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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
week 11
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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.
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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?
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Policy implications 2
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Policy implications 3
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?
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Policy implications 4
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.
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Policy implications 5
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Policy implications 6
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Applications
Taxation
Transportation
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Taxation and agglomeration
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 . . .
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Taxation and agglomeration
EU corporate tax rates
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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)
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Oresund Bridge
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Oresund Bridge
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
High-speed rail
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
High-speed rail 2
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
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
week 11
Békés - Rózsás
GeographicalEconomics andPolicy
The potential ofpolicy instrumentsPolicy implicationsTaxation andagglomerationTransportationand tra�c
Freeway