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Analysis and results of the TERA NEG model in six European study areas Luigi Marattin

Analysis and results of the TERA NEG model in six European study areas Luigi Marattin University of Bologna LOCAL DEVELOPMENT IN A EUROPEAN PERSPECTIVE Ferrara 18th – 19th October 2007. 1. THE NEG APPROACH 2. THE MODEL AND ITS CONTRIBUTION TO THE ACADEMIC LITERATURE

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Analysis and results of the TERA NEG model in six European study areas Luigi Marattin

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  1. Analysis and results of the TERA NEG model in six European study areas Luigi Marattin University of Bologna LOCAL DEVELOPMENT IN A EUROPEAN PERSPECTIVE Ferrara 18th – 19th October 2007

  2. 1. THE NEG APPROACH 2. THE MODEL AND ITS CONTRIBUTION TO THE ACADEMIC LITERATURE 3. THE APPLICATION TO THE TERA SIX STUDY AREAS 4. POLICY IMPLICATIONS PRESENTATIONS PLAN

  3. New Economic Geography (Krugman 1991) It attempts to provide answers to one question: What leads the process of concentration / dispersion of economic activities in a given geographical territory? 1. THE NEG APPROACH

  4. This neglect is surprising (……). For example, one of the most remarkable things about the United States is that in a generally sparsely populated country, much of whose land is fertile, the bulk of the population resides in a few clusters of metropolitan areas; a quarter of inhabitants are crowded into a not especially inviting section of the East Coast. It has often been noted that nighttime satellite photos of Europe reveal little of political boundaries but clearly suggest a center-periphery pattern whose pattern is somewhere in or near Belgium. A layman might have expected that these facts would play a key role in economic modelling" (Krugman, 1991, pp.483-484)

  5. Also in local development we observe core-periphery patterns: Northern-Southern Italy Industrial districts / rural areas Via Emilia development route / Ferrara area Ferrara / Basso Ferrarese

  6. A temptative answer: Marshall (1980) external economies explanation 1) Pooled market for industry- specific workers 2) Support the spillovers of non-tradeable specialized input or technology 3) Agglomeration can provide firms with better production function (vertical and horizontal integration) NEG QUESTION IS DIFFERENT: not so much why a particular industry ends up in a particular place, but rather why manufacturing activities in general end up in a “core” region(s), leaving the other (s) relatively underdeveloped (“periphery”).

  7. SHARE OF MANUFACTURING IN REGIONAL INCOME (determining the relative weight and importance of the crucial sector) DEGREES OF ECONOMIES OF SCALE (the higher it is, the higher the need for concentration so to exploit cost advantages) TRANSPORT COSTS (the higher they are, the less incentive to concentration, since it is convenient to locate close to their final market) THREE FACTORS

  8. TWO SECTORS Agricultural: perfect competition, constant returns to scale, homogenous good traded costlessly. Manufacturing: monopolistic competition, increasing returns to scale, transport costs. TWO REGIONS Labour force fixed in the short run, but responding to real wage movements in the long-run. MICROFOUNDED OPTIMIZING BEHAVIOUR. THE FORMAL FRAMEWORK

  9. The arising of core-periphery pattern depends on three exogenous parameters: 1) the share of demand going to manufacturing 2) the elasticity of substitution / degree of economies to scale 3) transport costs THEY ARE ALL EXOGENOUS. Sooner or later we always bump into something exogenous, especially in economic modelling. But number 3 is particularly unsatisfying, especially if coupled with the absence of public sector.

  10. INSERT PUBLIC SECTOR INTO THE STANDARD FRAMEWORK: - distortionary taxation on firms - public investment in infrastracture TRADE OFF: Costs / benefits of public expenditure WHAT ARE THE EFFECTS OF THESE INNOVATIONS ON THE MODEL’S PREDICTION ABOUT AGGLOMERATION PATTERNS? 2. MARATTIN (2006) MODEL

  11. Theoretical models always have an hard-time in replicating real data and/or find perfectly consistent results. NEG models are even worse in that respect; not by chance, NO empirical application has ever been tried on a theoretical NEG model. THUS…. These simulations aims at ISOLATING specific aspect of reality that only the NEG framework can explain. Policy results should therefore be very carefully handled. MUCH-NEEDED WARNING FOR NON-ECONOMISTS

  12. THE FINAL SYSTEM OF EQUATIONS

  13. Counterfactuals on taxation: Tax rate in the urban region: +2% “ “ “ “ “ : +4% Tax rate in the rural region : +2% “ “ “ “ “ : +4% Simulations

  14. Counterfactuals on labour supply: Labour supply in the urban region: +5% “ “ “ “ “ : +5% (intra) “ “ “ “ “ : +15% “ “ “ “ “ : +15% (intra) Labour supply in the rural region: + 5% “ “ “ “ “ : +15%

  15. Analyse quantitatively the effects on: 1) Income differentials 2) Price differentials 3) Nominal wage differentials 4) Real wage differentials We show only 1) and 4).

  16. 1)Home market effect: nominal wage is higher in the bigger region 2) Competition effect: nominal wage is lower in the bigger region 3) Price index effect: prices are lower in the bigger region (1) and (3) pushes towards divergence (2) pushes towards convergece OUR MODIFICATION (distorsionary taxation to finance infrastracture) MESSES EVERYTHING UP, TWICE. FORCES AT WORK

  17. 1) BEING DISTORTIONARY, ALTERS NOMINAL AND REAL VARIABLES 2) ITS REVENUE IS USED TO REDUCE TRANSPORT COSTS, WHICH IN TURN IS ANOTHER FORCE PUSHING TOWARDS CONVERGENCE/DIVERGENCE. SO TRADITIONAL NEG RESULTS CAN BE SIGNIFICANTLY MODIFIED. WHY TWICE?

  18. RESULTS BY COUNTRY

  19. Financing infrastracture via taxation in U affects negatively the income of U and does not significantly affect income in R. Income differentials reduce. Net effects (NEG three traditional ones + distorsionary taxation) pushes towards divergence. POLICY IMPLICATIONS

  20. Financing infrastracture via taxation in the R affects the income of R and does not affect income in U (exception:Greece) Income differentials increase. Net effects pushes towards convergence, but with a less extent. HOW TO FINANCE INFRASTRACTURE BETWEEN URBAN AND RURAL REGION? Tax the urban: income differential reduce, but push for divergence. Tax the rural: income differential increase, but it is a help for convergence.

  21. Increase in the size of U increases the income differentials, much more if it occurs at the expense of R (internal migration) It promotes the cumulative effect for divergence. Specularly, increasing the size of R reduces the income differentials and pushes for convergence.

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