The effects of fiscal equalisation in a model with endogenous regional governments: an analysis in a two-region numerical model

This paper is concerned primarily with the economic and welfare consequences of federal redistributive grants. We use a model which has two regions, each with households, firms and regional governments as well as a federal government. Private agents are (utility and profit) maximisers and we assume that regional governments are empire-builders in that they choose their expenditure and tax levels so as to maximise total expenditure—the size of their empire. Labour is free to move between regions in response to utility differences and does so until such differences have been eliminated. Inter-regional migration, inter-regional trade flows and federal government redistribution are the main sources of interconnectedness between the two regions. The model is linearised in log-differences and simulated using a calibration based on Australian state-level data. We find that the welfare effect of intergovernmental transfers is trivial but that all other variables of interest change substantially—consumption, employment, prices, taxes, wages, output and government expenditure. Finally, the signs of the effects of a federal transfer are not affected by the empire-building behaviour of regional governments although the magnitude of the effects is generally dampened.     

Has the increase in world-wide openness to trade worsened global income inequality?

This article contributes to our understanding of the relationship between globalization and world income inequality by analyzing the trend in global inequality for the period 1960–1989. Using Penn World Tables data and time-series econometric techniques, it analyzes how the increase in worldwide openness to trade has been related to global income inequality during this period. When differential population growth rates among the countries are taken into account, the results indicate that (i) global income inequality exhibited a downward trend between 1960 and 1989, and (ii) while there is a positive relationship between inequality and openness, the relationship is not statistically significant. Received: 22 December 2000 / Accepted: 29 May 2001     

Trade openness and regional income spillovers in Brazil: A spatial econometric approach*

This paper employs a spatial Durbin growth model to estimate the impact of trade openness on regional per capita income in Brazil using a data set of 469 Brazilian micro‐regions over the period 2004–2007. We calculate the direct, indirect and cumulative impact on per capita income of trade openness and human capital in these micro‐regions. Results indicate that greater trade openness in a region promotes economic development locally, while exerting negative influence on per capita income of the neighbouring regions. Our findings also show that human capital has a positive – direct and indirect – impact on the economic development of Brazilian micro‐regions.     

A note on export openness and regional wage disparity in Central and Eastern Europe

This paper extends the empirical literature on the effects of trade liberalization on regional disparities within a country. Studying the case of the Central and Eastern European countries, we find significant convergence of real wages in Poland and Bulgaria, only. Furthermore, countries with a faster growing export openness in the period 1991–1998 experienced larger increases in their regional disparities. Especially, intermediate goods trade seems to have been a main driving force. Our estimates suggest that the long run impact of rising intermediate goods export openness in the last decade was a 23% increase in the average economys variance of real wages.Received: December 2002/Accepted: January 2004The authors are grateful to two anonymous referees for their helpful suggestions.     

Economic growth and regional income inequality in Brazil

This paper analyses the evolution of regional inequality in Brazil in the period 1939–1995. Based on a data set organized by the author, indicators of per capita income dispersion among states and regions are presented and their evolution over time is analyzed. The correlation between the regional initial level of per capita income and its growth is considered, testing for Beta convergence. The speed of convergence is calculated in two different forms, the neoclassical model and the coefficient of variation, the later allowing for the analysis of oscillations in inequality over time and its relationship to national economic growth rates. The Kuznetz hypothesis, relating regional income inequality and level of development, is tested. The results indicate the presence of signs of regional income convergence in Brazil, but with important oscillations in the evolution of inequality over time as well as across regions within the country. The association of regional inequality with national income growth produced interesting results, indicating a promising line for future research. Received: April 1996/Accepted: February 2000     

The use of activity-based modeling to analyze the effect of land-use policies on travel behavior

This paper suggests that in order to analyze the effect of land-use policies on travel behavior an integrated framework that extend travel activity-based models to include various land-use issues such as residential location and work place should be developed and use. The importance of analyzing various land-use policies on travel behavior is continuously increasing as various policies such as transit-oriented developments, mixed land-use, different concentrations schemes, and more broadly Smart Growth, are often suggested as a means to mitigate transportation problems. Given our limited understanding of the effects of the various land-use polices on travel behavior it is imported to develop better approaches to analyze such policies. Activity-based models, that treat travel as a derivation of the demand for personal activities, provides an opportunity to better understand travel behavior as the explicit modeling of activities and the consequent tours and trips enable a more credible analysis of responses to policies and their effect on traffic and air quality. The theoretical framework of activity-based models starts with urban and land-use development as inputs; however, there is a need to translate this framework to analyze specific land-use policies. This paper discusses the advantages and potential of activity-based models for analyzing the effect of land-use policies on travel behavior. It suggests improvements that will extend the general framework to achieve a better understanding of travelers’ responses to various land-use policies and shows its advantages over tip-based models, which simply do not have such capabilities. The improved activity-based approach is illustrated through a case study based on the Portland activity-based model combined with a stated-preference residential choice model. A package of land-use policies— including improved land-use, school quality, safety, and transit service in the city center—is introduced, and its effect on household redistribution and regional travel is tested using this integrated framework. The results of this case study show that the effects of the land-use policies introduced had only marginal effects on regional travel.     

Multi-dimensional regional inequality as an alternative allocation mechanism For EU Structural Funds remittances: The case of Spain and Hungary

We propose a multidimensional approach to regional inequality as an alternative allocation mechanism for EU Structural Funds remittances based on per capita GDP, particularly after EU enlargement. The indicators of regional inequality are combined to a composite index by means of Maasoumi's aggregator function. We propose Partial Common Principal Component Aanalysis as the estimator of the weights for the aggregator function. Application of the multidimensional approach to Spain shows that there are substantial differences between the rankings of the regions obtained by means of the multidimensional approach and the traditional approach based on per capita GDP. For Hungary, which is less developed than Spain, the rankings differ less.     

Regional policy from a supra-regional perspective

The issue of the interplay between the two objectives of equity and efficiency for national policy-makers in charge of regional policy is becoming topical once again in regional economics. This paper first reviews this issue theoretically and looks at recent literature contributions to show that, although many advances have been made, little attention has been paid to the effects of regional structural differences on the trade-off between the two objectives. Then, to demonstrate that differences between the regions of which a country is composed may influence the results of the models, a new simple short-run two-country four-region model is introduced to study the trade-off (differentiating for different regional productivity and different strengths of agglomeration economies—which are innovatively modelled on the demand side). In this short-term model, the national policy-maker can affect entrepreneurship through the set-up costs of firms. Similarly to the traditional literature, for countries composed of identical regions, spatially dispersed allocations of public support to production are more efficient with low agglomeration economies whereas spatially concentrated allocations are more efficient with high agglomeration economies. As the regions become different, however, unbalanced allocations of public support to the most advanced region become more efficient even in the case of relatively weak agglomeration economies, until, when regions are sufficiently different, the most efficient allocation of public support to production is always concentrated in the most advanced territories. If some sort of compensating mechanisms were available, in the short-run the policy-makers could decide to support the competitiveness of the already more-productive regions and transfer income to the lagging ones. All these issues are studied with reference to southern Italy (“Mezzogiorno”) and eastern Germany (former DDR) in order to show not only the similarities with the model’s predictions but also the many differences, resulting from the far greater complexity of actual development processes. Discussions and comments from an anonymous referee, Marco Alderighi, Roberto Camagni, Roberta Capello and Andrés Rodríguez-Pose are gratefully acknowledged.     

Urban growth effects on rural population, export and service employment: evidence from eastern France

This paper examines how the spatial pattern of urban growth in functional economic regions influences the interplay of rural export employment, rural services employment, and population change in rural areas. Using an extension of the Boarnet’s model (Papers in Regional Science 73:135–153, 1994), we find that urban spread effects to rural areas in France are more likely than urban backwash effects, and that spatial urban (both dynamic and static) externalities affect rural population and employment growth. In the functional economic regions where the urban core is declining and the urban fringe is expanding, urban population growth involves an increase in rural export employment, and larger change in service employment favors rural population growth. However, urban export job growth reduces the growth in rural service jobs and expanding urban service jobs reduce rural export jobs, suggesting that expanding urban employment opportunities draws employees away from proximate rural communities. Conversely, where both urban core and fringe are growing, we observe an urban spread effect from the urban export sector to rural services—an export base multiplier effect with a spatial dimension—and from urban population growth to rural service employment.

The paradox of unequal regional investment and equal regional economic growth in China

China's policy on Special Economic Zones has attracted increasing flows of direct foreign investment to China. The investment has been very unequally distributed among China's 30 regions.  The article focuses on the regional economic growth as a result of the direct foreign investment in the region and its spillover effects on neighboring regions. The unequal distribution of direct foreign investment should in principle tend to enlarge the regional economic differences. The article, however, shows that this is not the result of the investment.  The empirical findings highlight the impact of direct foreign investment on the Chinese regional economies in transition. Received: November 2000/Accepted: August 2001     

The efficiency of Swedish regional policy

In this paper, I evaluate the efficiency of Swedish regional policy. I analyze the government’s regional policy goals and means as presented in Government Bills 1997/1998:62 and 2001/2002:4. In the light of the literature on where growth occurs as well as the results of the regional policy so far, the realism of the government’s goal of “sustainable economic growth in the whole country” could be questioned. Subsidies to companies in problematic regions have uncertain or even negative effects. The government could therefore eliminate these subsidies and replace them with venture capital loans. It could also stop its subsidies to municipal housing companies for shutting down apartments. The positive effects of the government’s tax and subsidy system for the municipalities, motivated by its distribution goal, come at the price of negative effects on incentives for a high national rate of growth. The government could replace this system with extended general subsidies. Investments in transportation projects that do not show a net benefit, such as the large Bothnia Railway in northern Sweden should be reconsidered. However, I find significant and systematic evidence that the government’s investments in regional colleges, particularly in research, have been successful.     

Do geographical agglomeration, growth and equity conflict?

Abstract.  The paper analyses the impact of economic integration on individual inequality and regional disparity in a model of endogenous growth and geography. Assuming localised learning externalities and perfect mobility of capital, trade integration of economies yields a trade-off for the policy maker because it increases growth and decreases inequality on the one hand, but geographical agglomeration strengthens on the other. However, a policy that aims to improve trade in ideas does not face this trade-off.
Abstract.  El artículo analiza el impacto de la integración económica en la inecualidad individual y la disparidad regional en un modelo de crecimiento endógeno y geografía. Asumiendo externalidades de aprendizaje localizadas y una perfecta movilidad de capitales, la integración de comercio de economías crea un trade-off para el formulador de políticas porque por un lado aumenta el crecimiento y disminuye la inecualidad, pero por otro aumenta la aglomeración geográfica. Sin embargo, una política que trate de mejorar un intercambio de ideas no se enfrenta a este trade-off .
 

     

Fundamental causes of inland–coastal income inequality in post-reform China

This paper investigates the fundamental causes of the widening inland–coastal inequality in China during the post-reform period 1978–2004 within a systematic framework of economic development theory. We highlight the roles of three policy variables, namely globalization, decentralization and marketization, in determining the income gap between the inland and coastal regions. The results derived from both time-series and panel data provide strong evidence that these policies are thus far inequality-enhancing. This finding is robust to the use of different estimation methods, alternative proxies for policy variables and regional income, as well as the inclusion of other controls. We also find significant but economically small spillover effects from the coastal to inland provinces. Our results suggest that more efforts should be made to improve the policies to reduce regional inequality in China.     

The spatial and temporal dynamics of US regional income inequality, 1950–1989

The inverted-U hypothesis which so influenced research on regional income inequality is obsolete and does not predict or explain the recent rise in regional inequality. We argue that the regional dynamics literature on polarization, polarization reversal and spatial restructuring offers more powerful explanations to changes in regional income inequality. In addition to the conventional approach of measuring systemic inequality, the empirical analysis in this paper emphasizes inequality variations, which put into focus the interplay between regional dynamics and regional income inequality. The findings highlight the impact of sectoral shifts and global spatial restructuring on the US regional economy, where new cores of growth and renewed growth are emerging.     

Trade openness and regional development in a developing country

This paper examines how economic openness influences regional development in a developing country, with the Philippines as a case study. It first looks at the disparities in economic and social indicators across the country's 14 regions and over time. Metro Manila continues to tower over the national economic landscape, although economic dispersal especially in adjacent regions appears to be expanding. The paper then analyzes the determinants of regional development, using five-year panel data. Trade openness appears to be beneficial to regional economic growth and, via growth, poverty reduction. However, it cannot by itself be expected to bring about more balanced regional development. The authors thank Emma Fan, Jesus Felipe, Rana Hasan, and participants in the conference on the Impacts of Globalization on Urban Development, Bellagio, Lake Como, Italy, 19–23 August 2002, for their helpful comments.     

Impact of the global crisis on spatial disparities in Russia

The global crisis has hit regions within Russia to variable degrees because of great differences in regional economy patterns, which might have changed inter-regional disparities observed at the aggregate national level. This paper focuses on two of them, related to population's welfare, namely, inter-regional inequality in real incomes and integration of regional goods markets, and seeks an answer to the question of whether the global crisis has had a persistent effect on these. Results obtained suggest that the answer is generally negative.     

Locational disadvantage of the hub

We show how spatial evolution is different between the two representative models of economic geography: [Krugman 99:483–499, 1991] and [Ottaviano et al. 43:409–436, 2002]. We analyze the impacts of falling transport costs on the spatial distribution of economic activities and welfare for a network economy consisting of three regions located on a line. It is normally considered that a hub city, i.e., a central region, always has locational advantage and manufacturing workers gain from trade. This is true in the former model, but not in the latter when markets are opened up to trade. This is because the price competition is so keen in the central region that the manufacturing sector moves to the peripheral regions, which aggravates the social welfare. We then show that when goods are close substitutes and share of manufacturing is of an intermediate level, the manufacturing activities completely disappear from the central region leading to a full agglomeration in one peripheral region.

R&;D accessibility and regional export diversity

This paper examines the influences of accessibility to R&D on the export diversity in Swedish regions. A theoretical model with fixed R&D cost predicts that spatial knowledge spillovers generate external economies of scale in R&D activities. These external effects are presumed to increase regions’ innovative capacity. Moreover, the model implies that the effects of R&D on regional export performance are reflected by the size of the export base rather than by the export volumes. The empirical analysis focuses on three different indicators of export diversity: the number of exported goods, the number of exporting firms and the number of export destinations. The hypothesis that regional accessibility to R&D facilities in the private business sector, on the one hand, and university research departments on the other hand, increases the export diversity in regions is tested in a spatial cross-regressive model. Since knowledge cannot be regarded as a spatially trapped resource the empirical analysis includes two measures of R&D accessibility: intra-regional and inter-regional. The empirical results indicate that the three indicators of regional export diversity are positively affected by the intra-regional accessibility to company R&D in commodity groups that have a relatively high R&D-intensity in production. Inter-regional accessibility to company R&D has significant positive impacts on the number of export goods and the number of export destinations also in less R&D-intensive industries. In the case of university R&D, the empirical results are weaker, in particular in the case of intra-regional accessibility. Yet, the inter-regional accessibility to university R&D has a significant positive impact on the number of export goods and the number of export destinations in the majority of commodity groups.     

Spillovers and growth in a local interaction model

This theoretical model investigates the extent of the effects of local technological spillovers on growth. We add to a growth model with vertical quality ladder innovations the assumption that firms are exogenously located around a circle and technological spillovers affecting R&D efficacy occur between neighbors. As a result, the presence of local spillovers makes it optimal for a firm to innovate intensively only if the neighbors do so. However, they do not produce clear effects on either growth or welfare. On one hand positive spillovers improve the quality of local goods—hence growth—but, on the other, a high level of positive spillovers generate discrepancies across intermediate sectors which reduce the level of household welfare. We are grateful to J. Caballé, D. Fridman, K. Kletzer, the participants to EUNIP Conference in Porto as well as XXVIII Simposio de Análisis Económico, and the editor R. Stough for useful suggestions. R. Nicolini research is supported by a Ramón y Cajalcontract and research grants 2005SGR00470 and SEJ2005-01427/ECON.     

The economic effects of local authority mergers: empirical evidence for German city regions

Cooperation of neighbouring local authorities in the provision of regional public goods can be efficiency enhancing due to economies of scale, a better realisation of fiscal equivalence or dynamic efficiency gains. While the need for such cooperation between local authorities is undisputed, there are different positions concerning the form the cooperation should take. Some argue that local authority mergers are the most efficient and democratic strategy. Others argue that functional cooperation is more appropriate and that mergers reduce the welfare enhancing effects of competition between local authorities. Based on the conditions in Germany that can be interpreted as a natural experiment it is shown in a cross-section analysis that local authority mergers in monocentric city regions have indeed significant economic effects. All else equal the financial situation of city regions where the core and the hinterland are separate administrative districts is worse than in single district regions. Radical mergers of core cities and suburban towns in the 60s and 70s led to higher economic growth in the period 1980–1998.