Saturday, December 29, 2012

The Impact of Odessa Sea Port on Agglomeration Tendencies in the City

The Impact of Odessa Sea Port on Agglomeration Tendencies in the City 

by Valeriia Sehstak

“The port is itself an existence of Odessa” Lanzheron A. (1763-1831) - former governor of Odessa, made the port of Odessa a free port (selling and storing imported goods with no customs duties) in 1819

The port of Odessa is one of the largest sea ports on the Black Sea and the Sea of Azov. It is considered to be the biggest passenger port on the Black Sea and a leader in cargo handling volumes among all of the 17 Ukrainian sea ports. The capacities of the port are such, that it can handle more than 21 million tones of dry and 25 million tons of bulk cargos every year. The passenger terminal is being used by roughly 4 million tourists annually. 

The port, stevedoring companies, other state and private companies related to the sea port activities, employ around 110,000 people. Given the aforementioned data, it is not hard to come to the conclusion that regional economics and the city prosperity and development are closely connected to this piece of infrastructure. This transport hub serves as a cluster of crewing agencies, logistic companies, building and wholesale trading firms, etc. In this regard one can see how the first nature conditions (the presence of the Black Sea) and the so called “one and a half geography” (meaning sea port as an infrastructure) can explain not only the fact that Odessa is one of the most developed cities in the whole country, but even agglomeration processes occurring throughout the whole history of the city, leading to the fact that Odessa became the regional center with more than 1,4 million people population of various nationalities and backgrounds.

The presence of port contributed to relatively high wages in the city, even despite the fact that Odessa is not the capital city of Ukraine. According to the data released in the end of 2011, the city not only has the lowest level of unemployment along with Kiev, but also has the highest level of relative wages if to compare with the cities similar population wise. Those effects can be partially explained by the presence of the sea port and high local market potential. However, here not only the local market matters. The city itself and the port have a rather crucial strategic location, as via using the port infrastructure and capacities, the region and the country itself are able to trade with 100 countries worldwide because of the transport lines that are eventually connected to 600 ports. The port also services ferries directly connecting the region with Greece and Turkey, two countries that also have a large market potential and have a spillover effect on the development of Odessa region.

However, I would argue that despite all of the benefits that the region gets from this piece of infrastructure and the market potential effect, the pace of development that can be extracted from this is far from its limit. The port cannot handle the economies of scale that arises with the development of shipping industry and especially a very rapid and far going growth from the Turkish side. Thus, major changes are desperately needed in order to benefit from the opportunities that globalization along with the extensive trading can give to the region and eventually the country itself.

One of the possible ways out has been presented by the U.S. Agency on international development, when the Plan for potential development of industrial zones and logistics territories has been introduced in 2011 and is supposed to be fully implemented by 2025. According to this development plan not only the capacity of the port will be considerably increased, but also a lot of industries and logistics companies will be established due to the port territory enlargement. The project will also require building new highways and roads and will create a lot of transportation hubs. The conceptual scheme of the whole enlarged area being under development can be seen on the picture below.

*The area that is currently being used is marked with orange circles; the rest should be built according to the 2011 Plan for potential development of industrial zones and logistics territories by the year 2025.

Thus, the enlargement of Odessa Sea Port will not only create enhanced clustering of the logistics and industrial firms nearby the port facilities, but will also enhance international trading in the region and create a basis for growing number of intermediate industries that will arise immediately after the port will obtain a bigger scale (such as maritime agencies, financial firms, etc.). According to the plan described above, the area will also have some space for non-commercial real estate, hence, enlargement of the facility will lead to the concentration of both enterprises and people in the area.

The benefits of such a development plan are clear when one refers to the New Economic Geography model, where larger scale and lower in costs trading in the sea port zone under development will lead to agglomeration tendencies. The city itself will also benefit and attract more firms and labor force; however, one should also take into account whether the activities of local authorities will be beneficial in terms of favorable business environment in the region.

Friday, December 28, 2012

Budapest: Central and Eastern Europe’s innovation hub?

Budapest: Central and Eastern Europe’
s innovation hub?

by Péter Csárdás

            A number of books and scientific articles deal with the evolution and functioning mechanism of clusters, but they fail to give a general definition which encompasses all aspects of these unique institutions. They agree however that a cluster is a great number of actors which operate closely together which grasps the essence of them: you know it when you see it. After the bust of Zsámbék, the „Hungarian Silicon Valley” whose story was discussed in this blog earlier, it makes sense to have a closer a look on a rather success story next door, namely the evolution of Budapest as an ideal location for IT giants as well as innovative tech start ups.

It all started in 1999 when the first building of Infopark was opened. The government and the private sector had a number of plans concerning the area between Petőfi and the then constructed Lágymányosi Bridge on both side of the river, and the establishment of the office park played a key role in the further development. In 2001 the new campus of Eötvös Loránd University (ELTE) was finished which together with the adjacent buildings of Budapest University of Technology (BME) formed a new center of scientific education in the Hungarian capital. 

These all fit well the seven determinants of a cluster: (1) it is spatially concentrated since the now eight towers of the park and the university campus are in walking distance from each other; (2) it is specialized, primarily for IT, telecommunication and software development companies. The cluster has diverse participants besides multinationals (3), including two universities, venture – capital companies, and now it hosts the European Institute of Innovation and Technology, an EU agency that was established in 2008 and choose Budapest for headquarter because of its leading role in innovation in the region. Furthermore, the participants compete and cooperate (4) with each other and now created a critical mass (5) of interests and ideas for the long run (6). Lastly, there is no doubt that residing institutions are active proponents of innovation (7). The success of Infopark led to the construction of two other entities: Science Park Budapest, an office park directly next Infopark, with Ericsson and Tata as its flagship research renters, and Graphisoft Park which offers research and development facilities and office spaces for Microsoft, SAP, Graphisoft, and other smaller innovative companies. A positive externality of the Budapest based R&D ventures is the boom of internationally acclaimed start ups which started their career in the city. Talented and well-educated people, who do not lack entrepreneurial spirit, have the chance to go big. Prezi and Ustream are just two examples of two ventures whose products are used by millions around the world.

In the location choice of the developers and the residing entities was most probably affected by a number of key factors. Innovation and technological education have had long history in Hungary which have been hurt partially during communist time, but gained momentum after the collapse the Iron Curtain, and they both have high potential in hand with talented youth. The country has a favorable location for multinationals and it has relatively cheap and well trained labor market. The actual government always has some kind of strategic plan about R&D, but the precious efforts sometimes lead to unwanted results (see the Zsámbék case). 

Currently the revised New Széchenyi Plan deal with the issue of innovation and sustainability that wants to achieve “competitiveness”, “jobs higher value added” and “sustainable economic and social development”. Furthermore it even specifies quantitative targets, namely to spend 1,5% of GDP on innovation by 2015, and 2% by 2020. The government can provide direct cash subsidy, tax allowance, training subsidy and job creation subsidy to achieve these goals. Despite of the ambitious plans private sector remains a key factor of the organizational and financial processes which hopefully can lead to the expansion of the now existing parks, and attract more innovative companies.  

Saturday, December 22, 2012

Kosovo Albania - Highway of Nation

Kosovo Albania - Highway of Nation

by Vahidin Nurshaba

As of 2007 Republic of Albania, and then in 2010 Republic of Kosovo, have started the largest project in the last decade in road building across the Balkan countries, respectively the highway between Kosovo and Albania. The Albania’s part of the highway is known as “Rruga e Kombit” (Highway of the Nation), and in the part of Kosovo it is named after its first president since declaring its independence, Dr. Ibrahim Rugova. 

It is a four lane highway, and it is being built by the distinguished Turkish American company called Bechtel & Enka. The cost of the highway is overseen to be more than 1 Billion Euros. The Project is part of the South East Europe route, to start from the city Lezhe in Albania and end at the E75 Corridor X in Doljevac in Nish, Serbia. Once the Kosovo part of the project is completed, the highway will join Adriatic Sea ports of Dures and Shengjin in Albania with the Pan-European Corridor X in Serbia through Prishitna, Republic of Kosovo. So far, one part of the project is finished, and the new route from Duhel, Kosovo to Thuanene, Albania is already accessible.

This project has helped in reducing the transportation cost and time between Prishtina (the capital city of Kosovo) and Tirana (the capital city of Albania). In comparison with the old poor mountains road, the contributed reduction was from 9 hours to just 3 hours in time. The road is financed by its respective governments. The emphasis goes around on occurring agglomeration along the highway between two countries, the highway that goes through the villages; there are modern shopping malls, hotels, gas station and restaurants opened along the highway because there is a demand for travelers to access those facilities for their use. However, the most significant feature is the comfort ability of traveling from Prishtina to Tirana for only three hours time of travel distance and the highways complies to high European standards which includes the tunnels and bridges.

From economic geography point of view, the advantages are for both countries. First, the patriotic feelings of nationalism between the two nations that will contribute in unification of policies that will culturally confine them. Second, it is a massive boost for tourism in Albania enabling Kosovars, Macedonians, and other neighboring countries to go for the summer to Albanian beautiful coastline. Furthermore, trade and labour mobility is increased further among the two countries due to reduced transportation cost and time span. Meanwhile, road opened new opportunities for new investments in which case Kosovo telecommunications companies started to open their branches in Albania, and vie-versa Albanian companies are present now in the Kosovo markets. Finally, it helped create jobs as long as the constructions were taking place since both of the Governments have specified in their contracts that labor force shall be employed locally.

The former Albanian Prime Minister believes that the road will “crystallize a year-round tourism industry and double the size of the Albanian market while allowing both communities to rationalize the market, Kosovo will probably start planting wheat while Albania deals with livestock and vegetable growing”, said Majko. Same has happened on the Kosovo side. Initially, there were villages with no prosperity whatsoever. However, now that the highway passes through those less developed villages, there are new shops, hotels and restaurants opened, providing those villages hope to prosper and commute more with the capitals. Another important aspect of agglomeration that occurred is that at the points of the borders between two countries, there are some services done well at the points of the border because it is much expensive to move to the capital.

Wednesday, December 19, 2012

British colonial heritage and modern railway development in Africa

British colonial heritage and modern railway development in Africa

by Gabor Gyurko,

'Few countries have ever industrialised […] in which entrepreneurs have been unable to corrupt the state, exploiting taxpayers and consumers far beyond the limits set by proper tolerance […]’
(Clive Dewey on imperial Britain’s ‘new industrial policy’)

Beyond military power and economic might, roads have shaped the outreach of empires throughout human history. Royal highways helped cement the rule of the Achaemenid dynasty over the Persian Empire. 

Roman roads aided legions of the Eternal City in their conquest of the known world. 

An epoch of trail network development steered the rise of Inca rule in Latin America.

It was Victorian Britain to pick up the mantle and recommence expanding the global transport infrastructure, with a more modern tool that time – railways. However, as regions and manufacturing production were part of a hierarchy, networks were constructed asymmetrically as well. Above all else, they were organized such that overseas resources would be supplied at the lowest cost for domestic British manufacturing. In Australia, they link the ‘wool-towns’ with the port of Sidney, the Northwestern coalmines with Newcastle harbor since the 1830s. They ship cotton across the British Raj of the Indian subcontinent from the mid-19th century.
With this single purpose in mind, a plethora of private enterprises and joint ventures entered the railway construction industry to capture profits from transportation fees. In this respect, trunk lines were simply part of individual supply chains, not only not serving integration, but essentially blocking it through limiting differentiated local economic development. Spread out ownership also resulted in major technical discrepancies, which hindered network unifications once lines began overlapping. For instance, in both Australia and India three gauges were in use, none of which matched the then-evolving European standard. Furthermore, with the demise of the colonial world and production processes under realignment, newly independent states were left with assets abandoned by their owners, and the daunting task of reform.

Although a decline in the cost of trade is the most explicit consequence of transport expansion, a well-integrated network also serves as a tool of convergence, both in prices and in incomes. This makes it crucial for a country to have infrastructure in place that services domestic needs. Illustrative studies are abundant for the British Raj, with mixed results in case of prices and marginal to none for incomes. Scholars note that this failure was exacerbated in times of famine, when price inflations and trade from surplus regions helped spread hunger, instead of relieving it.

‘Colonial rule in Africa was intended to be cheap, viz. for taxpayers in Europe.’
(Gareth Austin on the motivation of colonial powers)

While political and social forces would organize over time across most major British domains, inducing more inclusive developments and improving the character of the national infrastructure greatly, such pressures were lacking in Africa at large. The geographical partition of the continent caused a deep political divide across neighboring countries. 

Power-hungry European sovereigns – especially Britain, France and Germany – utilized colonial transport networks as means of military defense against each other, and as instruments of dominance and exploitation over the African territories. Political will dictated the choice of railway over paved road construction as well, as freight was less costly and more secure via trunk lines. Furthermore, given the low density of population and economic activity of the continent and long distances between major centers, there was little room left for regional integration.

Past 50 years of independence there is little change in the transport structure of newly-formed states. Road density is still extremely low even in comparison with other developing countries. The railroad network is in similarly dire straits, with very limited new construction since the 1950s across the Sub-Saharan region. Expansions have been limited to the Southern countries, while other lines were either scrapped or abandoned over the years as they are either too dangerous or no longer viable technologically. Furthermore, as linkages between colonial conglomerates and their overseas affiliates began to realign, many lines have lost their relevance altogether.

The rule of thumb in infrastructural investments is that it creates spillovers and hence increases overall efficiency even if it is itself loss-making via the decline in transportation costs for both freight and passengers. However, calculations suggest that as markets are unsaturated, construction and maintenance of trunk lines is self-financing – yet, concessions still number in single digits. In a globalizing economy, national borders and interest become secondary to integration and the composite performance of regions. In the lack of price and income equalization, the produce of especially landlocked and ‘monocultural’ countries remains uncompetitive, while their populations suffer greatly from their inability to access global markets. Proposed developments  clearly seek to further the international unification process that is increasingly prevalent in contemporary African politics. 

Perhaps, infrastructural expansion can lead to the rise of an economically and politically more stable, and socially more equitable Africa for the 21st century.

Literature review:

Quote by Clive Dewey is from this article.

Quote by Gareth Austin is from this article.

An extensive review of Australian colonial railways is available via this website.

A brief summary of Indian railway development is available here, with specific analysis of famines in this article.

A good summary of colonial heritage in African railroads is presented here, with policy recommendations found here, and in extensive detail here.

Illustrative brief on road networks in Africa is available here.

Tuesday, December 18, 2012

Building physical infrastructure in Singapore-first step towards agglomeration

Building physical infrastructure in Singapore-first step towards agglomeration

by Ivan Vovkanych

Singapore 40 years ago was a poor in all aspects area. In 1971 the strategic development plan was first introduced by the government. The reforms in housing, government expenditure, economic and infrastructure areas have been introduced. Now Singapore is a thriving city and an international business center. So what exactly Singapore government did that made such a progress?

Housing problem and unemployment were one of the most important issues after obtaining independence. Therefore the Housing and Development Board (HDB) and the Economic Development Board (EDB) have been established to deal with these problems. Cheap public housing has been introduced along with building schools, medical clinics, community centers etc. Government fostered mixing up homes of different classes, races and provided subsidies for lower income families in order to create balanced multi-racial, multi-class community. Along the salvations of class problems, sense of regional identity has been formed by building location-specific environments. These actions increased the fixed capital accumulation in the region and by this positively influenced efficiency.

Another important asset that Singapore government improved is the seaport. Port Authority of Singapore (PSA) has been created to coordinate actions with other logistics means like the air and land transport in order to create a global integrated logistics hub. 

Government used the following steps to achieve the given goal:

1. The port has been increased to play bigger role in the international trade,

2. Competition from other port, the Jurong Port, has been introduced to increase the quality and decrease the price of services offered.

3. World business executives were invited to join the team as board and executive committee members.

The first airport in Singapore was based at Paya Lebar, close to residential areas. In 1970s an airport has been build at Changi site. This place had better approach via the sea, better road access, there were less residential areas affected by noise and much less economically useful land has been used for it.
Moreover, advanced system of radial roads converging to the city center was built and The Mass Rapid Transit (MRT) railroad connection systems between Changi Airport, the North-east of Singapore, Sentosa, and Marina were introduced.
As the result a cargo arrived by plane, transported by a truck and sent further by ship via the seaport would be treated as a free trade zone regulated under single the special customs treatment mechanism. This decreased the transport costs and improved the trade dynamics in Singapore in order to make it a tread center of the region.

It is almost impossible to evaluate the influence of investments in the physical infrastructure on the development of Singapore and the agglomeration of firms and population without consideration of education, science, innovation, healthcare etc. But, based on theories of urban development a number of effects can be seen. First, transport cost for importing and exporting goods decreased. Bigger variety of goods supported competition and improved quality of products. This also allowed domestic producers to become competitive on the international markets. Secondly, increasing production and services capacities in the transportation industries led to increased market share and reduced cost. This helped Singapore to have comparative advantage and become one of the dominant players on the transportation market. Thirdly, according to New Economic Geography models, low transport cost, cheap housing (decreases price index) and home market effect made real wages relatively higher, ensured agglomeration in Singapore and improved efficiency of labor. Singapore development also proves the importance of History in migration dynamics. Since Independence transport costs were decreasing. After reaching breaking point agglomeration in terms of business and population occurred. This is an empirical demonstration how reaching the breaking point by reducing the transport costs changes the equilibrium from a spreading one to an agglomerated one.

Therefore Singapore is a perfect example to illustrate how physical infrastructure produced Home Market Effect, Price Index Effect, and Extent of Competition Effect with other externalities and contributed towards business and population agglomeration in Singapore.

Thursday, December 13, 2012

Count István Széchenyi and the Chain Bridge

Count István Széchenyi and the Chain Bridge

by Luca Drucker

The construction Chain Bridge as the first permanent bridge between Pest and Buda caused
the reduction of transport costs and helped Pest-Buda become the kind of centre Count
Széchenyi dreamed of.

If we hear the name of Count István Széchenyi we can recall a bunch of reforms he made in the Hungary of Reform Era: the foundation of the Hungarian Academy of Sciences and the Trade Bank, the National Casino, the introduction of horse racing in Hungary, the Hungarian National Economic Association, the National Theatre... However, in the aspect of regional economics, his most important contributions as transport minister were the steam ships on Lake Balaton, his plans for the first railways in Hungary, his support of making Danube navigable and the Chain Bridge.

Before the construction of Chain Bridge, in the early 18th century Danube could only be crossed between Pest and Buda by ferryboat and from 1767 via a pontoon-bridge supported by 43 boats. However, this bridge hindered the circulation of ships and it was unusable in winter because of debacles. So we can say transport costs were very high between the two cities. The idea of building a permanent bridge between Pest and Buda was relevant, and thanks to Count Széchenyi, the work started in 1939 and the bridge was opened on 20 November, 1849. The bridge was built to connect the two cities he wanted to be unified in the future and be the political, economic and cultural centre of Hungary. 

By that time Pest was flourishing: population grew, centres of trade and money were built, palaces and hotels were raised and cultural life bloomed, too. However, we cannot say this was caused by a historical accident: people invested in Pest because they wanted it to blossom and be the centre of Hungary. 

But if we think about New Economic Geography theory, maybe we can say a little bit more about the consequences of building a bridge between Pest and Buda than just that it connected the two parts of the future capital city. 

This theory is about how people decide on location between two regions with two sectors of the economy. The two sectors are agriculture and manufacturing and manufacturing labour and firms can move between regions but agricultural labour can’t. Migration decisions of manufacturing workers are affected by the wage differences between the regions, but the equilibriums are determined mainly by transport costs. With high transport costs, spreading (production in both regions) and with lower transport costs, agglomeration (production in only one region) will be the equilibrium. 

If we take a look at how population in Pest and Buda formed among the years we can see that after the reforms in transportation, mainly the construction of Chain Bridge, population in Pest grew faster than that in Buda. It is true that the area of Buda is smaller and the first geography of the two cities is different – Buda is mostly built on hills but Pest is on a plain. This is why even in the 18th century people in Buda still dealt mostly with viticulture and wine production and with industry and trade in Pest. However, maybe with the huge decline in transport costs – the construction of the bridge – people did migrate from Buda and from other Western parts to Pest because of the higher wages and better possibilities, so some kind of agglomeration started. 

This is just my theory. It may not be true. Budapest is not exactly the textbook example of this model but it is sure that building the Chain Bridge eased the trade and transportation not only between Pest and Buda but between Eastern and Western parts of the country, too. This project, among the various reforms of Count Széchenyi and followed by even more reforms in the end of the century contributed to Budapest becoming the centre he dreamed of.

Tuesday, December 11, 2012

Traffic Jams in Dar es Salaam city: Blowing away benefits of agglomeration

Traffic Jams in Dar es Salaam city: Blowing away benefits of agglomeration

By Elly Chuma

Dar es Salaam, the nucleus of Tanzanian economy, is the fastest growing city in East Africa. Prospect of good life beckons and attracts all classes and types of people in Tanzania; at the same time becomes the famous for traffic jams which are eating up the benefits of agglomeration economies.
Like other cities Dar es Salaam agglomeration is not an accident episode, since the city located on a natural harbour on the Indian Ocean which serves almost 90 percent of all imports. This harbour is the heart of the Tanzanian transportation system as all of the country's main railways Tanzania and Zambia Railway Authority (TAZARA) and Tanzania Railways Limited (TRL), and several highways originate in the city. Presence of more than 15 universities, good hospitals, schools has attracted many firms to locate their businesses in the city and workers to find jobs. Firms and workers locate in Dar es Salaam because this city offers a bunch of benefit, varying from product varieties, availability of workers, jobs, and so many amenities which are very difficult to get at low prices in other cities.

The city is the main engine of economic growth and serves as a major administrative, commercial, and industrial centre in Tanzania compared to other 29 regions. It is really surprising that this city contributes of 80 percent of the total GDP and home of one half of total manufacturing employees of the country. Dar es Salaam has invariably been an attractive, persuading centripetal centre, making its population one among of the most fast-growing in Africa. The city population has been double in last decades from 2.5 million in 2002 to approximately 5 million in 2012. The rural-urban migration into Dar es Salaam has involved different groups of people but young people are dominating. This group is looking for employment, with neither capital nor skills to undertake gainful business.

Transport problem in Dar es Salaam is a recent disease. Thanks to the government who did not make significant initiative to build new roads or rehabilitation of the existing ones. The fact that this city does not have rapid mass system, small buses do not offer enough services, consequently ownership of private cheap used cars especially from Japan has been increasing geometrically in Dar es Salaam and cause traffic jams more problematic

In past, commuters were able to move 30 kms only for 20 minutes which is quite difficult these days, now it takes more than 2 to 3 hours in the pick time. Minister of Works in 2011 lamented, "Dar es Salaam contributes nearly 80% of the national income, at the same time people are wasting a lot of time in the traffic jams. The latest study shows the jams cost the economy more than 4 billion Tanzanian shillings a day (equivalent to US dollar 2.5 million)."

“Do you want to be on time in your office”? Here is the deal; you have to wake up at 4:00 am to prepare yourself and make sure you get to the road around 5:00 am so that you can avoid traffic jams in the morning. Working hours starts from 7:30 am to 4:00 pm, but you have to wait until 8.00 pm when majority of people in the city center have already left. This is the innovative way used by some people to avoid using too much oil in the traffic jam.

Traffic jam in Dar es Salaam has influenced the location of the firms significantly. Traffic jam has increased cost of production for firms, and workers also are using a lot of time to commune and use a lot of oil in the queue. Some big companies like Heritage Insurance Company Limited, Tanzania Communications Regulatory Authority, and large cellular network companies (Airtel Tanzania Limited, Vodaphone Tanzania Limited), and Stanbic Bank Tanzania Limited have relocated to the periphery of the commercial capital to escape overhead costs caused by traffic jams, parking fees and other related problems.
It has been estimated by the Confederation of Tanzania Industries (CTI) that traffic jams costs up to 20 per cent of annual profits losses of most businesses in the city. Those companies that deal with the supply of fast moving consumer goods such as beverages, edible oil, bread and soap are the most affected since it is very hard to make timely deliveries of their products to customers.
Furthermore, traffic jam contributes to the increase level of crimes. Thieves used to walk along the cars’ queues and steal citizens’ belongs like handsets, jewelries. Also impatient drivers particularly dala dala drivers (famous public transport buses) in usually violate regulations cause killings of pedestrians. Traffic jam has led to significantly increase use of motorcycle (famous name boda boda) which has boomed the numbers of accidents in Tanzania killing hundreds of people.
The future of Dar es Salaam city is still uncertain, regardless of current attempt of government to curb this problem. Introducing train transport and a new plan to replace small buses with a government-managed rapid mass transit system are difficult to assess yet.

Monday, December 10, 2012

Standard but Poor: Understanding Northwestern Bulgaria

Standard but Poor: Understanding Northwestern Bulgaria

by Kristina Georgieva

Since August 2012, people in the Bulgarian capital, Sofia, have been riding on one of the sexiest metro lines on the Old Continent. It is fast, it is arty, it is fancy, and it is the pride and joy of the ruling party Citizens for European Development of Bulgaria. Ironically, less than 100km north, you can find a rather underdeveloped region; in fact, the poorest in the European Union - Northwestern Bulgaria.

So what does the poorest region in the European Union look like? 

The Northwestern region of Bulgaria encompasses five municipalities between the Danube river and the Balkan mountain: Vidin, Montana, Vratsa, Pleven, and Lovetch with total population of approximately 800 000 people (as of 2011). Ten years ago, it used to be around 20% more; however, due to high migration and low natural population growth, Northwestern Bulgaria has been shrinking rapidly. Its scores are in the worst possible ranges in almost all indicators presented in the Eurostat regionalyearbook 2012. The GDP and the primary income of households in the region are below 50% of the EU 27 average; it has the lowest population change and life expectancy, and to top it all off, Northwestern Bulgarians are also the least educated. In short, the situation is pretty dreary, and the forecasts for the future do not look much brighter. And these are merely the statistics behind the personal tragedies of the many people struggling and failing to make a living there.

But why so surprised?

Bulgaria joined the EU a mere five years ago, it hasn’t yet adopted the Euro, nor is it even near entering the Schengen area, and since somebody has to be the poorest in the EU, why not Northwestern Bulgaria? In fact, economic theory gives us quite a few answers to this question. To begin with, one of the borders of the Northwestern Bulgarian region is the Danube River, which should create better conditions for economic activity, as it allows cheap trade with other cities on or in proximity to the river. Considering that some of those cities are major European Capitals (Vienna, Bratislava, Budapest, and Belgrade), the economy of Northwestern Bulgaria should be benefiting largely from this major geographical asset. But it is not. It should also be benefiting from Bulgaria’s accession to the EU, which should trigger convergence, and thus rapid growth in the natural process of catching up. In fact, this growth should be even more explicit in the Northwestern region than in others, as it is on the western Bulgarian border, which should be the entry point of all new investment. But it’s not; the situation in the region has even deteriorated since the accession in 2007. Thus, it is surprising that contrary to economic logic, a region close to a major European river, in a new EU Member State, and in relative proximity to the “center” of the Single Market is not growing, but actually shrinking to the point of being the poorest in the EU.

How did this happen?

One possible explanation of why Northwestern Bulgaria’s economy is performing so poorly is its inability to adapt from making goods to making ideas – the most demanded product of our time. Similarly to the case of Detroit, Michigan, manufacturing in Northwestern Bulgaria was specialised in mass production of tangible goods: in Detroit it was cars, and in Northwestern Bulgaria: ceramics, accumulators, and automobile tires. With the sole goal of increasing production and decreasing costs on the assembly lines, firms both in Detroit and in Northwestern Bulgaria ended up creating a disincentive for innovation and an oblivious labour force. This archaic practice of cheap mass production cannot meet the consumers’ increasing demand for variety and constant quality improvement. Since it is incompatible with the changing market dynamics, Northwestern Bulgaria, like Detroit, is bound to struggle to stay above water.

But there’s more. Unlike Detroit’s economy, that of Northwestern Bulgaria did not always accommodate perfect competition or the right to private property, nor was it influenced by the forces of supply and demand. So when in 1989 the Berlin wall collapsed, so did the Bulgarian economy. It could not survive in the highly competitive capitalist market: production was no longer subsidised and became unsustainable, factories closed, unemployment shoot up, and people accustomed to working on the assembly line were incapable of running a business. While that story is the same across all of Bulgaria (and the other transition countries), the case of Northwestern Bulgaria is worse as the region was more industrialised than the others.

Still, there is light in the end of the tunnel with the recent opening of three IKEA factories, and another two – one for batteries and one for bikes. A new road bridge across the Danube is planned to open soon providing a connection between Vidin, Bulgaria and Calafat, Romania. So there is an opportunity for growth even in the poorest region, but bringing back the assembly lines and simply combating the physical distance from the market will not save Northwestern Bulgaria. If the Bulgarian politicians and policy-makers would like to achieve something more than reelection, they should shift the focus from convenient infrastructure projects to long-term investment in human capital and innovation, so that the region can adapt to the dynamic economic environment. If not, Northwestern Bulgaria will continue to reign as the “EU’s poorest” region.


The metro line in Sofia:

Silicon Valley à la française: Paris-Saclay

Silicon Valley à la française: Paris-Saclay

by Krisztina Horváth 

The case of Silicone Valley is probably the most iconic example of a so called innovation cluster, the notion that is commonly used to describe a group of densely linked organizations in the field of Research and Development that in some way benefit from the presence of each other. Due to many other similar success stories, the study of clusters became a center of interest and a fashionable approach in current economic policy. 
This great current attention on clusters requires some more concrete explanation that goes beyond the apparent magic. Clearly, the synergy of clusters is a result of opposing forces. On the one hand, common sense suggests that if many organizations tend to gather together at the same location they will end up with some costs arising from crowding. However, as a series of real life examples show, these so called congestion costs are highly offset by the benefits of being together. Let’s have a closer look now at these agglomeration forces through the example of Europe’s currently most ambitious innovation clustering project, Paris-Saclay.
Following the worldwide trends of cluster supporting in economic policy, in 2008 French president Nicholas Sarkozy announced the project of Paris-Saclay Campus, the development of a scientific supercampus from the merger of several universities and research institutes in the southern suburb of the capital. The ambition was not less than creating a scientific hub that is capable of competing with the world’s leading research universities.
One of the main missions of the project is to serve the convergence process between different fields of science. This interdisciplinarity is planned to be achieved by the union of universities from more than 10 different research fields such as Engineering, Physics, Social and Health Sciences with an integrated research infrastructure. According to the words of Sarkozy, ParisSaclay will be a “mosaic of institutions, each highly prestigious, but badly coordinated among themselves and separated by artificial institutional barriers that are totally obsolete in an era of global scientific competition.” 
The choice of location for the project is not a coincidence; Southern Paris has been a considerable concentration of R&D for a long time, with the presence of the prestigious engineering school, École Polytechnique or the great particle accelerator “Syncontron Soleil” for example.

In the beginning 23 organizations joined the ambitious project: state universities such as University Paris Sud 11, leading Grandes Écoles (HEC, École Polytechnique, Paris Tech, ENSTA, École Central Paris, etc.) and several national research organizations.
All of these leading French educational and research institutions committed themselves to move to Southern Paris and become a part of the new integrated campus and the joint super-university.
But what are the enormous benefits for which these prestigious institutions are willing to sacrifice a substantial part of their identity? Obviously, the most meaningful consideration in case of non-profit educational and research organizations is the access to a high concentration of financial sources.
First of all the French state invests billions of Euros in its vision of making Paris Saclay an internationally competitive R&D center as a coherent part of its „Competitiveness Clusters”, „Opération Campus” and „Investissements d’Avenir” programs, providing funding for new university buildings and expanding research capacity for example. Campus Saclay is also part of the giant transport development program called Grand Paris Project, as a result of which the integrated campus will be connected to the capital by the new suburban metro line, Grand Paris Express, making a smooth connection to the northern Charles de Gaulle Airport by 2020. 
On the other hand, many private companies are already attracted by the high concentration of human capital and research facilities in the science park. Large companies, such as Microsoft, EDF, Danone and Thales have established or are planning to move their R&D centers to South Paris, providing additional financial sources to the universities and research institutes.

Numerous other benefits of moving to Saclay can be mentioned, such as the facilitation of common projects, the easier exchange of researchers and the improvement of labor market connections between universities and private firms for instance.
There is nothing surprising in these motivation forces; they are the same for the formation of many other science parks in any parts of the world, but this project is rather unique in one sense: the French state is currently trying to achieve the topmost level of clustering, not only attracting the most prominent actors of the French scientific life to the same location, but also incorporating them into a common institutional framework, the future Paris-Saclay University. Whether this fact enhances further the synergies of being together or rather intensifies the difficulties during the transition process due to the fear of loss of identity will be answered by 2025.

Sunday, December 9, 2012

Agglomeration in Dhaka: How does Read Made Garment (RMG) industry make Dhaka the fastest growing city of the world?

Agglomeration in Dhaka: How does Read Made Garment (RMG) industry make Dhaka the fastest growing city of the world?

by Md Masud Karim

In a sunny day of last summer, I was shopping with my German friend in one outlet of H&M in Budapest and suddenly she shouted “Oh My God! This T-shirt is too cheap! Masud, you see it is from your country”.  There is no doubt that the magical role of Ready Made Garment (RMG) industry in the agglomeration of Dhaka, the capital of Bangladesh, is more surprising.

Between 1990 to 2005, Dhaka, the fastest growing city on the earth, doubled in number- from 6 million to 12 million. According to United Nations, Dhaka which is the residence of 17 million people by 2011 will be the home of more than 20 million by 2025. It is well known that massive migration, high birth rate and new experience of free international trade are swelling cities in developing world; however, these factors are perhaps more strongly intense in Dhaka than anyplace in the world. Thanks to the concentrations of export oriented textile industry in Dhaka, which starts in 1980s and flourished in last thirty years, and thus created this massive agglomeration.

The RMG sector of Bangladesh has experienced a dramatic growth in last three decades. At present, Bangladesh ranks the third largest garment exporter after China and Turkey in the world. Before 1980, the country’s RMG industry’s role was mainly import substitution; hence, was not subject to export limit under the Multi-Fiber Arrangement (MFA). This opportunity did not escape the attention of Daewoo Corporations of South Korea, one of the largest RMG manufacturers losing from quota system. Without making delay, Daewoo teamed up with a Dhaka based new enterprise Desh Ltd. in 1979.

Knowledge and technological spillovers seems to be the first cause of RMG industry development in Dhaka. In 1979, Desh sent 130 new employees to Daewoo’s factory in South Korea, where they took part in an eight-month intensive training course on garments industry. Within few years, like employees of Silicon Valley companies who started their own business, most of these employees had left Desh and started their independent RMG business in Gazipur and Mirpur area of Dhaka. In retrospect, even though it was a great blow to Desh and Daweoo, it was boon for Bangladesh. In 1980, number of RMG factory was 47 which increased to 804 by 1990 and 5000 by 2011.

The contribution of government in the sustainable development of this sector is beyond question. In 1985, special benefit under MFA was withdrawn; however, the growth of RMG was thriving. At present, this sector accounts for 75% of countryexport and 25% of GDP

Figure: Number of garments factories in Bangladesh                        

Figure:     Employment (million workers)
Source: Bangladesh Garments Manufacturers and Exporters Association

Perhaps no other industry in the world contributed in agglomeration of a city like RMG has done to Dhaka city. As majority of RMG factories are set up in Dhaka city, it attracted unskilled and semi skilled labor from the whole country. At present this sector employs 3.6 million people of which 85% are woman.

This sector has created job opportunity not only for unskilled and semi-skilled but also for university graduates. Nowadays many universities in Dhaka city offer degree on textile. This makes it easier for the industry to recruit employees and at the same time employees have choice whom to work for.  

The concentration of the RMG industry in Dhaka has also induced the growth of other related business with close proximity to the RMG factories. Importers of raw materials and agent offices of foreign buyers find it advantageous to be close to production units. Consequently, it increases efficiency of this industry.

In comparison to other cities in Bangladesh, Dhaka has the largest high and middle income consumer base. Moreover, people in Bangladesh have a tendency to travel to the capital for shopping which also makes Dhaka more important local market. Even if foreign buyers cancel orders, garments owners still can have sound sleep as they know these garments can be sold in clothing markets of Dhaka like hot cake.
In the long run, garments industry in Dhaka likely to be hurt by high labor cost pushed by high living expenses, labor unrest which has become a common phenomenon; however, the wave of agglomeration this industry has created seems to be long-lasting. At present, out of 87 universities in the country, Dhaka city, which is one of 64 cities in Bangladesh, is the home of 52 universities. Moreover, the presence of all the urban amenities such as healthcare, theaters, and stadiums are also biased toward Dhaka.  These factors will continue to attract rich, educated people of the country, who are willing to pay extra living expenses to enjoy urban amenities.

Slavutych: the Future of the Chernobyl Survivors’ Shelter

Slavutych: the Future of the Chernobyl Survivors’ Shelter

by Anastasiia Polner

What associations do you have when you hear the name – Slavutych? Slavutych is a city in Kyiv oblast, Ukraine, the population of which is 24 500 people – this information pops up in the first lines of the Wikipedia article. Nevertheless, the important facts are different. Slavutych is situated only 50 kilometers away from the ill-fated Chernobyl Nuclear Power Station (CNPS), where the disastrous catastrophe happened in 1986 due to the nuclear fallout. It is the youngest city in Ukraine and was constructed to host the survivors of the accident who were evacuated from Prypiat. 26 years ago Pripiat used to be home for thousands of Chernobyl personnel and their families; nowadays it is a ghost city, totally abandoned.
Chernobyl nuclear disaster is considered to be the most horrible in the history of Nuclear Power. Before the accident Chernobyl was producing 10% of Ukraine’s electricity. Today Prypiat and Chernobyl factory are surrounded by 30 kilometers of Chernobyl Exclusion Zone. Even now there are some places on that territory that are dangerous for live beings due to high level of radiation.

Yet, some people still work on the factory to maintain, monitor it for safety reasons and work upon scientific researches. More than half of Chernobyl employees are actually construction workers, building the Shelter, known as ‘Sarcophagus’ that covers the 4th reactor, where the explosion happened. All those people live in Slavutych. Today, out of its 24 500 citizens around 3 800 work in Chernobyl, even after the remaining processes in the nuclear units were finally stopped and the whole factory was officially shut down in 2000. Before the final shutdown half of the grown up population of Slavutych, or around 9 000 people, worked on the plant. Since the shutdown the city started to find itself in crisis; around 1 500 people already left it looking for better life in other regions of Ukraine.

Let’s look at the situation from the perspective of Spacial Equilibrium model. It analyzes the migration of working force by looking at the dependence between salaries, cost of living, comfort of living (so-called “amenities”) and personal preferences. For example, the model claims that shocks in demand or supply of the labour force and the corresponding changes in wages will be partially absorbed by changing housing prices. Accordingly, local demand for housing can be derived from other factors of the model.

As the counterparts of Slavutych we take two neighbouring regions – Kyiv and Chernihiv oblasts (without the capital city itself), because they are the main areas for people’s migration from Slavutych.

The numbers tell us an interesting story. The average salary in Slavutych is 475 Euro (and almost 700 Euro for those who work at Chernobyl Station) – much higher than the country average value of 300 Euro. The region average salary is also lower at 280 Euro. With such difference in levels of income we might expect higher housing prices in Slavutych compared to neighbouring regions. However this is not the case. With a price of some 500 Euro per square meter Slavutych lags behind its neighbours by some 200-300 Euro.
One reason for that is historical: Slavutych was built in emergency and all people who moved to it, naturally got their apartments for free.

Another explanation comes directly from the Spatial Equilibrium model. On the one hand, according to different researches, Slavutych has some good-quality amenities. For example, the city consistently holds its place among the top-20 wealthiest Ukrainian cities and the top-20 most comfortable Ukrainian cities according to Focus magazine. It scores high in terms of budget spending per capita, number of supermarkets, green areas and sport venues. On the other hand, however, the preferences for living in Slavutych are really weak - virtually non-existent. That is because of poor ecological situation and the constant health risk that the workers are exposed to. As a result and not contradicting the model, average salary in Slavutych is high, whereas housing prices are low relative to average wage and housing prices in the neighbouring regions. Stated differently, it means that workers are willing to move to Slavutych if, and only if, the salaries rise without the corresponding growth in the cost of living.

We can confirm our conclusions by looking at the situation in dynamics. After the shutdown of the plant in 2000 people started to flee from Slavutych, lowering demand for accommodation, putting additional downward pressure on housing prices and confirming our proposition about very weak location preferences.
The future of Slavutych looks obscure. The city has a weak level of business activity, it creates not enough of new jobs annually, and has a deteriorating infrastructure. Finally, the Chernobyl station inevitably will be closed, sooner or later. So, if the city survives in such circumstances, it will happen because of long-term forward-looking policy of reforms and diversification. Slavutych will cease to be a unique place on the region’s map; on the contrary, it should integrate into local business chains and processes. To conclude with, the factor of utmost importance that should be taken into account is the weak preference of people to live near the radiation zone.

Polycentric Moscow: overcoming transport collapse

Polycentric Moscow: overcoming transport collapse

By Anna Bakaykina

Modern Moscow is a classical representation of monocentric city. Approximately 70 % of all workplaces are concentrated in the area of ​​6.5 km from the Kremlin, whereas people mostly live in the suburbs (e.g., the population density of the Zyabliko district, located 17 km away from the city center, is 2.2 times larger than density in Arbat district located 1 km from the Kremlin. This can be explained by the bid-rent theory - moving away from the city center the prices for accommodation significantly decrease. So, a one-room apartment rent in Khimki is almost half that of one in the North-Western Administrative Districtof Moscow ($581.8 versus $1043.37, respectively,
However, this monocentric structure directly causes the severe transportation problem. Everyday a huge flow of Muscovites travels from their homes to the workplaces and the other way round (so-called “pendulum migration”). Along with the underdeveloped transport infrastructure (leading to one of the worst estimated commuting time in the world) and existing radial transportation system, it creates huge traffic jams and metro overload. Thus, every day the capital metro is overloaded by 20 % on average and typical traffic jam lasts 2.5 hours daily (Moscow is 8th in the world in terms of traffic jam duration). The current situation can be characterized as transport collapse.

Several separate steps can be implemented to cope with this problem, but they will unlikely have any real significant effect. Thus complex solution is needed. The concept of policentricity – the formation of several clusters of economic activity within one city – seems to be an effective solution for the Moscow case. Such capitals as Paris, London, Tokyo chose a similar path of development several decades ago by creating new poles of jobs concentration and relieving the historic center. Modern theory in this case is perfectly consistent with the existing practice*.
Permeated with the spirit of the polycentricity and the prospect of becoming a world financial center, the Russian government decided to create the Moscow metropolitan area (“Big Moscow”). This project provides for an expanding more than two-fold in area of the capital (from 1,070 squarekilometers to 2,560 sq km) with the establishment of multiple clusters (including medical, innovative and educational clusters) and relocation of several Federal authorities (e.g. Parliament and Supreme Court) to new greenfield sites. It also suggests the creation of an efficient transport infrastructure, in particular, development of chordwise directions, and putting into operation a total of 23 new metro stations by 2018. Special emphasis will be placed on an improvement of existing public transport system by an introduction of intelligent transport systems, creation of wide range of transport hubs, opening of passenger traffic in the small ring of the Moscow railway and integrating it with the functioning of underground.
Nevertheless, real economic effects from this project remain unclear. In short-term period, it is quite unlikely that there will be any real effect, because a simple change in administrative status of attached territories will not add more incentives to firms to reallocate. And terrain characteristics stay the same: there are still transport problems, and the population density is still low (compared to the "Old Moscow" and other areas of the Moscow region). Concerning pendulum migration, the flows will not change until real improvements in transport infrastructure and the development of chordwise directions.  The only thing that might change the situation in the short-term is the decision to relocate public institutions, but this effect is not likely to be significant because it can only accelerate the creation of infrastructure and this also will take time. Otherwise, the level of wages will stay the same because it depends on the demand and supply on local labor market. As income of people will not change, the level of local prices will not be also affected by this process.
Considering the long-term prospect, changes might occur but they mostly depend on the development of the full range of infrastructure, including social infrastructure (which besides transport includes health, education, housing). Only in this case an overflow of the economic activity from the "Old Moscow" and other areas of the Moscow region will be observed. However, the development of the “Big Moscow” 90 % of which is currently covered by forests, fields and villages  – will take time and will need to solve some existing issues. For example, it is impossible to create accommodation with the current absence of the proper water supply, for which two solutions have been proposed – to drill wells or to build a reservoir near Podolsk.  But the first will raise the level of prices on accommodation to premium class level (and will be provided mostly by private companies), which of course will not provide additional incentive for people to move there, whereas the second needs direct involvement of the authorities and huge state investments.
Despite the fact that the project itself looks very convincing in solving the existing problem of transport collapse, it is quite unlikely to expect real effect of it in the nearest future. Moreover, any real success can appear only in case of using integrated approach.

* The classical monocentric Von Thünen (1826) model extended later by Alonso (1964), Mills (1967), Muth (1969) and Fujita (1989) lost its position in comparison with emerging polycentric models (e.g. Anas and Kim, 1986), which are able to describe more complex patterns through interaction of agglomeration and dispersion. 

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