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