Export demand models & cumulative growth

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Local & Regional Economic Analysis
Export demand models & cumulative
growth
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
1
Local & Regional Economic Analysis
RELOCE Lecture 3b
Last lecture: Neoclassical model of regional growth
This lecture: Demand models & cumulative growth
Aims



To introduce the export-led growth model and examine
cumulative causation.
To examine how the BoP constrains regional growth.
To look at other explanations of cumulative growth
Objective



To be able to understand the export led growth model and
cumulative causation
Be aware of the effect on growth of an adverse BoP
To be aware of other explanations of cumulative growth
and the links between industrial clustering and growth.
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
2
Local & Regional Economic Analysis
Difference between neo-classical and exportbased approaches
Neo-classical model argues that:
 DEMAND adjusts to SUPPLY thus it ignores demand aspects
- but it argues that a region’s growth cannot be constrained
by supply, where factors are freely mobile”
The export base modelling approach argues that:
 Capital and Labour flow into regions rich in natural resources
 Thus regions grow at different rates due to the uneven
distribution of resources
Still Need to Explain:
 Why Regional specialisation occurs? and
 Circumstances under which a region will continue to grow or
decline?
 Explanations are rooted in theories of comparative advantage
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
Heckscher- Ohlin Model
Export demand:
Export supply:
X  f (P ,Z, P )
d
x
s
X s  f ( Px ,W , Pk , R, C, T )
Xstemp
P
Xs0
Xs1
P1
P*
Xd1
Xd0
Y*
Y1 Y**
Y
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
Cumulative causation model (Kaldor).
 Model emphasises the cumulative nature of the growth
process
 Kaldor’s original hypothesis argued that growth in per
capita output is determined by a region’s ability to
exploit economies of scale and the type of activity in
which it specialises
 Thus manufacturing areas have more scope for
productivity gains than rural areas do.
 AND the process is cumulative since the advanced
regions have an in-built competitive advantage which in
turn will reinforce the region’s specialisation
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
Dixon-Thirlwall model
Regional output
growth
Invent,
Expend on
R&D
Rate of tech
change
P of cap
relative to
P of labour
Growth in
cap/lab ratio
Growth in labour
Productivity
Change in
P of Reg X
Does the
region prod
goods which
have close
substitutes?
Change in P
of subs
Change in
input
prices (W).
Growth in
Reg X
How much
do W
respond to
excess S/D
for L?
Change in
Y in export
mkt.
Regional and Local Economics (RELOCE) Lecture
Adapted from Armstrong and Taylor (2000) pp 95
slides – Lecture 3b
How income
elastic are
the regions
exports?
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Local & Regional Economic Analysis
Thirwall – Dixon model in algebraic form
q  a  y1
p  wq
(1)
x  b0 p  b1 p f  b2 z
(3)
(2)
y  x
(4)
By substituting into eq. 4 and re arranging terms
y   b0 (w  a)  b1pf  b2z  c 0b0y 1
y   y
0
1
1
y
In long-run equilibrium y = y-1
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b

0
1
1
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Local & Regional Economic Analysis
D + T model changes in equilibrium growth rate
yy
y
y
yy
1
yy **
y   y
*
0
y
*
1
y
1
1
y
1
y     y
0
y   y
*
0
y
*
y
**
1
y
1
1
1
1
Adapted from Armstrong and Taylor (2000) pp 99
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
8
Local & Regional Economic Analysis
Criticisms of the cumulative causation model
 Does not explain type of exports regions will specialise in
 Export Sector is ONLY source of growth (what about intra
regional trade?)
 Complexities of Verdoorn’s law are not fully explained i.e. how
does output growth lead to increased productivity?
 Empirical evidence to support the Verdoorn relationship is
controversial.
 Armstrong and Taylor suggest that the model ignores the
consequences of output growth on a region’s balance of
payments
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
Balance of Payments as a constraint on
regional growth
 Thirlwall (1980), Regional Problems are "Balance of Payments
Problems, Regional Studies
 BOP problems are disguised
 “Favoured regions" prosper exports high IED but imports lower
IED - feeds through to productivity gains - other regions find it
hard to get a foothold
 Krugman - causal relationship other way round output growth
determines export and import elasticities. Thus an increase in
factor supplies will lead to an increase in output growth.
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
10
Local & Regional Economic Analysis
Alternative explanations of cumulative growth
 The Verdoorn relationship is complex but also picks up on
economies of scale arguments also in growth pole theory
INTERNAL ECONOMIES OF SCALE
 Fordism – rapid growth – comp advantage – specialised
production standard product
EXTERNAL ECONOMIES OF SCALE (two types)
 Localised economies - Geographical concentrations of
plants with input-output relationships –nodal points
 Agglomeration economies - Geographical proximity of a
large number of economic activities
 See notes for examples of manufacturing input-output
linkages and innovation clustering (Audretsch)
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
New trade theory approach to regional
growth draws on cumulative causation
Three key propositions
 Existence of scale economies - single location
 Barriers to trade - locate near markets
 Agglomeration economies - cluster in some areas
Regional growth dependant on
 Cost of transport
Low labour costs
 Degree of agglomeration
Congestion
 See Amiti (1998) New trade Theories and Industry
Location in the EU, Oxford Review of Economic
Policy
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
Evidence of the economic benefits of industrial
agglomeration


Hanson (1998), North American economic integration and industry
location, Oxford Review of Economic Policy. Examines trade US and
Mexico - MAQUILADORAS
Head et al (1995), Agglomeration benefits and location choice: evidence
from Japanese manufacturing investment in the US, Journal of
International Economics. Examines why Japanese investors cluster
Empirical studies of cumulative growth process


Cheshire et al (1996) Urban economic growth in Europe: Urban Studies.
Examines the potential determinants of growth against actual
determinants of growth
Sun et al (1998), Economic growth and regional disparity in China.
Quoted in Armstrong & Taylor (2000) Key factors; favourable industry
mix; access to international trade; attractive to FDI; higher domestic
investment; attitude of government
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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Local & Regional Economic Analysis
Conclusions
 No universal agreement between economists about the
causes of regional growth disparities
 Neo-classical models stress the supply-side influences
on growth those that lack lack resources
 Keyensian models stress the importance of demand for a
region’s export commodities you need to make things
people want
 Cumulative causation models stress the selfperpetuating nature of the growth process, once it has
started & important role of productivity.
 Growth policy is on the agenda for policymakers as they
realise that regional policy has an important part to play
in spreading economic growth outwards from national
and international growth centres.
Regional and Local Economics (RELOCE) Lecture
slides – Lecture 3b
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