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Although interest in spatial growth regressions has been growing in recent years, formal theoretical approaches that acknowledge the role of space in economic growth have been sparse. In particular in a regional context, the assumption of independent, non-interacting closed economies can lead to misinterpretations. This book fills the void by discussing neoclassical growth theory in a spatial context, in order to examine growth both theoretically and empirically in a system of N regional economies. A formal model is presented that allows for interregional fixed capital relocations, which are in turn determined by the economies’ relative locations in space. It is shown how initial endowments with human capital play a decisive role regarding the evolution of output, and how both convergence and divergence processes may occur. Using a spatial econometric model specification, the theoretical model is tested empirically for 255 European regions.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract
Some decrease, others persist or even widen: regional disparities continue to constitute one of the major challenges for European economic policy. The accession of twelve countries to the European Union (EU) on May 1, 2004 and January 1, 2007 has led to two major statistical effects, namely a decrease in the gross domestic product (GDP) per capita of the European Union, and an increase in the gap between the most and the least developed regions. The relative importance of structural policy is reflected in the financial allocation in the current financial framework for 2007–2013: of a total budget of 864 billion euros (price-level of 2004), 308 billion euros are set aside for cohesion policy (European Council 2006, Article 19). Of these, 251 billion euros (European Council 2006, Article 19) are provided to “promote growth-enhancing conditions and factors leading to real Convergence for the least-developed Member States and regions” (European Commission 2006, p. 2, upper cases in the original), of which 153 billion euros are destined for the twelve new member states and their regions (European Commission 2006, p. 3).
Sascha Sardadvar

Theory Of Economic Growth

Chapter 2. Neoclassical Growth Theory and Standard Models

Abstract
Thoughts and theories on economic growth can be traced back to the classical economists of the eighteenth and nineteenth century, whose works are briefly reviewed alongside the transition to neoclassical growth theory in Sect. 2.1. The basic outline of neoclassical growth models as first developed by Solow (1956) and Swan (1956) is presented in Sect. 2.2. The familiar but nonetheless special case of a Cobb-Douglas production function is examined in Sect. 2.3 in connection with the derivation of steady state levels of factors of production and output. Finally, Sect. 2.4 examines the inclusion of human capital as an additional factor of production and provides a note on endogenous growth theory.
Sascha Sardadvar

Chapter 3. Growth Models with Spatial Externalities

Abstract
Although it is widely acknowledged that interaction between economies has a decisive impact on economic development, there have so far been only a handful of attempts to implement space into theoretical models of economic growth, two of which are discussed in what follows: Sect. 3.1 presents a model that examines the incidence of knowledge spillovers from neighbouring regions within the framework of the Solow model. In Sect. 3.2, a spatial enhancement of the Solow model for N economies is reviewed, along with a brief discussion of approaches that refer to the Verdoorn Law.
Sascha Sardadvar

Chapter 4. Convergence: Theory and Evidence

Abstract
Considerations on growth theory inevitably raise the question of whether different economies converge to each other in terms of output, income, or related measures. Interest in cross-country disparities of wealth and their causes is omnipresent in international politics. In fact, the issue has become so important that it is now officially a major objective of the European Union, as discussed in the Introduction. Although there exist various definitions of what constitutes convergence, this study will refer to just one definition of convergence, which combines two concepts:
Sascha Sardadvar

A Model Of Regional Growth

Chapter 5. Remarks on Regional Growth

Abstract
A model’s purpose is to provide insights about particular features of the world, which requires making simplifying assumptions. The usual procedure is to start with a very simplified model and then make it increasingly realistic; in the process, one comes to a more sophisticated understanding of the actual system (Krugman 1994, p. 53). Hence before starting, one must check what particular feature of the world is actually of interest if the context slightly changes. Section 5.1 reviews some approaches to regional development, including new economic geography. In Sects. 5.2 and 5.3, some particular features of standard neoclassical growth models are reconsidered in view of setting up a model of regional growth.
Sascha Sardadvar

Chapter 6. Structure of the Model

Abstract
To include the relative location in space in a growth model means that an economy’s performance no longer lies solely within its range and conditions, but rather also depends on developments and decisions made beyond its borders. This chapter lays out the study’s model, which can be described as a growth model of N regional economies with a neoclassical production function that includes human capital, and where physical capital mobility between regional economies takes place. The configuration of the model, that incorporates both N regional economies and their accompanying superordinate economy is presented in Sect. 6.1. Section 6.2 examines specific characteristics of the neoclassical production. Finally, the key equations of the evolution of factors of production are discussed in Sect. 6.3.
Sascha Sardadvar

Chapter 7. Evolution of Factors and Output

Abstract
The purpose of this chapter is to discuss the dynamic developments of the model presented in the previous chapter. In Sect. 7.1, the model’s long run solutions are derived, and it is shown that under the given assumptions, all regions converge to the same stable output levels in the long run. An eventual outcome, possibly beyond our lifetimes, may be of limited interest; for this reason, a number of medium run scenarios of regional growth are discussed comprehensively in Sect. 7.2. The model makes clear predictions concerning mutual interdependence, initial output levels and stocks of capital, which are derived formally in Sect. 7.3.
Sascha Sardadvar

Chapter 8. Implications for Output Growth

Abstract
In this chapter, the theoretical model is translated into an econometrically testable linear expression. In Sect. 8.1, it is shown how a Taylor approximation of the production function’s derivative with respect to time results in a differential equation, the solution of which is given in Sect. 8.2: after a considerable number of equations, the model’s complexities are reduced into one linear equation with clear conclusions. Finally, in Sect. 8.3, the model’s implications are summarised in connection with an outlook to possible extensions and future research.
Sascha Sardadvar

Empirics

Frontmatter

Chapter 9. Regions, Variables and Data

Abstract
The aim of this chapter is to find and discuss the data that fit the assumptions of the theoretical model within Europe, as well as to present some noteworthy statistics. Section 9.1 explores the European integration process, while Sect. 9.2 discusses the appropriate variable selection. Section 9.3 presents an explorative analysis and some initial conclusions that accompany the subsequent econometric analysis.
Sascha Sardadvar

Chapter 10. Spatial Econometric Specification and Estimation

Abstract
The theoretical model laid out in Part II can be directly translated to a spatial econometric model specification, with output growth as the dependent variable, and two explanatory variables, which are also lagged in space, thus making a total of four independent variables, and in addition there are a constant and a spatially correlated term. The method of ordinary least squares would cause inefficient results in such a specification, but estimation using the method of maximum likelihood overcomes this problem.
Sascha Sardadvar

Chapter 11. Testing the Theoretical Model

Abstract
The final chapter is devoted to tests of the theoretical model using European data for the observation period 1995–2004. They show how a fixation on the incidence of convergence processes may in fact distract from persistent and widening disparities: after presenting the results from tests of the theoretical model, it is demonstrated how these are related to divergence tendencies within subgroups of regions.
Sascha Sardadvar

Chapter 12. Summary

Abstract
The purpose of this study was to contribute to regional growth theory by acknowledging an economy’s relative location in space. At heart of this study is a neoclassical growth model, whose N regional economies are assumed to be big enough to exhibit constant returns, and where each region produces output from the factors physical capital, human capital, and technology-augmented labour. Together, these regions form one superordinate economy. While output in one particular region can only be produced from factors found within the very same region, all regions are interconnected and interdependent with respect to the evolution of output levels. In particular, the choice of location of gross fixed capital formations is viewed as a function of expected rates of return, which depend on physical capital’s current marginal productivity. It is assumed that investment decisions take place either within the originating region, or in its neighbouring regions, from which it follows that the development of a particular region is dependent on its relative location in space.
Sascha Sardadvar

Backmatter

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