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New economic geography, empirics, and regional policy

Listed author(s):
  • Joeri Gorter

    ()

  • Albert van der Horst

    ()

  • S. Brakman
  • H.F.L. Garretsen
  • M. Schram

There are doubts about the effectiveness of regional policy. Well known are the fruitless attempts of Italy to bridge the gap between the Mezzogiorno and the North, of Germany to bridge the gap between the Neue Länder and the West, and of the European Commission to reduce regional disparities in general. We validate one explanation: agglomeration advantages lock business activity in relatively prosperous core regions, even though wages – and thus production costs – tend to be higher there. We set off from the ‘New Economic Geography’, a set of general equilibrium models that focus on location choice. Theory, descriptive statistics, and econometric analysis support the conclusion that the European economic geography is characterized by a network of local and stable core periphery systems. This implies that disparities between core regions and their peripheries at a (sub) provincial level of regional aggregation are with us to stay, as regional policy targeted on peripheries tends to be insufficient to counter centripetal market forces. Moreover, even if such policy has an impact, it may be adverse, as core regions may benefit disproportionately in the long run. A focus of regional policy on local agglomerations, which have a realistic chance to hold on to economic activity, is therefore desirable.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Special Publication with number 56.

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Date of creation: May 2005
Handle: RePEc:cpb:spcial:56
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