Session 2: The future of EMU - Paper 2
This is a modal window.
The media could not be loaded, either because the server or network failed or because the format is not supported.
Formal Metadata
| Title |
| |
| Title of Series | ||
| Number of Parts | 12 | |
| Author | ||
| Contributors | ||
| License | CC Attribution 3.0 Unported: You are free to use, adapt and copy, distribute and transmit the work or content in adapted or unchanged form for any legal purpose as long as the work is attributed to the author in the manner specified by the author or licensor. | |
| Identifiers | 10.5446/48026 (DOI) | |
| Publisher | ||
| Release Date | ||
| Language | ||
| Production Place | Sintra, Portugal |
Content Metadata
| Subject Area | ||
| Genre | ||
| Abstract |
|
4
7
8
00:00
Meeting/Interview
01:29
Meeting/Interview
02:39
Lecture/ConferenceComputer animationMeeting/Interview
04:58
Computer animationLecture/ConferenceMeeting/Interview
07:13
Computer animationMeeting/Interview
08:19
Lecture/Conference
09:41
Computer animationLecture/ConferenceMeeting/Interview
10:46
Computer animationLecture/Conference
12:14
Computer animationLecture/ConferenceMeeting/Interview
13:34
Computer animationMeeting/Interview
14:53
Computer animationLecture/Conference
15:50
Computer animationLecture/ConferenceMeeting/Interview
17:41
Computer animationLecture/Conference
18:55
Computer animationLecture/Conference
19:53
Computer animationLecture/ConferenceMeeting/Interview
20:56
Computer animationLecture/Conference
22:06
Computer animationMeeting/Interview
23:05
Computer animationLecture/ConferenceMeeting/Interview
24:23
Lecture/ConferenceMeeting/InterviewComputer animation
25:52
Lecture/ConferenceMeeting/InterviewComputer animation
27:44
Computer animation
28:54
Lecture/ConferenceMeeting/Interview
30:26
Computer animationLecture/Conference
32:20
Lecture/ConferenceMeeting/Interview
33:21
Computer animationMeeting/InterviewLecture/Conference
36:23
Computer animationLecture/ConferenceMeeting/Interview
37:25
Computer animationLecture/ConferenceMeeting/Interview
38:31
Computer animationMeeting/Interview
39:35
Computer animationLecture/ConferenceMeeting/Interview
40:30
Computer animationLecture/ConferenceMeeting/Interview
41:34
Lecture/ConferenceMeeting/Interview
42:47
Lecture/ConferenceMeeting/Interview
43:47
Lecture/ConferenceMeeting/InterviewDiagramProgram flowchart
44:52
Computer animationLecture/ConferenceMeeting/Interview
45:56
Lecture/ConferenceMeeting/Interview
46:58
Computer animationLecture/ConferenceMeeting/Interview
48:05
Computer animation
50:00
Lecture/ConferenceMeeting/Interview
51:10
Lecture/Conference
52:16
Meeting/InterviewLecture/Conference
53:40
Meeting/InterviewLecture/Conference
54:42
Meeting/Interview
56:35
Meeting/Interview
58:39
Meeting/Interview
01:00:30
Meeting/Interview
01:01:29
Meeting/Interview
01:02:43
Meeting/Interview
01:04:40
Meeting/InterviewLecture/Conference
01:06:01
Meeting/InterviewLecture/Conference
01:06:57
Meeting/InterviewLecture/Conference
01:07:59
Meeting/InterviewLecture/Conference
01:09:08
Meeting/Interview
01:10:08
Meeting/Interview
01:11:15
Meeting/InterviewLecture/Conference
01:12:12
Meeting/InterviewLecture/Conference
Transcript: English(auto-generated)
00:00
That will be now very difficult after this wonderful speech by Jean-Claude Juncker to go to the next step. But I warmly welcome you to the scientific session we have today. You know, yesterday was all about the last 20
00:21
years of the EMU. And today, we are going to discuss and talk about global regional trends that are likely to shape the EMU in the future and the lessons we can take away from that. I'm pretty sure when we are talking
00:41
about the future of the EMU, we all think about sustainable growth. We think about high employment. We think about price stability here in this room. For sure, that will be key to the success of the EMU in the future. And a number of trends, such as aging societies,
01:02
wage polarization induced by globalization and digitization, and an ever more complex international environment might have an important impact how we can reach, when we can reach the successful outcome.
01:21
So the paper in this session, and we will divide the session into two, they focus on a particular trend and what they imply for the economic and financial structures with a strong focus on the consequences for the EMU. And the first part of the session,
01:42
we will do together with Laura Alfaro and Gianmarco Ottaviano. Laura Alfaro is a professor at the Harvard Business School and a former minister of national planning and economic policy in Costa Rica. And she will discuss the role of industrial clusters,
02:04
Silicon Valley in the US being one of the most famous one, and always mentioned as an example. And her paper will be discussed by Gianmarco Ottaviano, who is a professor at Bocconi University. After the 25 minutes of Laura and the 15 minutes of Gianmarco,
02:24
we will have a short round, like always, with Q&A coming from you, and I hope for a lively discussion. And then we will do a break, and then we move on with another paper, but that for later. So Laura, the floor is yours.
02:55
First, let me thank the organizers for this great honor. It's an honor to be here celebrating
03:02
20 years of the euro. It's also a great pleasure to come back to this amazing country and this beautiful city, a country that always has great food and also very friendly people. In a way, it does remind me of home. This is co-author work with Maggie Chan and Harald
03:22
Fadinger. It is a little bit more micro, and it's building on some work we had done before that we're trying to extend to Europe. So of course, comments are more than welcome. Let me give you a little bit of a background. In many ways, we have been witness
03:44
to this great explosion of cross-border flows of capital goods services. I actually consider myself to be a globalization child, born in one country, marry a person from a different country, and working in a third country. And these changes have been the outcome, of course,
04:02
of technology changes, reductions in transportation costs, of course, reductions of barriers, but as was mentioned, also political will to implement many of these changes. And these changes have the potential to change the industrial landscape of countries.
04:21
And this is particularly the case in Europe that has been predicated in an integration of capital goods, services, and people, and in particular, the euro area that has a more integrated capital markets. This globalization has been led by what has been called superstar firms.
04:42
And depending on the setting, they tend to mean different things, a term was coined in the 80s. But in general, it relates to these very large productive firms, many times with complex production processes, that they have led the globalization process.
05:02
In many ways, they are the responsible for this cross-border of capital goods and ideas. And what is interesting about this phenomenon of the superstar firms is that it relates to what might be seen as a paradox in globalization. If you think about it, transportation costs matter.
05:24
Transportation costs broadly define as the cost of transporting goods, but also ideas. Because of that, location matters, and distance matters. So firms are going to choose where to locate, and this location of firms will affect productivity
05:43
and will have additional potential benefits. So firms like to locate closer to customers, close to suppliers. This may lead to more thicker markets, more availability of, again, thicker relations. This may also help workers.
06:01
You may want to specialize in certain activities. If your firm doesn't do well, you can go to another firm. That is also true for firms. They can specialize in different products because they can find the workers in case something happens. It's also the case for capital goods.
06:20
You can have thicker markets in capital goods, but also it allows to exchange ideas. So the reason we still come back to these conferences is because there is ideas generated when we interact with other people. However, economic integration should diminish these benefits
06:41
if you want of being close to each other. That is the idea of getting rid of barriers. You should be able to move goods, people, and ideas across borders, and also IT and communication technologies should allow this to happen. So in a way, we should be able to have this conference via Skype. But again, this is the interesting paradox
07:02
of globalization. We see that firms still dominate, industrial clusters still dominate. And this is interesting because there is more intense competition when we locate to each other, but there are also costs. Workers might be more expensive, and locations
07:20
might be more expensive. So this is what we're going to try to do in this paper. We're going to explore the industrial landscape through the eyes of firm heterogeneity. So we know now that firms are different. And I mentioned here the work by Hellman, Melitz, and Gipley,
07:42
but there's many papers that have now documented that firms are different. And so we're going to explore the implications of these firms being different in terms of that geographic allocation of economic activity. So we're going to examine how the degree of agglomeration relates to firm attributes, productivity, complexity, age,
08:04
and regional characteristics. And so what we're going to try to do is differentiate what relates to these firms being different and this cost-benefit analysis of proximity relative to regional variables that make it worthwhile to locate in different locations. And we're going to do this comparing the US.
08:24
And we're also going to compare US with Europe and within Europe, the eurozone and non-eurozone. And we're also going to extend to crisis and non-crisis countries. So the questions we want to answer is, is there agglomeration around highly productive firms?
08:42
Is this driven by multinationals? Is there any other characteristic, in addition to firm productivity and firms being global, that may affect this agglomeration? What is the role of regional characteristics? Does the euro area look similar to the US?
09:03
And what are differences? We think the euro area. To do this, we're going to build on a micro index. This is a methodology that was introduced by Durotan and Overmann in 2005. And I have used it in previous work.
09:21
This index has the advantage that it treats space as continuous. And it allows to analyze firm level characteristics. This is done by using the location of the firm. And calculating bilateral distances across different pairs of firms.
09:43
So based on this index, we're going to assess what is the role of firm characteristics and what is the role of regional variables. To mitigate concerns related to causality, we're going to look at agglomeration of new entrants
10:01
around an incumbent. So we're going to look at a firm. And we're going to see how new firms locate around these existing plants. And we're going to measure the distance related to these new plants. This allows us to consider some of the reverse causality that
10:22
may be associated with location. And also, we're going to do the analysis at the regional level to control for regional characteristics. We're going to employ a firm level data set that I have used in previous work. This is the DMB data set.
10:40
The advantage that this data set has is that it has a very detailed location of the plants, where plants are located. And so we're going to use this information to calculate the index. And based on this index, we're going to analyze. We're restricting the analysis right now to manufacturing firms.
11:02
Some overview of our findings so far is related to this work that has looked at firm productivity and firm heterogeneity. We do find that firms are different. We do find that there is a clear hub-and-spoke structure to how firms are located in terms
11:21
of their geographic concentration. More productive, larger firms are more centered by other firms. And these smaller, less productive firms like to locate relative to these larger firms, which is suggestive evidence that overall, they find benefits of locating relative
11:40
to more productive firms. In relation to potential costs, as I mentioned, it could be that land is more expensive and workers are more expensive. We find greater agglomeration within the eurozone. We also find that multinationals and productivity play a greater role in the Euro area.
12:02
We find differences following the crisis, in particular related to some of the big crisis countries. And we also find that regional attributes play an important role in agglomeration, depending on the specification, up to 70% of these differences.
12:21
So why does this matter? We looked at the relation between agglomeration and growth rates. This is, of course, not established in causality. This is just a correlation. But we found a very strong correlation between agglomeration and growth rates in Europe.
12:44
In the Euro area, we did this controlling for regional characteristics. In the Euro area, one standard deviation in density leads to approximately six standard deviation differences in growth.
13:00
It is 3% in non-Europe countries. Now again, this is not established in causality. This is more a correlation. And it turns out that in the US, the correlation is actually the opposite as we document in the paper. But at least in Europe, there seems to be still a very strong correlation
13:20
in terms of agglomeration and growth rates. In the paper, we also mentioned the literature. There's a long literature in trade and development that has analyzed the effects of agglomeration. My discussant has contributed to this literature.
13:41
And the reason we want to stress the literature is because it does present this evidence that agglomeration does relate to productivity. And it does relate to innovation. The literature has also documented differences between Europe and the US. What is interesting is that the US, there's now a tendency for grading concentration
14:01
that actually seems to be a negatively affecting investment. There's also a long literature, perhaps coming from the development world, looking at the role of firms in jump-starting economic activity. And here, there is work that has looked at the role of big firms,
14:21
and in particular multinational firms, which is where I come from in this project. There's a lot of work that has looked at the role of multinationals in jump-starting development in different countries, in general finding positive effects, but very conditional on local conditions.
14:41
As I said, so what we're doing in these papers, we're gonna examine micro-patterns and try to exploit firm heterogeneity. So in the paper, we present the methodology and the data. We present preliminary stylized facts. And in the concluding remarks, I will mention preliminary implications.
15:02
Let me stress the word preliminary, and also future work that is important to follow up. I don't wanna spend too much time in this part, but some background. It turns out that measuring spatial concentration
15:23
is a complicated exercise, complicated by many reasons, but one is that space is continuous. We use this DO index that has the advantage that treats space continuously, it treats space as a continuum, and has the advantage that allows
15:42
to think of counterfactuals and controls for location factors. So very general, the index exhibits different properties. It's comparable across industries, controls for overall location patterns of manufacturing for industrial concentration,
16:00
is unbiased respect to scale, and has an indication of significance. So all these advantages allow us to compare across countries and regions. The methodology involves different steps. In the first step, we calculate the geographic density
16:21
for each establishment in each industry. We look at bilateral distances from each incumbent to new firms. Then we calculate a counterfactual density, and then we aggregate densities. We can aggregate at five kilometers, 10 kilometers,
16:40
50 kilometers. In our work, we present results around 50 kilometers. Just to go a little bit more detail, as I said, we first start by calculating the bilateral distances, all the establishments, the new establishments relative to incumbents. This is just to give you an idea of the volume of calculation that is requiring
17:03
in this methodology, which is all perhaps the drawback of the methodology, the computational burden. Because of noise, we smooth the distribution. We limit the analysis to three-digit manufacturing, as I said, because of the calculation burden
17:22
of the methodology. In the second step, we calculate the counterfactual. There's many ways in which one can calculate counterfactual. Here, we're benchmarking against the mean kernel estimates at each industry. And in the last step, as I said,
17:41
we add the densities at different thresholds. In the paper, we present results for 10 kilometers, 20 kilometers. One can calculate also higher distances. We present results around densities of 50 kilometers.
18:01
We exploit the firm-level data set. We have different vintages of this data. I'm gonna present results around 2004, 2005, which is before the crisis, a little bit after the adoption of the euro, and then we look at the data, a recent vintage of the data. As I said, we're gonna limit the analysis
18:20
to three digits. Foreign ownership is calculated looking at firms that produce in one place, but headquarters are located in a different location, and we are going to look at productivity, labor productivity calculated using employment and sales.
18:41
We use geocoding data. Europe has made available the geocoding of many locations, so we exploit this information and we complement with additional sources. We calculate distance using the Havers-Sein formula, and as I mentioned, we limit to manufacturing firms.
19:04
We exploit the availability of regional data that Europe has made available. We use nuts to level different information, population, economic activity. Schooling measures the number of people
19:21
with more than a high school degree, R&D expenditures. We also look at tax policy, whether it's urban or not urban. Europe has made available different data at the regional level. We compare with the US data, and we also use different sources for the industry information.
19:43
So the empirical procedure is we're gonna have an estimate of our density. As I said, we're gonna look at it at 50 kilometers. We're gonna have different measures of performance. We're gonna control for industry characteristics and regional characteristics.
20:02
So are firm characteristics important in explaining agglomeration? So for this, we're gonna look at our density measure. We're gonna use labor productivity as a measure of performance. We're gonna control for the age of the firm,
20:21
and we're gonna control for whether this firm is engaged in different activities if it's a multi-product firm, which we take as a proxy of complexity. And we're gonna compare results for the US and within the non-euro zone countries.
20:41
So what we find is that, indeed, firms like to agglomerate around more productive firms. So again, this is perhaps another result related to this growing evidence that firms are heterogeneous and that this has different implications.
21:02
So firms overall prefer to locate close to more productive firms. It turns out that we find that this is stronger in the euro area relative to non-euro countries. And in fact, it's three times more important in the euro area relative to non-euro countries.
21:24
We also find that there's a positive relation with age. Firms like to locate closer to older firms, but they also like to locate closer to more complex firms, again, using multi-product as a proxy for this complexity.
21:42
And the difference between what we find in the euro area and non-euro area is quantitative and statistically significant. Then we look at whether there is non-linearities related to being a superstar firm. In particular, the way we calculate superstar firms,
22:01
and there are many ways that one can calculate it, is the firms that are at the top 5% of the distribution within each region. We play with different ways of calculating superstar firms. We also looked at 1%, but this is the definition that we use for superstar firms.
22:21
And what we find is that there is, interestingly, more agglomeration around these even more productive firms. This tends to be the case in particular in the euro area. So firms locate close to productive firms, but they tend to locate even more close to more productive firms.
22:43
So one question is whether this is driven by multinationals, which tend to be, if you want the poster child of the large productive firms. So we control for whether a firm is a multinational, and indeed we find that there is agglomeration,
23:00
important agglomeration around multinational firms, but firms still locate close to super-sized firms. And again, this is particularly the case around euro countries. So we find that there's more agglomeration
23:21
around productive firms, there tends to be agglomeration around more productive firms, the effects tend to be non-linear, and we also find that multinationals play an important role in this process. What is the role of regional characteristics? So we control for many regional characteristics.
23:40
One thing to say that many of these variables are very correlated when we look at the role of GDP, education, R&D spending, population, all of these variables tend to be very correlated, and so it's hard to disentangle the particular effects of each one of these variables. One that seemed to have a particularly interesting result
24:03
was the R&D spending. This is R&D spending that is a mixture of public and private. So firms do locate in regions that tend to have more public and private R&D, particular in the eurozone area. In general, regional characteristics do account
24:21
for most of the agglomeration in terms of explanatory power. It could be from 30 to 70%. We looked at other variables. One was tax policy. Yesterday, there was a lot of mention of tax policy. We didn't find significant results of tax policy. It could be more that the measure is not detailed enough,
24:42
but we didn't seem to find particular effects of tax policy. This tends to be related to the fact that many places that do have higher taxes also do offer more benefits to firms, and so that doesn't seem to be an effect related to tax policy.
25:02
Perhaps a related question is, can regional policies foster agglomeration? And again, establishing causality, it's a little bit more complicated, but we looked at interaction of some of these regional policies with productivity, and interestingly, when we look at superstar firms,
25:23
what we tend to find, and again, is there is a level effect of better fundamentals, but the interaction with supersized firms is negative. The way we interpret this result is that better location fundamentals can be seen as a substitute for requiring
25:40
to be located to more productive firms. So better locations can provide some of the benefits that firms seem to get from some of these supersized firms. Again, so we do find that higher R&D plays an important role in agglomeration in Europe, in particular in the Eurozone area,
26:01
and a better location can, if you want, lower the gains or incentives to locate closer to these more productive firms. Has the agglomeration patterns changed in the Euro and non-Euro countries after the crisis?
26:21
And what we do here is we look at the new vintage of data, and we also divide countries. We use Euro crisis countries as Ireland, Greece, Italy, Portugal, and Spain. And here, what we found is that in terms of productivity, there's still firms who want to agglomerate
26:41
close to more productive firms. It changes in non-Euro countries. Perhaps what is more interesting is that the effect of supersized firms diminishes after the crisis, and in particular, when we zoom into crisis countries, we find that patterns start to change. So using other data sets, we try to understand
27:02
this result that Euro crisis countries were a little bit different. A lot of the differences are driven by Greece, which had a very severe crisis, and some of the effects have not been reversed. Spain was interesting.
27:20
Even though Spain had a severe crisis, Spain actually has managed to recover in many ways. So the country that was really driving some of the more different results is Italy, which in many ways is a complex country. There has been this sluggish recovery
27:43
or slow growth in Italy. It's also a very complex country in terms of the regional differences. In fact, we find that in Italy, now firms tend not to agglomerate closer to older firms, perhaps a symbol of some of this lack of dynamism.
28:00
So we find that firm characteristics play an important role. So more productive firms are not only responsible for a lot of the economic activity, they tend to have positive spillovers to smaller firms. Again, related perhaps to the more complexity
28:21
of these firms that allows them to engage in externalities of different kinds with smaller firms. Regional attributes play an important role. Better location fundamentals, if you want, could weaken the incentives or the need to locate to more productive firms.
28:40
Again, speaking of the interplay with local policies, and even though we see this greater movement of goods, capitals, and ideas, we continue to see the dominance of certain firms, in particular, these more productive firms.
29:02
Preliminary policy implications, all this research related to firm heterogeneity does suggest that one size fits all policy is perhaps not the optimal policy. And I say this with a little bit of care, because of course political economy matters.
29:22
I come from a region that when you start to do targeted policies, one does need to worry a lot about capture. And so again, I say this being careful, one needs to think about what are the cost benefits of doing more targeted policies relative to potential of capturing.
29:41
At least in my country, we call it the hairy hand, a la mano peluda, that tends to take some benefits from one place to the other. But the policies does seem to suggest that one does need to target more productive firms. They will tend to create better business environment
30:02
and attract other smaller firms and allow them to grow. I know that there's a lot of emphasis on small firms, but we want the small firms to grow, and it seems to, when we locate or they locate to more dynamic, larger firms,
30:21
this process tends to happen. And so again, one does need to consider the role of these more productive firms, but also think of the role of regional policies that at the end of the day do explain a lot of this agglomeration. So again, location fundamentals matter
30:40
and a better business environment does allow firms to foster. Future research, of course understanding the mechanisms in which firms attract and other firms benefit from this interaction, whether they're complements and substitutes. One in particular is the role of private R&D
31:02
relative to public R&D, and in general, public policies relative to the ones within the boundaries of the firm. The other is we do find a lot of agglomeration around capital-intensive firms, in particular in the eurozone area, which is suggestive that there is an important activity
31:22
around capital goods externalities. And so one has to think whether we should pay more attention to the regional, local capital markets, but also the role of lending to underperforming firms. So we worry many times about saving firms because of employment and linkages
31:42
related to suppliers and customers, but one has to think of the implications in terms of cluster dynamism and whether it's a benefit in some other firms. I had a discussion yesterday that this is something that the region is worrying about, lending and evergreening loans.
32:01
Again, this might have negative effects in terms of cluster dynamism. And more general, we need to think how the rise in protectionism and the uncertainty associated with it may affect these industrial patterns. Thanks.
32:25
Very many thanks. Gianmarco, that I think was a wonderful transfer to your discussion now. Yeah, absolutely. So first of all, while I'm waiting for the slides, thanks a lot for giving me the opportunity, so thanks to the organizer
32:41
for giving me the opportunity to discuss this paper. I think this is a very promising line of research. It's really a paper that is providing a lot of new information. Using zillion of data points, and so this is really huge work going on by Laura and co-authors. So what I will do in this 15 minutes
33:03
is rather than summarizing what Laura and the others have achieved and getting into the technical details on the agglomeration index, I would like to broaden the scope and argue why a deeper understanding of agglomeration forces
33:20
and how these are related to other phenomena that are important nowadays, like the rise of superstar firms, the increase in markups, the increase in the unevenness of the distribution of firms in different sectors may be important for all sorts of aggregate outcomes.
33:40
So essentially the result, just to summarize this there, we have some establishments that are better than others. They're larger and more productive, and they tend to be associated to higher density of other firms. And this is a pattern that clearly could build up at the aggregate level in terms of clusters that have been,
34:02
as has been discussed by Laura. Why should we care? So as has been anticipated, there was a lot of studies, there were a lot of studies in the 90s that were very thin on data, but very thick on theory, at the time where the European Union
34:22
was planning the single market and then the implementation of the single currency. The underlying, if you want, real economy model that people had in mind at the time was a model in which if you have a trade liberalization, you're going to get all sorts of convergence. And so you would have also convergence across states
34:41
and across regions within the different nations. The theory challenge that was raised by Paul Krugman and others at that time was to show that once you're allowed to have big firms, meaning firms that have market power, then this neoclassical prediction of convergence may well go actually in the opposite direction.
35:01
So you could get agglomeration economies, you could get divergence, and therefore a challenge to have common policies even within countries. But for sure, the point of Paul Krugman was at the level of the European Union. Now, that literature was very thin in terms of data,
35:21
so at some point stopped, and people working on that stopped working on that. But now with this new data sets that Laurel and others are using, and things have really changed dramatically. So people are going back to that. So why should we care about all these issues of the origins of agglomerations and whether trade liberalization
35:41
and economic integration may lead to agglomeration? So there could be some issues that are obviously deeply related to economics. This is taken, of course, by the presentation that Laurel sent. And this is indeed what she was showing, that indeed agglomeration is associated to faster growth.
36:01
And actually, this is what you see generally, a pattern of longer centuries has been that economic development at the aggregate level has always been associated with increasing urbanization and clustering of economic activities. And we see that in China, for example, at this juncture in time. Now, there are also other reasons
36:21
why you would like to look at that, and these are related to the fact that no matter whether the mobility of people is restricted or not, you may have unequal outcomes for different people in different places. So people tend to be born somewhere, and where they are born has persistent implications
36:43
for their economic outcomes. We see that at the macro scale, global scale in terms of developing countries and developed countries, but we see that also in terms of regions within countries, and we see that also in terms of parts of town within our cities.
37:01
So agglomeration is also important because as immediate implications in terms of fairness of development or equal development of individuals, of people. But there are also other more pressing issues, if you think that issues related to chances, fair chances to everybody are not so pressing.
37:23
There are pressing political issues that can be easily understood in terms of the asymmetric distribution of economic activities. So by now there is a large body, or a growing body of literature that is trying to relate the regional distribution of economic outcomes
37:41
with electoral outcomes. It started with studies in the U.S., and the idea is essentially you liberalize, you're going to get shocks, and these shocks are due to liberalization or general liberalization are going to affect regions asymmetrically. And you want to measure,
38:02
if you want to measure the intensity of these shocks, so scholars like Otto, Ansel, and Dorn, they brought this idea that you could use some instrument, which is called the China shock, which is essentially showing how different areas are differently exposed to the competitive pressures of globalization.
38:24
And when you look at these things, you can actually predict fairly well, and surprisingly well, through this China shock electoral outcomes. So this is a map of the UK, darker means larger share of votes for Brexit, for leave.
38:42
And this, actually this is of the China shock, these are larger shocks from foreign competitions. And this kind of map can be associated with another map, which was the one I was mentioning of the votes for leave. And the association is pretty strong. Remember, this is an instrument. So these people that have studied this kind of stuff
39:03
can claim causation. So indeed, the China shock exposure to competition from low wage emerging countries is causing, as caused actually, this kind of outcome for the UK. And now you can move to continental Europe, and you could ask a similar question.
39:22
We didn't have a referendum for leaving the European Union or not, but we have, of course, several elections. And so other scholars have studied the effect of the China shock on the success of vote for the radical right, meaning, I mean, the kind of movements
39:41
that we see around Europe nowadays, and gathering support from the electorate. And this is the map of the China shock for Europe. And again, this map of exposure to foreign competition is something that predicts, if you believe in the instrument, again, the rise of the vote for the radical right
40:03
and protectionist platforms. For Europe, what is interesting is that on top of this globalization shock, you can build something similar, which is associated with the enlargement. So one could say, okay, it's interesting to know what happens
40:21
when you liberalize with respect to China, or maybe it's also interesting to see a similar shock and the asymmetry of this shock across regions associated with enlargement. And when you do a similar experiment, you're going to find that the Eastern enlargement shock is going to have a quantitatively similar effect
40:42
in terms of electoral outcomes as the globalization shock. So in a sense, if you want to understand from this geographical angle, the electoral results in Europe in the last years, well, to take into account the effect of competition in the Western part of Europe coming from enlargement
41:02
and competition coming from the rest of the world is a good start. Clearly, this is part of a broader set of events that are affecting the global economy, especially countries that are developed,
41:20
Western countries, as sometimes are called, because there are two big trends going on. So the first that has been called the great convergence by Richard Baldwin in a recent book is about the fact that, well, I will show you the picture so they're much more compelling than my words. The fact that the market shares, so the shares, this is in manufacturing,
41:42
across the world, if you compare G7 and other countries, have been reshuffled a lot in recent times. You see on the left, the share of world manufacturing, G7 versus, I would point out, China, of course, and on the right, the share of world GDP of the G7. So this is the idea of the great convergence
42:02
through the location, technological transfers, and local development. Well, there is a convergence at the global level. But then there is also what Enrico Moretti called the great divergence, which is local. So within countries, Western countries,
42:22
you see, and also other countries, but I'm focusing on those, you see a growing division of the economic landscape, so the location of economic activities Laura was mentioning, between dynamic growth centers and stagnating regions stuck somewhere in the past.
42:43
So this is a picture taken from the NASA website of the USA, just to give you visually what it means, what I mean when we talk about agglomeration. So here you have growth centers. You can try to remember this picture,
43:00
but because it will come back soon from another angle. And this is for Europe, and this is from the European Space Agency that for once has been cooler in creating pictures than the NASA. So you have this dynamic picture, this GIF that is showing us how
43:21
the pattern of agglomeration has changed from 92 to 2010, so essentially since the start of the single market to now. What is interesting about this picture is that you see, of course, more lights switching on, which is what you associate with development. So there's been clearly more development in these years.
43:44
At the same time, of course, it's more difficult to capture here, but what you see is that areas that were much brighter to start with, they become even brighter afterwards. So this is the idea of the great divergence that Enrico Moretti was pointing out.
44:01
And this is just, this blurred picture is just taken from one of the papers by Paul Krugman showing his blood on purpose, because I want to show that these things have been thought before when the single market was created and the Euro was introduced, and they stopped there because there were not much data
44:21
to discuss this sort of thing. So this idea that you have cumulacization and divergence. Now I would like to spend the last minutes to talk about another important thing that you can understand, or at least some aspects of which you can understand pretty well looking at the agglomeration distribution of economic activities.
44:42
So as you know, well, and we've been reminded of that even yesterday, there's been a change in the approach of the US to the global order. And in particular, from a trade point of view, well, after decades of pushing for lower global trade barriers,
45:00
the US have reversed, completed their approaches, their approach. And this is something quite important in the sense that what we've experienced in the last year or so is the largest return to protection is since the 30s with the Smoot-Hawley Act and it was reminded before the Nixon shock in the 70s.
45:24
So what is interesting is that, okay, we know that there are these trade wars going on, but there is a clear geographical pattern. So US tariffs so far have protected politically competitive counties, so where there is a close run
45:42
between Republican and Democrats, and retaliation has targeted from other countries has targeted Republican counties. So I've shown you before the map from space of the US. This is the map of the China shock for the US. So it seems quite similar, right?
46:01
Because where there are a lot of lights, but also in areas that used to be much lighter, with more lights in the past, you see one more intervention in terms of protection. So the geographical pattern of the China shock also can predict fairly well the reaction in terms of protectionist by the US.
46:22
So these are pictures that are showing now more detail with countries. The US increases in tariffs, and you see again, pretty similar to the map from space, and this is the reaction of the rest of the world. So it's pretty asymmetric.
46:41
You see the countries that are typically Republican are the red here, and these are the ones that have been targeted a lot, especially by China, not in terms you clearly cannot have trade policies against the region, but you can have trade policies against sectors that happen to be agglomerated in a certain region.
47:00
And similar information, you can get also in pictures that are easier to read because they're produced by journalists rather than economists. And so this is taken from the economist, but it is based on clearly a piece of scientific work of some young colleagues from the University of Warwick.
47:20
So what you have on the left are the tariffs imposed by the European Union as a retaliation against those imposed by the Trump administration, and on the right you see the same for China. So what is coming out is precisely picture
47:40
what I was mentioning before, that the retaliation is targeting the political support of Trump, and clearly the difference between the EU and China depends on what you import. If you don't import something, clearly you cannot put a tariff, it doesn't make any sense, so at least it's immaterial.
48:01
So you see, for example here, the agricultural tariffs imposed by China and the manufacturing ones imposed by the EU. And I will conclude with another piece of information on this kind of trade war and retaliation.
48:23
So what you have here is, again, from the same work I mentioned before, transforming more readable by the economist, you have on the left hand side, so what are these graphs? They're showing on the horizontal axis how much damage different packages
48:42
that have the same size in terms of value hit, the damage done to Trump voters, so we've seen the map before, and on the vertical one, the damage done to your own citizens. So clearly tariffs, despite some politicians
49:01
not seeing that, tariffs have always this double effect. They can inflict harm to others, but the price you have to pay is that you're arming some of your citizens. So what you see for the EU is that actually there is a trade-off there, so you would like to damage your enemy in this war.
49:22
At the same time, you would like to reduce as much as possible the damage for your own citizens, and this is what seems to be going on for the EU choices, so a trade-off between arming the enemy and defending your citizens. What is quite interesting, I think should give us some thoughts
49:42
about what is going to happen next is the approach of China, where instead what you see is that the choice of the Chinese has been to damage as much as possible the Trump voters with little consideration for the internal damage, and this interaction between a full-fledged democracy,
50:05
or democracies at least so far in European Union, an imperfect democracy if you want in China, this kind of interaction I think is something that will drive a lot the outcomes of these trade wars.
50:21
So having run out of time, thank you for your attention. Many thanks, Gianmarco. Laura, I'll give you the opportunity to answer perhaps a little bit if you wish to, otherwise I go into. No, just thanks for putting in context
50:44
some of the political ramifications of how geography matters, given that production is an industrial, production is particularly concentrated. Okay, so let's, ah, Lucrezia, please.
51:02
Well, this is very interesting, and I'm really, I'm out of my comfort zone because it's not at all my field, but I think it's potentially very interesting for policy what you have to say in Europe about the stuff about agglomeration in particular. So what I learn is that agglomeration is good for growth,
51:25
and that there is a lot of persistence in these clusters. In fact, if you look at the map from the satellite map of Europe, you know, the intense zones where there is a lot of light is the couloir de Charlemagne,
51:42
so it's still the advanced Europe a few centuries ago. So, and this is exactly the problem, that the euro, instead of favoring more regional equality, created more regional inequalities, and we know that inequality at the regional level, the regional, not national level,
52:00
is an important vehicle of inequality. So in a way, this is the opposite of what the optimal currency area, which is more what macroeconomy stress, you know, happens. You know, in the optimal currency areas, the idea was you want more mobility so that, you know, this will smooth the shocks, and that would be good, and so on,
52:22
but now with more mobility, we have seen more inequality so, or more inequality because of this, you know, tendency of agglomeration in areas which have complementarities of different factors of production, more human capital, and so on. So from the policy point of view, okay, so this is a policy conference, so what should Europe do? Should we favor special zones
52:41
in southern Italy and eastern Germany? Should we, you know, create, you know, these clusters, you know, with active policy, or should we just let the market work? Let me collect some other questions, too. I saw at least, yeah, somebody at the back, exactly.
53:03
Thank you, Shaheen Valley from the LSC. I have a question that follows from Lucrecia. If I understand correctly your presentation, you've established clearly that we have more agglomeration effects in the euro area than we have in the EU.
53:20
In the EU, we understood that we had these agglomeration effects, and we have policies to counteract them, and that includes structural policy and convergence policy, so we understood that we needed permanent transfers inside the EU budget to counteract agglomeration effects. In the euro area, where we have more agglomeration, according to your findings, we don't have such instruments.
53:41
Should we conclude from your work that you are suggesting that we might need permanent transfers inside the euro area to counteract these agglomeration effects? Many things. Another one? A follow-up question from that one.
54:01
I saw lots of lights on in the UK in the picture that we saw. Now, the non-euro zone country results are very, very strange. The coefficients are almost all the reverse of the ones in the euro zone, and the R squared is twice as high, so you wonder how robust those results are,
54:21
and I particularly wonder whether, if you exclude the UK from the non-euro zone countries, do the results change? Many things. So, let us try to answer the first three ones, and then we take another round. Jarnes, for sure. Rowan? So, we played a little bit. Let me start with the last one,
54:40
and a lot of the, if you want, counter-intuitive results come from what was formerly Eastern Europe. So, UK behaves a little bit more normal, except that the UK also has a lot of regional agglomerations, and in fact, they do correlate very well with the Brexit vote.
55:02
To the bigger question, on this role of agglomerations, so my discussant actually is an expert on this, and he has produced many documents on this subject, so I think it's also good to hear from him. I started by, this is a little bit of a paradox.
55:20
Globalization was not meant to make location so important, so that's why I think there is a lot of revival of this literature that was very much involved in the 90s, not only because we have data, but mostly because it is a paradox. Location was not supposed to matter. We, again, we could have had this conversation via Skype.
55:42
We still choose to come, because we have realized that proximity matters. In the world of, in the world led by more high-skill activities, it seems agglomeration matters even more. The possibility to specialize in very complex activities buoyed by firms and by people
56:02
means that you do wanna locate in cities to be able to, if you wanna ensure some potential shocks. So it is a paradox of globalization. The solution is complex because it involves politics, and let me say it before I get a finger, like yesterday,
56:26
because it seems to be having political effects. If one wouldn't worry about many of the political implications, one does want successful places to be more successful, and one would want people to be able to move
56:43
to those successful places. But the reality is that that doesn't happen, and many times for political reasons. So let me give you an example of my country, not to create any different sensitivities. I think this has to be approach
57:03
looking at the reasons why some regions are lagging relative to others. So in Costa Rica, there was a little municipality that used to be the place where you would stop in a way to the port. We have now a better road. This municipality is now not viable.
57:23
There is a major that wants many things for this municipality, including a university, but from an external point of view, this is a place that one probably thinks should not be dynamic.
57:40
There are other places for many other reasons. For example, the Atlantic in Costa Rica, that should be a viable place, and it's not viable for many reasons. The transportation is not great. We have problems with education. And I do think this is the approach that needs to be followed. One needs to think what are regions that are not viable because of their productive activity
58:02
is one that is not viable. And this, for example, happens in the US. For example, places where there is coal, one thinks they are not viable in the long run. For many reasons, one is also the demands of global climate change. But there's some other places because there is a lot still of population that one probably should have a more focused policy
58:24
in terms of revitalizing the area. And that probably does come through thinking what are the firms that are there that have hope to be able to become dynamic clusters in addition to thinking about
58:41
the related business environment, education, universities, so on and so forth. So I think, again, there is not one size fits all, and one needs to look at the different regions thinking about if they're viable or not and also potential political implications. So, Gianmarco, what do you think about a permanent transfer within the euro area?
59:01
Or what should we do in order to get more lively regions? So I have to thank Laura for leaving me the easy question. So, first, these optimal currency area literature, which is informing, actually, the entire framework,
59:23
this is precisely what Paul Krugman was criticizing at that stage. And so the point was really that these arguments on optimal currency areas, they are essentially grounded in frameworks in which firms do not have a market power.
59:42
And his point, and where you have constellators to scale, I mean, the standard models that we all know. His point was precisely to say, well, if I just modify very simple, his models are, by the way, very simple. Just make some simple change.
01:00:00
introduce imperfect competition or increasing returns, and then the entire construction of the optimal currency area is going to change, and in some cases dramatically. It's a question of parameters, I won't get into this, but things could really change dramatically. Now that position in the 90s was not so relevant in a sense for the policy debate
01:00:25
in the end, because it was a theoretical possibility. And in the recent years, people have started to, having all this data and better computing power, started to go back to this, but this is really, really very recent. But still they shy away from the most extreme implications of agglomeration forces.
01:00:48
And this is first because the very few studies that in the 90s were looking at whether this kind of strong agglomeration forces were there, were not able to identify in a convincing
01:01:01
way the presence of the strong agglomeration forces. And the other is again that the kind of mathematics you need to talk about strong agglomeration forces is much more complicated because it's sort of non-linear, I mean things that microeconomists can do very well, but trade economists much less in a sense.
01:01:23
Should we have these permanent transfers? So the welfare analysis of this sort of model is typically finding that you have agglomeration benefits for those who can move and those that happen to be already
01:01:41
in the place where everybody wants to be. And this is efficiency enhancing at the aggregate level. At the same time, there is an issue of how you redistribute these gains because these gains are by definition in the agglomeration and how do you diffuse these gains to the other places. So the thing that people at that time were after was exactly say, okay, you just
01:02:05
need to redistribute this, there's usual stuff, there are winners and losers, and then you just redistribute the additional gains. And this is, I mean, this is also in the old models of international trade, you liberalize someone, gain someone, losers, but benevolent government can always redistribute.
01:02:22
The point is that politically this is not working. There are these funds for compensating the losers from agglomeration in Europe. In the U.S., the people that have analyzed the effect of these funds, they find examples that they are really small compared to the shocks and exposed and not being
01:02:43
used that much. So they are notional in a sense. So the point is that if you introduce a mechanism of redistribution, which is a typical fiscal transfer that you have within states and you attach that to the European Union, I think this is politically not going anywhere.
01:03:02
There might be something that is more related, I mean, clearly the fund for globalization sounds much better than German taxpayers subsidizing Italian taxpayers, which is, I mean, this in terms of sending it to the crowd. So there might be room for funds that are specific, but, I mean, the details
01:03:25
of this requires also a lot of deep knowledge in ION designs of these schemes. So that's the point. The last point, should we have special zones in the south of Italy?
01:03:42
This sort of economic engineering has not worked very well in most places where it has been implemented. Yes, I mean, China, the point that we are going back to the picture I've shown, the logic of the political logic is completely different, so in the
01:04:02
sense that you don't have to gather democratic support when you spend the money of the people for some specific areas or parts. So I'm not, I mean, at this point in time, I'm not clear ideas on that, so for sure in China it worked, but it worked in a framework that is completely
01:04:22
different, and I'm not sure that in our countries this is something that we can implement in the same way. What we've implemented in the market economies has not worked in the way we hoped for in most situations. Any thanks.
01:04:41
Christina, do I get another 10 minutes? Because I promised a second round, at least, of two questions. It's five minutes. Okay, Yanis, and here, and the rest, I'm very sorry, has to talk during the break, and I would ask you please to have a short question, and I ask you to have a short answer to.
01:05:01
Yanis. Thank you. Very impressive papers. I would like to bring the discussion in the Eurozone, and especially the divide between the core countries and the peripheries over the previous 20 years. Yesterday we had some warring diagrams by Mrs. Sebnem Kalimli, which
01:05:24
saw the divergence both in income per head and total factor productivity between the core countries and the periphery countries, so can we say that this is part of the agglomeration effect, or was it part of the asymmetric
01:05:41
adjustment in the current account during the crisis? Also lessons from the adjustment that might have affected real convergence was the fact that we liberalized the labor market first and product and services market later.
01:06:01
That had a negative impact on income per head. So can you control in your model for policy effects from the agglomeration effects, or can we ask whether the agglomeration effect negates the neoclassical forces, like beta convergence?
01:06:20
Thank you. Many thanks, Yanis. Please. Yes. Andres Appir from Free University of Brussels and Brugel. Very interesting paper and discussion. The focus was very much on manufacturing. Now, I think before we draw a policy conclusion, I think we also
01:06:44
need to talk about services, which is, after all, the bulk of the employment. Now, agglomeration, I mean, there is agglomeration in services as well, right? There is the urban, sort of the large cities versus the smaller cities.
01:07:06
And when you look at the Brexit picture, it's very much the large cities versus the, not the countryside, but the smaller towns.
01:07:21
The same thing happened in the U.S. There's not one of the top 40 largest cities in the U.S. that voted Trump, not a single one. If you look in the U.K., there is only one large city that voted Leave. If you look in France, Front National, or the successor,
01:07:46
none of the large cities, Paris or the others, voted for them. So there is agglomeration, there is agglomeration of a particular kind, but it's not in manufacturing, it's in services.
01:08:03
So I think the contrast between the large cities, where there is agglomeration but in services, versus the smaller towns, where there is agglomeration but in manufacturing, they are very, very different stories. So there is agglomeration, but there are different kinds of agglomeration
01:08:21
and I think one needs to distinguish between manufacturing and services. So I'd just like to ask you, how do you bring services in your story and what kind of difference it may make in terms of policy impact? Many thanks, André. Two minutes for each. So you're 100% correct.
01:08:41
The analysis we have done is manufacturing. If we add services, there's even more agglomeration. Perhaps the literature has not studied services as much. Out of data restrictions, we continue to have, as economies and also data gathering institutions, a bias towards manufacturing,
01:09:01
but indeed services is 70% of most economies and I do think we need to do a better job in collecting data for services. If we were to add services, there would probably be more agglomeration than the one we have. But that also limits a little bit the implications in terms of what I can say,
01:09:22
what is driving this convergence relative to yesterday's session because a lot of growth is coming from services. Having said that, there is a lot of persistence related to these manufacturing regions that were doing well. We see that continue to do well in terms of this growth
01:09:41
and it does explain some component of this convergence or lack of convergence. Gianmarco? Very, very quickly. There's two Yanis too. Yes, two Yanis too. I mean the identification of say agglomeration forces due to increasing returns and all this stuff and the standard adjustment that you would expect in models,
01:10:04
the standard models also with the perfect competition is an ongoing research priority. I mean this is precisely what killed that literature in the 90s that in the end, to make it simple, it was difficult to see whether what you observe
01:10:21
is the only equilibrium of a neoclassical model that is subjected to shocks or is a shift to another equilibrium of a model with nonlinearities. This is what killed the thing in the 90s. Nowadays, people have better tools. They may be able to sort this out, but we are not there yet.
01:10:41
In terms of services, more city, big city, this is really a crucial dimension at least from the political point of view as you mentioned, but also it's interesting in terms of structural change because a lot of these cities were manufacturing centres before or at least not in the city but just outside and they managed to successfully transition
01:11:02
from centre of excellence in manufacturing to service centres. The small cities instead, they didn't make this transition and so maybe they were in industrial clusters, serving these industrial clusters, but they didn't become service hubs, especially of high-end services
01:11:23
and so this is indeed a big challenge. Okay. Well, I think I have to close down. We could talk or discuss for another hour, I'm pretty sure. Let me just add that I get it that one size fits all is for sure not the correct thing,
01:11:42
but we had a clean slate or state in the 90s with East Germany and when you look into the development of East Germany with the south having agglomerations and being quite successful and the north with all the transfers still being very underdeveloped,
01:12:00
there is for sure a lot of need to think about how to put a transfer into a very sensible and successful way and probably better than we did in the last 20 years, but this is for the politicians to discuss too,
01:12:21
but for us to perhaps hear their advice, so perhaps in the break which is coming now and shall we be very disciplinary to shorten it? Yeah, to come back. If we shouldn't, we don't have one. A little bit, drink the coffee a little bit quicker than usual and use afterwards the lunchtime to discuss some politics about it.
01:12:44
Perfect. Thank you very much. Many thanks to my presenter and my discussant, Laura and Jean Marco.