Export demand models & cumulative growth

1. Export demand models & cumulative growth Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

2. RELOCE Lecture 3b Last lecture: Neoclassical model of regional growth This lecture: Demand models & cumulative growth Aims • To introduce the export-led growth model and examine cumulative causation. • To examine how the BoP constrains regional growth. • To look at other explanations of cumulative growth Objective • To be able to understand the export led growth model and cumulative causation • Be aware of the effect on growth of an adverse BoP • To be aware of other explanations of cumulative growth and the links between industrial clustering and growth. Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

3. Difference between neo-classical and export-based approaches Neo-classical model argues that: • DEMAND adjusts to SUPPLY thus it ignores demand aspects - but it argues that a region’s growth cannot be constrained by supply, where factors are freely mobile” The export base modelling approach argues that: • Capital and Labour flow into regions rich in natural resources • Thus regions grow at different rates due to the uneven distribution of resources Still Need to Explain: • Why Regional specialisation occurs? and • Circumstances under which a region will continue to grow or decline? • Explanations are rooted in theories of comparative advantage Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

4. Xstemp P Xs0 Xs1 P1 P* Xd1 Xd0 Y* Y1 Y** Y Heckscher- Ohlin Model Export demand: Export supply: Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

5. Cumulative causation model (Kaldor). • Model emphasises the cumulative nature of the growth process • Kaldor’s original hypothesis argued that growth in per capita output is determined by a region’s ability to exploit economies of scale and the type of activity in which it specialises • Thus manufacturing areas have more scope for productivity gains than rural areas do. • AND the process is cumulative since the advanced regions have an in-built competitive advantage which in turn will reinforce the region’s specialisation Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

6. Regional output growth Invent, Expend on R&D P of cap relative to P of labour Growth in cap/lab ratio Rate of tech change How much do W respond to excess S/D for L? Change in input prices (W). Change in P of Reg X Does the region prod goods which have close substitutes? Change in Y in export mkt. How income elastic are the regions exports? Growth in Reg X Change in P of subs Dixon-Thirlwall model Growth in labour Productivity Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b Adapted from Armstrong and Taylor (2000) pp 95

7. (1) (2) Thirwall – Dixon model in algebraic form (3) (4) By substituting into eq. 4 and re arranging terms In long-run equilibrium y = y-1 Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

8. D + T model changes in equilibrium growth rate Adapted from Armstrong and Taylor (2000) pp 99 Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

9. Criticisms of the cumulative causation model • Does not explain type of exports regions will specialise in • Export Sector is ONLY source of growth (what about intra regional trade?) • Complexities of Verdoorn’s law are not fully explained i.e. how does output growth lead to increased productivity? • Empirical evidence to support the Verdoorn relationship is controversial. • Armstrong and Taylor suggest that the model ignores the consequences of output growth on a region’s balance of payments Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

10. Balance of Payments as a constraint on regional growth • Thirlwall (1980), Regional Problems are "Balance of Payments Problems, Regional Studies • BOP problems are disguised • “Favoured regions" prosper exports high IED but imports lower IED - feeds through to productivity gains - other regions find it hard to get a foothold • Krugman - causal relationship other way round output growth determines export and import elasticities. Thus an increase in factor supplies will lead to an increase in output growth. Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

11. Alternative explanations of cumulative growth • The Verdoorn relationship is complex but also picks up on economies of scale arguments also in growth pole theory INTERNAL ECONOMIES OF SCALE • Fordism – rapid growth – comp advantage – specialised production standard product EXTERNAL ECONOMIES OF SCALE (two types) • Localised economies - Geographical concentrations of plants with input-output relationships –nodal points • Agglomeration economies - Geographical proximity of a large number of economic activities • See notes for examples of manufacturing input-output linkages and innovation clustering (Audretsch) Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

12. New trade theory approach to regional growth draws on cumulative causation Three key propositions • Existence of scale economies - single location • Barriers to trade - locate near markets • Agglomeration economies - cluster in some areas Regional growth dependant on • Cost of transport Low labour costs • Degree of agglomeration Congestion • See Amiti (1998) New trade Theories and Industry Location in the EU, Oxford Review of Economic Policy Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

13. Evidence of the economic benefits of industrial agglomeration • Hanson (1998), North American economic integration and industry location, Oxford Review of Economic Policy. Examines trade US and Mexico - MAQUILADORAS • Head et al (1995), Agglomeration benefits and location choice: evidence from Japanese manufacturing investment in the US, Journal of International Economics. Examines why Japanese investors cluster Empirical studies of cumulative growth process • Cheshire et al (1996) Urban economic growth in Europe: Urban Studies. Examines the potential determinants of growth against actual determinants of growth • Sun et al (1998), Economic growth and regional disparity in China. Quoted in Armstrong & Taylor (2000) Key factors; favourable industry mix; access to international trade; attractive to FDI; higher domestic investment; attitude of government Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b

14. Conclusions • No universal agreement between economists about the causes of regional growth disparities • Neo-classical models stress the supply-side influences on growth those that lack lack resources • Keyensian models stress the importance of demand for a region’s export commodities you need to make things people want • Cumulative causation models stress the self-perpetuating nature of the growth process, once it has started & important role of productivity. • Growth policy is on the agenda for policymakers as they realise that regional policy has an important part to play in spreading economic growth outwards from national and international growth centres. Regional and Local Economics (RELOCE) Lecture slides – Lecture 3b