The geography of inequalities in Europe Philippe Martin ... - ENPC

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their real impact, in part because the government does not provide much data. In the UK, on theother hand, these policies are much less important. This suggests that interregional transfers arevery large and growing in France. It also suggests that they are mostly due to progressive incometaxes and the welfare state, not to spatially defined policies such as regional policies.III. A tentative explanation for global convergence and local divergenceThe presence of economies of scale and of trade costs may explain why regions with noobvious comparative advantage in certain activities can become centers of production of thoseactivities. A model of the underlying mechanisms was introduced by Krugman (1991), who wasat the origin of the so-called “new economic geography” (see also the paper by Baldwin, 2006, inthis issue). The central finding of this literature is that the reduction of trade costs may engendera concentration of economic activities in certain regions that have better access to the largemarkets even if they do not have the lowest production costs. This spatial concentration isadvantageous because of the existence of economies of scale conducive to limiting productionlocations, and it is made possible by trade integration which, while reducing transaction costs,does not oblige enterprises to be located close to all their consumers.We simply here want to analyse very briefly what are some of the necessary conditionsfor a process of “local divergence” with “global convergence” to follow trade integration 1 . Theinteraction of economies of scale, comparative advantage and trade costs are essential. Thepurpose of the small “model” we provide here is simply to illustrate a mechanism which webelieve may be more general. Suppose there are three regions. The first one, which we call forillustrative purposes the Ruhr, is a rich and central region with high wages and hence high laborcosts. The second region, which we call Catalonia, is a middle-income region close to the largeEuropean markets. A third region, Andalusia, is a peripheral region with low wages and hencelow labor costs. Economies of scale play a major role in the sense that average production costsincrease with the number of locations due to fixed costs. Let us assume that the firm can produce1 Andres (2004), in the context of the footloose capital model, shows a similar result in a general equilibriumframework.
in the three regions, or in only one 2 . The choice of location is simply a minimization of the sumof production and trade costs.If the firm decides to produce in the three regions, its total cost is:TC ( R + C + A)= 3F+ c S + c S + cRRCCwhere F is the fixed cost associated to each plant, c R,, c C, , c A are the marginal costs of production(that can be interpreted as the wage costs) respectively in the Ruhr, Catalonia and Andalusia. Weassume that c R, > c C, > c A . S R, , S C, , S A are the market sizes respectively in the Ruhr, Cataloniaand Andalusia. We assume that S R > S C > S A . Note that in this situation, the firm pays no tradeor transport costs as it produces in all three locations.If the firm produces in the Ruhr only, its total cost is:TC ( R)= F + c ( S + S + S ) + t ( S + S ) + tRRCAIwhere t I, is the international trade cost which the firm located in Germany has to pay to sell inCatalunia and Andalusia. To sell in Andalusia, the firm also has to pay the domestic Spanishtrade cost (which can be interpreted as a transport cost) as this region is in the periphery.If the firm produces in Catalunia only, its total cost is:TC ( C)= F + c ( S + S + S ) + t S + tCRCAIRso that it pays the international trade cost to sell in Germany and the domestic Spanish cost tosell in Andalusia.Finally, if the firm decides to produce in Andalusia, its total cost is:ARCACASDAASADS( tI+ tD) SRtDSCTC ( A)= F + c ( S + S + S ) ++Suppose we start from a situation where international trade costs t I, are very high. In thissituation, which we interpret as the pattern before the European integration process, the firm willwant to locate some activity in the three locations. It is easy to check and it is intuitive indeedthat if t I, is high enough (and domestic transport costs are not too low either) then:TC ( R + C + A)< TC ( R),TC ( C), TC ( A)or any other location equilibrium. This just says that iftrade costs are high, firms will want to be close to all their consumers.Suppose now that Spain and Germany lower their trade costs t I, . In a highly stylized way,we interpret the scenario of “global convergence with local divergence” as a case when the firmA2 Of course, the firm could produce in two regions. This possibility would complicate the presentation withoutadding much.
Page 7: average the regional inequality in
Page 11 and 12: Overall, this example suggests that
Page 13 and 14: appears (see Martin 1999a, b and Ba
Page 15 and 16: convergence towards the rest of the
Page 17 and 18: each earn 5.5 and 80% 1.5 so that t
Page 19 and 20: Table 2: Income inequality and spat
Page 21 and 22: example is the subsidy program prov
Page 23: - Dupont V. and P. Martin, 2003,

The geography of inequalities in Europe Philippe Martin ... - ENPC

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