing size square-size stability: a minimum of 100 regions seems necessary

8. Government taxation and spending standard view: increased capital mobility reduces tax burden on capital –"race to the bottom" Baldwin & Forslid (2002): not if tax revenues are spent on public goods that benefit the mobile production factor Baldwin & Krugman (2004): agglomeration rent can offset higher taxes (see the Wiggle diagram, fig 11.3) in general for the mobile factor: –taxes stimulate spreading –spending stimulates agglomeration

9. Figure 11.2 Effective average tax rate and Golub index (barriers to FDI)

11. Figure 11.3 The Wiggle Diagram r N /r S 01 t N -t S A C D B (i) geo ec. intermediate trade costs (ii) geo ec. high trade costs (iii) standard tax competition share of firms in North r N /r S 01 t N -t S A C D B (i) geo ec. intermediate trade costs (ii) geo ec. high trade costs (iii) standard tax competition

12. Box 11.2 International transfers can be simply modelled by some exogenous change of Λ = {λ 1, λ 2,..., λ n } may or may not have permanent effects after ending (shift of equilibriuim or return to old equilibrium) as always in geographical economics: effects depends on the inital distribution (history) and phase of integration (transport costs) see figure 11.5

13. Figure 11.5 Change in real wage rate of bystander (intermediate transport costs)

14. Baldwin & Krugman (2004) use the Forslid & Ottaviano model of 4.8 extended with government spending production function becomes –f j (Z j ) [ r j + β x j ] (parameter normalization β = 1-1/ε or β = (ε -1)/ε in the book equation 11.1 mentions σ in stead of ε) –f is efficiency function for government good Z: f (0)= 1 ; f' <0 –competition of human capital resources between K and Z: n j = (K j - Z j ) / f j (z j ) Z reduces n; fig 11.6: more agglomeration tendency

15. Figure 11.6 Marginal impact of introducing public goods on break- point 10 0 1 2 3 4 0 δ ε

16. Infrastructure changing D rs -> changing T Drs example section 11.4: change a neutral geography without history into a non-neutral geography assignment: changing a non-neutral geography with history

17. Figure 11.7 The pancake economy

18. Figure 11.8 Impact of building a bridge on spatial distribution

19. Figure 11.9 Impact of transport costs; bridge between 4 and 10

20. Welfare implications simple definition: ∑ j y j with real income y=YI -δ Link 2-12link 3-11link 4-10 average change in real income (%)0.91.92.2 average change in real farm income (%)-0.30.2 average change in real manufacturing income (%) 1.62.83.5

21. Figure 11.10 Real income and welfare changes; link 4-10

24. Chapter 12 Critics and evaluation

25. GE can be thought of as an attempt to unify international and regional economics (Ohlin, 1933) Comments from –Regional and urban economics –International economics –Economic geography

26. Nijkamp (2000) Critics from regional/urban economics –Neglect of work by forerunners –Too narrow view on geography with iceberg transport costs –No attention to spatial competition between firms, no well developed theory of the firm –No attention for the role of institutions –Rely heavily on simulations, poor empirical basis

27. Neary (2001) Critics from international economics –No strategic interaction between firms –To simple transport costs and too simple (one- dimensional) geographies –Reliance of specific functional forms and simulations –Lack of empirical evidence

28. Comment from geography Outright rejection Interested critics (Martin/Storper) Serious gap between GE and EG; Storper(2003): –Economists are the kings and queens of generality (deductive/ theoretical/analytical) –Geographers are the kings and queens of specificity and particularity (inductive/empirical/descriptive) See also Box 12.2 and Appendix NEG versus PEG

29. Martin (1999) Critics from geography –Neglect in GE of more recent work –General equilibrium framework unable to deal with the role of institutions –NEG is neither new (just a restatement of outdated earlier insights of EG) nor geographical because there is no place for real-world geography –Spatial policy is far to complex for the simple NEG framework

30. Evaluation of critics yes / no longer / no –Reliance on simulations remains a problem –Iceberg specification too simple –More complex and less simple models have evolved recently –More empirical content on the way –Real novelty 1) in the way it tackles the relation between econoics and geography 2) agglomeration is an outcome of the model

31. Future directions integration with growth theory spatial scales differentiated sectors "richer menu" of agglomeration and spreading forces as in other fields: no "one size fits all" other functional forms more empirical content