Regional impacts of regional integration. Tony Venables, DFID & Oxford • Integration between similar economies • Integration and economic differences – Underlying comparative advantage • Comparative advantage and trade diversion • Regional vs international trade – Acquired comparative advantage • Wage gradients and market access • European urban structures Comparative advantage and trade diversion Trade diversion a problem for the Capital ‘extreme’ country: imports from abundance partner are in line with regional but not global comparative advantage Germany Regional integration brings Portugal convergence World ave Kenya Regional integration brings Uganda divergence Regional vs international trade Country 2 Copper Maize Copper Equipment R of W Country 1 Regional vs international trade What is effect of integrating economies 1 and 2? Symmetric equilibrium with free international trade in both maize and copper, real income both countries = 1. Only regional trade in maize Capital stocks fixed: Country 1 Country 2 Initial 0.89 1.08 Regional integr. 0.92 1.09 Capital stocks endog: Country 1 Country 2 Initial 0.59 1.04 Regional integr. 0.71 0.95 Increasing returns and acquired comparative advantage Regional integration and regional inequalities • Regions with good market access, good access to suppliers, and the other advantages of being in a cluster pay relatively high wages. • Centre – periphery wage gradient in the EU. • Effects of economic integration: Ambiguous: • improves the market access of remote regions • facilitates the development of clusters/ economic centres. • Brief look at the data and speculation about future possibilities The time path of spatial income inequality (Theil index EU NUTS2) Total Between country Within country Geography and per capita income, NUTS2. • Regression of per capita income on population density and distance from centre: (1980- 83 and 1997- 00) – Centre-periphery income gradient: present with and w/o country fixed effects. – Regions with high population density growing faster (w and w/o country fixed effects) – With country fixed effects, regions with high population density have higher income, and effect increasing THE EUROPEAN CITY SYSTEM. High density regions (cities) are doing well: • In line with economic geography theories of the gains from agglomeration. • In line with econometric studies of productivity in cities. What might be the implications of further integration – particularly increased labour mobility -- for the relative performance of EU cities? •Zipf’s law (the rank size rule) : Rank cities by size from the largest to the smallest, then the nth city has population 1/n that of the largest. • New York,highest ranked city, population of 19,876,488. Santa Barbara, 100th ranked city, population of 198,760. • Empirics: Zipf’s law holds for US, not for the EU. US EU25 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 4 0 1 2 3 4 5 0 1 2 3 4 5 ln city rank ln city rank Largest cities Smallest cities Name Rank Population Name Rank Population (thousand) (thousand) Paris 1 11330.7 Grenoble 87 521.7 Rhein-Ruhr 2 11285.9 Szczecin 88 505.0 London 3 11219.0 Murcia 89 486.0 Ranstad (Neths) 4 6534.0 Belfast 90 484.8 Madrid 5 5130.0 Bari 91 480.7 Milano 6 4046.7 Montpellie 92 466.3 r Berlin 7 3933.3 Bratislava 93 428.8 Barcelona 8 3899.2 Dublin 94 418.8 Napoli 9 3612.3 Messina 95 415.3 Manchester-L’pool 10 3612.2 Coventry 96 409.1 What if…..? Change city size distribution holding constant the total population in the top 96 EU cities Zipf’s law: US city size distribution. 1st city nearly triples to 1st city nearly increases to 32.4m. 18.4 m. 2nd city increases to 16.2 m 2nd city increases to 14.4 m 3rd city shrinks to 10.8 mill 3rd city shrinks to 8 m 4th – 8th ranked cities 4th – 10th ranked cities increase. increase All remaining cities shrink All remaining cities shrink Concluding comments • Analysis of regional integration remains fascinating because: • Varying degree of mobility of knowledge/ services/ tasks/ goods/ factors • Some sources of increasing returns, some of decreasing • Need to understand effects on particular countries/ regions/ cities, as well as on aggregate. • Needs both innovative theory and good applied work.