Silicon Valley in Zsámbék(?)

There's a next Silicon Valley being built right in our backyard. According to the numerous promises soon there will be one of the biggest technology (and a whole lot more) cluster in the world and Bill Gates drinking a Hungarian wine in one of the cellars in Etyek will be a regular sight.

Zsámbék - which was mostly famous for it's historical church - now will be the heart of innovation. So how can this nearly miraculous thing can happen? Well, all started off when Sándor Kenyeres started the Talentis Program in 2003 to enhance the exploitation of human capital in the region and to make the talented young people stay and flourish in Hungary. Of course the socialist-liberal government fully supported the idea and it's one of the few issues that is supported across governments - I guess everyone loves to hear that Hungary will be the leader in a certain field. What happened since then? Not much. But there's one question that's bothering me: why this project needs the financial support of the government? If the cluster is really a good investment, why won't the consumers privately invest to it...?

Let's take a look what does economic geography tells us about making such a cluster. To be successful we'll

need the following ingredients: Venture capital, Critical mass, Anchor firm(s), Social capital, Diversity, Appropriate Demand conditions. So what can a government do? It can't be a venture capitalist, since it's risk-averse and does a bad job. It can't be anchor firm either. And it can't influence the other points directly.

What it can do is to make indirect interventions or little nudges: enhance R&D, make the firms negotiate with each other, support universities and so on. An article made up a witty analogy: the government is the owner of a shell-farm and she wants to produces pearls. Now to make a pearls she needs just a small dirt to get into a shell, so the shell can begin to create beautiful pearls. Since we're talking about business, the bulk of the process is made by firms whom - just like a shell - can create value outside the clusters too. But if we run a mussel feeding company - under the title of a shell farm - we won't have pearls.

"Okay-okay, I get it" you might say "But most of the time theory tells us a lot of contradicting implications. What can we say about reality?" First, let's take a closer look at Silicon Valley in California. The major force behind it's development was Stanford University. Stanford University started out as an engineer school and dean of the engineering in the 1940's and 1950's encouraged the graduate students to start their own companies. This encouragement lead to companies today known as Hewlett-Packard, Varian Associates among other high-tech firms (note: they didn't get any state-subsidized loan for the start-up). And then slowly but steadily the whole region grew into the world's most innovative areas, which gave us the Internet, Google, the semiconductor chip, and the microprocessor. Today one-third of all the venture capital investments in the US happens in this small region. As you can see this cluster was entirely privately funded.

But we don't have to go that far to examine successful science parks. Cambridge Science Park is located in the UK near to University of Cambridge. It was a rural area until in the October of 1971 Laser-Scan, the first company moved into the region. Then the area started develop slowly as more companies joined the park. Notice that there were no direct state interventions, just the University of Cambridge promoted the park in the late '80's and the beginning of the '90's. All of the companies came here just to do business and not because the government gave away subsidies or such.

So the bottom-line of my whole argument is that we should be at least skeptical about this 'Hungarian Silicon Valley'. As you can see both of these examples had famous, research-intensive universities from the start. How many famous, research intensive universities we have in Zsámbék? None. How many research institutions we have in Zsámbék? Zero. Also, the development of both of these clusters were very slow, we can't just hurry the whole thing. And if one needs the direct intervention of the state (and not just small nudges), then something isn't right. Government has it's comparative advantages, but none in business.

That's the job of the private sector.

Balázs Stadler

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„We Built It, They Didn’t Come” The Tale of Great Expectations

Empty airport of Cork in 2011

There is this old wisdom that compared to low transport costs the lower transportation cost is even better. This was a rationale for many transport projects in the past and a good slogan however it is not quite clear whether that is a sound argument to build railways, motorways and airports upon. Here is the brief case of Ireland: they have made it all. What they did not know at the time what they had coming: a big recession due to the turmoil it the USA and also a bursting bubble at home. The question arises: did they fail because they have made oversized projects and have invested huge amounts in vain or due to the economic slump of 2008. Could they have planned more carefully? Was this particular project bad by design? Answering all these will be a long shot but let’s give it a try and go in detail about Ireland’s latest transport project.

Ireland has come a long way from being one of the poorest countries in Europe to a fast growing one which earned him the nickname Celtic Tiger. From 1995 until 2002 they experienced substantially rapid growth. By 2004 they slowed down to an average growth rate 4,4-5% and that was the time when they began to implement the projects in question.

They designed a Spatial Policy with the announced objective to attract new and innovative industries in the country. This would have been a paradigm change for Ireland considering the fact that the majority of Irish industry was -and is still in the present - conventional mass production, employing low skilled workers. They reopened and connected railways, built motorways and introduced internal air services and the idea behind it was that Ireland could re-earn its “Celtic Tiger competitiveness” by transport improvements.

Based on the economic theory we expect from transportation improvements to have impact on the productive sector through product and labor market effect as well. The product market effect origins from the fact that by reduced transport costs firms source materials and deliver their product more efficient. Furthermore the labor market effect means that it is also cheaper to access labor supply.  So there is hypothetical potential to yield economic benefits by improving transport opportunities although we did not see it in this example. The new capacities like the airports and new railway lines run at loss. The expected new industries did not arrived so there are massive inefficiencies, the transportation network is oversized and the employment has shrunk. According to the transport minister Leo Varadkar the lesson they learnt is – not surprisingly, very core of economic theory – to optimize the size of investments, cut back spending and stop subsidizing inefficient transportation forms. They already introduced market forces by opening up railways to competition and they are also planning to franchise out local bus companies.

            What about the new firms? Why didn’t they come? The usual suspect is the global turmoil which is also the explanation suggested by the Irish government. As we know it began in the US by the shock which was due to a bubble in the housing market. This initial shock spilled over to the financial system which later on infected the real economy.  It makes sense that the firms did not come because they faced too high a risk to invest under such circumstances and they rather postponed new project because it would have been too costly to finance.

However I would make a case for not to overestimate the effect of the depression. The problem of the Irish transport project is rather that they misestimated the potential benefits and did not include incentives that also count for a firm when it choose its location like availability of skilled labor, special needs of the particular industry, local demand and taxes and subsidies. In the case of Ireland there were these foreseeable factors they left out and to make the consequences of this miscalculation even more serious the worst case scenario happened.

The truth is that we still do not know for sure whether transport improvement is only a catchy phrase or a sound policy instrument to expand output and employment. We have our pro cons mostly in the form of different cases, so there is no obvious choice of transport cost to set. Speaking of catchy phrases the most popular ones are nowadays clusters. In order to attract such high tech industries there are some basic conditions. There must be at very least a university and a research program which can be served as a core of concentration. What’s more the economic theory also implicates that there are demand conditions also needed. In this view what in Ireland was lacking is the policy’s objective to make room for innovation and actively support the existing clusters to attract there new companies.

Réka Sulyok

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Success of the Vasco da Gama Bridge?

Background:

The constructions of the Vasco da Gama Bridge, in Lisboa, Portugal started in 1995 and after 3 years of work it was opened to the traffic in March, 1998. This is the longest bridge in Europe with its length of 17,2 km. The two goals of the bridge - clearly declared before this project - were accepted.

1. First, it aimed for the decongestion of the other bridge of Lisbon. The 25th of April Bridge was built in the sixties and the traffic has heavily increased since then, thus some measures needed to be taken.

2. Second, it meant to create the north-south connection around the capital city.

After the first bridge went into use, many inhabitants and firms moved to the other side of the river Tejo opting for a further location. However, it led to an increased congestion cost for those who traveled from Spain in order to trade or who decided to commute instead of living in the central business district. To sum it up, the goals of a new bridge were focused on lowering both transportation costs and congestion.

Theory: What is expected according to the theory?

As the Vasco da Gama Bridge is not the first connection between the north and the south side of the river Tejo (Tagus), the main goal was the reduction of congestion on the 25th of April Bridge. In our analysis we should ignore the impacts of the first bridge and focus on the second one. According to the theory, the bigger the city is (that means a larger number of firms), the higher the congestion costs are. If there are many companies in the city, congestion acts as a spreading force that stimulates firms to move from the central business district to the periphery zone, where traffic is lower.

The core model of new economic geography (congestion is not included) says that if transport costs are low then agglomeration is the stable equilibrium. Adding congestion to the theory, spreading equilibrium becomes more general and agglomeration is only an exception. According to the two-region core model (Brakman et al.), even a small change in congestion can easily lead to a new long-run equilibrium. As transport costs start to decrease, first partial then total agglomeration will develop. The further shrinking of costs result in spreading as a stable equilibrium again.

Although in Lisbon’s case it is not about cities. Decreasing congestion is the main aim of the bridge. So, based on this theory, the new equilibrium after the opening of the bridge depends on the previous balance in Lisbon. Assuming that building the 25^th of April resulted in spreading equilibrium, the Vasco da Gama Bridge should foster agglomeration and at the same time reduce congestion on the other bridge.

Reality: What had happened?

As for the decongestion of the 25th of April, traffic experts agreed that this aim can be reached without building a new bridge. Another, even better solution could have been achieved with focusing on the significant improvements of the railways and public transport connections between the two banks of the river. However, the Vasco da Gama Bridge was built.

According to a document from 1994 it had been estimated in advance that the new bridge would stimulate traffic above the annual transport growth rates without having too much impact on the other bridge. As we see on the table below, the expectations came true.

Source: Melo, J.

As data shows, after opening the Vasco da Gama Bridge the total amount of vehicles grew dramatically while the traffic of the 25^th of April Bridge did not represent significant decrease. Why? A new bridge always generates urban and traffic growth, as we can see in our case.

So, can we explain these empirical evidences with the transport coming from the East in order to trade with the Centrum of Portugal? As they do not have to either be in the traffic jam or bypass the whole river in order to get into the city, it should be the appropriate solution to reduce transport costs. Interestingly, according to a paper (Melo, J.), these traders prefer to use the bridge in Carregado that is about 30 km from Lisbon to the North and was built after the Vasco da Gama Bridge. This latest bridge seems to have become the main part of the north-south connection...

To sum it up, decreasing this level of congestion theoretically drives agglomeration forces. As the bridge did not stimulate so far development in the south, the theory seems to be confirmed on this side. However, we cannot observe any significant reduction in congestion on the 25^th of April Bridge either. So, the Vasco da Gama Bridge does not seem to reach its initial goals, although it has clearly positive effects in other areas.

Noémi Szabó 

References

Brakman et al. (2009). The New Introduction to Geographical Economics. Cambridge University Press, New York.

Melo, J. (2000). The Vasco da Gama Bridge on the Tagus Estuary: A paradigm of bad decision making, but good post-evaluation. World Transport Policy & Practice, 6(2). 20-30. p.

„Portugal celebrates opening of giant bridge” (1998).

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