What drives regional growth?

The importance of the sectorial composition of economic activity. Diego Ocampo

Introduction:
Why some regions grow so fast and so others dont?
Some countries are becoming more and more rich, while other seem to be stagnated. Inside the countries, some regions develop very fast and at the same time a less fortunate group of regions just stares the success of the other.

This facts clearly have consequences for the inhabitants Problems with inequality=> Scope for policy
Necessity to understand the source of the problem.

 Among the many possible answers is the composition of economic activity. This presentation has the objective to outline the theories and models that can explain the different growth pattern across regions.
Particularlly the focus is on the relevance of sectoral composition of the regions as a source of growth. Find the opportunity to come up with a new idea

The roots I: explaining growth differences

Harrod-Domar model: unbalanced growht
Growth is driven by saving rate, depresation rate and capitalLeontief technology.

The neoclasical model of Solow:

Growth is driven by (exogenous) technological progress.

Regional differences due to different parameters.

 Technologycal growth is the responsable for output growth. What explains technology/TFP at a regional level?
At a regional level neighbors can have very different outcomes, even if they have more in common than countries.

Regions are different from countries:

Common institutional framework Common currency, Factor flows and trade are free: no tariffs or any other kind of barrier. Shared institutions: taxes, laws, customs

Theories of Regional differences

Ricardo
Comparative advantage.

The Growth Pole concept (Perroux 1955)

Dynamic industry capeble to pull the rest of the economy.

The Cumulative Causation theory (Myrdal 1957)

Self reinforcing circular process.

The CC theory is increasing returns to scale (Kaldor 1970)

Advantages from accumulation of knowledge, opportunities, skills.

Corner stones
Endogenous growth theory (Romer 1986)
No more diminishing returns Accumulation of knowledge has positive externalities (public good) Probides and explanation for TFP. Differences in stock of capital will make regions diverge

New economic geography/Core-periphery model (Krugman 1991).

The transportation costs are the keey element of the model. The modern sector will agglomerate in one region.

Corner stones II
The importance of externalities: Glaeser et al 1992.
Jacobs externalities prevail: diversity is the source of externalities, hence for productivity growth.

From another perspective: density promps gainings in productivity: Ciccione and Hall (1996): externalities on productivity depend on density.
Differences across regions depend on differences of density.

Resent developments
Related variety: not all kind of diversity fosters

productivity growth.
Frenken et al 2007: proximity at the local level Boschma and Iammarino 2009: industries inside a region have to be close to each other to take advantage of new knowledge.

Martin and Ottaviano 2001

Two equal region model, A innovation sector, the cost of a new a idea for firms is lower where are more firms producing ideas because of perfect competition. Agglomeration will take place giving place to regional disparities. Transport costs : key concept, krugman -style

Resent developments II
Fujita and Thisse 2003, also present a model with a
Innovation sector, Ideas are produced under perfect competition, so agglomeration makes cheaper for manufactures to by new ideas. Mobility of labor. Agglomeration process can take place. Externalities:The more ideas in one region, the higher the productivity of researchers. Denser regions will innovate more and will grow faster.

Resent developments III

Martin and Baldwin 2004
An innovation sector, no labor mobility but capital mobility is what determines the structure of the economy. Cost of innovation (spillovers) depend on wether are local (each region has its own costs of innovation) or global (same cost in both regions) When spillover are localized Cost of innovate declines inversely related to regions output of innovation sector.

Regions with the biggest share of innovation sector will be the core and grow faster.

Conclusions
There could be identify two approaches
Spillovers coming from industry diversity.
Glaeser et al 1992, Frenken et al 2007, Boshma and Iammarino 2009.

Spillovers coming from density and agglomeration.

Ciccione and Hall 1996, Martin and Ottaviano 2001, Baldwin and Martin 2004, Fujita andThisse 2003.

Conclusions II
Nontheless they share the notion of the importance of some sectors over the others.
The related sectors or the innovation sector are the most important for different growth paths among regions.

Also we can see that the concept of diversity is contained in the models of agglomeration. But a gap between the two approaches can be seen.

Conclusions III
To tend a bridge I propose that there is a inverse relation among diversity in sectorial composition as driver of growth and size.
At some point the importance externalities vanishes and density takes its place. It is a matter of scale. Also could be a matter of relative size between regions.