Thursday, March 28, 2013

The main exporter of the world and its increasing labor costs: China

The main exporter of the world and its increasing labor costs: China 

by Varga Anita

I think it is not surprising that in 2011 China was again the biggest exporter of the word. Some of the main advantages of the country are the low labor and transportation costs. However the former is getting higher and higher.

Comparing countries by their exports in 2011 China was followed by the European Union, Germany and the United States. The reason why this country could become the biggest manufacturer of the world is that the country has some comparative advantages. As well known the country is not just labor abundant, but also the cost of labor are quite low. On the other hand, this cannot be the only reason as there are many other countries and areas where the wages and other costs are also relatively low. Additionally in many cases these other countries are much nearer to the importer. So there have to be other explanations.

According to economic geography the firms’ decisions are strongly influenced by transport costs. This principle can be also used in this case, so to explain why China is the biggest exporter of the world. So an other significant advantage of China is its geographical location (its first nature), as it has a coastal part. This means low transport costs. These two comparative advantages, so the low labor cost and low transportation cost can explain why China specialized in exporting mainly those labor intensive goods which are also easy to transport.

As a result most of the foreign investments, according to some estimate from 1980 the 90% of them, arrived in coastal areas. The cities where the most significant economic growth took place are situated on the seaside, such as Shenzhen, Hong Kong, Shanghai and Dalian.

However China can lose one of its main comparative advantages, as labor costs getting higher and higher which means a real challenge for many companies. Not surprisingly this progress started in the coastal areas, where most of the firms are situated. It can be explained by the Heckscher-Ohlin model which says: if a country has a comparative advantage, but there is free trade then the factor prices equalize. Thus nowadays the coastal areas of China are not as attractive as they used to be. As a result some companies have already moved to other parts of China and to other attractive countries, for example to India and Vietnam, where the labor cost are still lower. And as they also have coastal parts their first nature is similar to China.

Perhaps now some people think that because of these changes most of the companies will leave the coastal part of China. However it is not so simple because there are other things that should be considered, as China still has some advantages. Even though the labor costs are really lower in inland China, the transport costs are much higher. In addition China has already a reasonable supply chain, and it has also advantages considering its second nature: for example the transporting infrastructure is better than in India or in Vietnam. It is also important to mention that the Chinese workers’ productivity is also better which can partly explain the higher wages. So the main advantage of India and Vietnam are their lower labor costs. This can explain why mainly those companies left China which were related to labor intensive industries. However it is not a big problem for China as now its aim is to develop advanced technologies so as to attract more high tech enterprises.

So in spite of the increasing labor costs of China, which was a significant advantage of the country, it still has some other advantages. But of course the changes have some effects. As China and the other countries with lower labor cost have in some extent different factor abundance, some kind of specialization can be observed among them: mainly labor intensive companies are moving to India and Vietnam, while China started to attract companies with high technology.

Wednesday, March 27, 2013

How Beijing-Shanghai rail will effect economic growth?

How Beijing-Shanghai rail will effect economic growth? 

by Vanda Szendrei

Improving public transportation has always played an important role in economic development. Now you can see the possible effects of the new Chinese high speed railway, even for clustering.

In the summer of 2011 the Beijing-Shanghai High-Speed Railway started to operate connecting together two major economic zones. The railway is 1.318-kilometre long and it is the world’s longest high-speed line ever constructed in a single phase. This line means only one part of the huge railway development in China: starting with the operation of China’s first high-speed railway, Beijing-Tianjin intercity railway on August 1, 2008, China’s high speed railway develops from nothing. In the past four years, 21 high-speed railways have been come into service. Until the end of July 2012, the total mileage of China’s high-speed railway reaches up to 6,894km, ranking first in the world. Let’s have a look why the railway is vital for China! 

This development is determined by both China’s first and second geographic nature. Regarding its first geographic nature, China is a vast country with 5,000 km of north-south and east-vast distance. As for second geographic nature the distribution of resources and industries is uneven and large amount of goods through the regions needs to be transported via train. These reasons explain the importance of these giant constructions.

One of the first effects was the decline in transportation costs. Coinciding with the rail launch, economy airfares have slumped with 52 % immediately. However, fares in less price sensitive business and first-class markets appear to have remained comparatively unaffected. Since commuting has become faster for most people, the real distance (measured in time, not in distance) has decreased.

Going back to the impacts, accelerating economic growth seems to be obvious. According to the China Daily newspaper, the newest high-speed railway will create a new economic belt and strengthen the integration of the Bohai Sea Rim and the Yangtze River Delta economic zones. Indeed before the operation started, cities surrounding the railway had benefited from its potential economic effect because real estate prices have risen in spite of the general downward trend. For example in Changzhou, a third-tier city the real estate prices doubled within one year. Soaring housing prices along the rail line are due to the high-speed train's projected effect of business clustering – predicts the paper.

The “direction of” the clustering is an important question. Probably the concerned inter-cities will behave as Central Business Districts gaining more importance over the neighbouring area. Although, as we have seen in the case of the fast-railway between Madrid and the southern part of Spain, a possible outcome is that either Shanghai or Beijing or both of them will loose from their leading role and there will be a shift in emphases to the five inter-stations.

This hypothesis is supported by Zhao Hui who analysed the prospects of this measure with investigating the case of Jinan West Area. The expert predicts that after the completion of Beijing-Shanghai High-Speed Railway, the passenger capacity can achieve 27,000,000 people in the very short time which will lead to huge demand to service industry therefore the market potential of these areas will increase as well. It is possible that local cultural industry will develop enormously. According to the plan, Jinan’s Cartoon Industry will achieve 20 billion dollar. Moreover Huaiyin Industry district, Huaiyin Industry Science district and Modernization International Physical distribution which are close to the station will gain a chance to develop.

However, it seems a self-generating process the government has a vital role too. So, what should the government do? At first, they should provide an appropriate environment for investment through following the market economy rule, producing effective administration environment and promoting strict and standard legal and faithful credit environment. Secondly, they should display the function of strategy guidance It realizes by the pure pursue quantity to quality, introduces better project of high technology, intensity investment, low resources consume, less environmental pollution, strong lead role, good development prospects. Finally, they should formulate corresponding industrial promotion policy continuity. That means, relevant institution should pay close attention to research corresponding executive regulation to enlarge the support to the development of Cartoon Industry. Evolving good tax environment can be a key to this goal.

What we can deduct from case study is that although high-speed rail means a great opportunity for clustering, Chinese policy-makers need to be cautious in order to promote and not hinder the development.

Tuesday, March 26, 2013

The prosciuotto cluster of San Daniele

The prosciuotto cluster of San Daniele 

by Szabó Balázs

The prosciutto of San Daniele is a world famous ham which is made only by a few town. The business model of this region is based on the experience of decades and the cooperation of local manufacturers.The success roots from the unique production process and the special two-tier cluster system of San Daniele makes the brand even more valuable. 

Perhaps most of us have seen the name of „prosciutto di San Daniele” on the European restaurants’ menus. The famous Italian ham is usually served with melon or sometimes with fig. The production of this unique, delicious food is based on the special knowledge accumulated over generations in the territory of San Daniele. The cool air coming from the hills mixed with the salty air of the seaside makes the territory quite suitable for the production of this ham. The first written proof of the high quality production dates back to the 18th century. Nowadays the production is organised by a consortium utilizing the special environmental conditions. Since this business model is very successful, we can draw some conclusions: some small towns, with a high-quality product can remain profitable on this highly competitive market dominated by big companies. 

The strict rules applied to the breeders, slaughterhouses and food companies are the basic conditions for the production of this fine product. The pigs can be bred only in the 10 determined regions around San Daniele, and their feeding is highly regulated. The pigs are slaughtered when they reach the weight of 160 kilograms. After the slaughter the meat is cooled down in order to get a steady temperature and humidity. The next processes are the removing of the bones, extruding and salting. The 4-5 month old hams are stored for maturation for 9 months. After having completed the process which takes at least 13 months, if the producers find everything in order, e.g. the size, weight and colour, the ham can get the San Daniele brand name.

This complex and precise process and the special environmental conditions are the basis of the San Daniele ham’s competitiveness. The ham producing business model is based on the cooperation of local manufacturers. The present cluster organization’s predecessor was founded in 1961. Nowadays the cluster consists of 31 ham manufacturers which have business relationships with more than 100 slaughterhouses and 4500 pig farms. The 31 manufacturers produce 2,7 million pieces of hams every year, one fifth of them for exports. The revenue generated from these hams was EUR 335 million in 2010.

The speciality of this business model is the two- tier cooperation among local companies. On one hand there is cooperation within San Daniele ham consortium to produce quality hams while on the other hand there is Agro-food Park, which has the main goal to protect the natural environmental resources. It means that the companies within the territory are responsible not only for the mutual innovation, marketing and brand equity development, for the protection of the environment as well, and they emphasize this role very actively.

Agro-food Park is situated in province Udine, covering the villages and towns in the Friuli-Venezia Giulia area. The park stretches over 168 km2 and has 2500 inhabitants. Agro-food’s objective is to preserve the natural treasure and traditions of the region. It wishes to develop such a sustainable business strategy that will make the region well known in the world. The combination of sun, river, air and mountain on the logo of the park serves this objective. The park’s operations is based on the consortium of more than 100 businesses, which employs 1,000 people and gives a job to 700 more people through sub-contractors. These companies do business in different fields of food industry. The most important food productions comprise dry-cured ham, beef, cured pork products; sweet and savoury bakery goods; diary products; fish and smoked trout; organic products; wine and spirits.

The park assigned an annual budget of EUR 1 million to develop marketing, innovation, international trade and environment protection strategies. However the park may face difficulties to finance these projects as major part of the money has been provided by regional development funds. This shortage in financing will probably be covered by local private businesses.

The second tier of the business strategy is the Prosciuotto di San Daniele consortium, the partnership of ham makers that is integral part of Agro-food. The consortium focuses its effort on quality assurance and marketing. Certain companies outsourced almost all the marketing activities to the consortium, having provided EUR 20 million to manage joint promotional and marketing activities in 1988 - 2010. The ham with the San Daniele logo guarantees the quality of the ham in domestic or foreign markets. This premium market position is further strengthened by the ham from San Daniele having the PDO (Protected Designation of Origin) certificate that guarantees the region of origin of the pigs, quality of the ham manufacturing and maturation processes.

The speciality of San Daniele cluster is visible. The 31 profit-oriented companies that compete with each other are able to manage some key business activities jointly. The possibility for them to cooperate is provided by their mutual traditions and technologies. Both the Agro-food Park and the consortium are vital that a small, apparently unremarkable town can be a match for either multinational companies that produce lower quality ham or prosciutto from Parma region of equally high quality.

Monday, March 25, 2013

The Ocean’s Hot Dog – The Fish Stick and its Development

The Ocean’s Hot Dog – The Fish Stick and its Development 

by Éva Révész

At first sight it might seem strange to mention fish sticks together with the topics like science parks and clusters but as you will see, they are strongly related.

Transport costs are extremely important in the theory of New Economic Geography and in each and every field of economics. With the lowering of transport costs, after a certain point the economy settles in agglomeration. In agglomerations, innovations start as ideas are close to each other, so these happenings give way to the formation of clusters and science parks, as well. That is exactly the thing that happened in the fish stick industry. Let’s have a closer look at it!

The fish stick is a postwar invention as Paul Josephson says in his study. First, people abstained from trying it as they did not look great and people were not used to these types of „fast food”. But later on, as innovations were made to improve the quality and their looks, and as women became busier and had less time to cook they began to use ready-to-cook food like fish sticks. In order to make it profitable, so called „floating factories” were built, ie. ships that had the necessary equipment onboard to prepare the ready-to-cook fish sticks (fishing, cleaning, freezing, canning, etc. were done still on board). (The picture represents a fish processor/factory mother ship from the late 1980s from Finland.)

What is more, to propagate the consumption of these types of food, innovations occured in freezing and storing techniques and in transportation, too. Supermakets, which were opened in the 1930s in the US, had to install high-capacity refrigerated display cases where the product could be properly stored. What is more, trucks and railway cars having the new freezing techniques were introduced in order to ease the transportation of fish sticks and other fresh and frozen goods on land. Even the expansion of the federal highway system in the 1950s helped the industry to proceed. That is why transportation costs became lower.

What else happened? Other innovations and regulations in terms of the quality also helped the fish stick to become a widely popular food of Americans. Strange as it seems, but scientists from such – nowadays popular – universities as MIT or Harvard made researches. Economists form Harvard made a detailed report to determine the proper long-term strategy to secure the position of Gorton’s (discussed later on) within the industry and researchers from MIT’s Department of Food Technology helped the same firm to improve the quality control and efficiency of production of fish sticks. MIT even sponsored the so called „first seminar in the history of frozen foods industry”. Almost a whole science park centered around this small industry to help and propagte it!

As I have already mentioned, the Gorton’s Gloucester Corporation was a small company that later became the leader of this industry by the good managing of the firm. It constantly expanded its product line, paid huge attention to the quality of its products and advertised a lot to attract consumers. As time passed, other firms, like Birds Eye and Fulham Brothers entered the market of fish sticks and other frozen foods, which first seemed great as these firms began to act like a cluster in Massachusetts: they competed against each other, on the other hand they improved the quality of the products, which was good news to the consumers, and paid significant attention to the level of it. But later on, unfortunately, competition grew bigger at the expense of quality.

What is the end of the story? Fish sticks did not become as popular as hamburgers in America, but not even elsewhere. The industry boomed in an unbelievable way but shrinked in the same way and with the same speed as it started out. Why did it happen? In my opinion, it was not as popular as hamburger among ordinary people, as it still needed some cooking, so as the quality worsened people began to substitute it with something else. One thing is sure: fish sticks became only „the ocean’s hot dog”, not „the ocean’s hamburger”.

Sunday, March 24, 2013

The Californian high-speed rail project

The Californian high-speed rail project 

A prestige investment

by Szilard Peredi

The construction of the high-speed rail in California started with big expectations, but now it seems that the efficiency of the project is strongly questionable.

The High-speed rails are probably the most amazing transport systems of the world. These rails are the symbols of the future’s technologies in some way. Maybe that’s the reason, why it becomes to a prestige investment instead of an efficient movement of the governments.

Of course, it’s very hard to compute the costs and the benefits before the construction. The engineers have to take into account the demography and macroeconomic changes, the intertemporal trade-offs, and a lot of stochastic variables. But after the construction, they also need to find all of the externalities, to be able to rate the project. So you can never have an ultimate opinion about the success of a HSR development.

However, if a project lost the support of the majority before the first segment of the implementing, probably something went wrong. This happened in the case of the Californian high-speed rail project. The project biggest purpose is to connect Los Angeles and San Francisco with high-speed rail service by about 2028. 

The project wasn’t the only in the USA, but all of the other HSR programs was canceled because of the local politics. It can be said generally, the US government with Barack Obama supported the projects, while the local politicians were against them because of the nuisances. And in this fight the only survival was California with its strong democratic background.

It’s hard to believe that with this history this could be an efficient program, and the happenings justify our opinion. The California High-Speed Rail Authority, which is managing the project, announced a delay, which reduced the supporter basis of the construction. And this basis wasn’t so strong before the notification either.

In The USA the property rights are strong, and this is hardly compatible with big infrastructural developments. The planned track traverses a lot of farmer’s land, and they doesn’t see any of the advantages of the project. But this also could be said about churches, schools, businesses and homeowners near the track.

If we suppose that the government is the arm of the citizens, the project wouldn’t be finished at all. In 2008 people voted $9 billion bond issue to funding the early stages of the project. And this is just a small part of the whole needed finance support. The whole cost of the bullet train project is $68 billion.

After 4 years, in 2012, a USC Dornsife/Los Angeles Times poll found changes in people’s opinion. The 55% of the answerers want back the $9 billion bond issue, which was voting with majority in 2008, and 59% said that, if they could vote again in this case, they would vote against it.

The plans also changed a lot during the 4 years. According the new calculations, the cost of the project will be the double of the original amount. Moreover, now the constructors plan the sharing of the track with slower commuter and freight trains in some areas.

According to the coalition of bullet train backers this investment is needed in long term, because the other forms of transport, like cars and airplanes, will reach their limit.

But we can say that these problems come with democracy, and don’t affect the long term efficiency. But the poll saddest part is the results, which said that the most of the people don’t think that, they will use the HSR in more than once in a week.

Of course, none of the arguments above guarantee the failure of the Californian high-speed rail project. The bias of the poll could be big, and the opinions maybe temporary. But I think that this project shows a good example, that a mainly political prestige investment how becomes a not supporting money wasting.

Saturday, March 23, 2013

The industrial park of Pécs

The industrial park of Pécs 

by Márton Kormanik

This post examines the way the industrial park of Pécs was created and whether it was successful or not. It also tries to outline if the industrial park was capable of coping with the recent crisis or not.

The following post is going to be about the industrial park of Pécs. There was a campaign for encouraging the establishment of new industrial parks throughout different regions of the country. That program is called IPPP (Industrial Parks Partnership Programme) and it aimed for an increasing number of industrial parks each year beginning with 1997. The programme was considered highly successful for being enough of a force to create 165 industrial parks around Hungary until 2003. Later on the European Union contributed to this program with 138,309 EUR. 

What was a really good idea of this programme was to focus on poor regions. In 1999 there were 112 industrial parks established, and 66 of these parks were installed within the four poorest regions of Hungary (northern Hungary, the Great North Plain, the Great South Plain and southern Transdanubia). The primary goal of installing these parks in poor regions must had been to decrease regional inequalities within Hungary to an acceptable level. The programme was also supported by Italian partners, who granted training for the directors of the 66 parks established in the poorest regions.

Through this programme the industrial park of Pécs was also established. This industrial park replaced mining facilities that provided workplaces for local people, and it had overcome its predecessor in many ways. First of all mining is a very harmful industry for nature and human health too. By bringing down the mining facilities the pollution of that location dropped sharply. Second, the industrial park not just employed more people than the mines previously, but it also opened a re- and further training facilities that are now vital in supplying companies with highly trained, advance and cheap workforce. This had various results during the years since then.

First of all, the industrial park of Pécs became an agglomerating force. More and more companies settled down in the park, thus raising its importance even further. Although the financial crisis of 2008 sort of broke that trend, for many companies became bankrupt or were just simply forced to streamline their budget, and this resulted in many plots being sold.

But this still does not mean that the industrial park in Pécs is done forever. In fact, the financial crisis might be a positive impact in the end. Investments and expenditures began in the year of 2006 supported by the government that are probably becoming productive soon. Those investments focused on expanding the territory of the park and developing the infrastructure.

The raising amount of disposable land raises the supply of land that already had been boosted by those companies that went bankrupt during the crisis. This means that soon the land prices should start dropping within the industrial park, which could attract other companies or investors. Furthermore, the training facilities still operate there, creating well qualified and cheap workforce, what can also attract companies. And if more companies or investors could be attracted then soon, the industrial park of Pécs could flourish again. All in all in my opinion the industrial park of Pécs can be considered a success. There are 3 main reasons supporting my opinion. The first one is that the park replaced a harmful industry with industries that have less devastating effects on the nature and human health. Second, the park had been considered a success by companies too, because they chose to move there in great numbers. Third, despite the relapse caused by the financial crisis the industrial park still have many opportunities to utilize.

Friday, March 22, 2013

“Canal-mania” –water system during the Industrial Revolution in Great-Britain

“Canal-mania” –water system during the Industrial Revolution in Great-Britain 

by Mónika Kiss

Britain canal-building process between 1760-1840 was extremly important in the process of industrial revolution, as it reduced the transport costs and caused agglomerations to rise. 

Transport costs are the heart of the New Economic Geography theory, as they are the most important exogenous factor. If transport costs start to fall, until a particular point, nothing happens. Then the economy sharply renders to agglomeration, to a region which the first migrant decides to move or the outcome is solely the result of a historical accident.

The story of “canal-mania” is clearly based on the process of relatively sudden lowering of transport cost. This process speeded up the development of the industrial cities. 

Let’s see the facts! Britain had very few proper canals before 1750, however its water system was perfectly suitable for such a purposes. (Year-round rainfall, perennial water supply.) The earliest canal building was undertaken as a local enterprise needing to ship goods, such as the Duke of Bridgewater's canal built to ship coal from Worsley to Manchester. The end of the American War of Independence and good years in agriculture helped the disposable income to rise, and people wanted to earn yield on their money.

In less than a generation, England was full of navigable waterways and heavy goods were carried by boat. Canal boats were massive: they could carry 30 tons pulled by a single horse, which was more than ten times the cargo per horse using a cart. Innovations: boat lifts, puddle-clay process (the process of lining the channel with puddle - a watertight material) helped the canal-building further. Historians say that this was the time when transition to the “business mentality” started, entrepreneurs were born, utilizing surpluses from agriculture and trade, and capital assured by manufacturers and other investors. But let’s get back to the transport costs!

The ‘canal mania’ of 1760–1840 converted England to an interconnected web of efficient all-year round waterways with 3,400 kilometers of navigable rivers, and 3200 kilometers of canals. Why the rush? Not only because of the trade. Coal and iron deposits were reachable via the water transport system in England, to a much larger extent than anywhere else. This made possible the raw materials to deliver to the production sites. Widely known that the manufacturing cities like Manchester or Birmingham were major economic drivers for the 'canal mania', and benefited vastly from a network of canals. Most of the traffic on the canals was solely internal. However the network linked the mainland cities with coastal port cities such as London, Liverpool, and Bristol, where cargo could be exchanged for import and export.

The end of the story? It happened also very fast, as usually things happen in revolution. From about 1840 railways began to threaten canals, canal companies were unable to compete against the speed of the new railways. With building the railway system another round of lowering of the transport costs occurred, but this is a different story. Consequence? The New Economic Geography theory showed us again: transport costs are the key.

Thursday, March 21, 2013

I believe Europe can fly – The SESAR program

I believe Europe can fly – The SESAR program

By Eszter Szücs

At the time when we in Hungary still cry about the collapse of our airline, the Malév, in the EU there is an ambitious new project about the union of the EU countries’ skies. This project is called SESAR, and it is developped to be the European air traffic control infrastructure modernisation programme. With the success of this programme, the EU will have a new generation of air management system which will correct the actual system’s problems.

There are three phases of the SESAR project, as we can see in the picture below.

The first part is the definition phase - it lasted from 2004-2008. It was an ATM (Air Traffic Management) master plan defining the content of the future’s airline system. The second part is the development phase, it began in 2008 and will end in 2013. In that part will be the new generation of technological system and components on the plans of the first phase. And the last phase, what will begin in 2014 called deployment phase, and will last for 2020. It this part of the programme will be the new infrasturcture in both Europe and in partner countries built.

But why is it good for us? Why is the SESAR such a big deal? Because air transport is more and more important in the countries’s economics, and the SESAR is not just a transport project, but a big, multinational system to will reform the Air Traffic Management as we know today. It will optimalise the air transportation what is thronged, but with the optimal organisation referring to the brochure of SESAR, we will have shorter flight times, with 50% fewer delays, more sustainable air travel through 10% in CO2 emissions, enchanced mobility through a better match between future demand and offer for air transport in line with economic growth, safer air travel, an overall increase in economic growth/ GDP, and the creation of new jobs. The number of those jobs will be 42000 if we can believe the official numbers. This new jobs can cause a growth in the GDP - but this will be not the only impact the project has on GDP - So if we count all the implementions, so direct, indirect and induced effects, in the period of 2013-2030 the SESAR would cause a 0,02 percentage point growth in the GDP.

It seems like air transportation has many effects on the economy of a country. We can find many studies about the regional economic benefits of air transport. They say that the most air transport employment is in the developed regions of the world, so the level of the air transportation in a country is related to a nation’s financial status. Buti n that case Hungary is not in the best position, but that is now an other topic.

So as we can see, if the SESAR turns into reality, with time it will have a very positive impact on the European air transportation and on the economy too. Europe in the time of the long.lasting crisis needs those new developments and investments to support innovation, mobility and economic growth.

But still we have to wait. The project needs too much circumstances, to give the wanted effect. First of all, one of the main points is central coordination. To build this new system in the EU, countries need good infrastructure, a synchronisation between each other, and for all these the project is in need of a lot of time. I hope, that for 2050 we will se the good impacts of that reform in the air on the ground too.

Wednesday, March 20, 2013

The rise and fall (and rise?) of the Hartford Empire

The rise and fall (and rise?) of the Hartford Empire 

Attempts at reducing regional inequality in the greater Hartford area 

by Rozalia Kepes

The 20th century brought unseen inequality on Hartford county in Connecticut: by today, a ring of wealthy White suburbs surrounds an extremely poor, predominantly Black and Hispanic inner-city area. After years of unsuccessful interventions, downtown Hartford might stand a chance at regaining its once buzzing economic life thanks to a new set of regional policies. 

The state of Connecticut is a controversial one – while according to per capita income it is the 4th richest out of the 50 states in the U.S., its inequality, measured by the Gini coefficient, is the 2nd greatest. (No.1 is – who would have guessed? – New York). Inequality is even more pronounced in Hartford County, where the per capita income of the most affluent town is almost 4 times as big as that of the poorest: the state capital, Hartford. How did the 20th century reduce Hartford, once the richest city in America, to – in the words of New York Times columnist Paul Zielbauer – “the most destitute 17 square miles in the nation's wealthiest state”? And more importantly: is there any hope for recovery? 

The glory days of Hartford came to a sudden halt in the 1950s, when – because of a huge reduction in transportation costs due to an increase in car ownership – the wealthy white inhabitants started to move out of the city center. By today this trend has resulted in near-complete social stratification with low-income minorities living in tiny flats under appalling conditions in downtown Hartford, and the fortunate whites residing in grandiose mansions in the suburbs. The map below, showing the percentage of whites living in each Hartford region in 2010, illustrates this: the tendency is that the closer a region is to the center, the smaller the percentage of whites are. (The University of Connecticut offers a great tool where fascinated students can discover how racial segregation has evolved.)

Matters got even worse after 1991, when the Governor changed the tax system in a way that was mostly favorable for investment income. This resulted in a great number of hedge funds moving to the state, which, among other things, changed the structure of labor demand rapidly. The manufacturing industry, which used to be happy to employ the cheap and unskilled immigrant workforce, were now going downhill, while skillful businessmen and insurance company agents were in great demand. This was a change to which most Hispanic immigrants could not adjust: with a general low level of education and the language barrier, inter-sectoral mobility was (and still is) extremely low in the area. The numbers need no further explanation: in 1999 poverty rate in Hartford County (which includes Hartford and its suburbs) was 9%, while that of Hartford itself was a shocking 30%.

Ever since the mid-1990s, policy makers and NGOs have been designing projects aimed at revitalizing downtown Hartford, such as residential improvements, or the building of a football stadium, with more or less success. Some projects, such as the Knowledge Corridor between Hartford (CT) and Springfield (MA), intended to attract and benefit from the rich human capital of the surrounding towns, which have an outstanding density of universities and hospitals. So far the most promising of these has been the launch of the grandiose Adriaen’s Landing project in 2001, which was a complex plan to breathe new life into the city center. This consisted of the Connecticut Convention Center, the greatest meeting space between New York City and Boston, to which was attached a huge hotel, the Connecticut Science Center, and Front Street, a passage full of retail and entertainment. Or at least this was the plan.

In reality, however, constructing big buildings is not – or not necessarily – enough. Regional economists call this the threshold effect: policy actions may or may not be effective depending on whether their amount surpasses a certain critical mass, which in turn depends on the initial point of the economy. Therefore, one of the reasons why so many expensive projects failed in their attempt to improve Hartford is that the city started from such a low economic level that it needs an unusually high amount of intervention before one can reach the break point.

The most recent initiative attempted to get a handle on the problem from the opposite direction by trying to improve the existing human capital of Hartford rather than to attract well-educated people. The “Social Justice Plan”, set in motion in 2012 by community activists, is aimed at reducing the health and economic inequalities as well as the achievement gap in education. As it is explained on their website, they encourage locals to get involved in any of their Task Forces, which are forums focusing on issues such as literacy education, afterschool programs, healthcare R&D, employment and entrepreneurship training, and child care subsidies.

Based on regional growth theory, such a project might be the cure Hartford has been longing for. The prosperity of a city is usually determined by its physical geography and by the policy measures taken. Hundreds of successful years are the proof that Hartford has great geographical endowments, but after these doomed decades it is in serious need of some policy enhancement. Luckily, by focusing on education, healthcare, and the building of the new convention center, it might on the right track, because investing in human capital is said to be the most robust way to promote growth. Still, while the increase in the city’s human capital can boost productivity – which in turn raises wages – these measures are advised to be complemented by improvements of infrastructure, innovation, and agglomeration. Therefore, the “Social Justice Plan”, combined with the planned 2015 opening of a Knowledge Corridor high-speed intercity rail line, has enormous potential for giving real meaning to Hartford’s nickname: “New England’s Rising Star”.

Berlin airports economic effects

Berlin airports economic effects 

by Priksz Tamás

The numbers of Berlin’s airport is decreasing. By nowadays Berlin has only two airports – Tegel, Schönefeld - and in a longer perspective the aim is to build only one called Berlin Brandenburg Willy Brandt Airport. And the BER is starting to operate in one year from now, in 2013. The question is why this new airport is constructed what was the motivation to concentrate the aviation services and what kind of economic effects it already have and what effects are predictable for the future? I will investigate these questions from economic aspects.

Historical overview

By the mid 20th century Berlin possessed decent infrastructure for air traffic but due to the World War II. the city became occupied by the Soviets and Allies which divided the city to a western and an eastern zones. Each zone had its own airports. For West Berlin Tempelhof and Tegel, the former played a great rule during the Cold War in supply the western part, for the east part Schönefeld. During the Socialist era three airports were operating simultaneously. After the reunification in 1990 many things had changed, economic preferences have come into view.

Airports have an important function in the aviation system. Airports take part in the process of transporting passengers and freight from one place to another. Airports increase the wealth of the region they are located in, providing new employment possibilities and bringing more tourists their region. In case of Berlin due to the greater scale of passengers and cargo volume all the three airports became overcrowded. It had two reasons, once these airports were designed with the demand of earlier times, second since 2003 with the start of Low Cost Carriers increased the number of passengers in a dynamic way. Two of the airports – Tempelhof, Tegel – had no opportunity for expansion. Tempelhof was situated close to the city center, in a high density residential area which prevented expansion. Tegel is also closely situated to the city and the expansion would highly increase noise pollution for the inhabitants. To solve this problem Berlin decided to expand the capacity of Schönefeld and build a new airport outside of Berlin in Brandenburg Province. This project based on the concentration of aviation services.

The economics of airport 

The idea of the Berlin Brandenburg Airport is based on increasing the efficiency of the aviation system since airport investment has an indivisible aspect. Land and runways are the most important factors in indivisibility since the cost of finding appropriate land area to construct an airport is quite high especially in large cities. Landing system, lights and terminal navigation systems are also the part of indivisibility. If there is an appropriate land for the airport it is much easier to increase the capacity of terminals so this is not the part of indivisibility. Looking at the characteristics of airports from the supply side brings that the concept of economies of scale plays a great role in industries with high fixed cost such as aviation. Runways had strong economies of scale but there can be diseconomies of scale in terminal facilities investments. Sunk cost is another economic factor is related to specific investments such as runways and transport connections with the city. These investments can only be recouped by appropriate level of passenger traffic. This is the reason why with the opening of BER the other airports of Berlin will be closed down. The economies of scale can be also investigated from the demand side. If passengers and airlines use only one airport in a city create benefit to both of them. Serving passengers in a concentrated way provides greater economies of scale both to airports and airlines which based on the theory of network benefit.

Berlin Brandenburg Airport

Berlin’s new airport is situated in a special geopolitical place called Schönefelder Kreuz which is a highway intersection. This region is one of the most dynamic economic areas in Central Europe. The completion of 4.2 billion euros project of the new airport enhances the economic growth in the region. Not just by creating 40,000 new jobs but with supplementing the Berlin-Potsdam growth axis to a triangle. 

From economic aspect the establishment of the new airport also provides better returns on the transport services between the city and the airport. The transportation investments in connection with BBI are based on the mentioned network benefit theory. That is why the missing part of the Highway A113 was finished and why will be the train lines integrated into the underground level of the terminal of BER. Moreover simple train lines, S-Bahn and ICE lines will also be integrated into the terminal. BER terminal is designed to 22-25 million passengers with the possible expansion to scale of 40 million.

As the north part of the city became quieter also losing some economic weight and accessibility. On the other hand the conversion and the reuse of the areas of closed airports are vague but provide many opportunities for utilization and new quarters of living. In the future we will see if these urban planning questions are solved successfully and whether BER brought greater economic prosperity to the area.

Tuesday, March 19, 2013

The Great City and the new city model

The Great City and the new city model 

by Popper Dávid

A new city is planned to be built from scratch in China. The main goal of the project would be an environmentally friendly city model that also ensures all the services of modern city life. This article examines the emerging questions related this project.

In October 2012, a lot of online press website has dealt with the news, that in China a new city is planned to be built from scratch. The project is named Great City and it aims to enable the popular city life, the environmental protection and being near-natural at the same time.

According to the proposal the city would be built in the middle of China, next to the city of Chengdu. Many refer the new town as a car-free city, because due to the plans, although cars won’t be forbidden, the residents won’t need it, since everything will be accessible in 15 minutes with environmentally friendly public transport and short distances. The bunch of greenery let people to be in the nature in two minutes from any part of the city.

The city will be built-up the way, that the location of the buildings will allow the most efficient usage of wind energy. Thanks to the environmentally friendly solutions the Great City will use 48% less energy and 59% less water and will produce 89% less garbage than other cities with similar density of population.

In a regional and urban development point of view not the environmentally friendly deserves attention but the questions which occurs from the case of a city built-up from scratch. The model is destined to be (one-to-one) applicable and can be built in elsewhere in China. So the question arises, if there might be such as functioning city model, which could be built anywhere in the world to provide a more environmental living. And if it exists, in which size could it be materialized? The Great City however has been plant as a town for 80000 people, so the infrastructure and the urban structure were evolved correspondingly.

As can be seen on the plan of the city, its structure is profoundly planned. Although it’s first of all environmentally friendly, basic conceptions of city planning can be detected. The farmland that can be used for agricultural activities is placed on the edge of the city. This area connects with the city centre through developed electric transport lines. In the city centre are concentrated all the services that an inhabitant could need: education, medical care, entertainment services etc. The residential area will be between the city centre and the rural land. This structure is in harmony with the consequences of the Von Thünen model.

The question emerges whether a system caused by human decisions made during a long period can be artificially planned. The procedure is in this case reverse than normally. So far the theories of city planning used hypotheses and models to explain the structure of existing cities. Now a whole new city is planned to be built from scratch using the theoretical and empirical results of former researches of city planning. Since there is a given structure of the city, the change of it in the future is slightly possible. The question will be that a city built based on models could fit to all the expectations of the inhabitants. This can be answered after the first years of the Great City.

If the Great City functions well, it could be considered whether this city model can be realised in greater size. Can we build an environmentally friendly city which ensures all the needed services and functions for one million inhabitants? Could be realised such a project with modern infrastructure so that it is still payable for the further inhabitants? Is there enough demand for it or is it just the game of some rich investors and enthusiastic designers?

As living near the nature and the protection of the environment are popular subjects nowadays, in my opinion there would be demand for such projects. But under such economic circumstances only the most privileged people could afford to start such investments. Because of the narrow supply the real estate prices would be very high in these new cities. As consequences of them I assume that this new city model won’t be used widespread in the following years, not even if the prototype is successful.

Monday, March 18, 2013

Highway to heaven? – Regional effects of the Hungarian M6 motorway

Highway to heaven? – Regional effects of the Hungarian M6 motorway

by Pass Dániel

On 31st March 2010, M6, the newest motorway of Hungary was opened to the traffic by the prime minister. It was more than two and a half year ago, so we can answer the question whether it has been a good investment? Or was it a mistake to waste a lot of money to this enourmos project?

The M6 motorway is a north-south motorway in Hungary connecting the capital Budapest with Pécs. Its first 58 km part between Érd and Dunaújváros was opened to the public in 2006 and the building of following parts (Dunaújváros-Szekszárd, Szekszárd-Bóly) was finished in 2010. The direct connection between the M6 motorway and Pécs is provided by the M60 between Bóly and the seat of county Baranya.

In an economic perspective, the construction of such a long motorway like M6 (193 km) always means a huge decrease in the transaction costs beacause of the faster and safer road network. As follows, it would have to connect more little towns into the inland and maybe to into the foreign trade, too.

Thanks to the highway development, the length of the travel between Pécs and the capital reduces with one hour. It’s very significant if we pay respect to the fact that the two cities are approximately 200 km from each other. This is related to the other bigger cities along the M6 motorway like (in order, from north to south) Dunaújváros, Paks, Szekszárd, Mohács, Bóly.

But have these cities really realized profit from the closeness of the M6 motorway as it was opened? Can we see a significant development in the economical position of the towns and cities located in the area of the motorway?

After two years, the economist in county Baranya are disaapointed about the results. According to them, only several cities could gain by the M6 motorway, the most of settlements could not profit on it.

The wine region of Villány has won from the investment. Wine regions and tourism are highle interconnected, so if Villány can be reached faster than more people will go there. And this is what we can see. The same has happened in Harkány which is famous for its thermal spa – the turnover has increased by 15%.

The biggest winner of the new M6 motorway has been definitely Bóly. The industry park of the town is 55 hectare large and still growing. It provides 800 workplace to the citizens. The unemployment rate in Bóly has been 6.9% in this year which is far the best in the region.

After the empirics, we should make an inquiry to the causes.

First, we cannot disregard the fact that there is a crisis and an economic downturn in Hungary. The general investment mood and the activity of investors are not impressive – the hungarian economy has not been growing for three years. On the other hand, the region’s leader town, Bóly could have shown an improve in spite of the crisis.

Second, the construction of the new motorway was rather political than professional decision. Pécs won the title Capital of Europe 2010 and had a successful lobby to win this project, although according to specialists the M7 motorway is very close to M6 and that is why the latter does not have any added value to the inland road network.

Third, M6 connects Budapest only with Pécs, and does not have a connection to the neighbour countries. The original plan was to continuing the construction of the M6 motorway to the CroatiAn border and connect with the Croatian A5 motorway , but this is not in the development strategy of the next years.

Fourth, the effect of the motorway could be also reversed. According to regional statistics, we can establish that in the last two years more people from the region have applied a job in a wealthier region, in the capital or abroad. They have exploited the lower transaction costs to choose a better alternative and probably earn more money. That is a totally rational decision of that people and it is socially positive.

To sum up, we can say that the successfulness of the M6 highway is unassured. There are many positive effects of the project, but it is not very impressive in view of the volume of the investment. We should hope that the picture will be better in long run.

Friday, March 15, 2013

How should we imagine the industry clusters of Europe 30 years later?

How should we imagine the industry clusters of Europe 30 years later? 

by Ferenc Nyakas

The industry of the world is going to change in the next decades – what should we expect for our continent?

The decision makers of Europe have to face up with the challenge of the current crisis, but they also have to care about the further future and competitiveness of the continent. The competitiveness can be raised by more effective activities in the industry and continuous research and development processes. As competitive advantage replaced comparative advantage by the 1990’s (Porter), clusters in the economy are the most effective tools to reach the above mentioned purposes.

The basic idea of clustering goes back to the second half of the 19th century when Alfred Marshall was inquiring of why the firms of the same industry are located geographically close each other? His answer was there is something in the air, what indicates new and new ideas.

Nowadays the advantages of clustering can be summarized in four main points. Firstly, the close location of similar companies can be explained both by first and second nature reasons, like common sources of raw materials or easy access to transportation hubs, like train centres. Secondly, if companies with similar activities and demand for labour force are concentrated geographically, it creates a pool of specialized labour, and it makes easier the search and matching process for both the employers and employees. Thirdly, the bigger demand for special inputs can raise a supplier network for the members of the cluster, thus it can be easier to find and use the most appropriate inputs. Finally, the observation of Marshall is right – in this atmosphere it is more likely to get the latest information of the branch, to get new ideas and develop them. (The Economist)

The leaders of Europe had recognized the benefits of clustering, and since 2006 there is a framework to encourage the creation of world class clusters in the European Union (Communication from the European Commission), therefore the intention of the governing institutions is serious, but it says almost nothing about the industrial area of the future clusters. A public research was carried out in 2010 by a business consultant company, aiming to find the key areas of industry clusters around 2040. (Research of PricewaterhouseCoopers

The industry clusters of the world in 2040
The authors of the Macro Consulting group examined five key areas of industry - like pharmaceuticals, automobile assembly, asset management, filmed entertainment and tertiary education - to find out what kind of shifts going to take place in the future. 

Europe, especially London will be able to maintain its role in the production of pharmaceuticals, asset management and tertiary education, but the continent will lose the one of its most important clusters, namely the automobile assembly in Germany. It is interesting, because the automotive cluster of Stuttgart is among the oldest ones in the world, but as it can be seen, its advantage from tradition is not going to be enough to compete with the new centres of the branch in South-America and Asia. In the field of tertiary education, the present clusters are likely to be able to retain their primacy, therefore Europe is going to play an important role in the next decades, but regarding the intensity of investments in this field in developing countries, it is likely that their universities going to get almost as well qualified as the former ones. Down to linkages to the leading academic institutions of the world, pharmaceutical clusters in London and New York can retain their present role, but the growing population of Asia going to fuel the rising up of a new cluster in Shanghai. Despite the tighter and tighter regulations, asset management clusters of Europe going to play important role, but the importance of Singapore is likely to get much higher in the following years. Finally, filmed entertainment clusters in Europe are week nowadays, and both in the future in comparison with Mumbai, Shanghai or Hollywood. To sum up the main message of the post, the importance of clusters in ensuring the future competitiveness of the EU is quite high and also we have to prepare for the challenges against the traditional areas, like automobile assembly, and we must concentrate on asset management, tertiary education and pharmaceuticals. It is important to emphasize that this article is focusing on industry, but for a deeper insight into the topic of competitiveness, the examination of services and information and communications technologies is also unavoidable.

Thursday, March 14, 2013

Sex and the city

Sex and the city

by Péter Lukács 

Young women seem to outnumber men in the western cities lately. This phenomenon is controversial however, since cities require more skilled workers which could only explain the higher proportion of male inhabitants. One paper argues that attractive marriage markets appear to draw women into the cities.

Numbers prove that in the western world young women outnumber young man in urban areas. According to several studies cities offer better labor market for skilled workers then rural areas. It would then predict a surplus of young men in the cities, since we also know that in average man are more skilled than women. What explains the counterfactual balance of the sex-ratio then? What is so attractive in the cities for young women? One paper with the same title argues that it is the marriage market. But how?

According to the paper we can assume that men value characteristics associated with female fecundity which we could simply describe as young women. Since youth is a scarce “good” in the market, young women then tend to have a choice. If we also assume that women value financial security, richer men stand better chances. If rich men are located in urban areas indeed, that could explain the greater proportion of women.

We could then ask why marriage market doesn’t attract man and women symmetrically so that the sex ratio would balance. The paper answers this question by supposing that there is asymmetry in the marriage market and men pay women for marriage, meaning that men’s only way of achieving better chances in getting married is getting a high wage job, but women can chose between a high wage job career and a marriage as another income source. Thus such high paying areas (most likely cities) can support women more than men, since women have a choice between the income sources of a job or a man. 

Municipality sex ratio bye male average annual income, Sweden
Source: Edlund, L. (2005). Sex and the City. The Scandinavian Journal of Economics,107(1), pp.35.

The paper examines its assumptions on the date of Swedish municipality data. The hypothesis that young women match with rich men was a clear result. It also turned out that younger women are pricier indeed. However, there is also a merely plausible evidence that the male to female ratio is positively correlated with the women’s wages, in other words women are drown to areas with lower female income. The explanation is not obvious: when male incomes are low women tend to work more. Firstly, because in case of marriage the father’s low income must be made up and secondly, because in case of low male incomes, women are less likely to get married anyway so they rather concentrate on their wage income. Since it also turned out that municipalities with male surplus often have a low marriage rate it becomes clearer that this tendency cannot be explained by low availability of men but the low income of the men available.

But what does this really tell us about our world today? In cities, young women are attracted to rich man, whereas in rural areas they (comparing to cities) tend to choose working over marrying a lower income man. Clearly, money plays central role in our life, and no one can really be blamed for setting it high at the priorities, even when finding a partner. Financial insecurity might be many people’s nightmare. Many argues that extended families might not always stand behind us anymore when it’s about childbearing or that in this alienated word one cannot easily decide who is good for us, while the information about a man with high wage probably imply other good qualities other than richness. However, many people probably couldn’t accept this financial wellbeing as the main goal, especially not in the case of finding our love of life. They can only hope for other “positive” explanatory characteristics in these models which could outweigh the earning one.

Wednesday, March 13, 2013

Tropicalisation at Its Best – Copycats Stealing Venture Capital

Tropicalisation at Its Best – Copycats Stealing Venture Capital 

Innovation without innovation 

by Teodora Lang

Copycats are rapidly becoming popular in the eyes of venture capital investors, shifting the whole business towards emerging “tropical” areas. The smell of speedy success is tempting; the question is how fast it will start to stink…

Innovation clusters such as Silicon Valley are facing serious competition when it comes to attracting venture capital: emerging markets created their very own development technique which leads to the phenomenon of “tropicalisation”. According to a recent Economist article, the term refers to the practice of backing start-ups that adapt existing business models to emerging markets by becoming copycats. The concept is quite simple; while the original company may not have the expertise to enter new regions so quickly; copycats have an advantage to access those markets faster.

First of all, they do not have to worry about the success of a new business project, since they are copying ideas that already convinced investors and consumers. There are well-known examples, just think about the Chinese version of eBay called or Sonico which was once the Facebook of Latin-America. Secondly, the original firm lacks the inside knowledge about local habits at fresh markets and copycats can easily profit from their familiarity to the area. Former employees took full advantage of their local knowledge and designed Flipkart (the reproduction of Amazon services) to the Indian demand -- where credit cards are less common -- by offering the option of payment on the date of delivery.

These replica businesses have a significant impact on emerging market economies via drawing the attention of venture capitalists to the region. In the presence of venture capital start-ups are more likely to emerge, boosting growth and attracting other firms to establish in the area. This happened in the case of Silicon Valley, where the advantageous combination of education (Stanford University) and industry resulted in the leading hub of innovation and technology. According to a recent National Venture Capital Association study, approximately 1/3 of the total venture capital investment flows to Silicon Valley, but the area is facing significant competition from India, China and Brazil.

Albeit they seem to be substitutes, emerging markets (in the sense of “innovation” clusters) and Silicon Valley are quite different. While in California research and development are the inputs of innovation, copycats -- by definition -- are not creating anything new or revolutionary. If we follow the economic theory, namely that innovation clusters are centers for growth, some serious concerns arise regarding emerging market hubs. There is no doubt that copycats can easily lose their funding share when the original company (in time) enters the local market. Just as it happened with Sonico when Facebook crossed the Latin-American borders. A representative of a Brazilian venture firm summarized the issue as follows: “With innovation you have a global upside, but with copycat innovation you have geographical limits.” So, what remains for emerging hubs? Are they gonna lose their attractiveness eventually or there is hope in the air? The current trend indicates that copycat-strategy is gaining even more popularity. The main question is whether these regions start to create and implement new ideas or continue to be content with replicas. Changing to the innovative attitude would be closer to the “spirit of venture capital” which is supposed to financially support creativity instead of imitations. In time, markets will decide if the copycat-behavior is creative enough in itself…

Tuesday, March 12, 2013

The impact of CERN

The impact of CERN 

by Kozics György

It has been more almost 60 years since the foundation of CERN (European Organization for Nuclear Research), and now we can ask the question: how much impact did it have on the economy of the Geneva region?

This summer, me and my friends spent one day in Geneva. While wandering the streets, suddenly a tram occurred with a label: „14 CERN”. While running after the tram to see the place where thousands of scientists work, one of my friend said: „Unbelievable, I thought the CERN is 10km from here!” When we arrived, we were surprised: after leaving the city and 10 minutes of traveling out of the city, we saw huge buildings, vast parking places and even a gas station.

CERN was founded in 1954 for the sole purpose of the studying and experimenting particle physics. Now, it employs 2,400 full-time employees, 1,500 part-time employees and over 10,000 visiting scientists, who visit the facility regularly. This article’s purpose is to study the impact of CERN and its huge number of researchers on the local economy.

First, let’s examine the direct impact of CERN. As it is quite far from Geneva, and Geneva being a very expensive city (4th most expensive city in the world in 2008), most of the 4000 employees doesn’t live in Geneva. Instead, they live in Meyrin, which is the closest village to the facility. Originally it was a small agricultural village, with a small population, but after the start of the construction, it grew rapidly, as seen on the chart below. 

What we see, is that the population of the village increased by 12,000, which is more than 600%, just because of the foundation of CERN. It means that the employees of CERN attracted very much people, who don’t work for the laboratory, but work in the manufacturing or the service sector. It is also obvious, that the 10.000 of visiting scientists attracted transportation companies. These people need a transportation system to be able to get to the facility, therefore the tram line 14 has been built. Probably not solely of the CERN, the Geneva Airport is the headquarters of number of airlines, and the airport started to construct a new terminal.

Now, we can examine the secondary effect of the foundation of CERN. More than 10,000 of physicists and engineers could attract other research laboratories or schools, and the facility is always in need of new equipment which can attract many different industries. While it is true that some electronic and telecommunication companies came to Geneva, and in 1970 a new industrial park appeared near CERN, we cannot say for sure, that they came because of it. Some may work for CERN, but they aren’t dedicated for it, and they also don’t work together with it.

The reason for the failure to attract other firms that can work for or work with the CERN is simple. It could be beneficial, if a factory that produces devices for CERN move close to it. However, the investment costs of it would be very high, and the firm couldn’t make enough profit compared to the costs, moreover CERN already has its supplier. The other reason is the following: working together with CERN has very low transport costs. Most of workers examine data, so it can be easily sent via internet, therefore someone who wants to work for CERN can do it anywhere in the world, if he has access to internet.

In conclusion, CERN attracted a lot of people and firms that serve the people who works there, but it didn’t attract similar companies as working together with CERN has very low transportation costs.

Monday, March 11, 2013

Does history matter? – A tale of the 1879’s great flood of Szeged

Does history matter? – A tale of the 1879’s great flood of Szeged 

by Szilléry Mirjam

The 1879’s great flood of Szeged is a case where it can be tested whether history played a role in spatial distribution or not. By examining what changed after the reconstruction it can be found that the location of the city is rather determined by first geography factors while the location of certain institutions within the city can be explained with historical effects.

In the spring of 1879, one of the most tragic events of Szeged’s history happened, when a dam of the River Tisza burst and the flood destroyed almost every building in the city. There were about 6000 houses before, but only 265 remained. After the disaster, Emperor Francis Joseph visited the city and promised to help. His words became well known: “Szeged will be even more beautiful than it was”. His words didn’t remain empty promises; the reconstruction began with great forces.

Let’s look at this story as an illustration of the New Economic Geography Theory. One statement of this model is that spatial distribution is also determined by history. In other words, it is possible that there are two areas with different spatial distribution (one is spatially concentrated, while the other is dispersed) and we observe that they are similar in every relevant factor expect for their pasts. This can happen because in this dynamic model subsequent states of an area also determine the current one. If we want to prove the statement that history matters, we can consider a case when an exogenous shock erases the importance of history. In our example this exogenous shock is when water swept away the city of Szeged. If history matters, than the new outcome can be completely different from the original equilibrium.

Firstly, we should take a look at the population change. From that time, we have less precise data sets than those we use nowadays, but we have an estimated growth rate of every decade. Between 1860 and 1870 there is a growth rate of 10,9%, while between 1870 and 1890 the population only increases by 3,7%. In the three subsequent decades the growth rate is 16%, 17% and 15%. Lacking the annual data we can only make assumptions, but is seems logical to believe that the disaster made some families move out of the city, but then they started to move back to Szeged. Therefore, by analyzing the population change we cannot observe a permanent impact of the exogenous shock.

However, there are some aspects in which the city has changed dramatically. Instead of the original one, a wholly new city-structure came to life. This new structure was characterized by a small and a big semi-circle shaped boulevard, starting from the banks of the Tisza. With the reconstruction many new public buildings were also established. 

By looking at these contradictory facts, we might think it is time to give up searching for connections with the theory, but in my opinion these facts can be explained with the concept of Economic Geography. If we take into account first geography, it becomes clear why the city remained an important one after such a disaster. Located at the meeting point of Tisza and Maros, the city could benefit from the shipping opportunities. Thus we can assume that the location of the city was not determined by historical accident but by permanent first geography factors. Now turning to the structure of the city, we might find a better ground for an illustration of the importance of history. The location of certain institutions within the city could have been affected by historical factors and when starting off fresh new locations became optimal. 

As we have seen from the illustration, it is important to highlight the importance of first geography in localization while we can also see some evidence of historical determination. It is important to mention that we should treat these conclusions with some suspicion, as in the model of New Economic Geography the outcome is the equilibrium of many actors’ behavior, while in this case the reconstruction was also a policy decision and it is hard to separate the effects.

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