Regional Economics Lecture 1 Sedef Akgüngör. Class Objectives The aim of the course is to explore and discuss the problem of regional economic disparities.

Regional Regional EconomicsEconomics

Lecture 1Lecture 1

Sedef AkgüngörSedef Akgüngör

Class ObjectivesClass Objectives The aim of the course is to explore and The aim of the course is to explore and

discuss the problem of regional economic discuss the problem of regional economic disparities. disparities.

Theories of migration, location and regional Theories of migration, location and regional economic growth will be introduced. economic growth will be introduced.

Techniques for analyzing aspects of the Techniques for analyzing aspects of the regional problem, including cost-benefit regional problem, including cost-benefit analysis, regional accounting, shift share analysis, regional accounting, shift share analysis, multiplier analysis will be presented. analysis, multiplier analysis will be presented.

The course will cover current issues on The course will cover current issues on regional economic policy and development regional economic policy and development particularly with respect to Turkey-EU particularly with respect to Turkey-EU relations. relations.

Reading MaterialsReading Materials There is no specific textbook for the class, There is no specific textbook for the class,

we will be using articles and reports as well we will be using articles and reports as well as parts from a web text book : as parts from a web text book :

Edgar M. Hoover and Frank Giarratani. An Edgar M. Hoover and Frank Giarratani. An Introduction to Regional Economics (1999). Introduction to Regional Economics (1999). The Web book of Regional Science. The Web book of Regional Science. Regional Research Institute. West Virginia Regional Research Institute. West Virginia University. University. (http://www.rri.wvu.edu/WebBook/Giarratan(http://www.rri.wvu.edu/WebBook/Giarratani/preface.htm)i/preface.htm)

Additional Readings Additional Readings are available on the are available on the course web sitecourse web site..

Regional EconomicsRegional Economics Economic systems are dynamic entities Economic systems are dynamic entities

and they affect the well being of the and they affect the well being of the ndividuals as well as social and political ndividuals as well as social and political fabric.fabric.

Regional economics represents a Regional economics represents a framework within which spatial character framework within which spatial character of an economic system can be understood.of an economic system can be understood.

Regional science is a field of social Regional science is a field of social science concerned with analytical science concerned with analytical approaches to problems that are approaches to problems that are specifically regional.specifically regional.

Location theoryLocation theory Spatial economicsSpatial economics Location modellingLocation modelling TransportationTransportation MigrationMigration Location of economic activityLocation of economic activity …………

Or any social science analysis that has a Or any social science analysis that has a spatial dimension.spatial dimension.

Origins of Regional Origins of Regional ScienceScience

Founded in the late 1940s.Founded in the late 1940s. Wide variety of disciplinesWide variety of disciplines To promote the “objective” and To promote the “objective” and

“scientific” analysis of settlement, “scientific” analysis of settlement, industrial locaton and urban developmentindustrial locaton and urban development

Regional Science Association was Regional Science Association was founded in 1954 to expand this science founded in 1954 to expand this science beyond the restrictive world of beyond the restrictive world of economics.economics.

Regional Science is Regional Science is concerned with:concerned with:

The determinants of industrial locationThe determinants of industrial location The regional economic impact of the The regional economic impact of the

arrival or departure of a firmarrival or departure of a firm Immigration patternsImmigration patterns Regional specialization and exchangeRegional specialization and exchange Environmental impactsEnvironmental impacts Geographic association of economic Geographic association of economic

and social conditionsand social conditions

Spatial character of Spatial character of EconomicsEconomics

What is where, why and so what?What is where, why and so what? What: refers to every type of economic What: refers to every type of economic

activityactivity Where: refers to location and involves Where: refers to location and involves

questions of proximity, concentration, questions of proximity, concentration, dispersion and similarity/disparity of dispersion and similarity/disparity of spatial patterns.spatial patterns.

Why and so what refers to political Why and so what refers to political implications.implications.

Three Foundation Stones Three Foundation Stones Underlying The Pattern of Underlying The Pattern of

Economic ActivityEconomic Activity 1) Natural resource advantages1) Natural resource advantages 2) Economies of concentration2) Economies of concentration 3) Transportation costs3) Transportation costs

Or more formally:Or more formally:• Imperfect factor mobilityImperfect factor mobility• Imperfect divisibilityImperfect divisibility• Imperfect mobility of goods and Imperfect mobility of goods and

servicesservices

DiscussionDiscussion

Why are some regions more Why are some regions more developed than the others? What developed than the others? What factors affect differences in regional factors affect differences in regional development patterns??development patterns??

Write down three most important Write down three most important reasons that first comes to your reasons that first comes to your mind.mind.

Analysis of Regions: Analysis of Regions: Statistical FoundationsStatistical Foundations

The Nomenclature of Territorial UnitsThe Nomenclature of Territorial Units for Statistics for Statistics (NUTS) is defined (NUTS) is defined and developedand developed according to a according to a numbernumber of basic principles.of basic principles.

Favors institutional breakdown – according to Favors institutional breakdown – according to normative criteria and has three levels: NUTS 1, 2 normative criteria and has three levels: NUTS 1, 2 and 3and 3

NNormative regions are the expression of a political will; ormative regions are the expression of a political will; according to the sizes of population necessary to carry according to the sizes of population necessary to carry out these tasks efficiently and economically, and out these tasks efficiently and economically, and according to historical, cultural and other factors;according to historical, cultural and other factors;

AAnalytical (or functional) regions are defined according nalytical (or functional) regions are defined according geographical criteria (e.g., altitude or type of soil) or geographical criteria (e.g., altitude or type of soil) or using socio-economic criteria (e.g., homogeneity, using socio-economic criteria (e.g., homogeneity, complementarily or polarity of regional economies).complementarily or polarity of regional economies).

NUTS 2 NUTS 2 Regions in Regions in Turkey Turkey

Ön Ulusal Kalkınma Planında belirlenen 12 öncelikli Düzey 2 Bölgesi

Ranking of Cities on Ranking of Cities on Socioeconomic Development Socioeconomic Development

IndicatorsIndicators

Five cities with highest socioeconomic development Five cities with highest socioeconomic development index: İstanbul, Ankara, İzmir, Bursa, Kocaeliindex: İstanbul, Ankara, İzmir, Bursa, Kocaeli Contribution to GDP: %21.3, %7.6, %7.5, %5.2, %7.6Contribution to GDP: %21.3, %7.6, %7.5, %5.2, %7.6 Per capita GDP index: 143, 128, 150, 117, 191Per capita GDP index: 143, 128, 150, 117, 191 Unemployment rate: %12.3, %14.8, %14.3, %8.8, %12.0Unemployment rate: %12.3, %14.8, %14.3, %8.8, %12.0

Five cities with lowest socioeconomic development Five cities with lowest socioeconomic development index: Van, Ağrı, Mardin, Şanlı Urfa, Erzurumindex: Van, Ağrı, Mardin, Şanlı Urfa, Erzurum Contribution to GDP : %1, %0.6, %1.2, %2.2, %1.0Contribution to GDP : %1, %0.6, %1.2, %2.2, %1.0 Per capita GDP index : 35, 34, 46, 54, 50Per capita GDP index : 35, 34, 46, 54, 50 Unemployment rate : %11, %1.7, %6.1, %10.8, %4.1Unemployment rate : %11, %1.7, %6.1, %10.8, %4.1

Cities According to Socioeconomic Cities According to Socioeconomic Development IndexDevelopment Index

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Basic QuestionsBasic Questions

Some regions have higher income Some regions have higher income levels and better job prospects than levels and better job prospects than the others.Why should this be so?the others.Why should this be so?

What factors determine the income What factors determine the income level and job prospects of regions?level and job prospects of regions?

So then the next So then the next question is:question is:

Is it possible to construct general Is it possible to construct general models that can be used to explain models that can be used to explain the determinants of income and the determinants of income and employment in all types of regions employment in all types of regions regardless of vast differences regardless of vast differences between them?between them?

Two main routes have been taken , Two main routes have been taken , one based on the Keysnesian one based on the Keysnesian income-expenditure approach to income-expenditure approach to modelling the national economy, and modelling the national economy, and the other based on input-output the other based on input-output analysis. analysis.

Kenesian ModelKenesian Model

The Keynesian approach to modelling The Keynesian approach to modelling the regional economy is virtually the regional economy is virtually identical to teh simplest open economy identical to teh simplest open economy version of the keynesian income-version of the keynesian income-expenditure model, the only difference expenditure model, the only difference being that all the expenditure variables being that all the expenditure variables refer to the regional or local economy refer to the regional or local economy instead of to nation. The model begins instead of to nation. The model begins with the familiar income-expenditure with the familiar income-expenditure identity:identity:

Y=C+I+G+X-MY=C+I+G+X-M

Y : Regional incomeY : Regional income C : Regional C : Regional

consumptionconsumption I : Regional I : Regional

investmentinvestment G : Government G : Government

expenditureexpenditure X : Regional exportsX : Regional exports M : Regional importsM : Regional imports

I = I0 , G = G0 , X = X0

C = C0 + cDY

M = M0 + mDY Where DY is

disposable income and given by

DY = Y-tY Where t is the rate of

income tax Y = k (C0 +I0+X0+M0)

Where, Where,

kk is the Keynesian regional is the Keynesian regional multiplier and is given by: multiplier and is given by:

k=1/ 1-(c-m)(1-t)k=1/ 1-(c-m)(1-t)

(c-m) (c-m) =the marginal propensity to =the marginal propensity to consume locally produced goods.consume locally produced goods.

tt= tax rate= tax rate

The multiplier is clearly sensitive The multiplier is clearly sensitive to changes in to changes in c - m, c - m, rising quite rising quite rapidly as it increases.rapidly as it increases.

Since the marginal propensity to Since the marginal propensity to consume locally produced goods consume locally produced goods (c (c - m) - m) has a crucial effect on the has a crucial effect on the magnitude of the regional magnitude of the regional multipliermultiplier..

This model says that the regional income can This model says that the regional income can be magnified by the Keynesian regional be magnified by the Keynesian regional multiplier. multiplier.

To obtain higher regional income, we wish to To obtain higher regional income, we wish to have a bigger multiplier. have a bigger multiplier.

The strategical implications from this model The strategical implications from this model are to lower the income tax rate and are to lower the income tax rate and promote the propensity to consume locally promote the propensity to consume locally produced goods. produced goods.

This model justifies the demand-side policies This model justifies the demand-side policies by showing that promoting the demand, by showing that promoting the demand, consumption of locally produced goods in consumption of locally produced goods in this case, can boost the regional economy. this case, can boost the regional economy.

These are the sorts of questions that regional These are the sorts of questions that regional economic models are designed to address.economic models are designed to address.

Regional models vary tremendously in detail Regional models vary tremendously in detail and complexity.and complexity.

They range from very aggregative, demand-They range from very aggregative, demand-driven explanations based upon simplistic driven explanations based upon simplistic interpreations of the Keynesian macro model interpreations of the Keynesian macro model to more sophisticated approaches which to more sophisticated approaches which allow for the supply side to respond to allow for the supply side to respond to changes in capital and labour markets. changes in capital and labour markets.

Export demand and Export demand and cumulative growth model cumulative growth model

This model says that if the world income This model says that if the world income grows, the region's exports will increase grows, the region's exports will increase which will lead to the region's output to which will lead to the region's output to increase. The region will be more increase. The region will be more productive in production. Thus, the productive in production. Thus, the region's competitiveness will increase region's competitiveness will increase which will decrease the region's price which will decrease the region's price and increase the exports. Another round and increase the exports. Another round of productivity increase and of productivity increase and competitiveness increase begin. competitiveness increase begin.

Other cumulative growth Other cumulative growth models models

Growth poleGrowth pole: Perroux (1950), Myrdal (1957), and : Perroux (1950), Myrdal (1957), and Hirschman (1958) The theory says that if an indstry is Hirschman (1958) The theory says that if an indstry is subject to significant internal economies of scale, the subject to significant internal economies of scale, the firms grow quickly and will gain a competitive firms grow quickly and will gain a competitive advantage over rivals and growth will be cumulative. advantage over rivals and growth will be cumulative.

Localization economiesLocalization economies: Localization economies result : Localization economies result from the geographical concentration of plants in the from the geographical concentration of plants in the same industry at the locality. Located close to each same industry at the locality. Located close to each other, the firms with input-output ties can enjoy other, the firms with input-output ties can enjoy benefits, such as the low costs of transportation, quick benefits, such as the low costs of transportation, quick exchange of information, ideas and knowledge, and the exchange of information, ideas and knowledge, and the spillover effects of cross-fertilization. Clustering allows spillover effects of cross-fertilization. Clustering allows individual plants to specialize more than they would if individual plants to specialize more than they would if firms are wildly apart. The increase in specialization firms are wildly apart. The increase in specialization will increase the productivity and competitiveness of will increase the productivity and competitiveness of the industry.the industry.

Regional Regional CompetitivenessCompetitiveness

Economic growth; economic Economic growth; economic development and innovationdevelopment and innovation

Economists have recognized the Economists have recognized the central importance of technological central importance of technological innovation for economic progressinnovation for economic progress Adam Smith “Wealth of Nations”Adam Smith “Wealth of Nations” Marx’s model of capitalist economyMarx’s model of capitalist economy Marshall considers knowledge as chief Marshall considers knowledge as chief

engine in progressengine in progress

Growth Competitiveness Index

Technology Transfer Sub-Index

Information & Communications

Technology Sub-Index

Technology IndexMacroeconomic

Environment IndexPublic Institutions

Index

Contracts and Law Sub-Index

Corruption Sub-Index

Macroeconomic Stability Sub-Index

Innovation Sub-Index

Country CreditRating

GovernmentWaste

THE GLOBAL COMPETITIVENESS REPORTTHE GLOBAL COMPETITIVENESS REPORT

Kaynak: WEF, 2003

Business Competitiveness Index

Company Operations

& Strategy

Factor (Input) Conditions

Demand Conditions

Related and Supporting Industries

THE GLOBAL COMPETITIVENESS REPORTTHE GLOBAL COMPETITIVENESS REPORT

Context for Firm Strategy and Rivalry

Kaynak: WEF, 2003

Türkiye (65,52)

Kaynak: WEF, 2003 Growth Competitiveness

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Kaynak: WEF, 2003

National Innovation Capacity Index (2001)

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Kaynak: WEF, 2003