Essays on new economic geography, natural resources and income transfers

Abstract

The New Economic Geography literature has focused mainly on industrialized economies. However, environmental induced migratory flows from rural areas are gaining interest among citizens and academics. A number of well documented examples of migration and redistribution of economic activity have been motivated by the depletion of natural resources. One of the main objectives of this thesis is to identify the forces driving these migrations, providing the microeconomic foundations to understand the effect of the exploitation of natural resources, and their regenerative ability, on the spatial distribution of economic activity. To tackle this issue we have developed an extension of the CP model that incorporates notions from the environmental economic literature. Moreover, international and interregional income transfers are widely established to compensate spatial economic disparities. According to the NEG literature, income transfers enlarge the market size of the recipient region, making it more attractive for firms to settle in. However, a negative relation between income transfers and industrial employment is sometimes observed. The Dutch disease literature advises that a large windfall of economic resources tends to harm the competitiveness in international markets. To provide a comprehensive explanation of the effects of income transfers on the spatial distribution of the industry we have extended the FE model by incorporating some key elements from the Dutch disease literature. The first chapter develops an extension of the Core-Periphery (CP) model (Krugman, 1991) by considering a competitive primary sector that extracts a renewable natural resource. The dynamics of the resource gives rise to a new dispersion force: the resource effect. If primary goods are not tradable, lower trade costs boost dispersion, and the agglomeration-dispersion transition is sudden or smooth depending on the productivity of the primary sector. Cyclic behaviors arise for high levels of productivity in resource extraction. If primary goods are tradable, in most cases, the symmetric equilibrium goes from stable to unstable as the openness of trade increases. The second chapter develops an extension of the CP model proposed in the first chapter by allowing for specific transport costs in the primary and the industrial sectors. We focus on the interaction between the so called "resource effect" and transport costs, identifying three channels: wage, firms and primary productivity channels. The resource effect is stronger the higher the extractive productivity and the both transport costs are. We also find that, depending on primary transport costs and the extractive productivity, the symmetric equilibrium presents the following patterns as industrial transport costs diminishes: unstable-stable, stable-unstable-stable, and stable-unstable. The third chapter studies the effect of income transfers on the distribution of economic activity through a modified footloose entrepreneurs model (Forslid & Ottaviano, 2003). Our model incorporates some key features of the Dutch disease (DD) literature: sectoral mobility and non-tradable goods. We find that a DD can emerge in the short and long run when the competition is high (low transport costs). For intermediate levels of competition, DD appears only in the short run. And, for low levels, the recipient region always benefits from the income transfers. We prove that, the DD in the short run affects long-run results; whereas regional mobility can reverse a short-run deindustrialization scenario.