Thursday, January 31, 2013

Failure of the M3-M30 motorway?

Failure of the M3-M30 motorway?

by Áron Iker

The Hungarian government aimed to positively affect the regional development of the agglomeration of Miskolc by constructing a motorway between the capital and the city. However,  the reduction in transportation costs between Miskolc and Budapest supposedly has driven to an equilibrium where Miskolc faces with negative agglomeration forces, so the construction of the motorway has had an adverse effect than expected.

The construction of the M3-M30 motorway in Hungary started in 1978 and after long offset periods it eventually reached Miskolc, one of the biggest Hungarian cities. The project had clear goals which were declared by the Hungarian governments. Firstly, it aimed to reduce the congestion on the Road 3 which turned over large cargo and personal traffic. Secondly, the government expected a significant development in the region around the track of the motorway. After the beginning of the 90’s when the artificially sustained heavy industry and mining ceased or rapidly declined, these areas became the poorest ones of the country. Along many economists’ suggestion that infrastructural improvements (through reducing transportation costs) boost the economic prosperity of a given region, politicians had large hopes for the opening of the highway. To sum it up, the goals of the new motorway were focused on lowering both transportation costs and congestion.

In the core model of new economic geography transport costs play a substantial role in the determination of location equilibrium. Construction of a motorway lowers transport costs directly – primarily by higher speed and consequently by less time required for transportation. Congestion can be also considered as a factor that increase transport costs – mainly by time loss and additional hiring costs. By reducing congestion we can also diminish transportation costs. The core theory of new economic geography says that in the presence of high transport costs the unique stable equilibrium is spreading and the reduction of transport costs mainly drives agglomeration forces. In the extended version of the model, where there are vertical linkages between firms, the Bell curve says us that incomplete agglomeration can be also a stable equilibrium and under low values of transport cost we can observe again spreading equilibrium. It is obvious that the result of opening a new motorway is highly depends on the initial state of equilibrium.

While the M3-M30 motorway connects Miskolc with Budapest (and of course with West-Hungary) we can describe it with a two-region model where the agents decision is whether serving the demand of Miskolc by transportation (agglomeration) or establishing local firms (spreading). The aim of the government was the enhancement of the second one. However, if the equilibrium was on the right side of the Bell-curve (the previous history of the region suggests this version), the motorway construction would have negative agglomeration effects in Miskolc.

According to the empirical evidences the decline in the transport costs resulted in a shift toward agglomeration. Firstly we can review the traffic-count data. ( I have chosen Emőd - and in earlier years Vatta - for observations, because here we can find data about the traffic of the Road 3 as well as the M30 motorway, and it is close enough to Miskolc that we can suppose that almost all of the traffic reaches it but there is just negligible local traffic.) It clearly indicates that one of the government’s goals has been fulfilled: congestion sunk significantly. The average daily traffic on the road 3 toward and from Miskolc accounted for 10514 vehicles in 2002 (directly before the opening of the M30 motorway) and 3879 in 2010. The shaping of the traffic also can sign whether agglomeration forces actuate or not. As Graph 1 shows the daily cargo traffic toward and from Miskolc permanently grew. (In order to eliminate distortions originated from measurement imperfections every data are the averages of 3 years.It can sign that it worth for firms to satisfy demand in Miskolc by transport and also that Miskolc becomes an agglomeration where firms export from.

The conclusions of Németh (2006) highly support that the process which evolves is the first one. He shows that the construction of the M3 motorway to Polgár (and the M30 to Emőd) has had no significant effect on the wage levels (which grows if agglomeration evolves) and on the unemployment rate (which usually falls due to the more workplaces in the agglomeration). The only indicator where improvement is observable is the density of firms (all of the data are related to the Hungarian average). However, this indicator depends not only on the number of firms but also on the size of the local population. According to the data of the Hungarian Statistical Office (KSH) the population of Miskolc accounted for 185,567 in 2000 while only 166,823 in 2010. Consequently the growth in the firm density does not sign the evolving agglomeration. Other KSH data confirm that in Miskolc we can observe negative agglomeration trends. As Graph 2 shows after 2004 (when the motorway reached Miskolc) the number of operating firms in the city began to decline.

On the whole we can say that the reduction in transportation costs between Miskolc and Budapest supposedly has driven to an equilibrium where Miskolc faces with negative agglomeration forces, so the construction of the motorway has had an adverse effect than expected. The most important consequence of this story is that reducing transportation cost is not always useful for the aimed region, especially if it does not couple with other sufficient measures.

Tuesday, January 29, 2013

The impact of Metro 4 on property prices and economic activity

by Horn Miklós

Metro 4 despite still being in the construction phase seems to be an important determinant of flat prices and future economic activity in Budapest.

The construction of the new metro line (Metro 4) in Budapest – running from southwest to northeast – has been in the centre of attention for the last couple of years in Hungary. In this short blog entry I will discuss the possible effects of the construction and the planned completion of the new metro line by March 2014 on house prices and economic activity.

Transport developments do not necessarily have to link previously unreachable areas to central ones, sometimes they can just provide new, alternative ways of transportation which is the case with Metro 4. The new metro line running from Kelenföldi railway station to Keleti railway station (with possible extensions on both ends later) will cover a transport corridor that is already associated with the most passengers. Despite this, construction does seem to have a significant effect on property prices – especially in relatively poor neighborhoods according to studies. Both distance and time costs will be reduced for individuals using public transportation; traffic and congestions are also expected to decrease. A slight increase can be anticipated near the ends of the tracks though where the building of future parking lots is planned. A transport study shows that the metro construction will hopefully result in 90.000-100.000 less individual car travels a day in the capital.

The unopened metro line already has a visible and significant effect on flat prices. Properties that are closer to metro stations have higher offer prices ceteris paribus, indicating causality between the proximity of public transport and flat prices. No such effect of accessibility can be demonstrated for rent levels as the metro line is not yet available for public use. An estimation of the magnitude of the effect mentioned gives us around a 2.5% increase in property offer prices that are located near a metro station. These facts are backed up by theory: if we interpret the new metro line within the framework of the Central Business District (CBD) monocentric model we see that the travel cost is a trade-off against rents and population density when moving towards the suburbs from the CBD. Since the construction of a new metro line basically reduces travel costs it is not surprising that property prices are therefore raised – upon completion rent levels are likely to increase as well.

The property price increase has a rippling effect on to economic activity. Plans for the renovation of station surroundings are already submitted e.g. Móricz Zsigmond circus will gain a more central role as it gets connected to the shopping centre and market hall nearby. Regional side effects are at work: everywhere in the world metro stations attract new investments mainly from the commercial and business sectors. The value changes, if large enough, will generate investment and development decisions. Therefore the property market can act as a channel for economic and social changes that in the long-run might change technological and economic trends – and even the competitiveness of Hungary – to which flat prices would react with an even bigger increase. From a pessimistic point of view the extent of this effect is questionable. Since, as mentioned earlier and shown on the figure, the new line mainly serves as a new way of transportation on an already busy road, the result is that the explained positive effects might not be as strong as they could be, should the line be laid down for example in further outlying areas – which could make the improvements of public transportation much more efficient.

The effect on property prices depend on other factors as well; for instance, barriers at the stations, P+R car parks etc. can also contribute to rising flat prices. Yet, there are not many negative spatial externalities associated with living near the underground on the long-run as no noise pollution is present and changes to the urban landscape are not substantial. On the short-run construction works can be viewed as a burden, but their effects on flat prices – even though negative – are not significant. In conclusion we can say that the construction of the Metro 4 in Budapest has started boosting the property market – flat prices have already increased – and opening the space for new investments for which the extent depends on several factors discussed earlier. Once the metro line is available for public use it can be suspected that a rapid increase in rent prices will follow.

Thursday, January 24, 2013

The Ruin Bars of Budapest

The Ruin Bars of Budapest

by Renata Eszter Horvath

How socio-demographic characteristics and decreasing state ownership led to the development of a new genre of hospitality in Budapest.

Hungary’s capital, Budapest is starting to become known across to world for its famous hot springs and bars. This article focuses on bars, mainly hospitality venues operating in dilapidated, urban buildings in Budapest. These venues, referred to in Hungarian as “romkert” (ruin garden) and “romkocsma” (ruin pub), are established in abandoned residential or office buildings. Some of these are opened all-year while others operate from the early spring until late autumn. Several have reopened in the same location in subsequent years, although many have moved from one place to another and the itinerant hospitality topographies of Budapest’s districts have thus been reconfigured annually.

The majority of the “rom” venues are operated in the VII district of Budapest, with a few in the surround VI, VIII an IX districts. This inner area of Budapest (including the V district) is characterised by low-quality housing, the value of which is compensated for by its good location in the heart of Budapest. In the VII district, 89% of the housing stock was constructed before 1919. Only 10% of buildings were built between the two world wars and only 1% originates from the socialist period. Following the Second World War, damaged buildings were pulled down and the resulting lots largely left vacant or used for car parking. The general deterioration of buildings was coupled with a declining population until 2001. More recently the population in the VI, VII and VIII districts has grown by over 20%.

The socio-demographic characteristics of VII district have four general features: an ageing population, with a high rate of elderly widows; lowering social status compared with the early 20th century; decreasing Jewish and increasing Roma population; and no marked segregation of different residents. The recent growth of the population in the VII district has seen a shift in the socio-demographic profile with the arrival of young people, artist, students renting or even buying flats for a relatively low price. There is growing number of higher educated people, childless young couples and a reduction in the proportion of unemployed, lower-status residents. These features played an important role in the development of this new genre of hospitality.
There has been the absence of a singular local governmental strategy for the regeneration (development) of this area. It was mainly led by the privet sector, often on market rather than public-private partnership terms, with a strong emphasis on speculation. Local government has limited opportunities for intervention because of the high degree of privatisation and the resulting ownership structure. There’s also a strong presence of civil organisations, which have opposed specific initiatives. This context means that the unfolding regeneration in this area is different from state- or public-private partnership dominated districts, where transformation has been more radical and comprehensive. The fragmentation of ownership and governance has led to numerous conflicts in the regeneration process in which “rom” venues have developed.

The increasing rent- and value-gap in the VII and neighbouring districts has led to tensions between residential and commercial use. Investors, developers and the municipality may be keen to engage in more radical transformation, but many of the buildings in the VII district are distinctive and have been given protected heritage status. These tensions between urban decay, valued and protected heritage and private investment are important in establishing the context for the development of “rom” venues.

In summary the underpinning forces of regeneration are the following: low-quality housing, with a growing rent and value gap, decaying urban fabric with an ageing, lower-status population, shrinking in size and decreasing state ownership and influence. The transformation of Budapest has created countless “loose spaces” and “dead zones” and in these in-between spaces, the planning and regeneration process is stalled, although the buildings do not remain empty. These constructions have been turned into galleries, concert halls and clubs, the ruined nature of the buildings into an aesthetic feature and colonised these spaces. The occupation of loose spaces and dead zones may be considered as the outcome of opportunistic entrepreneurialism, which thrives by exploiting conflicts surrounding planning and regeneration. Allowing the hospitality venues to operate thus enables private owners to capitalise on their investment in situations where other, more comprehensive transformation of spaces would encounter legal and political obstruction.

Tuesday, January 22, 2013

The Panama Canal Expansion: are clustering forces in action?

The Panama Canal Expansion: are clustering forces in action?

By Szabolcs Görög

The expansion project of the Panama Canal, started in 2007, will almost double the commerce through the Canal. It will also raise employment and increase revenues. However the main improvements it can bring to the region comes from the beneficent impact of clustering forces.

The Panama Canal was finished in 1914 and it immediately became one of the most important canals of the world maritime transportation. Unfortunately, many vessels exceed the maximum size which can safely sail through due to the development of the cargo ships. Panama Canal Authority (ACP) in order to retain their competitiveness and market power, started to deepen and broaden the existing canal. They also begun to dredge out a new one with larger locks. In this brief blogpost, I attempt to summarize the most important effects of this investment for Panama.

The expansion of the Canal began in 2007. According to the ACP’s calculation, the project should be finished in 2014 at a cost of $5.25 billion. $3 billion of the total investment come from retained earnings, the rest is financed by bilateral and multilateral lenders, for instance by the Japan Bank for International Cooperation, the European Investment Bank and the Inter-American Development Bank. The list of these lenders indicates the high expectations about the benefits of the expansion.

According to Alberto Alemán Zubieta, the ACP's chief executive, the total cargo per year will grow from 250 million tons to 510 million tons between 2005 and 2025, and the container traffic will also triple to 300 million tons during this period. Moreover, the ACP expect a 1.2 additional percentage points in the annual growth rate of Panama after the completion of the expansion, supporting Panama to attain a GDP of $31.700 million by 2025 (in 2005 dollars), which is almost a 2.5-fold increase. Furthermore, the ACP hopes that on account of the expansion 100.000 inhabitants will emerge from the poverty. Some probably would say that these numbers are too optimistic, especially in the context of the growth of the GDP. Nevertheless, if we put on the glasses of Economic Geography we wouldn’t be one of them.

First of all, the Canal and its close area, primarily Panama City and Colón, is already a notable transportation and logistics hub in the region and actually in Central America as well. Thanks to the expansion, additional clustering forces are in action. In anticipation two computer-maker giants (HP and Dell) and a leading manufacturer of constructing machinery (Caterpillar) already moved to Panama, and operate distribution centres in Panama City. In addition, the City is home to numerous banks, providing saving services in the region, especially to Venezuelans, Columbians and Central Americans, moreover several companies enjoying the favourable tax system for offshore business. Mr. Alemán rightly expects that numerous new arrivals will settle in the region. In particular, such firms will provide fuel sales, tourist operations, airport and merchant marine activities, legal and financial services, vessel repairs and maintenance, telecommunications, shipping services, land and intermodal transportation etc. He also hopes that new railroads, ports, roads and some research institutions will be established.

These economic activities complement each other, some of them directly attached to the Canal, others are in connection with the primary activities, in response to those demands. Therefore, there is an international clustering force of activities that generates local demand for further complementary activities this trigger other important services. Additionally, because of this agglomeration, circular causation will also get in motion. Countless new jobs will appear many of these jobs will demand skilled workers in a relatively short period of time. However Panama do not dispose such number of skilled workers yet, as a consequence, immigrants will show up. Certainly, many unskilled Panamanians will get a job as well. According to the ACP estimates, this number will be between 35.000 and 40.000 in line with the construction, and a total of 150.000 to 250.000 new jobs will be created in the long run, thanks to the considerable cluster effects. Last, but not least, at thing worth mentioning: the ACP is a state owned company which operate independently from the government, but a considerable proportion of its profit goes to the treasury directly.

All things considered, the expansion of the Panama Canal will directly help the life of Panama thanks to the lots of new jobs and the increasing commerce. Furthermore, its indirect effects through clustering will provide an even greater benefit for the whole country, especially in the close region of the Canal.

Thursday, January 17, 2013

Two North-Italian Clusters

Two North-Italian Clusters

by Alfa Diallo

The text describes two North-Italian Clusters’ (chair cluster of Manzano, and the wine cluster of Conegliano- Valdobbiadene) most important characteristics. The hypothesis is that now days in a cluster’s effectiveness innovation and integration are the most important factors. The cases seem to prove this hypothesis.  

What is common in chairs and wines? First this question looks really difficult because with standard logic it is quite impossible to figure out the connection. One can assume that it is much more comfortable to drink wine if one sits in a chair. It is a possible solution too, that if someone drinks too much wine it can be really difficult for him to succeed in sitting down in a chair at first time.

I can imagine an infinite number of creative solutions to my question but this time I will speak about a special connection which relationship is not a real linkage only the creation of my imagination. In this blog post I will examine the role and effectiveness of two very famous North-Italian clusters, and by doing this comparison, I am trying to identify some general conclusions about the characteristics of the clusters. The two protagonists this time will be the chair cluster of Manzano and the wine cluster of Conegliano and Valdobbiadene.
Before I start my examination it is really important to define what a cluster is, and describe in a few words, that why are they important in the modern business system. Because of the globalization most business theorist thinks that in most of the markets a new competition type has risen, because instead of competition between firms the dominant effect now is the competition between networks. As these forces became more dominant, many types of networks got popular. One type of these networks are clusters in which firms and other institutes that work in the same field and geographically concentrated mutually cooperate in some of their operating activities. Now I will present two real example of this type of connection.

The first cluster I will describe more, in detail will be the chair cluster of Monzano. The tradition of chair making is really old in North- Italy so there are many firms that are specialised on producing chairs. The problem is that most of the production firms of the regions were small or medium sized companies so alone it was nearly impossible for them to face the rising rate of competition. That is why the cluster of Monzano was formed involving the small and middle sized firms of the region and some big firms too. The core competence of the cluster that it has a high reputation in the Italian market, and being a member is a guarantee for the consumers that the purchased product has a high quality.

The cluster is not highly integrated because mostly it is only a horizontal type of cooperation because the activity of the firms in the cluster is quite the same. This is the reason why most of the common activity in this cluster are centralised around the production, so it is about how to organize the production process the most efficient way. One channel of this is the joint acquisition of raw materials and long term contracts with the suppliers at a cluster level. Of course there are other joint activities like marketing and research and development but these factors are less important. There are some non-market members of the cluster like the University of Udine and the University of Trieste that insure the supply of trained workforce.

The second cluster to examine is the wine cluster in Conegliano and Valdobbiadene. The structure of the industry is much similar than it was by the case of chairs. There are many small and middle sized firms that traditionally operate in the industry, and at the market of wine reputation is as important as on the market of chairs. So the conclusion in this case is quite the same. In order to survive the firms had move into a closer cooperation so they formed a cluster.

But the similarities end here. The wine cluster is much more integrated, than the chair cluster because we can identify horizontal and vertical cooperation too within its members. The focus of the cooperation is different too, because there main activity is based on research and development with the first research centre of wine industry in Italy. The other activities of the cluster are highly integrated too, because they use common marketing campaigns or make wine fests together.

So we saw two similar industries with two different types of clusters. But why is this so important? As we look at the recent trends of the clusters we can see, that both were hit by the recession, but the recovery paths are quite different. The chair cluster faced a huge setback at productivity and many problems emerged. The smaller firms stated that the bigger firms have too much power in the decision making of the cluster, because there is not enough interdependence between the firms. The way out looks to be some kind of common research and development activity, and much more integrated all day operation. On the other hand the wine cluster only faced a small setback and the estimations show that they will produce five times as much wine as now until 2035.

The main message of my text is that close networks really matter in modern business life so in clusters we should focus on the “double I rule”, because integration and innovation matters the most. And what is common in wines and chairs? I think it is still hard to say.

Tuesday, January 15, 2013

The Revival of Trams – France is The Frontrunner

The Revival of Trams – France is The Frontrunner

by Ákos Budai

The development of public transport is beneficial for many, France knows this very well as the country has been the world’s frontrunner in the revival of trams in the last couple of decades. This time’s experience shows that tramways are accelerators for urban projects and they can help bring districts and business entities closer together.

Currently, twenty-three French urban areas have at least one tramway line, but it wasn’t like that just a couple of years ago. France once had an excessive tram network, but almost all systems were replaced by bus services in the 1930s or after WW2 because of international trends and government policies favoring buses and cars. The revival of trams started in the 1970s with the introduction of a tax in favor of public transport, which helped many cities develop their metro systems. In the 1980s, the decentralization helped the re-introduction of tramways after local governments realized that smaller cities (which are not suited for a metro system) can also benefit from public transport. Trams made their first big comeback in Nantes in 1985. In 1996, the law on clean air and the rational use of energy set urban travel plans the goal of reducing car use. That and government aids helped smaller cities to build their own tram systems. In 2000, another law allowed urban planning to work on longer timescales and a larger spatial scale. This law provided a strong incentive to link urbanization with transport. No wonder that tramways have been experiencing a revival for several years now.

Tramways are the means of urban planning which perfectly fit into the scheme of urban renewal, transport planning and environmental concerns. The political choice of building tram lines is firmly rooted in the sustainable development philosophies favored by governments. With the help of trams, city planners can take a new approach to urban mobility and urbanization projects. Building a tramway expresses a desire to renew the image of its city, so trams have also become a tool for promoting a city.

Statistics show that tramways increase people’s willingness to use public transportation. Cities with a dense network of public transport systems including tram lines have seen a bigger increase in passenger numbers than cities without trams. This phenomenon can be explained by the fact that the opening of tram lines is usually accompanied by the implementation of a global transport policy to create a better spread across the different means and methods of transport. Therefore, this encourages greater use of public transport and involves restrictions on car traffic and parking. Creation of new cycle routes, mobility management (development of company transport plans, promotion of car pooling and car sharing) and promotion of walking also fit into these tram-building urban plans.

Tramways interact with the city in many different ways: they are open to the city and visible from the streets. Architects and landscape architects have realized this, so they took this opportunity and refurbished streets around tram lines. This refurbishment is especially good for crowded city centres, where decades of heavy car traffic usually lowered the quality of life. Tramways therefore greatly transform urban landscape: silence, reduction in air pollution, tree planting, planting on platforms is visible by everybody, not just tram passengers.

But not only landscape and people’s attitude is changed by trams. Building a tramway in a city has an impact on businesses both during and after its introduction. Owners of businesses are often initially concerned about the loss of trade from customers who travel by car, but subsequently realize that a more peaceful environment can be profitable for them. In the last decades, France provided an excellent study for the consequences of newly built tramways and feedback demonstrates that after the building and adjusting phases - which can both be very damaging in some cases - businesses overall find that trade returns to previous or even higher levels.

Tramway projects usually come with a redefinition of public space, leading to a change of image. This also means an opportunity for owners to renew their businesses. Owners who use this opportunity well can benefit hugely from the introduction of tramways, but those who don’t make the right moves, might experience serious problems. Growth in the service sector is usually a pleasant externality caused by tramways. However, the changes in traffic flow (in customer parking and deliveries) may have a negative impact on businesses which are already vulnerable. Businesses which previously relied mainly on passing trade may also face serious problems. But if the tramway is located in a pedestrian area, businesses in the city centre usually benefit from the flood of pedestrians generated by the tramway. Also, central districts generally attract leisure shopping, leaving more practical purchases to outlying areas, which usually become more accessible with the new tram lines.

Not only small businesses in the building city are affected by new tramways. Many large French companies are using their expertise to create tramways and export skills worldwide, ranging from studies and construction to operating tramway systems. Also, engineering companies are involved in designing tramway projects, they provide studies, project management, project management support to project owners and construction supervision, not just for French clients. Rolling stock designers and manufacturers also play a really important role in today’s tram revival. Until recently, most of the trams running on French networks were manufactured by Alstom. (Alstom is quite well-known internationally as well, just think about the
new metro cars in Budapest.) However, trams designed by other companies such as Bombardier, Siemens and Tranhslor have been selected by some cities as well.

All of this proves that tramways are beneficial for many – they are accelerators for urban projects and they can help bring districts and business entities closer together.

Thursday, January 10, 2013

Recent posts by CEU graduate students

Recently, Regionomist authors have written posts about regional development and transportation issues around the globe. For example, Gábor Gyurkó discussed how roads - beyond military power and economic might-  have shaped the outreach of empires throughout human history presenting the example of royal highways and the Persian Empire. What is the link between city growth and the clothing in Bangladesh?Md Masud Karim talked about how outsourcing shaped Dhaka. The role of infrastructure was emphasized by Valeria Shestak who looked at the impact of a new port in Odessa as well as by Ivan Vovkanych who talked about how investments mattered in Singapore. Clusters and science park projects remain interesting, Krisztina Horvath discussed a new project around Paris while Péter Csárdás asked if a science hub makes sense in Budapest. Any many many more interesting posts - check it out!

Catalonian independence and the Catalan economy

Catalonian independence and the Catalan economy

By Ambrus Bárány

A number of regions within the EU might want to secede from their country, the newest example being Spain’s Catalonia. However, the economic consequences of such a secession are grave.

Separatist movements are one the rise in the EU. Belgium’s richer Dutch-speaking Northern half, Flanders, would want to secede from Wallonia, its poorer French-speaking counterpart. Scotland will also have a referendum on independence soon. The newest and most interesting case might be Catalonia’s: this wealthy region of Spain just held regional elections, which were widely recognized as a contest between parties for and against secession. These elections were a victory for those backing independence ambitions.

This short post will endeavor to leave politics out of the picture as much as possible, and concentrate on the economic analysis of the issue: how would independence affect Catalonia’s economy? The most important question for the economic outlook of an independent Catalonia is in particular is trade: will trade structure, exports and imports change greatly in case of secession. It is important to understand that currently Catalonia’s most important trading partner is actually –not surprisingly- the rest of Spain. The map below comes from Pankaj Gherawat of IESE Business School Barcelona, and it shows the area of Catalonia’s export destinations proportionally to their relative weight in Catalan exports (based on 2010 data). The map takes Spain’s regions as separate export partners. It shows that although this way Catalonia’s biggest export partner –accounting for 10% of its exports is France, Spanish regions are not at all that far behind: if taken as a whole Spain is obviously the region’s largest trading partner, with almost half its exports. It is even more shocking to realize that Aragon, a neighboring Spanish region, is not that far behind France in terms of Catalonia’s exports (7% vs. 10%), though its economy is less than a fiftieth of France’s. Imports are similar to exports in the sense that Spain is very important to the Catalan region, though imports tend to come from further away while exports travel little: Catalonia actually re-exports a lot of its imports to Spain (often with added value). The region would have a large trade deficit with the world; however, exports to the rest of Spain rebalance this in such a way that Catalonia’s economy shows a healthy trade surplus.


However, the question is whether or not Catalonia’s trade would be affected by a secession from Spain. Though many think it’s clear that an independent Catalonia would automatically be part of the European Union, that is not at all necessary: it’s unprecedented for an EU member state to divide into two countries, and EU law isn’t equivocal on the matter. It seems more likely that an independent Catalonia would have to apply for EU membership. In this case if tariffs were imposed on Catalan goods even for a short time, that would definitely bruise the economy severely. But even if automatic EU membership weren’t a problem, Catalonia’s economy most likely wouldn’t stay undamaged by secession. Most basic empirics of geographical economy show that trade between two regions, or two companies located in different regions is much smaller if the regions are located on different sides of a border (they are in different countries). This can be shown by a number of examples: US states trade much less with Canadian provinces of the same size than between themselves (even if accounting for differences in distance), and Canadian provinces likewise. German Bundeslander also trade much less intensively with other countries than between themselves: and it is usually accepted empirically that trade falls by about two-thirds due to national borders (if we assume distance to be constant zero between the two regions). If Catalonia’s trade were to fall with Spain to a third of its pre-secession level, even that would have devastating effects on its economy: the trade surplus would turn into a deficit, and its GDP would plunge greatly.

One could argue that it’s not at all clear why established business ties should fade away (or cease abruptly). However, there is one example of a friendly bifurcation when trade between the two countries fell by roughly 75% in a few years time, despite serious measures taken to mitigate the separation’s affect on trade: the example of the Velvet Divorce of Czechoslovakia. And there are talks of a possible Spanish boycott on Catalan products (obviously fuelled by national pride and indignation), as many Spaniards would simply stop buying products from the seceded region in order to punish the ungrateful Catalans. It is also plausible that reexports from Catalonia to Spain would drop sharply in case of secession: Spain and Spanish firms can improve goods from other countries just as well as Catalonia can, and Spanish consumers would probably boost Spanish importers with an increased demand (due to the “embargo” on Catalan products). Thus it is reasonable to assume that even in the best case scenario, with automatic EU membership as a given, Catalonia’s trade and GDP would be hard hit by the craved independence.

Why then are there so many “independentistas” is Catalonia? Most are angry about Catalonia being a net contributor to Spain’s budget: in other words, Catalonia –as a rich Spanish region- provides fiscal transfers to other Spanish region. If these transfers could be stopped, a tax relief could be given to Catalans. Nationalistic, pro-independence feelings were thus fuelled by this “economic reasoning of fiscal transfers making Catalonia poorer than it should be”, especially since the region was very much hard-hit by the crisis. However, Catalonia’s people should weigh the pros and contras together more thoroughly, carefully considering possible affects on Catalan trade and economy. If they were to do this, their enthusiasm for independence would surely decline fast. 

Tuesday, January 8, 2013

Make the history or “Just do it”

Make the history or “Just do it” © Nike 

by Jamila Mammadova

The agglomeration in Dubai is broadly discussed by many economists as an example of  rapid growth and successful policy implementation. Its development is unusual since Dubai  has a list of obstacles to the revolutionary development it achieved. Even though, the reasons are economically explainable, and bunch of literature is provided on the subject, we would like to re-consider the Dubai case in the frameworks of the new economic geography. The main argument we are supporting here is that artificial interventions and
planning in the geographical economy matter. The statement comes from the classic economic geography, which argues that history matters for the agglomeration. By the same logic, if the history matters, it can be corrected by policymakers in such a way that forces leading to agglomeration in the target destination are activated. The theory says, after certain level of economic cluster is reached, the decreased transaction costs for market players and beneficial market conditions create sort of spiral proliferation of the agglomeration.

Why the agglomeration in Dubai would not happen by itself? Firstly, Dubai is oil rich zone that has all preconditions to fall into the pitfall called “resource curse”. In fact, it happened with similar economies of Gulf States, like Oman or Qatar, which are rich countries, but are too reliant on the oil sale. Dubai could have historically ended up there, but in contrast, its economy is highly diversified, despite the fact that oil money played a high role in the initial investments. Secondly, the climate of Dubai would keep a great part of the travelers far from the city in hot periods. This could, in theory, lead to some tourism increases in winter and sleeping periods in summer. The mirror image of economic activities can be empirically demonstrated by Antalya or Bodrum, which are Turkey resort zones, and are frozen cities in cold times of the year. By the same token, there should be strong motivation to stay in the emirate during tremendously hot summer. Even though today summer life in Dubai allows closed-air skiing, thanks to the engineers and magic of the air
conditioning, the puzzle is in the achievement of the threshold that led to this development. The confusing part is how did they manage to make the first people invest, to bring FDIs to the country? Thirdly, religious and cultural background would never suggest that emirate can open up its economy and internationally integrate to the extent that it became one of the most popular tourist destinations in the world. 

In fact, it is not only tourism, which brings money to the economy, but also business and finance activities. The history of Dubai would never foresee it. Perhaps, it is because somebody stepped in and changed the road. In fact, the intervention to the development of the city took a long path. Even though Dubai was never poor before, it was definitely not on this scale of agglomeration. Interestingly, the first investments in the economy in the 60-s were made by Ruler Rashid bin Saeed Al Maktoum, who is perceived as the main driver of today’s expansion of Dubai. Thus, it is an individual and not a simple historical outcome that is treated as the favorable reason. Interestingly, the first investments in non-oil sector of the economy, infrastructure, were made even before oil money influx started, and were borrowing-grounded.

During two generations of rulers of Dubai, the aggressive investments in the various fields of economy were made, starting from the dredging of the Dubai Creek in order to allow larger ships to accost in Dubai. Later, the investments were made in the airport, hotels, aluminum and desalination plants, tourism promotion, trade promotion in form of festival arrangements, and, importantly, establishment of the free trade zones. All of these measures successfully brought the result, despite the fact that it took long time and large volume investments. As an award, today Dubai enjoys rich and stable economy thanks to its diversification and investments continuation. Nothing is black or white, and the debt accumulated for these investments is to be repaid by the government. Nevertheless, the city attracts business units as magnet given its developed market and, thus, low transaction costs, which ensures large money turnover. 

In the framework of our theory, all these measures taken by the rulers of Dubai represent artificial intervention in the history. The theory anticipated that once threshold is achieved, agglomeration would occur on the target geographical place. Indeed, what Dubai did, it practically managed to achieve this theoretical threshold.

The Dubai case should inspire the policymakers of other “oil embraced” countries to be not led by the history, but make it. Dubai does not have to invest so hard anymore, since the market players are clustering there and trying to amaze tourists, rich country citizens, and create more and more new services. Moreover, the high concentration of the firms provides Dubai with a luxury good: easy access to information, rapid modernization, and upto-date market. Indeed, Dubai has all possible international firms, restaurants, hotels, brands. And as one of those brands would suggest to the weaker countries, “Just do it”.

Friday, January 4, 2013

Agglomeration of population in Baku. Labor Pooling.

Agglomeration of population in Baku: Labor Pooling in action.

by Turan Orujova

 Azerbaijan republic (AR) is one of the biggest countries in the Caucasus region. It is located on the border of Europe and Asia and bounded by the Caspian Sea. The neighborhood countries are Russia, Georgia, Armenia, Iran and Turkey. Total area of Azerbaijan is 86,600 sq km and it is divided into 10 economic regions.

  The major contribution to the economic growth of the country is energy resources (oil). After gaining the independence from the USSR, the Azerbaijan Republic is considered to be a transition economy, with major export sector being oil. From the middle of 90 s the government managed to open up to the international trade and business. During last decade the total FDI into Azerbaijan exceeded $ 25 bn, and from this aspect Azerbaijan is a leading country in the region.

   The reason for enterprises to make equity investments in Azerbaijan is that in general these companies are mostly oil and petroleum oriented enterprises, and abundant natural resources make Azerbaijan an attractive target for such investments. The most interesting fact is that most of these enterprises are located in the capital of the country- Baku. If we look at the country from the point of view of the regional economy, we can easily observe the agglomeration of population in one particular part of the state, - the capital. The population of Baku has changed considerably during the last decade; moreover, there is an escalating tendency of migration to the capital during the last two decades. Below, we can see the changing pattern of agglomeration in the capital, here the increasing tendency of population growth can be observed.

What is the incentive for moving to the capital (Baku)? There are many reasons for agglomeration to occur in the capital and let us observe some of them.

Azerbaijan has access to the Caspian Sea, which oil and gas reserves are considered to be one of the major condensed gas and oil deposits. For the reason that Baku is situated on the seashore, it is a suitable location for the businesses doing oil exportation. In 1994 the ”Contract of the century” was signed, which implied the projected investment equal to $13 bn.  This is how we can explain the increasing tendency of population in the capital. Huge amounts of FDI give government a push for development, thus, creating new workplaces and that pushes people to move. The rapid increase in agglomeration started approximately in 90ts,  when the major 11 companies invested into Azerbaijan oil sector: BP, Amoco (U.S.), LUKoil (Russia), PennzoilUNOCAL (U.S.), Statoil(Norway),Dermott(U.S.), Ramco (Scotland), TPAO (Turkey),DeltaNimir and SOCAR (Azerbaijan).

Consequently, during the last decade there has been a significant drop in the unemployment level. As State Statistics Committee reports, recent time (especially starting from 2003) the unemployment rate fell almost by 3.6%. Such a decreasing tendency of unemployment can be explained by the creation of new workplaces in the industry production. New investors and new firms mean expanding of productions, thus, creation of workplaces, consequently, incentive for people to move from poor rural parts of the country to the capital, where they can easily find a job.

Another reason is the new economic formation with high level of private sector participation. The increased share of private sector (98% in 2001) makes the country’s economy more competitive. Rapid growth of economy, based on the processes of globalization, led to the development of SMEs and privatization. Most of the private corporations are located in the capital, because it is less costly to find educated people, with good knowledge and background. Fine infrastructure of the city makes it convenient to do business with foreign partners, which are attracted to the emerging market with abundance in natural resources.

Finally, as a result of agreement between Azerbaijan, Georgia and Turkey in 2006, The Baku-Tbilisi-Ceyhan pipeline started to function. Since then Azerbaijan started to act on the international market. The international agreement caused migration not only within the country; it became the reason for migration of foreign workers to Baku, in order to participate in the construction of the pipeline.

Thus, on the example of Baku, we noticed that if a country is abundant in natural resources it can cause the agglomeration of people (consequently firms, workplaces, production) in a particular part of the country, which can be considered as the business center of the whole state.

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