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1. Introduction 1 1. INTRODUCTION This introduction describes the field of Regional Economics. Section 1.1 describes the related disciplines. In Section 1.2 we discuss a number of fundamental spatial concepts. Sections 1.3 and 1.4 sketches the history of Regional Economics briefly, taking two classical theories as examples. Finally, Section 1.5 contains general conclusions and an overview of the content of the book. 1.1 Borders of the discipline Regional Economics deals with the allocation of economic activities over space. Two aspects can be distinguished: the micro-aspect or location and the macroaspect or region. The former means the location of firms, households, and individual consumers. The latter is the explanation of the distribution of economic activities over spatial units like provinces or municipalities. A description like this also matches the area of spatial economics, which can be considered to be synonymous with regional economics. Human Geography also deals with spatial aspects of economic activities, called Economic Geography. However, the geographical approach differs from the regional economic one. Geography is a more descriptive science than economics. Of course, areas overlap to a great deal. Still, one could say that regional economics is more deductive, whereas economic geography is more inductive. In regional economics there are two streams: firstly, the mainstream neoclassical approach and secondly, the institutional approach. The neoclassical approach has a deductive and the institutional approach has an inductive character. It is easy to see the old battle of methods in these two approaches. In fact, institutional regional economics fits better in human geography, while the neoclassical approach is without doubt a part of economics. Most of this book is a product of the neoclassical approach to regional economics.1 Regional economics and economic geography are both sub-disciplines of Regional Science. In regional science it is the use of space and not the discipline that counts. It is interdisciplinary in nature. This implies that all disciplines that deal with the use of space, like physical planning and civil engineering, are subdisciplines of regional science Also the distinction between regional economics and International Economics must be taken into account. According to Ohlin there is no essential difference between the process of spatial division of labour within national borders and the global division of labour between countries (Ohlin, 1933). The title of his book "Interregional and international trade" clearly indicates that. A similarity certainly is that both branches try to explain the spatial allocation of economic activities. However, in regional economics the spatial units are the regions within a country, whereas in international economics the countries are 1 For another interesting description of the area of ‘geographical economics’, see O’Sullivan (1981). 1. Introduction 2 considered in that role.2 A region is seen as a part of a bigger spatial unit, normally speaking a country.3 This means that international economics also deals with monetary subjects like the balance of payments and exchange rates, where regional economics deals only with problems in the real economy. Further, regional economics studies microeconomic themes like the locational behaviour of firms and households, subjects that are not normally studied in international economics. 1.2 Spatial concepts With "space" is meant here: the physical substrate of human actions. A space is defined by dimensions. The value of a dimension is called a coordinate, and a coordinate is measured in a distance unit (metre, mile etc.). Normally speaking, regional economics deals with one or two dimensional spaces, whereas in other sciences spaces with more dimensions also occur. A unique combination of coordinates is called a location. An economic space can be defined as a bounded space of locations that can be profitably used for various purposes. These locations can be called scarce. By a scarce location we mean a location suited for human actions, which bears a price or rent. The rent of land can be defined as the net revenue per unit of time of a spatial unit. The opposite of economic space is free space, which is space that does not bear a rent and therefore is not interesting for a regional economist. A route is the set of locations connecting two designated locations. Distance is the length of a route measured in distance units. The spatial concentration of production and consumption causes the need of the transportation of goods and persons, and therefore transportation costs influence consumer prices. A border is the set of locations that demarcates a bounded space. Finally, a region is a bounded space that is part of a bigger space (e.g. a country). Some of the concepts discussed are clarified by Figure 1.1. In order to classify regions the EU uses the so-called NUTS-classification.4 2 A regional economist can sometimes study the relationship between regions in different countries. This is of increasing importance, especially for the cross border interregional relationships within the EU. 3 This needs not always be the case. Sometimes one speaks for example of the "Region South-East Asia". In that case countries are part of a region and not the other way round. 4 See http://ec.europa.eu/eurostat/documents/3859598/6948381/KS-GQ-14-006-EN-N.pdf/b9ba3339b121-4775-9991-d88e807628e3 and www.raumplanung.tu-dortmund.de/irpud/pro/ten/nuts_e.htm 1. Introduction 3 dimension y in km country border country regional border location B region location A y-coordinate x-coordinate route dimension x in km Figure 1.1: Spatial concepts. The central object of regional economics is scarce (economic) space, which means the set of locations, for which economic subjects are prepared to pay a price (rent). Free space, that does not bear a rent, is not scarce and is therefore not studied by a regional economist. Apart from the above defined physical concept of economic space, one sometimes speaks of economic space as a network of relations between economic subjects.5 Physical locations and distances are not taken into account with this concept. To avoid confusion we will use the term ‘economic network’ for this (e.g. Lambooy, 1980). We will conclude this section by indicating how the distance between two locations is computed. In a one dimensional space only one coordinate is necessary to indicate a location. Location A may be located at coordinate 5 km where B is located at 10 km, then the distance between the two locations equals 5 km. In a two-dimensional space the distance between A and B is computed as indicated in Figure 1.2. 5 This is a so-called topological space. 1. Introduction 4 Figure 1.2: Distance between Location A and Location B. For a two dimensional space we need two coordinates in order to determine a location. Location A is located at (XA, YA); B at (XB, YB). The distance between A and B can now be computed as follows: AB 2 YA YB X B X A , so : AB 2 1.3 2 YA YB 2 X B X A 2 . Von Thünen's land rent theory The land rent theory of Johann Heinrich Von Thünen (1783-1850) is generally considered to be the start of regional economics. In 1826 Von Thünen published his most important book titled "The isolated state in relation to agriculture and the national economy". In the book he concludes that the growing of a crop depends on the land rent per hectare generated by that crop and that this in turn depends on the transportation costs of the crop to a central market place. Further, he sees that as the distance to the market place decreases agriculture intensifies. In his work von Thünen developed a deductive land use model. It is interesting to see to what extent his model can still be used today. To study that we will have to adapt the assumptions of the original model. 1. Introduction 5 The distance to the market place must be interpreted as population density.6 The idea behind this is that, statistically speaking, as the population density increases the distance to a "central market place" decreases. Based on the adapted theory the hypothesis to be tested then is: "as the population density increases, agriculture intensifies, which means that the input of production factors per unit land (hectare, acre) increases, thus increasing the output per unit land”. In Chapter 2, we discuss this more extensively. Generally speaking we can say that Von Thünen tried to explain the productivity of land and the intensity of land use. The core of his theory is that land will be used for the activity that generates the highest possible rent. This result not only applies to the agricultural sector but can also be applied much wider than von Thünen foresaw (Isard, 1956). Ceteris Paribus, Land rent and land prices are influenced by the population density of an area.7 The pressure on open space in densely populated areas will be high because of the expected high land rents of productive land use alternatives (industrial areas, residential areas). 1.4 Weber's theory on location The second example of a classic regional economic theory is the theory of location developed at the beginning of the 20th century by Alfred Weber (1868-1958), the less famous brother of Max Weber.8 Von Thünen worked in a period in which agriculture was still the dominating sector in the economy. In the second half of the 19th century the industrial sector became increasingly important in Germany. General and regional economic theory was profoundly influenced by this development. Therefore, Weber did not focus on the agricultural sector, but on the optimum location of an industrial firm. He put forward his theory in his book "Pure theory of the location of the firm", in which he concludes that, when looking for a location, firms aim at minimizing transportation costs (Weber, 1909). However, he also suggests that firms may deviate from the location of minimum transportation costs if labour costs on an alternative location are lower, as the benefits of the lower labour costs may outweigh the higher costs of transportation. At present, this theory may partly explain the relocation of industries from the traditional European and American industrial countries to the emerging economies, i.e. the low wage countries. 6 The idea here is that, generally speaking, where population density is high, there are more central market places then where population density is low. This means that, everything else being equal, on average, in a densely populated area, the distance to a central market place is smaller than in less densely populated areas. When growing, real world population tends to spread over space in separate locations rather than concentrate in one single location. 7The Latin expression "ceteris paribus" means "all other circumstances being equal". 8Alfred Weber is considered to be the founder of the classical theory of location. However an important part of his theory can be found in the work of Wilhelm Launhart, especially in his book "Mathematical foundations of economics" (1885). 1. Introduction 6 Another important aspect of Weber's theory is "agglomeration". This points to the benefits of spatially concentrated firms. These benefits can be caused by the common use of physical infrastructure (such as roads and cables) and also by the common use of 'know how' and scientific knowledge. Further, producers of semi-manufactured products can gain benefits (lower transportation costs, better contacts with their customers) by locating near their customers. In the so-called "new economic geography" these agglomeration benefits are indicated as "external economies of scale".9 This can lead to a geographical concentration of firms (Krugman, 1995). A famous example is the American Silicon Valley with its information and communication technology (ICT) based industry. External economies of scale cannot continue without limitation. As the number of firms increases deglomerative forces develop. Land prices and wages increase in the area, so that land intensive and labour intensive industries move away from the ‘core areas’ to a location where the land prices and wages are still moderate. In fact, this idea of deglomeration is the beginning of a spatial general equilibrium theory. Besides Weber, Marshall also dealt with the economic benefits of geographical concentrations in his "Principles of Economics". Later, in the 1950's, Perroux with his growth pole theory and Myrdal with his principle of "cumulative causation" examined it (Marshall, 1890; Perroux, 1950; Myrdal, 1957; Vanneste, 1967). In the 1960's and 70's the so called "growth pole" policy, that was based on these ideas, became fashionable in Europe as a specific form of regional policy (Klaassen, 1969). The link between the growth pole theory and the theory of economic growth led to a new idea about the character of economic growth: economic growth is a spatially concentrated process. This implies that economic growth in a country will always be regionally unbalanced. It is not clear why it took so long for this to be recognized. Perhaps it was because of the more or less separate development of general and regional economics. This separation ended with the so-called "new economic geography" developed among others by Paul Krugman, who indicated for example that rigorous modeling of agglomeration by means of the traditional economic tools assuming perfect competition and constant returns to scale had to fail. The important insight into the inevitability of regionally unbalanced growth will certainly have a profound impact on regional policies. Instead of trying to achieve something in weak regions, policy should aim at regions in which the chances for the development of a cluster (or growth pole) are good. Clusters can be defined here as geographic concentrations of mutually dependent firms. However, one has to realize that no two clusters are alike. The attempt to copy successes from elsewhere is a recipe for disappointment. Regional policy must be relatively passive here. This means that it should not try to create clusters out of nothing. The planning of clusters is impossible, but the strengthening of existing For an overview of the most important articles in the area of “New Economic Geography” see Henderson (2005). 9 1. Introduction 7 tendencies toward the development of clusters is feasible. A cluster is not a public but a market phenomenon. This marks the difference between the growth pole policy from the past and the modern cluster policy. 1.5 Summary and preview In this chapter the discipline of regional economics has been sketched. There is an overlap between regional economics and economic geography. An important difference between the two areas of study is the more qualitative and descriptive character of economic geography compared to regional economics. Further, in this chapter, some aspects of the history of regional economics have been described. Von Thünen's land rent theory and especially Alfred Weber's classical location theory are still important elements of modern regional economics. New economic geography is based upon the latter. It is appropriate to mention here that, apart from von Thünen and Weber, there are more founding fathers of Regional economics. The ideas of a number of them will be dealt with later on in the book. New economic geography is an attempt for bridging the gap between general and regional economics. It can put an end to the artificial neglect of the factor space in general economics. It is the aim of this book to diminish this neglect. Further, this book concentrates on Europe. Examples and applications of theories are mostly (but not always) related to European regions. The book is organised as follows. Chapters 2, 3, 4, and 5 deal with land use theory, the theory of location and their applications. Chapters 6, 7, 8, 9, 10, and 11 deal with regional development theory and its applications. Questions and exercises 1.1 a. What is the connection between regional economics and general economics? b. What is the difference between economic geography and regional economics? c. What is 'regional science'? 1.2 a. b. c. d. 1.3 a. Give a short description of von Thünen's theory. b. Indicate how land prices relate to land rent. 1.4 a. Give a short description of Alfred Weber's theory. b. What is agglomeration? c. What is deglomeration? What is a location? Give a definition of "space"? What is "economic space"? What is a "topological space"?