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Economic Geography and Public Policy

Economic Geography and Public Policy

Copyright Date: 2003
Pages: 504
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  • Book Info
    Economic Geography and Public Policy
    Book Description:

    Research on the spatial aspects of economic activity has flourished over the past decade due to the emergence of new theory, new data, and an intense interest on the part of policymakers, especially in Europe but increasingly in North America and elsewhere as well. However, these efforts--collectively known as the "new economic geography"--have devoted little attention to the policy implications of the new theory.

    Economic Geography and Public Policyfills the gap by illustrating many new policy insights economic geography models can offer to the realm of theoretical policy analysis. Focusing primarily on trade policy, tax policy, and regional policy, Richard Baldwin and coauthors show how these models can be used to make sense of real-world situations. The book not only provides much fresh analysis but also synthesizes insights from the existing literature.

    The authors begin by presenting and analyzing the widest range of new economic geography models to date. From there they proceed to examine previously unaddressed welfare and policy issues including, in separate sections, trade policy (unilateral, reciprocal, and preferential), tax policy (agglomeration with taxes and public goods, tax competition and agglomeration), and regional policy (infrastructure policies and the political economy of regional subsidies). A well-organized, engaging narrative that progresses smoothly from fundamentals to more complex material,Economic Geography and Public Policyis essential reading for graduate students, researchers, and policymakers seeking new approaches to spatial policy issues.

    eISBN: 978-1-4008-4123-3
    Subjects: Economics, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-xii)
  3. CHAPTER 1 Introduction
    (pp. 1-6)

    Economists’ interest in the location of economic activity has waxed and waned over the last two centuries, as Fujita and Thisse (2000) illustrate in their excellent monograph.

    Policy makers’ interest in the subject, by contrast, has never wavered. US President Alexander Hamilton advocated high tariffs as a means of shifting industrial production from Great Britain to the United States in the late 18th century. Throughout the 19th century, the captured-markets aspect of the global colonial system was viewed as essential to keeping and promoting industrial activity in Europe. In the mid-20th century, the European Union’s founding treaty explicitly cited the...


    • CHAPTER 2 The Core–Periphery Model
      (pp. 9-67)

      This chapter studies the model that has been the backbone of the ‘new economic geography’ literature to date—the so-called core–periphery model (Krugman 1991a). Unfortunately, the core–periphery model (CP model for short) is astoundingly difficult to manipulate analytically and indeed most results in the literature are derived via numerical simulation. Since the goal of this book is to illustrate new insights into public policy—and insights are best illustrated with analytic reasoning—subsequent chapters work with more analytically tractable economic geography models. The particular aim of this chapter is, therefore, to establish a definitive list of the CP...

    • CHAPTER 3 The Footloose Capital Model
      (pp. 68-90)

      While yielding valuable insights on the interactions between trade costs, factor mobility and agglomeration, the CP model is astoundingly difficult to work with, forcing numerical simulations for most results. In particular, the endogenous variables that are instrumental in determining the location of firms and workers (i.e. wages and prices) cannot be expressed as explicit functions of the spatial distribution of economic activities. As a consequence, numerical investigation can only provide a gallery of possible equilibrium outcomes; each obtained under a particular set of parameter values. From a theorist’s perspective, this is less than fully satisfactory since, of course, one cannot...

    • CHAPTER 4 The Footloose Entrepreneur Model
      (pp. 91-109)

      The FC model presented in Chapter 3 redresses the CP model’s obdurate intractability by eliminating circular causality. While this permits closed-form solutions for all variables, the natural cost for this tractability is that the FC model displays only some of the key features of the CP model. In particular, the FC model does not allow for catastrophic agglomeration or locational hysteresis.

      This chapter presents a model that relies on a much less radical approach to redressing the CP model’s intractability. Indeed, the model displaysallthe key features of the CP model while still remaining amenable to analytic reasoning. The...

    • CHAPTER 5 Linear Models
      (pp. 110-136)

      Since the publication of the core–periphery (CP) model by Krugman (1991), the new economic geography has suffered from tension between the broadness of the issues addressed and the relative narrowness of the modelling strategy adopted. This narrowness is summarized by Krugman (1998, p. 164): ‘‘To date, the new economic geography has depended heavily on the tricks summarized in Fujita et al. (1999) with the slogan ‘Dixit–Stiglitz, icebergs, evolution, and the computer’.’’

      This chapter considers a family of models that are based on an alternative framework due to Ottaviano et al. (2002)—a framework that does not rely on...

    • CHAPTER 6 The Constructed Capital Model
      (pp. 137-154)

      At a very abstract level, the models presented in the previous chapters can be thought of as representing points on the trade-off between richness of features and tractability. The FC model of Chapter 3 is entirely tractable in the sense that closed-form solutions could be had for all endogenous variables including the spatial distribution of industry. Unfortunately, this tractability comes at the cost of losing many of the most exciting features of the CP model of Chapter 2, including circular causality, catastrophic agglomeration, locational hysteresis and the overlap.

      The FE model of Chapter 4 restores all of these features, but...

    • CHAPTER 7 Global and Local Spillovers Models
      (pp. 155-189)

      The models we have examined in the previous chapters focus on the long-run spatial distribution of industry. While this is a concern of policy makers, it is certainly not all they care about and indeed it may not be the main thing they care about. When policy makers argue that something should be done to help encourage economic activity in poor regions, the goal is to promote growth, not just a one-off shift of industry. Likewise, the main goal of national policies aimed at influencing the international distribution of industry—that is, pro-industrialization policies—is growth; promoting industrialization is merely...

    • CHAPTER 8 Vertical Linkages Models
      (pp. 190-224)

      Migration drives agglomeration in both the CP and the FE models. Inter-regional migration, however, is not always a reasonable assumption. While labour is quite mobile among US states, labour mobility across and even within EU countries is rather limited. This observation encouraged the development of an alternative agglomeration mechanism. Perhaps the most important is that of the so-called ‘vertical linkage’ models (VL models for short). In these models, input–output linkages in the presence of inter-sectoral, rather than inter-regional labour mobility, support agglomeration.¹

      The seminal paper, Venables (1996a), introduces cost linkages between an upstream sector and a downstream sector. For...


    • CHAPTER 9 Policy and Economic Geography: What’s New?
      (pp. 227-242)

      What makes policy analysis in a location framework interesting?

      Ultimately this question must be answered by the reader after having worked thorough the policy chapters in Parts III, IV and V, but in this chapter we discuss the question at an abstract level. The basic point is that economic geography models have a number of properties that makes policy analysis very different to standard neoclassical models. Some of these properties stem from the fact that factor mobility raises a number of issues that are often ignored, but the most important of these properties arise because of the non-linearity of the...

    • CHAPTER 10 A Typology of Welfare Effects: Regional Perspective
      (pp. 243-251)

      The nomenclature of policy effects is rich and confusing. Terms of trade effects, trade creation and diversion, dynamic effects, scale effects, growth effects are but a few of the terms applied by various authors to various channels. To provide a unified terminology for our policy analysis, this chapter presents a framework for organizing our thinking about how policy changes can affect welfare. We do not specify the connections between particular policies and the changes in the various endogenous variables; we simply identify and label the various channels through which policy changes may affect welfare. James Meade pioneered the basic approach...

    • CHAPTER 11 Efficiency, Equity and Optimal Agglomeration
      (pp. 252-274)

      The models reviewed in the previous chapters have been used to study the logic of agglomeration and regional development in the presence of monopolistic competition, increasing returns and trade costs. In this chapter, we turn to the crucial welfare questions: Is agglomeration desirable? Should policy makers foster or control it?

      These and related questions can be addressed from two different points of view. From anequitypoint of view one may ask: Who are the gainers and the losers from agglomeration? Which regions are advantaged and which disadvantaged? In particular, what happens to those that are left behind in disadvantaged...


    • CHAPTER 12 Unilateral Trade Policy
      (pp. 277-316)

      The economic geography literature is a bit like Hamlet without the Prince. Trade policy should playthe, or at leasta, leading role in the literature—or that is what one might expect since trade barriers are at the very heart of the models and the literature’s founding fathers are famous for their theoretical trade policy analysis. Alas, the literature is surprisingly short on trade policy analysis. For example, in Peter Neary’s excellent overview (Neary 2001), not a single article on trade policy is referenced.

      The reason for this lacuna is uncomplicated. The policy implications implicit in the standard models...

    • CHAPTER 13 Reciprocal Trade Agreements
      (pp. 317-329)

      In virtually any model that displays agglomeration forces, two-way trade liberalization between a big and a small nation has a tendency to boost the large nation’s share of world industry at the expense of the small nation. This is just a straightforward application of an effect that was explored at length in Part I—the home-market magnification effect (the tendency for large nations to attract disproportionate shares of industry is magnified by trade openness). These results might be taken as explaining or justifying the fact that small nations often fear that trade liberalization with larger, richer nations will erode their...

    • CHAPTER 14 Preferential Trade Agreements
      (pp. 330-362)

      Preferential trade liberalization is a pervasive aspect of the world trading system. More than a hundred such arrangements have been announced to the WTO. Although only a handful of them function well, that handful accounts for a massive share of world trade. For instance the sum of intra-EU and intra-NAFTA trade accounts for about 40% of all world trade. It is, therefore, important to investigate the insights that economic geography models can add to the study of preferential liberalization. In this chapter, we address two main questions: ‘What effect does the formation of a free trade agreement (FTA) have on...


    • CHAPTER 15 Agglomeration with Taxation and Public Goods
      (pp. 365-390)

      One of the most exciting applications of new economic geography models to policy questions lies in the area of taxation and tax competition. Almost without exception, the public finance literature on tax competition and the effects of international taxation has relied on ‘smooth’ models. That is to say, models in which small changes lead to small effects. Economic geography models are ‘lumpy’ by their very nature and this, as we shall see, casts new light on a number of old issues.

      This chapter, which is the first of two devoted to tax policy, shows as simply as possible what agglomeration...

    • CHAPTER 16 Tax Competition and Agglomeration
      (pp. 391-422)

      The previous chapter provided a series of insights that would seem to be important for our thinking on international tax competition. That chapter, however, stopped short of actually modelling the full set of interactions. In particular, tax rates were taken as given in the economic geography models, so issues concerning the interaction among governments could not be addressed. The aim of this chapter is to remedy the omission.

      This chapter first considers a formal tax game between similar countries. This allows us to more formally show that free trade and stronger agglomeration forces tend to magnify international tax competition, leading,...


    • CHAPTER 17 Infrastructure Policies and Economic Geography
      (pp. 425-447)

      This chapter proposes a very simple way to analyse some of the effects of regional policies on industrial geography, regional income disparities and growth. For this, we use the ‘localized spillovers’ model of Chapter 7 in which both the location and the endogenous growth rate of industry are simultaneously determined. The model is extended to allow explicit consideration of different public policies such as infrastructure policies, transfers and subsidies to technology transfers. An important message of this section, which is based on Martin (1998, 1999), is that the presence of localized technology spillovers implies that a trade-off exists between spatial...

    • CHAPTER 18 The Political Economics of Regional Subsidies
      (pp. 448-471)

      A striking features of OECD economies is the regularity with which governments favour rural regions to an extent that seems far out of proportion with their population shares. The classic example is the subsidization and protection of agriculture, but rural regions also often receive direct economic aid. In Western Europe, for example, governments routinely subsidize industry in rural/poor regions. Some of this is direct, taking the form of tax breaks and/or production subsidies, and some of it is indirect, taking the form of regional infrastructure such as roads, airports and industrial parks.

      This chapter takes a first look at the...

    • CHAPTER 19 Concluding Remarks and Directions for Future Research
      (pp. 472-480)

      In this closing chapter, we limit ourselves to two tasks: we summarize the insights that have been illustrated in the various chapters; and we list our conjectures concerning future research.

      To be systematic, we go through each chapter, grouping them by parts.

      Part II considers general welfare and policy issues. The first chapter in Part II, Chapter 9, considers what sort of new insights can arise in models that allow for agglomeration forces. Perhaps the most important and general point is that many policies have very non-linear or even non-monotonic effects on prices, trade flows, industrial location, and the like....

  9. INDEX
    (pp. 481-487)