Download Regional Economics

Regional Economics
Lecture 2
Sedef Akgüngör
Perspectives on
Economic Growth
GDP Growth in Turkey (1968-2004)
(in 1987 constant prices)
GSYİH (1987 fiyatları ile)
160000
140000
120000
100000
80000
60000
40000
20000
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
0
Per Capita GDP Growth in Turkey
(in 1987 constant prices)
SAGP'na Göre Kişi Başına GSYİH
9.000
8.000
7.000
6.000
5.000
4.000
3.000
2.000
1.000
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
0
GDP Per Capita in EU-15 and Japan
Growth in Real GDP
Per Capita GDP Index, 2002
(EU25=100)
Most Developed 10 regions in Europe
Least Developed 10 Regions in Europe
1 Inner London (UK)
315
1 Lubelskie (Polond)
32
2 Bruxelles-Capitale (Belgium)
235
2 Podkarpackie (Polond)
33
3 Lüksemburg
213
3 Warmińsko-Mazurskie (Polond)
34
4 Hamburg (Germany)
188
4 Podlaskie (Polond)
35
5 Île de France (France)
176
5 Świętokrzyskie (Polond)
36
6 Wien (Avusturia)
173
6 Észak Magyaroszág ()
37
7 Berkshire, Buckinghamshire &
Oxfordshire (UK)
162
7 Opolskie (Polonya)
37
8 Provincia Autonoma Bolzano
(Italy)
160
8 Eszag-Alföld (Hungary)
38
9 Stockholm (Sweden)
158
9 Východné Slovensko (Slovakia)
39
10 Oberbayern (Germany)
158
TR42 (Kocaeli, Bolu, Sakarya,
Yalova, Düzce)
53
10 Letonya
TRB2 (Bitlis, Hakkari, Muş, Van)
39
10





There have been dramatic changes in standards of
material well being in the world.
During the period of 1000-1700, real income per capita
in W. Europe roughly tripled.
Between 1700-1750 annual growth rate rose to 0.4%.
During the next century, it escalated to 1.2-1.5% per
year.
As these transformations exolved, scholars sought with
varying degrees of success to understand what
happened. What is the cause of economic growth.
Classical Views of Growth

Serious considerations on economic growth
began with the mercantalist economists.
(William Petty, John Locke, Jean-Baptiste
Colbert).
Money as a source of national wealth (gold, silver).
 Export promotion.
 Adam Smith argued for free trade policies.
 Pin Factory example. Adam Smith’s observations on
the impact of labor division on labor productivity.

Ricardo and Malthus Wiews on
Economic Growth


Ricardo on law of diminishing returns.
Malthus on population increase at a geometric
rate. Increase more rapidly than land’s capacity
Was Malthus Wrong?


Complex mixture of increased capital
investment, as foreseen by Ricaardo and
Malthus, and technological progress they failed
to anticipate.
Hayami and Ruttan contended that both labor
and capital productivity have increased.
Neoclassical Growth Models

Economic growth depend on increasing the
stock of capital to keep pace with growth and
labor force and technological improvements.

The aggregate production fuction lies at the heart of
neoclassical growth models.

In an economy in which there is no technical progress,
output is determined entirely by capital and labour
inputs.

This relationship can be expressed in general form as
follows:
Y= F (K,L)


Where Y is real output, K is the stock of capital
and L is the labour force.

A specific form of this general relationship is
provided by the well-known Cobb-Douglas
production function. Assuming constant returns to
scale, we have:

1
Y  A.K .L

Output per worker will increase as each worker is
provided with more capital equipment- but the increase
will be at a decreasing rate due to diminishing marginal
returns.

What conclusions can be drawn so far?

1. Output grows without limit as the supplies of capital
and labour increase

2. Output per worker can increase only if there is
capital deeping (i.e. if the capital/labour ratio increases)

3. When the capital/labour ratio reaches its long-run
equilibrium level, there will be no further increase in
output per worker.


More realism can be built into the neoclassical
model by allowing for the effect of technical
progress on output growth.
Solow’s contribution to the neoclassical growth
model: The most convenient way of allowing
for technical progress is to regard technical
knowledge as an additional and separate element
in the production function.



Capital and labour are assumed to benefit equally from
any technical progress that may occur as in the
following function:
Y= F (A,K,L)
Where A is technical knowledge. Technical progress is
said to be disembodied in this model since it is
independent of capital and labour inputs.

Thus, regional disparities in the growth of
output per worker are explained by regional
differences in the rate of technical progress and
by regional differences in the growth of the
capital/labour ratio.

REGION’S OUTPUT GROWTH

The neoclassical model identifies three sources of
output growth:

1. The capital stock

2. The labour force

3. Technology

A region’s output growth will therefore depend
upon the growth rate three factors of
production.

Why are the rates of growth of capital, labour
and technology vary between regions.

A potentially important influence on regional
growth disparities is inter-regional factor
migration.

According to the neoclassical model, capital and
labour will move to those regions offering the
highest rates of return.

Producers will search for the most profitable
locations for their plant and machinery while
workers will be attracted to those regions in
which wages are high.

The neoclassical model assumes that there are
no impediments to factor mobility between
regions and that there is perfect knowledge
about factor prices in all regions.

Which factors may be expected to influence the
growth of capital, labour and technology within
any individual region?

1. Growth of capital stock:

1.1. Investment by region’s residents. Regional saving
rate.

1.2. Net inflow of capital into region
Rate of return relative to rate of return in other
regions

2. Growth of labour force
2.1. Net in-migration of workers
Regional wage relative to wage rate in other regions
 2.2. Population growth
Birth rate and death rate


3. Technical progress

3.1. Inflow of technical knowledge from other
regions

3.2. Investment in R&D education

The Solow growth model argues that the growth
in output per capita is driven by the rate of
technological progress.

Without technological progress there would be
no growth in the long run. But since the cause
of technological progress are not identified in
the Solow model, this means that the underlying
explanations of growth is not spelt out.
Endogenous Growth Model as an
Extension to Neoclassical Growth Model

Endogenous growth theory attempts to
overcome this deficiency in the Solow model by
providing an explanation of the causes of
technological progress.

This extension to the neoclassical model is
referred to as endogenous growth theory since it
argues that technological progress is itself
determined by the growth process.

Basically, entrepreneurs are looking for ways to
make a profit and one way of doing this is to
produce and sell new ideas.

Since there is a profit incentive to produce new
ideas, this means that economic growth is
endogenous.

The embodiment of technogical progress in the
newest capital goods is not only way in which
technology enters the production system.

More recent developments of the neoclassical
model recognize the importance of human
capital as a critical factor in determining the
productive capacity of the economy.

Human capital is important for two reasons:

First, a region’s stock of human capital determines its
ability to absorb and use new technology.
As the stock of human capital increases, the economy
will be more able to benefit from technological
developments, thereby expanding the economy’s
productive capacity.
Hence, although technology may be available
everywhere, its efficient use requires an appropriately
skilled workforce.



Second, human capital is an important ingredient in
determining the ability of a region to generate its own
technical progress.

The capacity of a region to absorb or create technical
progress is not simply a matter of investing in physical
or human capital. A region’s capacity to absorb or
create technical progress is determined by its
institutional environment.

The creation of technical progress is determined by a
collective learning process within which many
individuals interact and exchange ideas and
information, thereby providing a knowledge-rich
environment.

If such an environment exist, knowledge pases quickly
from one economic agent to another , giving rise to the
rapid creation of a wide variety of new ideas.

There are therefore economies of scale to be
gained from the geographical concentration of
large numbers of highly educated people since
their proximity to each other results in a more
rapid transfer of knowledge and ideas.

These ideas are then transformed into new
products and new processes, thereby raising
labour productivity.

This means that technical progress is not simply
an automatic outcome of investment in R&D,
but requires an institutional environment which
is conducive to the adoption and assimilation of
new ideas into the production system.

Regional disparities therefore occur in technical
progress because the institutional environment
varies between regions.

In other words, some regions are more capable
of using and producing technical progress than
others.

The regions which are knowledge-rich and
which have relatively large quantities of human
capital will specialize in creative activities such as
R&D, scientific research institutions and highlevel service activities

Such regions will generate new ideas which add to the
region’s technical knowledge which will be transformed
into new products and new methods of production.

Conversely, regions that are less well endowed with
human capital will specialize in routine activities which
rely on technical know-how embodied in the capital
equipment available globally. Such regions will depend
heavily upon being cost competitive in world markets.

This modern variant of the neoclassical model
therefore explains why regional disparities in
economic development can and do persist, even
in the long run.

The primary reason for long-term persistence is
that some regions are more able to generate
their own technical change.

Knowledge-rich regions with an institutional
environment conducive to the creation and
transmission of new ideas will have a continuning
advantage over less well-endowed regions which
depend far more on acquiring technical change through
purchasing capital equipment from other regions.

Less well-endowed regions have no alternative but to
rely on exogenously embodied technology since they
are not capable of producing their own
What Determines Labor Productivity?

Output/Labour Ratio

1.Capital/labour ratio
2.Technology embodied in capital stock

Investment in new capital
Regional saving

Output/Labour Ratio
3. Endogenous technical progress: R&D spending

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3.1.Creation and transmission of new ideas
3.1.1. Social and economic networks in region:
transmission between individuals
3.1.2. Public and private investment in education

Output/Labour Ratio

4.Human capital
Per Capita GDP Index, 2002
(EU25=100)
Most Developed 10 regions in Europe
Least Developed 10 Regions in Europe
1 Inner London (UK)
315
1 Lubelskie (Polond)
32
2 Bruxelles-Capitale (Belgium)
235
2 Podkarpackie (Polond)
33
3 Lüksemburg
213
3 Warmińsko-Mazurskie (Polond)
34
4 Hamburg (Germany)
188
4 Podlaskie (Polond)
35
5 Île de France (France)
176
5 Świętokrzyskie (Polond)
36
6 Wien (Avusturia)
173
6 Észak Magyaroszág ()
37
7 Berkshire, Buckinghamshire &
Oxfordshire (UK)
162
7 Opolskie (Polonya)
37
8 Provincia Autonoma Bolzano
(Italy)
160
8 Eszag-Alföld (Hungary)
38
9 Stockholm (Sweden)
158
9 Východné Slovensko (Slovakia)
39
10 Oberbayern (Germany)
158
TR42 (Kocaeli, Bolu, Sakarya,
Yalova, Düzce)
53
10 Letonya
TRB2 (Bitlis, Hakkari, Muş, Van)
39
10
Discussion


Based on what we have discussed in the class,
relate what you see in the tables to the
theoretical models of economic growth and
development.
In your point of view, what explains regional
disparities?