Session 2: The future of EMU - Paper 2
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Alfaro, Laura
Ottaviano, Gianmarco
Chair: Sabine Lautenschläger, Member of the Executive Board, European Central Bank. Paper 2 - Superstar firms and spatial agglomeration: An exploration of effects in Europe: Laura Alfaro, Professor, Harvard University, with Maggie X. Chen, Professor, George Washington University and Harald Fadinger, Professor, University of Mannheim. Discussant: Gianmarco Ottaviano, Professor, Bocconi University
 That will be now very difficult after this wonderful speech by Jean-Claude Juncker to go to the next step, but I warmly welcome you to the scientific session we have today. You know yesterday was all about the last 20 years of the EMU and today we are going to discuss and talk about global regional trends that are likely to shape the EMU in the future and the lessons we can take away from that. I'm pretty sure when we are talking about the future of the EMU we all think about sustainable growth, we think about high employment, we think about price stability here in this room for sure that will be key to the success of the EMU in the future and a number of trends such as aging societies, wage polarization induced by globalization and digitization and an ever more complex international environment might have an important impact when we can reach the successful outcome. So the paper in this session and we will divide the session into two. They focus on a particular trend and what they imply for the economic and financial structures with a strong focus on the consequences for the EMU and the first part of the session we will do together with Laura Alfaro and Gianmarco Ottaviano. Laura Alfaro is a professor at the Harvard Business School and a former minister of national planning and economic policy in Costa Rica and she will discuss the role of industrial clusters, Silicon Welle in the US being one of the most famous one and always mentioned as an example. And her paper will be discussed by Gianmarco Ottaviano who is a professor at Bucone University. After the 25 minutes of Laura and the 15 minutes of Gianmarco we will have a short round like always with Q&A coming from you and I hope for a lively discussion and then we will do a break and then we move on with another paper about that for later. So Laura, the floor is yours. First let me thank the organizers for this great honor. It's an honor to be here celebrating 20 years of the Euro. It's also a great pleasure to come back to this amazing country in this beautiful city, a country that always has great food and also very friendly people in a way it does remind me of home. This is co-author work with Maggie Chan and Harold Fadinger. It is a little bit more micro and it's building on some work we had done before that we're trying to extend to Europe so of course comments are more than welcome. Let me give you a little bit of a background. In many ways we have been witness to this great explosion of cross-border flows of capital goods services. I actually consider myself to be a globalization child, born in one country, marry a person from a different country and working in a third country and these changes have been the outcome of course of technology changes, reductions in transportation costs, of course reductions of barriers but as was mentioned also political will to implement many of these changes and these changes have the potential to change the industrial landscape of countries and this is particular the case in Europe that has been predicated in an integration of capital goods services and people and in particular the euro area that has a more integrated capital markets. This globalization has been led by what has been called superstar firms and depending on the setting they tend to mean different things, a term was coined in the 80s but in general it relates to these very large productive firms many times with complex production processes that they have led the globalization process. In many ways they are the responsible for this cross-border of capital goods and ideas and what is interesting about this phenomenon of the superstar firms is that it relates to what might be seen as a paradox in globalization. If you think about it transportation costs matter, transportation costs broadly defined as the cost of transporting goods but also ideas because of that location matters and distance matters so firms are going to choose where to locate and this location of firms will affect productivity and will have additional potential benefits. So firms like to locate closer to customers, close to suppliers, this may lead to more thicker markets, a more availability of again thicker relations. This may also help workers, you may want to specialize in certain activities if your firm doesn't do well you can go to another firm that is also true for firms they can specialize in different products because they can find the workers in case something happens. It's also the case for capital goods you can have thicker markets in capital goods but also it allows to exchange ideas so the reason we still come back to these conferences is because there is ideas generated when we interact with other people. However economic integration should diminish these benefits if you want or being close to each other that is the idea of getting rid of barriers. You should be able to move goods, people and ideas across borders and also IT and communication technologies should allow this to happen so in a way we should be able to have this conference via Skype but again this is the interesting paradox of globalization. We see that firms still dominate industrial clusters still dominate and this is interesting because there is more intense competition when we locate to each other but there are also costs, workers might be more expensive and locations might be more expensive. So this is what we're going to try to do in this paper. We're going to explore the industrial landscape through the eyes of firm heterogeneity. So we know now that firms are different and I mentioned here the work by Helman, Melit and Ghibli but there's many papers that have now documented that firms are different and so we're going to explore the implications of these firms being different in terms of the geographic allocation of economic activity. So we're going to examine how the degree of agglomeration relates to firm attributes, productivity, complexity, age and regional characteristics and so what we're going to try to do is differentiate what relates to these firms being different and discuss benefit analysis of proximity relative to regional variables that make it worthwhile to locate in different locations and we're going to do this comparing the US and we're also going to compare US with Europe and within Europe the eurozone and non- eurozone and we're also going to extend to crisis and non-crisis countries. So the questions we want to answer is is there agglomeration around highly productive firms? Is this driven by multinationals? Is there any other characteristic in addition to firm productivity and firms being global that may affect this agglomeration? What is the role of regional characteristics? Does the euro area look similar to the area US and what are differences within the euro area? To do this we're going to build on a micro index. This is a methodology that was introduced by Drutano and Overman in 2005 and I have used in previous work. This index has the advantage that it treats space as continuous and it allows to analyze firm level characteristics. This is done by using the location of the firm and calculating bilateral distances across different pairs of firms. So based on this index we're going to assess what is the role of firm characteristics and what is the role of regional variables. To mitigate concerns related to causality we're going to look at agglomeration of new entrants around an incumbent. So we're going to look at a firm and we're going to see how new firms locate around these existing plants and we're going to measure the distance related to these new plants. These allow us to consider some of the reverse causality that may be associated with location and also we're going to do the analysis at the regional level to control for regional characteristics. We're going to employ a firm level dataset that I have used in previous work. This is the DMV dataset. The advantage that this dataset has is that it has a very detailed location of the plants where plants are located and so we're going to use this information to calculate the index and based on this index we're going to analyze, we're restricting the analysis right now to manufacturing firms. Some overview of our findings so far is related to this work that has looked at firm productivity and firm heterogeneity. We do find that firms are different. We do find that there is a clear hub and spoke structure to how firms are located in terms of their geographic concentration. More productive larger firms are more centered by other firms and these smaller, less productive firms like to locate relative to these larger firms which is a suggestive evidence that overall they find benefits of locating relative to more productive firms. In relation to potential cost, as I mentioned, it could be that land is more expensive and workers are more expensive. We find greater agglomeration within the eurozone. We also find that multinationals and productivity play a greater role in the the euro area. We find differences following the crisis in particular related to some of the big crisis countries and we also find that regional attributes play an important role in agglomeration depending on the specification up to 70% of these differences. So why does this matter? We looked at the relation between agglomeration and growth rates. This is of course not establishing causality. This is just a correlation but we found a very strong correlation between agglomeration and growth rates in Europe. In the euro area we did this controlling for regional characteristics. In the euro area one standard deviation in density leads to approximately six standard deviation differences in growth. It is 3% in non-Europe countries. Now again, this is not establishing causality. This is more a correlation and it turns out that in the US the correlation is actually the opposite as we document in the paper. But at least in Europe there seems to be still a very strong correlation in terms of agglomeration and growth rates. In the paper we also mentioned the literature. There's a long literature in trade and development that has analyzed the effects of agglomeration. My discussion has contributed to this literature. The reason we want to stress the literature is because it does present this evidence that agglomeration does relate to productivity and it does relate to innovation. The literature has also documented differences between Europe and the US. What is interesting is that the US there's now a tendency for gradient concentration that actually seems to be a negatively affecting investment. There's also a long literature perhaps coming from the development world looking at the role of firms in jump-starting economic activity. Here there is a work that has looked at the role of big firms and in particular multinational firms which is where I come from in this project. There's a lot of work that has looked at the role of multinational in jump-starting development in different countries in general finding positive effects but very conditional on local conditions. As I said so what we're doing in these papers we're going to examine micropraterns and try to exploit firm heterogeneity. So in the paper we present the methodology and the data we present preliminary stylized facts and in the concluding remarks I will mention preliminary implications. Let me stress the word preliminary and also a future work that is important to follow up. I don't want to spend too much time in this part but some background it turns out that measuring spatial concentration is a complicated exercise, complicated by many reasons but one is that space is continuous. We use this DO index that has the advantage that treats space continuously, it treats space as a continuum and has the advantage that allows to think of counterfactuals and controls for location factors. So very general the index exhibits different properties, it's comparable across industries, controls for overall location patterns of manufacturing, for industrial concentration, its ambiance with respect to scale and has an indication of significance. So all these advantages allow us to compare across countries and regions. The methodology involves different steps. In the first step we calculate the geographical density for each establishment in each industry we look at bilateral distances from each incumbent to new firms. Then we calculate a counterfactual density and then we aggregate densities, we can aggregate at 5 kilometers, 10 kilometers, 50 kilometers. In our work we present results around 50 kilometers. Just to go a little bit more detail as I said we first start by calculating the bilateral distances, all the establishments, the new establishments relative to incumbents. This is just to give you an idea of the volume of calculation that is required in this methodology which is all perhaps the drawback of the methodology, the computational burden. Because of noise we smooth the distribution, we limit the analysis to three-digit manufacturing as I said because of the calculation burden of the methodology. In the second step we calculate the counterfactual, there's many ways in which one can calculate counterfactual. Here we're benchmarking against the mean kernel estimates at each industry. In the last step as I said we add the densities at different thresholds. In the paper we present results for 10 kilometers, 20 kilometers. One can calculate also higher distances, we present results around densities of 50 kilometers. We exploit the firm level data sets, we have different vintages of this data. I'm going to present results around 2004-2005 which is before the crisis, a little bit after the adoption of the Euro and then we look at the data, a recent vintage of the data. As I said we're going to limit the analysis to three digits. Foreign ownership is calculated looking at firms that produce in one place but headquarters are located in a different location and we are going to look at labor productivity calculated using employment and sales. We use geocoding data. Europe has made available the geocoding of many locations so we exploit this information and we complement with additional sources. We calculate distance using the Haversheim formula and as I mentioned we limit to manufacturing firms. We exploit the availability of regional data that Europe has made available. We use nuts to level, different information, population, economic activity, schooling measures the number of people with more than a high school degree, R&D expenditures. We also look at tax policy whether it's urban or not urban. Europe has made available different data at the regional level. We compare with the US data and we also use different sources for the industry information. So the empirical procedure is we're going to have an estimate of our density. As I said we're going to look at it at 50 kilometers. We're going to have different measures of performance. We're going to control for industry characteristics and regional characteristics. So our firm characteristics important in explaining agglomeration. So for this we're going to look at our density measure. We're going to use labor productivity as a measure of performance. We're going to control for the age of the firm and we're going to control for whether this firm is engaging different activities if it's a multi-product firm which we take as a proxy of complexity. And we're going to compare results for the US and within the euro zone and non-euro zone countries. So what we find is that indeed firms like to agglomerate around more productive firms. So again this is perhaps another result related to this growing evidence that firms are heterogeneous and that this has different implications. So firms overall prefer to locate close to more productive firms. It turns out that we find that this is stronger in the euro area relative to non-euro countries and in fact it's three times more important in the euro area relative to non-euro countries. We also find that there's a positive relation with age. Firms like to locate to closer to older firms but they also like to locate closer to more complex firms. Again using multi-product as a proxy for this complexity. And the difference between what we find the euro area and non-euro area is a quantitative and statistically significant. Then we look at whether there is non-linearity related to being a superstar firm. In particular the way we calculate superstar firms and there are many ways that one can calculate it is the firms that are at the top 5% of the distribution within each region. We play with different ways of calculating superstar firms. We also looked at 1% but this is the definition that we use for superstar firms. And what we find is that there is interestingly more agglomeration around these even more productive firms. This tends to be the case in particular in the euro area. So firms locate close to productive firms but they tend to locate even more close to more productive firms. So one question is whether this is driven by multinationals which tend to be if you want the poster child of the large productive firms. So we control for whether a firm is a multinational and indeed we find that there is agglomeration, important agglomeration around multinational firms but firms still locate close to super-sized firms and again this is particular the case around euro countries. So we find that there's a more agglomeration around productive firms that tends to be agglomeration around more productive firms. The effects tend to be non-linear and we also find that multinational play an important role in this process. What is the role of regional characteristics? So we control for many regional characteristics. One thing to say that many of these variables are very correlated when we look at the role of GDP, education, our and the expending population. All of these variables tend to be very correlated and so it's hard to disentangle the particular effects of each one of these variables. One that seemed to have a particularly interesting result was the R&D spending. This is R&D spending that is a mixture of public and private. So firms do locate in regions that tend to have more public and private R&D particular in the euro zone area. In general regional characteristics do account for most of the agglomeration in terms of explanatory power. It could be from 30 to 70%. We looked at other variables. One was tax policy. Yesterday there was a lot of mention of tax policy. We didn't find significant results of tax policy. It could be more than the measure is not detailed enough but we didn't seem to find particular effects of tax policy. This tends to be related to the fact that many places that do have higher taxes also do offer more benefits to firms and so that doesn't seem to be an effect related to tax policy. Perhaps a related question is can regional policies foster agglomeration? And again, establishing causality is a little bit more complicated but we looked at the interaction of some of these regional policies with productivity and interestingly when we look at superstar firms what we tend to find and again is there is a level effect of better fundamentals but the interaction with supersized firms is negative. The way we interpret these results is that better location fundamentals can be seen as a substitute for requiring to be located to a more productive firms. So better locations can provide some of the benefits that firms seem to get from some of these supersized firms. Again, so we do find that higher R&D plays an important role in agglomeration in Europe, in particular in the eurozone area and a better location can, if you want, lower the gains or incentives to locate closer to these more productive firms. Has the agglomeration patterns changed in the euro and non-euro countries after the crisis? And what we do here is we look at the new vintage of data and we also divide countries. We use euro crisis countries as Ireland, Greece, Italy, Portugal and Spain. And here what we found is that in terms of productivity there's still firms want to agglomerate close to more productive firms. It changes in non-euro countries. Perhaps what is more interesting is that the effect of supersized firms diminishes after the crisis and in particular when we zoom into crisis countries we find that patterns start to change. So using all their data sets we try to understand this result that euro crisis countries were a little bit different. A lot of the differences are driven by Greece which had a very severe crisis and some of the effects have not been reversed. Spain was interesting even though Spain had a severe crisis Spain actually has managed to recover in many ways. So the country that was really driving some of the more different results is Italy which in many ways is a complex country. There has been this sluggish recovery or slow growth in Italy. It's also a very complex country in terms of the regional differences. In fact we find that in Italy now firms tend not to agglomerate closer to older firms perhaps a symbol of some of this lack of dynamism. So we find that firm characteristics play an important role so more productive firms are not only responsible for a lot of the economic activity they tend to have positive spillovers to smaller firms. Again related perhaps to the more complexity of these firms that allows them to engage in externalities of different kinds with smaller firms. Regional attributes play an important role better location fundamentals if you want could weaken the incentives or the need to locate two more productive firms. Again speaking of the interplay with local policies and even though we see this greater movement of goods, capitals and ideas we continue to see the dominance of certain firms in particular these more productive firms. Preliminary policy implications in this all this research related to firm heterogeneity does suggest that one side fits all policy is perhaps not the optimal policy and I say this with a little bit of care because of course political economy matters. I come from a region that when you start to do targeted policies one does need to worry a lot about capture and so again I say this being careful one needs to think about what are the cost benefits of doing more targeted policies relative to potential of capturing at least in my country we call it the hairy hand, the manopeluda that tends to take some benefits from one place to the other but the policies does seem to suggest that one does need to target a more productive firms. They will tend to create better business environment and attract other area other smaller firms and allow them to grow. I know that there's a lot of emphasis on small firms but we want the small firms to grow and it seems to when we locate or they locate to a more dynamic larger firms this process tends to happen. And so again one does need to consider the role of these more productive firms but also think of the role of regional policies that at the end of the day do explain a lot of these agglomerations so again location fundamentals matter and a better business environment does allow firms to foster. Future research of course understanding the mechanisms in which firms attract and other firms benefit from this interaction whether they're complement and substitutes one in particular is the role of private R&D relative to public R&D and in general public policies relative to the ones within the boundaries of the firm. The other is we do find a lot of agglomeration around capital intensive firms in particular in the eurozone area which is suggestive that there is an important activity around capital goods externalities and so one has to think whether we should pay more attention to the regional local capital markets but also the role of lending to underperforming firms. So we worry many times about saving firms because of employment and linkages related to suppliers and customers but one has to think of the implications in terms of cluster dynamism and whether is benefiting some other firms. I had a discussion yesterday that this is something that the region is worrying about lending and evergreening loans because again this might have negative effects in terms of cluster dynamism and more general we need to think how the rise in protectionism and the uncertainty associated with it may affect these industrial patterns. Thanks. Thanks. But many thanks. Jean-Marco that I think was a wonderful transfer to your discussion now. Yeah absolutely. So first of all while I'm waiting for the slides so that thanks a lot for giving me the opportunity so thanks the organizer for giving me the opportunity to discuss this paper I think this is a very promising line of research it's really a paper that is providing a lot of new information using zillion of data points and so this is really huge work going on by Laura and co-authors. So what I will do in in in this 15 minutes is rather than then summarizing what Laura and the others have achieved and getting into the technical details on the agglomeration index I would like to broaden the scope and and argue why a deeper understanding of agglomeration forces and how these are related to other phenomena like that are important nowadays like the the rise of superstar firms the increasing markups the the increasing the unevenness of the distribution of firms in different sectors may be important for all sorts of import of aggregate outcomes. So essentially the result just to summarize is there we have some establishments that are better than others they're larger and more productive and they tend to attr- to be associated to higher density of other firms and this is a pattern that is clearly could build up a de-aggregate level in terms of clusters that have been as it's been discussed by Laura. Why should we care? So as has been anticipated there was a lot of studies there were a lot of studies in the 90s that were very thin on data but very thick on on theory at the time where the European Union was planning the single market and then the implementation of the of the single currency. The underlying if you want a real economy model that people had in mind at that time was a model in which if you have a trade liberalization you're going to get all sorts of convergence and so you would have also convergence across states and with across regions within within the different nations. The theory challenge that was raised by Paul Krugman and others at that time was to show that once you're allowed to have big firms meaning firms that have market power then this neoclassical prediction of convergence may well go actually in the opposite direction. So you could get agglomeration economies you could get divergence and therefore a challenge to have common policies even within countries but for sure the point of Paul Krugman was at the level of the European Union. Now that literature was very thin in data in terms of data so at some point stopped and people working on that stopped working on that but now with this new data sets that Laul and others are using and things have really changed dramatically so people are going back to that. So why should we care about all these issues of the origins of agglomeration and whether trade liberalization and economic integration may lead to agglomeration. So there could be some issues that are obviously deeply related to economics this is taken of course by the by the presentation that Laura sent and this is indeed what she was showing that indeed agglomeration is associated to faster growth and actually this is what you see generally a pattern along centuries has been that economic development at the aggregate level has always been associated with increasing urbanization and clustering of economic activities and we see that in China for example at this juncture in time. Now there are also other reasons why you would like to look at that and these are related to the fact that no matter whether the mobility of people is restricted or not you may have unequal outcomes for different people in different places so people tend to be born somewhere and where they are born has persistent implications for their economic outcomes. We see that at the macro scale global scale in terms of developing countries and developed countries but we see that also in terms of regions within countries and we see that also in terms of parts of town within our cities. So agglomeration is also important because as immediate implications in terms of well fairness of development or equal development of individuals of people. But there are also other more pressing issues if you think that issues related to chances fair chances to everybody are not so pressing. There are pressing political issues that can be easily understood in terms of the asymmetric distribution of economic activities. So by now there is a large body or a growing body of literature that is trying to relate the regional distribution of economic outcomes with electoral outcomes. It started with studies in the US and the idea is essentially you liberalize, you're going to get shocks and these shocks due to the trailiburization or general liberalization are going to affect regions asymmetrically. And you want to measure, if you want to measure the intensity of these shocks, so scholars like author Hanson and Dorn, they brought this idea that you could use some instrument which is called the China shock which is essentially showing how different areas are differently exposed to the competitive pressures of globalization. And when you look at these things you can actually predict fairly well and surprisingly well through this China shock, electoral outcomes. So this is a map of the UK, darker means larger share of votes for Brexit, for leave. And this, actually this is of the China shock, these are larger shocks from foreign competitions. And this kind of map can be associated with another map which is the one I was mentioning of the votes for leave. And the association is pretty strong. Remember this is an instrument. So these people that have studied this kind of stuff can claim causation. So indeed the China shock is poised to competition from low wage emerging countries is causing, as caused actually, this kind of outcome for the UK. But now you can move to continental Europe and you could ask a similar question. We didn't have a referendum for leaving the European Union or not, but we have of course several elections. And so other scholars have studied the effect of the China shock on the success of both for the radical right, meaning, I mean, the kind of movements that we see around Europe nowadays and gathering support from the electorate. And this is the map of the China shock for Europe. And again, this map of exposure to foreign competition is something that predicts, if you believe in the instrument, again, the rise of the vote for the radical right and protectionist platforms. For Europe, what is interesting is that on top of this globalization shock, you can build something similar which is associated with the enlargement. So one could say, okay, it's interesting to know what happens when you liberalize with respect to China or maybe it's also interesting to see a similar shock and the asymmetry of this shock across regions associated with enlargement. And when you do a similar experiment, you're going to find that the Eastern enlargement shock is going to have a quantitatively similar effect in terms of electoral outcomes as the globalization shock. So in a sense, if you want to understand from this geographical angle the electoral results in Europe in the last years, well, taking into account the effect of competition in the Western part of Europe coming from enlargement and competition coming from the rest of the world is a good start. Clearly, this is part of a broader set of events that are affecting the global economy, especially countries that are developed, Western countries as sometimes are called, because there are two big trends going on. So the first that has been called the Great Convergence by Richard Baldwin in a recent book is about the fact that, well, I will show you the pictures, so they're much more compelling than my words, the fact that the market shares, so the shares, this is in manufacturing across the world, if you compare G7 and other countries have been a shuffle the lot in recent times. You see on the left the share of war manufacturing G7 versus I would point out China, of course, and on the right the share of war GDP of the G7. So this is the idea of the Great Convergence. Through the location, technological transfers, and local development, well, there is a convergence at the global level. But then there is also what Enrico Moretti called the Great Divergence, which is local. So within countries, Western countries, you see, and also other countries, but when I'm focusing on those, you see a growing division of the economic landscape. So the allocation of economic activities Laura was mentioning between dynamic growth centers and stagnating regions stuck somewhere in the past. So this is a picture taken from the NASA website of the USA just to give you visually what it means, what I mean when we talk about agglomeration. So here you have growth centers. You can try to remember this picture, but because it will come back soon from another angle. And this is for Europe. And this is from the European Space Agency that for once has been cooler in creating pictures than the NASA. So you have this dynamic picture, this GIF, that is showing us how the pattern of agglomeration has changed from 92 to 2010, essentially since the start of the single market to now. What is interesting about this picture is that you see, of course, more lights switching on, which is what you associate with development. So there's been clearly more development in these years. At the same time, of course, it's more difficult to capture here, but what you see is that areas that were much brighter to start with, they become even brighter afterwards. So this is the idea of the great divergence that Enrico Moretti was pointing out. And this is just this blurred picture is just taken from one of the papers by Paul Krugman showing his blard on purpose because I want to show that these things have been thought before when the single market was created and the euro was introduced, and they stopped there because there was not much data to discuss of this sort of thing. So this idea that you have cumulicization and divergence. Now, I would like to spend the last minutes to talk about another important thing that you can understand or at least some aspects of which you can understand pretty well looking at the agglomeration distribution of economic activities. So as you know, well, and we've been reminded of that even yesterday, there's been a change in the approach of the US to the global order. And in particular, from a trade point of view, well, after decades of pushing for lower global trade barriers, the US have reversed completely their approaches, the approach. And this is something quite important in the sense that what we've experienced in the last year or so is the largest return to protection is since the 30s with the smooth only act and this and it was and it was reminded before the Nixon shock in the 70s. So what is interesting is that, okay, we know that there are these trade wars going on, but there is a geographic clear geographical pattern. So US tariffs so far are protected politically competitive counties. So where there is a close run between Republican and Democrats and retaliation is targeted from other countries as targeted Republican counties. So I've shown you before the map from space of the US. This is the map of the China shop for the US. So it seems quite similar, right? Because where there are a lot of lights but also in areas that used to be much like which more lights in the past, you see what more intervention in terms of protection. So the geographical pattern of the China shock also can predict fairly well the reaction in terms of protectionist by the US. So these are pictures that are showing now more detail with countries. The US increases in tariffs and you see again pretty similar to the map from space and this is the reaction of the rest of the world. So this pretty asymmetric, you see the countries that are typically Republican are the red here and these are the ones that have been targeted a lot especially by China in not in terms of clearly cannot have trade policies against the region but you can have trade policies against sectors that happen to be agglomerated in a certain region. And similar information you can get also in pictures that are easier to read because they are produced by journalists rather than economists. And so this is taken from the economists but it is based on clearly a piece of scientific work of some young colleagues from the University of Warwick. So what you have on the left are the the tariffs imposed by the European Union as a retaliation against those imposed by the Trump administration and on the right you see the same for China. So what is coming out is precisely a picture of what I was mentioning before that the retaliation is targeting the political support of Trump and clearly the difference between the UK, the EU and China and China depends on what you import. If you don't import something clearly you cannot put a tariff it doesn't make any sense or at least it's immaterial. So you see for example here the agricultural tariffs imposed by China and manufacturing ones imposed by the by the EU. And I will conclude with another piece of information on this kind of trade war and retaliation. So what you have here is again from the same work I mentioned before transforming more readable by the economists you have on the left hand side so what are these graphs they are showing on the horizontal axis how much damage different packages that have the same size in terms of value hit. The damage done to Trump voters so we've seen the map before and on the vertical one the damage done to your own citizens. So clearly tariffs despite some politician not seeing that tariffs have always this double effect they can inflict harm to others but the price you have to pay is that you're arming some of your citizens. So what you see for the EU is that actually there's a there is a trade off there so you would like to damage your enemy in this war. At the same time you would like to reduce as much as possible the damage for your own citizens. And this is what seems to be going on for the EU choices. So a trade off between arming the enemy and well defending your citizens. What is quite interesting I think should give us some thoughts about what is going to happen next is the approach of China where instead what you see is that the choice of the Chinese has been to damage as much as possible the Trump voters with little consideration for the internal damage. And this interaction between well a full fledged democracy or democracy at least so far in European Union and and well an imperfect democracy if you want in China. This kind of interaction I think is something that will drive a lot the outcomes of these trade wars. So having run out of time thank you for your attention. Many thanks Jean-Marc. Laura I'll give you the opportunity to answer perhaps a little bit if you wish to otherwise I go into. No I just thanks for putting in context some of the political ramifications of how geography matters given that production is an industrial production is particularly concentrated. Okay so let's look right here please. Well this is very interesting and I'm really I'm out of my you know my comfort zone because it's not at all my field but I think it's potentially very interesting for policy what you have to say in Europe about you know the stuff about agglomeration in particular. So what I learned is that agglomeration is good for growth and that there is a lot of persistence in these clusters. In fact if you look at the at the map from the you know satellite map of Europe you know the intense zones where there is a lot of light is the Couloir de Charlemagne. So it's still the you know advanced Europe a few centuries ago. So and this is exactly the problem that the euro instead of favoring more regional equality created more regional inequalities and we know that inequality at the regional level the region not national level is an important vehicle of inequality. So in a way this is the opposite of what the optimal currency area which is more what macroeconomy stress you know happens you know in the optimal currency areas the idea was you want more mobility so that you know this will smooth the shocks and that would be good and so on but now with more mobility we have seen more inequality so or more inequality because of this you know tendency of agglomeration in areas which have complementarities of different factors of production more humocomital and so on. So from the policy point of view okay so this is a policy conference so what should Europe do? Should we favor special zones in southern Italy and eastern Germany? Should we you know create you know these clusters you know with active policy or should we just let the market work? Let me let me collect some other questions too. I saw at least somebody at the back exactly. Thank you Shehain Valley from from the LSE. I have a question that that follows from from Lucrezia. If if I understand correctly your your presentation you've established clearly that we have more agglomeration effects in the euro area than we have in the EU. In the EU we understood that we had these agglomeration effects and we have policies to counteract them and that includes structural policy and convergence policy so we understood that we needed permanent transfers inside the EU budget to counteract agglomeration effects. In the euro area where we have more agglomeration according to your findings we don't have such instruments. Should we conclude from your work that you are suggesting that we might need permanent transfers inside the euro area to counteract these agglomeration effects? Many things. Another one? A follow-up question from that one. I saw lots of lights on in the UK in the picture that we saw. Now the non-eurosan country results are very very strange. The coefficients are almost all the reverse of the ones in the euro zone and the R-square is twice as high. So you wonder how robust those results are and I particularly wonder whether if you exclude the UK from the non-eurosan countries do the results change? Many thanks. So let us try to answer the first three ones and then we take another round. Janice for sure. Laura? So we played a little bit. Let me start with the last one and a lot of the the counterintuitive results come from what was formerly Eastern Europe. So UK behaves a little bit more normal except that the UK also has a lot of regional agglomerations and in fact they do correlate very well with the Brexit vote. To the bigger question on this role of agglomeration, so my my discussion actually is an expert on this and he has produced many documents on on this subject so I think it's also good to hear from him. I started by this is a little bit of a paradox. Globalization was not meant to make locations so important. So that's why I think there is a lot of revival of this literature that was very much involved in the 90s not only because we have data but mostly because it is a paradox. Location was not supposed to matter. We again we could have this conversation via Skype. We still choose to come because we have realized that a proximity matters. In the world of in the world led by more high-skill activities it seems agglomeration matters even more. The possibility to specialize in very complex activities boy by firms and by people means that you do want to locate in cities to be able to if you want to ensure some potential shocks. So it is a paradox of globalization. The solution is complex because it involves politics and let me say it before I get a finger like yesterday because it seems to be having political effects. If one wouldn't worry about many of the political implications one does one successful places to be more successful and one would want people to be able to move to those successful places but the reality is that that doesn't happen and many times for political reasons. So let me give you an example of my country not to create any different sensitivities. I think this has to be approached looking at the reasons why some regions are lagging relative to others. So in Costa Rica there was a little municipality that used to be the place where you would come stop in a way to the port. We have now a better road this municipality is now not viable. There is a major that wants many things for this municipality including a university but from an external point of view this is a place that one probably thinks should not be dynamic. There are other places for many other reasons for example the Atlantic in Costa Rica that should be a viable place and it's not viable for many reasons. The transportation is not great. We have problems with education and I do think this is the approach that needs to be followed. One needs to think what are regions that are not viable because of their productive activity is one that is not viable and this for example happens in the US. For example places where there is coal one thinks they are not viable in the long run for many reasons one is also the demands of global climate change but there are some other places because there is a lot still of population that one probably should think should have a more focused policy in terms of revitalizing the area and that probably does come through thinking what are the firms that are there that have hope to be able to become dynamic clusters in addition to thinking about the related business environment, education, universities and so on and so forth. So I think again there is not one size fits all and one needs to look at the different regions thinking about if they're viable or not and also potential political implications. So Jan Marco what do you think about a permanent transfer within the euro area or what should we do in order to to get more lively regions? So I have to thank Laura for leaving me the easy question. So the so I mean first the optimal currency area literature that or I mean which is informing actually the entire framework this is precisely what Paul Krugman was criticizing at that stage and so the point was really that these arguments on optimal currency areas they are essentially grounded in frameworks in which firms do not have a market power and his point and where you have constrictors to scale I mean in the standard models that we all know his point was precisely to say well if I just modify very simple these models are by the way very simple if just make some simple change you would introduce imperfect competition or increasing returns and then the entire construction of the optimal currency area is going to change and in some cases dramatically it's a question of parameters I won't get into this but things could really change dramatically. Now that position in the 90s was not so relevant in a sense for the policy debate in the end because it was a theoretical possibility and in the recent years people started to having all this data and better computing power started to go back to this but this is really really very recent and but still they shy away from the most extreme implications of agglomeration forces and this is first because the very few studies that in the 90s were looking at whether this kind of strong agglomeration forces were there were not able to identify in a convincing way the presence of the strong agglomeration forces and the other is this is again that the kind of mathematics you need to talk about strong agglomeration forces is much more complicated because it's a sort of non-linear I mean things that microeconomists can do very well but trade economy is much less in a sense. Should we have this permanent transfers? So the welfare analysis of this sort of models is typically finding that you have agglomeration benefits for those who can move and those that happen to be in already in the place where everybody wants to be and this is efficiency enhancing at the aggregate level. At the same time there is an issue of how you redistribute these gains because these gains are by definition in the agglomeration and how they diffuse these gains to the other places. So the thing that people at that time were after was exactly say okay you just need to redistribute. There's usual stuff there are winners and losers and then you just redistribute the additional gains and this is I mean this is also in the old models of international trade you liberalize someone gains someone loses but benevolent government can always redistribute. The point is that politically this is not working there are these funds for compensating the losers from agglomeration in Europe, in the US. The people that have analyzed the effect of these funds they find ex ante that they are really small compared to the shocks and exposed they're not being used that much. So they are notional in a sense. So the point is that if you introduce a mechanism of redistribution which is the typical fiscal transfer that you have within states and you attach that to the European Union I think this is politically not going anywhere. There might be something that is more related I mean clearly the fund for globalization sounds much better than than German taxpayers subsidizing Italian taxpayers which is I mean this in terms of selling it to the crowd. So there might be there might be room for funds that are specific but I mean the details of this requires also a lot of deep knowledge in in IO and designs of these schemes. So that's the that's the point should the last point should we have special zones in the south of Italy. This sort of economic engineering has not worked very well in most places where it has been implemented. Yes I mean China the point that we are going back to the picture I've shown the logic of the political logic is completely different. So in the sense that you don't have to gather democratic support when you when you spend the money of the people for some specific areas or parts. So I'm not I mean at this point in time I'm not clear ideas on that. So for sure in China it worked but it worked in a framework that is completely different and and I'm not sure that in our countries this is something that we can implement in the same way what we've implemented in the market economies has not worked in the way we hoped for in most situations. Any thanks. Cristina do I get another 10 minutes because I promised a second round at least of two questions it's five five minutes. Okay Janis and here and the rest I'm very sorry has to talk during the break and I would ask you please to have a short question and I ask you to have a short answer too. Thank you very impressive impressive papers. I would like to bring the discussion in the eurozone and especially the divide between the core countries and the peripheries over the previous 20 years. Yesterday we had some boring diagrams by by mrs. subnem Calemly which showed the divergence both in income per head and total factor productivity between the core countries the periphery countries so can we say that this is part of the agglomeration effect or was it part of the asymmetric adjustment in the current account during the crisis also lessons from from the adjustment that might have affected real convergence was the fact that we liberalized the labor market first and product and services market later that had a negative impact on income per head so can you control in your model for policy effects from from the agglomeration effects or can we ask whether the agglomeration effect negate the classical the neoclassical forces like better better convergence thank you many thanks Janis please yes entre sapiens from free university of brussels and brugel a very interesting paper and discussion the focus was very much on on manufacturing now i think before we we draw a policy conclusion i think we also need to to talk about services right which is after all the bulk of the of the employment now agglomeration i mean there is agglomeration in in services as well right there is there the urban sort of the large cities versus the smallest cities and you know when you look at at the at the brexit at the brexit picture it's very much the large cities versus the not the countryside but the the smaller towns the same thing happened in in the us there's not one of the top 40 largest cities in the us that voted trump not a single one if you look in the uk there is only one large city that voted leave if you look in france france national or you know the successor none of the large cities paris or the the others voted for them so there there is agglomeration there is agglomeration of a particular kind but you know it's not in it's not in manufacturing it's in it's in services so i think the contrast between the large cities where there is agglomeration but in in services and versus the smaller towns where there is agglomeration but in manufacturing is they are very very different stories so there is agglomeration but there are different kinds of agglomeration and i think one needs to distinguish between manufacturing and and services so i just like to ask you you know how do you bring services in your in your story and what kind of difference it may make in terms of policy impact thanks many thanks andre two minutes for each so you're 100 correct the analysis we have done is manufacturing if we add services there's more agglomeration perhaps the the literature has not studied services as much out of data restrictions we continue to have as economies and also data gathering institutions are biased towards manufacturing but indeed services is 70 percent of most economies and i do think we need to do a better job in collecting data for for services if we were to add services there would probably more agglomeration than the one we have but that also limits a little bit the implications in terms of what i can say what is driving this convergence relative to to yesterday's session because a lot of growth is coming from services having said that there is a lot of persistence related to these manufacturing regions that we're doing well we see that continue to do well in terms of this growth and it does explain a some component of this convergence or lack of convergence very very quickly so the to yanes too yes to yanes too i mean the identification of say agglomeration forces due to increasing returns and all this stuff and the standard adjustment that you would expect in models the standard models also with perfect competition is an ongoing research priority i mean this is precisely what killed that literature in the 90s that in the end to make it simple it was difficult to see whether what you observe is the only equilibrium of a neoclassical model that is subjected to shocks or is a shift to another equilibrium of a model with non-linearities this is what killed the thing in the 90s nowadays people have better tools they may be able to sort this out but we are not there yet in terms of services more city big city this is really a crucial dimension at least from the political point of view as you mentioned but also it's interesting from in terms of of structural change because a lot of these cities were manufacturing centers before or at least not in the protecting the city but just outside and they managed to successfully transition from center of excellency manufacturing to two service centers the small cities instead they didn't make this transition and so maybe they were in in industrial clusters serving these industrial clusters but they didn't become service hubs especially of eye and services and so this is indeed a big challenge okay well I think I have to close down now we could talk or discuss for another hour I'm pretty sure let me just add that I mean I get it that one size fits all is for sure not the correct thing yeah but we had a clean slate or state in the 90s with East Germany and when you look into the development of East Germany with the south yeah having agglomerations and being quite successful and the north yeah with all the transfers still being very underdeveloped yeah there is for sure a lot of need to think about how to put a transfer into a very you know sensible and successful way and probably better than we did in the last 20 years but this is for the politicians to discuss too but for us to perhaps here and their advice so perhaps in the break which is coming now and shall we be very disciplinary to shorten it yeah to come back if we don't have one a little bit you know a little bit drink the coffee a little bit quicker yeah than than usual and use and use afterwards the lunch time to discuss some politics about that perfect thank you very much many thanks to my to my presenter and my discussant Laura and John었땐 voor juvenile law and Section constitution amendments to CPP膩의와 동의상위협회에
 That will be now very difficult after this wonderful speech by Jean-Claude Juncker to  go to the next step, but I warmly welcome you to the scientific session we have today.  You know yesterday was all about the last 20 years of the EMU and today we are going  to discuss and talk about global regional trends that are likely to shape the EMU in the future  and the lessons we can take away from that. I'm pretty sure when we are talking about the future  of the EMU we all think about sustainable growth, we think about high employment, we think about  price stability here in this room for sure that will be key to the success of the EMU in the  future and a number of trends such as aging societies, wage polarization induced by globalization  and digitization and an ever more complex international environment might have an important  impact when we can reach the successful outcome. So the paper in this session and we will divide  the session into two. They focus on a particular trend and what they imply for the economic  and financial structures with a strong focus on the consequences for the EMU and the first  part of the session we will do together with Laura Alfaro and Gianmarco Ottaviano. Laura Alfaro  is a professor at the Harvard Business School and a former minister of national planning  and economic policy in Costa Rica and she will discuss the role of industrial clusters, Silicon  Welle in the US being one of the most famous one and always mentioned as an example. And  her paper will be discussed by Gianmarco Ottaviano who is a professor at Bucone University.  After the 25 minutes of Laura and the 15 minutes of Gianmarco we will have a short round like always  with Q&A coming from you and I hope for a lively discussion and then we will do a break and then  we move on with another paper about that for later. So Laura, the floor is yours.  First let me thank the organizers for this great honor. It's an honor to be here celebrating  20 years of the Euro. It's also a great pleasure to come back to this amazing country in this  beautiful city, a country that always has great food and also very friendly people in a way it  does remind me of home. This is co-author work with Maggie Chan and Harold Fadinger. It is a  little bit more micro and it's building on some work we had done before that we're trying to extend  to Europe so of course comments are more than welcome. Let me give you a little bit of a background.  In many ways we have been witness to this great explosion of cross-border flows of capital goods  services. I actually consider myself to be a globalization child, born in one country, marry  a person from a different country and working in a third country and these changes have been the  outcome of course of technology changes, reductions in transportation costs, of course reductions of  barriers but as was mentioned also political will to implement many of these changes and these changes  have the potential to change the industrial landscape of countries and this is particular the  case in Europe that has been predicated in an integration of capital goods services and people  and in particular the euro area that has a more integrated capital markets. This globalization  has been led by what has been called superstar firms and depending on the setting they tend to  mean different things, a term was coined in the 80s but in general it relates to these very  large productive firms many times with complex production processes that they have led the  globalization process. In many ways they are the responsible for this cross-border of capital goods  and ideas and what is interesting about this phenomenon of the superstar firms is that it  relates to what might be seen as a paradox in globalization. If you think about it transportation  costs matter, transportation costs broadly defined as the cost of transporting goods but also ideas  because of that location matters and distance matters so firms are going to choose where to  locate and this location of firms will affect productivity and will have additional potential  benefits. So firms like to locate closer to customers, close to suppliers, this may lead to  more thicker markets, a more availability of again thicker relations. This may also help  workers, you may want to specialize in certain activities if your firm doesn't do well you can  go to another firm that is also true for firms they can specialize in different  products because they can find the workers in case something happens. It's also the case for  capital goods you can have thicker markets in capital goods but also it allows to exchange ideas  so the reason we still come back to these conferences is because there is ideas generated  when we interact with other people. However economic integration should diminish these benefits if  you want or being close to each other that is the idea of getting rid of barriers. You should be able  to move goods, people and ideas across borders and also IT and communication technologies  should allow this to happen so in a way we should be able to have this conference via Skype but again  this is the interesting paradox of globalization. We see that firms still dominate industrial  clusters still dominate and this is interesting because there is more intense competition when  we locate to each other but there are also costs, workers might be more expensive and locations might  be more expensive. So this is what we're going to try to do in this paper. We're going to explore  the industrial landscape through the eyes of firm heterogeneity. So we know now that firms are different  and I mentioned here the work by Helman, Melit and Ghibli but there's many papers that have now  documented that firms are different and so we're going to explore the implications of these firms  being different in terms of the geographic allocation of economic activity. So we're going to examine  how the degree of agglomeration relates to firm attributes, productivity, complexity, age  and regional characteristics and so what we're going to try to do is differentiate what relates to  these firms being different and discuss benefit analysis of proximity relative to regional variables  that make it worthwhile to locate in different locations and we're going to do this comparing  the US and we're also going to compare US with Europe and within Europe the eurozone and non- eurozone  and we're also going to extend to crisis and non-crisis countries. So the questions we want to  answer is is there agglomeration around highly productive firms? Is this driven by multinationals?  Is there any other characteristic in addition to firm productivity and firms being global  that may affect this agglomeration? What is the role of regional characteristics? Does the euro area  look similar to the area US and what are differences within the euro area?  To do this we're going to build on a micro index. This is a methodology that was introduced by  Drutano and Overman in 2005 and I have used in previous work. This index has the advantage that  it treats space as continuous and it allows to analyze firm level characteristics. This is done  by using the location of the firm and calculating bilateral distances across different pairs of  firms. So based on this index we're going to assess what is the role of firm characteristics  and what is the role of regional variables. To mitigate concerns related to causality we're  going to look at agglomeration of new entrants around an incumbent. So we're going to look at  a firm and we're going to see how new firms locate around these existing plants and we're going to  measure the distance related to these new plants. These allow us to consider some of the  reverse causality that may be associated with location and also we're going to  do the analysis at the regional level to control for regional characteristics.  We're going to employ a firm level dataset that I have used in previous work. This is the DMV dataset.  The advantage that this dataset has is that it has a very detailed location of the plants where  plants are located and so we're going to use this information to calculate the index and  based on this index we're going to analyze, we're restricting the analysis right now to manufacturing firms.  Some overview of our findings so far is related to this work that has looked at firm  productivity and firm heterogeneity. We do find that firms are different. We do find that there is a  clear hub and spoke structure to how firms are located in terms of their geographic concentration.  More productive larger firms are more centered by other firms and these smaller, less productive firms  like to locate relative to these larger firms which is a suggestive evidence that overall they  find benefits of locating relative to more productive firms. In relation to potential cost,  as I mentioned, it could be that land is more expensive and workers are more expensive.  We find greater agglomeration within the eurozone. We also find that multinationals and productivity  play a greater role in the the euro area. We find differences following the crisis  in particular related to some of the big crisis countries and we also find that regional attributes  play an important role in agglomeration depending on the specification up to 70% of these differences.  So why does this matter? We looked at the relation between agglomeration and growth rates.  This is of course not establishing causality. This is just a correlation but we found a very strong  correlation between agglomeration and growth rates in Europe. In the euro area we did this  controlling for regional characteristics. In the euro area one standard deviation in density  leads to approximately six standard deviation differences in growth. It is 3% in non-Europe  countries. Now again, this is not establishing causality. This is more a correlation and it turns  out that in the US the correlation is actually the opposite as we document in the paper. But  at least in Europe there seems to be still a very strong correlation in terms of agglomeration and  growth rates. In the paper we also mentioned the literature. There's a long literature in trade  and development that has analyzed the effects of agglomeration. My discussion has contributed to  this literature. The reason we want to stress the literature is because it does present this  evidence that agglomeration does relate to productivity and it does relate to innovation.  The literature has also documented differences between Europe and the US. What is interesting is  that the US there's now a tendency for gradient concentration that actually seems to be a negatively  affecting investment. There's also a long literature perhaps coming from the development  world looking at the role of firms in jump-starting economic activity. Here there is a work that has  looked at the role of big firms and in particular multinational firms which is where I come from  in this project. There's a lot of work that has looked at the role of multinational in jump-starting  development in different countries in general finding positive effects but very conditional  on local conditions. As I said so what we're doing in these papers we're going to examine  micropraterns and try to exploit firm heterogeneity. So in the paper we present the methodology and the  data we present preliminary stylized facts and in the concluding remarks I will mention preliminary  implications. Let me stress the word preliminary and also a future work that is important to follow  up. I don't want to spend too much time in this part but some background it turns out that  measuring spatial concentration is a complicated exercise, complicated by many reasons but one is  that space is continuous. We use this DO index that has the advantage that treats space continuously,  it treats space as a continuum and has the advantage that allows to think of counterfactuals  and controls for location factors. So very general the index exhibits different properties,  it's comparable across industries, controls for overall location patterns of manufacturing,  for industrial concentration, its ambiance with respect to scale and has an indication  of significance. So all these advantages allow us to compare across countries and regions.  The methodology involves different steps. In the first step we calculate the geographical density  for each establishment in each industry we look at bilateral distances from each incumbent to  new firms. Then we calculate a counterfactual density and then we aggregate densities,  we can aggregate at 5 kilometers, 10 kilometers, 50 kilometers. In our work we present results  around 50 kilometers. Just to go a little bit more detail as I said we first start by calculating  the bilateral distances, all the establishments, the new establishments relative to incumbents.  This is just to give you an idea of the volume of calculation that is required in this methodology  which is all perhaps the drawback of the methodology, the computational burden.  Because of noise we smooth the distribution, we limit the analysis to three-digit manufacturing  as I said because of the calculation burden of the methodology. In the second step we calculate  the counterfactual, there's many ways in which one can calculate counterfactual. Here we're  benchmarking against the mean kernel estimates at each industry. In the last step as I said we add  the densities at different thresholds. In the paper we present results for 10 kilometers, 20  kilometers. One can calculate also higher distances, we present results around densities of 50 kilometers.  We exploit the firm level data sets, we have different  vintages of this data. I'm going to present results around 2004-2005 which is before the crisis,  a little bit after the adoption of the Euro and then we look at the data, a recent vintage of  the data. As I said we're going to limit the analysis to three digits. Foreign ownership  is calculated looking at firms that produce in one place but headquarters are located  in a different location and we are going to look at labor productivity calculated using  employment and sales. We use geocoding data. Europe has made available the geocoding of  many locations so we exploit this information and we complement with additional sources. We  calculate distance using the Haversheim formula and as I mentioned we limit to manufacturing firms.  We exploit the availability of regional data that Europe has made available. We use  nuts to level, different information, population, economic activity, schooling measures the number  of people with more than a high school degree, R&D expenditures. We also look at tax policy  whether it's urban or not urban. Europe has made available different data at the regional level.  We compare with the US data and we also use different sources for the industry information.  So the empirical procedure is we're going to have an estimate of our density. As I said we're going  to look at it at 50 kilometers. We're going to have different measures of performance. We're  going to control for industry characteristics and regional characteristics. So our firm characteristics  important in explaining agglomeration. So for this we're going to look at our density measure. We're  going to use labor productivity as a measure of performance. We're going to control for the age of  the firm and we're going to control for whether this firm is engaging different activities  if it's a multi-product firm which we take as a proxy of complexity. And we're going to compare  results for the US and within the euro zone and non-euro zone countries.  So what we find is that indeed firms like to agglomerate around more productive firms.  So again this is perhaps another result related to this growing evidence that firms are heterogeneous  and that this has different implications. So firms overall prefer to locate close to more  productive firms. It turns out that we find that this is stronger in the euro area relative to  non-euro countries and in fact it's three times more important in the euro area relative to  non-euro countries. We also find that there's a positive relation with age. Firms like to locate  to closer to older firms but they also like to locate closer to more complex firms. Again  using multi-product as a proxy for this complexity. And the difference between what we find the euro  area and non-euro area is a quantitative and statistically significant.  Then we look at whether there is non-linearity related to being a superstar firm. In particular  the way we calculate superstar firms and there are many ways that one can calculate it is the  firms that are at the top 5% of the distribution within each region. We play with different ways  of calculating superstar firms. We also looked at 1% but this is the definition that we use  for superstar firms. And what we find is that there is interestingly more agglomeration around  these even more productive firms. This tends to be the case in particular in the euro area.  So firms locate close to productive firms but they tend to locate even more close to more  productive firms. So one question is whether this is driven by multinationals which tend to be if  you want the poster child of the large productive firms. So we control for whether a firm is a  multinational and indeed we find that there is agglomeration, important agglomeration around  multinational firms but firms still locate close to super-sized firms and again this is particular  the case around euro countries. So we find that there's a more agglomeration around productive  firms that tends to be agglomeration around more productive firms. The effects tend to be non-linear  and we also find that multinational play an important role in this process.  What is the role of regional characteristics? So we control for many regional characteristics.  One thing to say that many of these variables are very correlated when we look at the role of  GDP, education, our and the expending population. All of these variables tend to be very correlated  and so it's hard to disentangle the particular effects of each one of these variables. One that  seemed to have a particularly interesting result was the R&D spending. This is R&D spending that  is a mixture of public and private. So firms do locate in regions that tend to have more public  and private R&D particular in the euro zone area. In general regional characteristics do account for  most of the agglomeration in terms of explanatory power. It could be from 30 to 70%. We looked at  other variables. One was tax policy. Yesterday there was a lot of mention of tax policy. We didn't  find significant results of tax policy. It could be more than the measure is not detailed enough  but we didn't seem to find particular effects of tax policy. This tends to be related to the fact  that many places that do have higher taxes also do offer more benefits to firms and so that doesn't  seem to be an effect related to tax policy. Perhaps a related question is can regional policies  foster agglomeration? And again, establishing causality is a little bit more complicated  but we looked at the interaction of some of these regional policies with productivity  and interestingly when we look at superstar firms what we tend to find and again is there is a level  effect of better fundamentals but the interaction with supersized firms is negative. The way we  interpret these results is that better location fundamentals can be seen as a substitute for  requiring to be located to a more productive firms. So better locations can provide some  of the benefits that firms seem to get from some of these supersized firms.  Again, so we do find that higher R&D plays an important role in agglomeration in Europe,  in particular in the eurozone area and a better location can, if you want, lower the gains or  incentives to locate closer to these more productive firms. Has the agglomeration patterns  changed in the euro and non-euro countries after the crisis? And what we do here is we look at the  new vintage of data and we also divide countries. We use euro crisis countries as Ireland, Greece,  Italy, Portugal and Spain. And here what we found is that in terms of productivity there's still  firms want to agglomerate close to more productive firms. It changes in non-euro countries. Perhaps  what is more interesting is that the effect of supersized firms diminishes after the crisis and  in particular when we zoom into crisis countries we find that patterns start to change. So using  all their data sets we try to understand this result that euro crisis countries were a little  bit different. A lot of the differences are driven by Greece which had a very severe crisis and some  of the effects have not been reversed. Spain was interesting even though Spain had a severe crisis  Spain actually has managed to recover in many ways. So the country that was really driving some of the  more different results is Italy which in many ways is a complex country. There has been this  sluggish recovery or slow growth in Italy. It's also a very complex country in terms of the regional  differences. In fact we find that in Italy now firms tend not to agglomerate closer to older  firms perhaps a symbol of some of this lack of dynamism. So we find that firm characteristics  play an important role so more productive firms are not only responsible for a lot of the economic  activity they tend to have positive spillovers to smaller firms. Again related perhaps to the  more complexity of these firms that allows them to engage in externalities of different kinds with  smaller firms. Regional attributes play an important role better location fundamentals  if you want could weaken the incentives or the need to locate two more productive firms.  Again speaking of the interplay with local policies and even though we see this greater  movement of goods, capitals and ideas we continue to see the dominance of certain firms in particular  these more productive firms. Preliminary policy implications in this all this research related  to firm heterogeneity does suggest that one side fits all policy is perhaps not the optimal policy  and I say this with a little bit of care because of course political economy matters. I come from  a region that when you start to do targeted policies one does need to worry a lot about  capture and so again I say this being careful one needs to think about what are the cost benefits  of doing more targeted policies relative to potential of capturing at least in my country  we call it the hairy hand, the manopeluda that tends to take some benefits from one place  to the other but the policies does seem to suggest that one does need to target a more productive  firms. They will tend to create better business environment and attract other area other smaller  firms and allow them to grow. I know that there's a lot of emphasis on small firms but we want the  small firms to grow and it seems to when we locate or they locate to a more dynamic larger firms  this process tends to happen. And so again one does need to consider the role of these  more productive firms but also think of the role of regional policies that at the end of the day  do explain a lot of these agglomerations so again location fundamentals matter and a better business  environment does allow firms to foster. Future research of course understanding the mechanisms  in which firms attract and other firms benefit from this interaction whether they're complement  and substitutes one in particular is the role of private R&D relative to public R&D and in general  public policies relative to the ones within the boundaries of the firm. The other is we do find  a lot of agglomeration around capital intensive firms in particular in the eurozone area which is  suggestive that there is an important activity around capital goods externalities and so one  has to think whether we should pay more attention to the regional local capital markets but also  the role of lending to underperforming firms. So we worry many times about saving firms because  of employment and linkages related to suppliers and customers but one has to think of the implications  in terms of cluster dynamism and whether is benefiting some other firms. I had a discussion  yesterday that this is something that the region is worrying about lending and evergreening loans  because again this might have negative effects in terms of cluster dynamism and more general  we need to think how the rise in protectionism and the uncertainty associated with it may affect  these industrial patterns. Thanks.  Thanks.  But many thanks. Jean-Marco that I think was a wonderful transfer to your  discussion now. Yeah absolutely. So first of all while I'm waiting for the slides so that  thanks a lot for giving me the opportunity so thanks the organizer for giving me the opportunity  to discuss this paper I think this is a very promising line of research it's really a paper that is  providing a lot of new information using zillion of data points and so this is really  huge work going on by Laura and co-authors. So what I will do in in in this 15 minutes is rather than  then summarizing what Laura and the others have achieved and getting into the technical details  on the agglomeration index I would like to broaden the scope and and argue why a deeper  understanding of agglomeration forces and how these are related to other phenomena like that are  important nowadays like the the rise of superstar firms the increasing markups the the increasing  the unevenness of the distribution of firms in different sectors may be important for  all sorts of import of aggregate outcomes. So essentially the result just to summarize is there  we have some establishments that are better than others they're larger and more productive  and they tend to attr- to be associated to higher density of other firms and this is a pattern that  is clearly could build up a de-aggregate level in terms of clusters that have been as it's been  discussed by Laura. Why should we care? So as has been anticipated there was a lot of studies  there were a lot of studies in the 90s that were very thin on data but very thick on on theory  at the time where the European Union was planning the single market and then the implementation of  the of the single currency. The underlying if you want a real economy model that people had in mind  at that time was a model in which if you have a trade liberalization you're going to get all sorts  of convergence and so you would have also convergence across states and with across regions within  within the different nations. The theory challenge that was raised by Paul Krugman and others at  that time was to show that once you're allowed to have big firms meaning firms that have market power  then this neoclassical prediction of convergence may well go actually in the opposite direction.  So you could get agglomeration economies you could get divergence and therefore a challenge to have  common policies even within countries but for sure the point of Paul Krugman was at the level of  the European Union. Now that literature was very thin in data in terms of data so at some point  stopped and people working on that stopped working on that but now with this new data sets that  Laul and others are using and things have really changed dramatically so people are going back to  that. So why should we care about all these issues of the origins of agglomeration and whether  trade liberalization and economic integration may lead to agglomeration. So there could be some  issues that are obviously deeply related to economics this is taken of course by the by the  presentation that Laura sent and this is indeed what she was showing that indeed agglomeration is  associated to faster growth and actually this is what you see generally a pattern along centuries  has been that economic development at the aggregate level has always been associated with  increasing urbanization and clustering of economic activities and we see that in China for example  at this juncture in time. Now there are also other reasons why you would like to look at that and  these are related to the fact that no matter whether the mobility of people is restricted or not  you may have unequal outcomes for different people in different places so people tend to be born  somewhere and where they are born has persistent implications for their economic outcomes. We  see that at the macro scale global scale in terms of developing countries and developed countries  but we see that also in terms of regions within countries and we see that also in terms of parts  of town within our cities. So agglomeration is also important because as immediate implications in  terms of well fairness of development or equal development of individuals of people.  But there are also other more pressing issues if you think that issues related to chances  fair chances to everybody are not so pressing. There are pressing political issues that can  be easily understood in terms of the asymmetric distribution of economic activities. So  by now there is a large body or a growing body of literature that is trying to relate  the regional distribution of economic outcomes with electoral outcomes. It started with studies in  the US and the idea is essentially you liberalize, you're going to get shocks and these shocks  due to the trailiburization or general liberalization are going to affect regions asymmetrically.  And you want to measure, if you want to measure the intensity of these shocks, so scholars like  author Hanson and Dorn, they brought this idea that you could use some instrument which is called  the China shock which is essentially showing how different areas are differently exposed to the  competitive pressures of globalization. And when you look at these things you can actually predict  fairly well and surprisingly well through this China shock, electoral outcomes. So this is a map  of the UK, darker means larger share of votes for Brexit, for leave. And this, actually this is  of the China shock, these are larger shocks from foreign competitions. And this kind of map can be  associated with another map which is the one I was mentioning of the votes for leave. And the  association is pretty strong. Remember this is an instrument. So these people that have studied  this kind of stuff can claim causation. So indeed the China shock is poised to competition from low  wage emerging countries is causing, as caused actually, this kind of outcome for the UK.  But now you can move to continental Europe and you could ask a similar question. We didn't have  a referendum for leaving the European Union or not, but we have of course several elections. And so  other scholars have studied the effect of the China shock on the success of both for the  radical right, meaning, I mean, the kind of movements that we see around Europe nowadays and  gathering support from the electorate. And this is the map of the China shock for Europe. And  again, this map of exposure to foreign competition is something that predicts,  if you believe in the instrument, again, the rise of the vote for the radical right and protectionist  platforms. For Europe, what is interesting is that on top of this globalization shock,  you can build something similar which is associated with the enlargement. So one could say, okay,  it's interesting to know what happens when you liberalize with respect to China or maybe it's  also interesting to see a similar shock and the asymmetry of this shock across regions  associated with enlargement. And when you do a similar experiment, you're going to find that  the Eastern enlargement shock is going to have a quantitatively similar effect in terms of  electoral outcomes as the globalization shock. So in a sense, if you want to understand from this  geographical angle the electoral results in Europe in the last years, well,  taking into account the effect of competition in the Western part of Europe coming from  enlargement and competition coming from the rest of the world is a good start.  Clearly, this is part of a broader set of events that are affecting the global economy,  especially countries that are developed, Western countries as sometimes are called,  because there are two big trends going on. So the first that has been called the Great Convergence  by Richard Baldwin in a recent book is about the fact that, well, I will show you the pictures,  so they're much more compelling than my words, the fact that the market shares, so the shares,  this is in manufacturing across the world, if you compare G7 and other countries have been  a shuffle the lot in recent times. You see on the left the share of war manufacturing G7 versus  I would point out China, of course, and on the right the share of war GDP of the G7. So this is  the idea of the Great Convergence. Through the location, technological transfers, and local  development, well, there is a convergence at the global level. But then there is also what Enrico  Moretti called the Great Divergence, which is local. So within countries, Western countries,  you see, and also other countries, but when I'm focusing on those, you see a growing division  of the economic landscape. So the allocation of economic activities Laura was mentioning  between dynamic growth centers and stagnating regions stuck somewhere in the past. So this  is a picture taken from the NASA website of the USA just to give you visually what it means,  what I mean when we talk about agglomeration. So here you have growth centers. You can try to  remember this picture, but because it will come back soon from another angle. And this is for  Europe. And this is from the European Space Agency that for once has been cooler in creating pictures  than the NASA. So you have this dynamic picture, this GIF, that is showing us how the pattern  of agglomeration has changed from 92 to 2010, essentially since the start of the single market  to now. What is interesting about this picture is that you see, of course, more lights switching  on, which is what you associate with development. So there's been clearly more development in these  years. At the same time, of course, it's more difficult to capture here, but what you see is  that areas that were much brighter to start with, they become even brighter afterwards.  So this is the idea of the great divergence that Enrico Moretti was pointing out. And this is just  this blurred picture is just taken from one of the papers by Paul Krugman showing his blard on  purpose because I want to show that these things have been thought before when the single market  was created and the euro was introduced, and they stopped there because there was not much data to  discuss of this sort of thing. So this idea that you have cumulicization and divergence.  Now, I would like to spend the last minutes to talk about another important thing that you can  understand or at least some aspects of which you can understand pretty well looking at the  agglomeration distribution of economic activities. So as you know, well, and we've been reminded of  that even yesterday, there's been a change in the approach of the US to the global order.  And in particular, from a trade point of view, well, after decades of pushing for lower global  trade barriers, the US have reversed completely their approaches, the approach. And this is  something quite important in the sense that what we've experienced in the last year or so  is the largest return to protection is since the 30s with the smooth only act and this and it was  and it was reminded before the Nixon shock in the 70s. So what is interesting is that, okay,  we know that there are these trade wars going on, but there is a geographic clear geographical pattern.  So US tariffs so far are protected politically competitive counties. So where there is a close  run between Republican and Democrats and retaliation is targeted from other countries as targeted  Republican counties. So I've shown you before the map from space of the US. This is the map of  the China shop for the US. So it seems quite similar, right? Because where there are a lot of  lights but also in areas that used to be much like which more lights in the past, you see  what more intervention in terms of protection. So the geographical pattern of the China shock also  can predict fairly well the reaction in terms of protectionist by the US. So these are pictures  that are showing now more detail with countries. The US increases in tariffs and you see again  pretty similar to the map from space and this is the reaction of the rest of the world. So this  pretty asymmetric, you see the countries that are typically Republican are the red here and these  are the ones that have been targeted a lot especially by China in not in terms of clearly  cannot have trade policies against the region but you can have trade policies against sectors that  happen to be agglomerated in a certain region. And similar information you can get also in pictures  that are easier to read because they are produced by journalists rather than economists.  And so this is taken from the economists but it is based on clearly a piece of scientific work  of some young colleagues from the University of Warwick. So what you have on the left are the  the tariffs imposed by the European Union as a retaliation against those imposed by  the Trump administration and on the right you see the same for China. So what is coming out is  precisely a picture of what I was mentioning before that the retaliation is targeting the  political support of Trump and clearly the difference between the UK, the EU and China  and China depends on what you import. If you don't import something clearly you cannot put a tariff  it doesn't make any sense or at least it's immaterial. So you see for example here the agricultural  tariffs imposed by China and manufacturing ones imposed by the by the EU. And I will conclude  with another piece of information on this kind of trade war and retaliation. So what you have  here is again from the same work I mentioned before transforming more readable by the economists  you have on the left hand side so what are these graphs they are showing on the horizontal axis  how much damage different packages that have the same size in terms of value hit.  The damage done to Trump voters so we've seen the map before and on the vertical one the damage  done to your own citizens. So clearly tariffs despite some politician not seeing that tariffs  have always this double effect they can inflict harm to others but the price you have to pay is  that you're arming some of your citizens. So what you see for the EU is that actually  there's a there is a trade off there so you would like to damage your enemy in this war.  At the same time you would like to reduce as much as possible the damage for your own citizens.  And this is what seems to be going on for the EU choices. So a trade off between arming the enemy  and well defending your citizens. What is quite interesting I think should  give us some thoughts about what is going to happen next is the approach of China  where instead what you see is that the choice of the Chinese has been to damage as much as  possible the Trump voters with little consideration for the internal damage. And this interaction  between well a full fledged democracy or democracy at least so far in European Union  and and well an imperfect democracy if you want in China. This kind of interaction I think is  something that will drive a lot the outcomes of these trade wars. So having run out of time thank  you for your attention. Many thanks Jean-Marc. Laura I'll give you the opportunity to answer  perhaps a little bit if you wish to otherwise I go into. No I just thanks for putting in context  some of the political ramifications of how geography matters given that production is an  industrial production is particularly concentrated. Okay so let's look right here please.  Well this is very interesting and I'm really I'm out of my you know my comfort zone because  it's not at all my field but I think it's potentially very interesting for policy what you  have to say in Europe about you know the stuff about agglomeration in particular.  So what I learned is that agglomeration is good for growth and that there is a lot of  persistence in these clusters. In fact if you look at the at the map from the you know satellite map  of Europe you know the intense zones where there is a lot of light is the Couloir de Charlemagne.  So it's still the you know advanced Europe a few centuries ago. So and this is exactly the  problem that the euro instead of favoring more regional equality created more regional inequalities  and we know that inequality at the regional level the region not national level is an important  vehicle of inequality. So in a way this is the opposite of what the optimal currency area which  is more what macroeconomy stress you know happens you know in the optimal currency areas the idea  was you want more mobility so that you know this will smooth the shocks and that would be good and  so on but now with more mobility we have seen more inequality so or more inequality because of this  you know tendency of agglomeration in areas which have complementarities of different factors of  production more humocomital and so on. So from the policy point of view okay so this is a policy  conference so what should Europe do? Should we favor special zones in southern Italy and eastern  Germany? Should we you know create you know these clusters you know with active policy or should we  just let the market work? Let me let me collect some other questions too. I saw at least somebody  at the back exactly. Thank you Shehain Valley from from the LSE. I have a question that that follows  from from Lucrezia. If if I understand correctly your your presentation you've established clearly  that we have more agglomeration effects in the euro area than we have in the EU. In the EU we  understood that we had these agglomeration effects and we have policies to counteract them and that  includes structural policy and convergence policy so we understood that we needed permanent transfers  inside the EU budget to counteract agglomeration effects. In the euro area where we have more  agglomeration according to your findings we don't have such instruments. Should we conclude from  your work that you are suggesting that we might need permanent transfers inside the euro area to  counteract these agglomeration effects? Many things. Another one? A follow-up question from  that one. I saw lots of lights on in the UK in the picture that we saw. Now the non-eurosan  country results are very very strange. The coefficients are almost all the reverse of the  ones in the euro zone and the R-square is twice as high. So you wonder how robust those results are  and I particularly wonder whether if you exclude the UK from the non-eurosan countries do the results  change? Many thanks. So let us try to answer the first three ones and then we take another round.  Janice for sure. Laura? So we played a little bit. Let me start with the last one and a lot of the  the counterintuitive results come from what was formerly Eastern Europe. So UK behaves a little  bit more normal except that the UK also has a lot of regional agglomerations and in fact they do  correlate very well with the Brexit vote. To the bigger question on this role of agglomeration,  so my my discussion actually is an expert on this and he has produced many documents on on this  subject so I think it's also good to hear from him. I started by this is a little bit of a paradox.  Globalization was not meant to make locations so important. So that's why I think there is a lot  of revival of this literature that was very much involved in the 90s not only because we have data  but mostly because it is a paradox. Location was not supposed to matter. We again we could have  this conversation via Skype. We still choose to come because we have realized that a proximity  matters. In the world of in the world led by more high-skill activities it seems agglomeration  matters even more. The possibility to specialize in very complex activities boy by firms and by  people means that you do want to locate in cities to be able to if you want to ensure some potential  shocks. So it is a paradox of globalization. The solution is complex because it involves  politics and let me say it before I get a finger like yesterday because it seems to be having  political effects. If one wouldn't worry about many of the political implications one does one  successful places to be more successful and one would want people to be able to move to those  successful places but the reality is that that doesn't happen and many times for political reasons.  So let me give you an example of my country not to create any different sensitivities. I think this  has to be approached looking at the reasons why some regions are lagging relative to others.  So in Costa Rica there was a little municipality that used to be the place where you would  come stop in a way to the port. We have now a better road this municipality is now not viable.  There is a major that wants many things for this municipality including a university  but from an external point of view this is a place that one probably thinks  should not be dynamic. There are other places for many other reasons for example the Atlantic  in Costa Rica that should be a viable place and it's not viable for many reasons. The transportation  is not great. We have problems with education and I do think this is the approach that needs to be  followed. One needs to think what are regions that are not viable because of their productive  activity is one that is not viable and this for example happens in the US. For example places  where there is coal one thinks they are not viable in the long run for many reasons one is also  the demands of global climate change but there are some other places because there is a lot  still of population that one probably should think should have a more focused policy in terms of  revitalizing the area and that probably does come through thinking what are the firms that are there  that have hope to be able to become dynamic clusters in addition to thinking about the related  business environment, education, universities and so on and so forth. So I think again there is not  one size fits all and one needs to look at the different regions thinking about if they're viable  or not and also potential political implications. So Jan Marco what do you think about a permanent  transfer within the euro area or what should we do in order to to get more lively regions?  So I have to thank Laura for leaving me the easy question.  So the so I mean first the optimal currency area literature that or I mean which is informing  actually the entire framework this is precisely what Paul Krugman was criticizing at that stage  and so the point was really that these arguments on optimal currency areas they are essentially  grounded in frameworks in which firms do not have a market power and his point and where  you have constrictors to scale I mean in the standard models that we all know his point was  precisely to say well if I just modify very simple these models are by the way very simple  if just make some simple change you would introduce imperfect competition or increasing  returns and then the entire construction of the optimal currency area is going to change  and in some cases dramatically it's a question of parameters I won't get into this but things  could really change dramatically. Now that position in the 90s was not so relevant in a sense for the  policy debate in the end because it was a theoretical possibility and in the recent years  people started to having all this data and better computing power started to go back to this but this  is really really very recent and but still they shy away from the most extreme implications of  agglomeration forces and this is first because the very few studies that in the 90s were looking  at whether this kind of strong agglomeration forces were there were not able to identify  in a convincing way the presence of the strong agglomeration forces and the other is this is again  that the kind of mathematics you need to talk about strong agglomeration forces is much more  complicated because it's a sort of non-linear I mean things that microeconomists can do very well  but trade economy is much less in a sense. Should we have this permanent transfers? So  the welfare analysis of this sort of models is typically finding that you have agglomeration  benefits for those who can move and those that happen to be in already in the place where everybody  wants to be and this is efficiency enhancing at the aggregate level. At the same time there is an  issue of how you redistribute these gains because these gains are by definition in the agglomeration  and how they diffuse these gains to the other places. So the thing that people at that time were  after was exactly say okay you just need to redistribute. There's usual stuff there are  winners and losers and then you just redistribute the additional gains and this is I mean this is  also in the old models of international trade you liberalize someone gains someone loses but  benevolent government can always redistribute. The point is that politically this is not working  there are these funds for compensating the losers from agglomeration in Europe,  in the US. The people that have analyzed the effect of these funds they find ex ante that they are  really small compared to the shocks and exposed they're not being used that much. So they are  notional in a sense. So the point is that if you introduce a mechanism of redistribution which is  the typical fiscal transfer that you have within states and you attach that to the European Union  I think this is politically not going anywhere. There might be something that is more related I  mean clearly the fund for globalization sounds much better than than German taxpayers subsidizing  Italian taxpayers which is I mean this in terms of selling it to the crowd. So there might be  there might be room for funds that are specific but I mean the details of this requires also a lot  of deep knowledge in in IO and designs of these schemes. So that's the that's the point should  the last point should we have special zones in the south of Italy. This sort of economic engineering  has not worked very well in most places where it has been implemented. Yes I mean China the point  that we are going back to the picture I've shown the logic of the political logic is completely  different. So in the sense that you don't have to gather democratic support when you when you spend  the money of the people for some specific areas or parts. So I'm not I mean at this point in time  I'm not clear ideas on that. So for sure in China it worked but it worked in a framework that is  completely different and and I'm not sure that in our countries this is something that we can  implement in the same way what we've implemented in the market economies has not worked in the  way we hoped for in most situations. Any thanks. Cristina do I get another 10 minutes because I  promised a second round at least of two questions it's five five minutes. Okay Janis and here and  the rest I'm very sorry has to talk during the break and I would ask you please to have a short  question and I ask you to have a short answer too. Thank you very impressive impressive papers.  I would like to bring the discussion in the eurozone and especially the divide between the core  countries and the peripheries over the previous 20 years. Yesterday we had some boring diagrams  by by mrs. subnem Calemly which showed the divergence both in income per head and total  factor productivity between the core countries the periphery countries so can we say that this is  part of the agglomeration effect or was it part of the asymmetric adjustment in the current account  during the crisis also lessons from from the adjustment that might have affected  real convergence was the fact that we liberalized the labor market first and product and services  market later that had a negative impact on income per head so can you control in your model for  policy effects from from the agglomeration effects or can we ask whether the agglomeration effect  negate the classical the neoclassical forces like better better convergence thank you many thanks  Janis please yes entre sapiens from free university of brussels and brugel a very interesting paper  and discussion the focus was very much on on manufacturing now i think before we we draw a  policy conclusion i think we also need to to talk about services right which is after all the bulk  of the of the employment now agglomeration i mean there is agglomeration in in services as well  right there is there the urban sort of the large cities versus the smallest cities and you know when  you look at at the at the brexit at the brexit picture it's very much the large cities versus the  not the countryside but the the smaller towns the same thing happened in in the us there's not  one of the top 40 largest cities in the us that voted trump not a single one if you look in the  uk there is only one large city that voted leave if you look in france france national or you know  the successor none of the large cities paris or the the others voted for them so there there is  agglomeration there is agglomeration of a particular kind but you know it's not in it's not in  manufacturing it's in it's in services so i think the contrast between the large cities where there  is agglomeration but in in services and versus the smaller towns where there is agglomeration  but in manufacturing is they are very very different stories so there is agglomeration but  there are different kinds of agglomeration and i think one needs to distinguish between manufacturing  and and services so i just like to ask you you know how do you bring services in your in your  story and what kind of difference it may make in terms of policy impact thanks many thanks andre two  minutes for each so you're 100 correct the analysis we have done is manufacturing if we add services  there's more agglomeration perhaps the the literature has not studied services as much  out of data restrictions we continue to have as economies and also data gathering institutions  are biased towards manufacturing but indeed services is 70 percent of most economies and i do think  we need to do a better job in collecting data for for services if we were to add services  there would probably more agglomeration than the one we have but that also limits a little bit  the implications in terms of what i can say what is driving this convergence relative to to  yesterday's session because a lot of growth is coming from services having said that there is a  lot of persistence related to these manufacturing regions that we're doing well we see that continue  to do well in terms of this growth and it does explain a some component of this  convergence or lack of convergence very very quickly so the to yanes too yes to yanes too  i mean the identification of say agglomeration forces due to increasing returns and all this stuff  and the standard adjustment that you would expect in models the standard models also  with perfect competition is an ongoing research priority i mean this is precisely what killed  that literature in the 90s that in the end to make it simple it was difficult to see whether  what you observe is the only equilibrium of a neoclassical model that is subjected to shocks  or is a shift to another equilibrium of a model with non-linearities this is what killed the thing  in the 90s nowadays people have better tools they may be able to sort this out but we are not there  yet in terms of services more city big city this is really a crucial dimension at least from the  political point of view as you mentioned but also it's interesting from in terms of of structural  change because a lot of these cities were manufacturing centers before or at least not  in the protecting the city but just outside and they managed to successfully transition from  center of excellency manufacturing to two service centers the small cities instead they didn't make  this transition and so maybe they were in in industrial clusters serving these industrial  clusters but they didn't become service hubs especially of eye and services and so this  is indeed a big challenge okay well I think I have to close down now we could talk or discuss for  another hour I'm pretty sure let me just add that I mean I get it that one size fits all is for sure  not the correct thing yeah but we had a clean slate or state in the 90s with East Germany  and when you look into the development of East Germany with the south yeah having agglomerations  and being quite successful and the north yeah with all the transfers still being very underdeveloped  yeah there is for sure a lot of need to think about how to put a transfer into a very you know  sensible and successful way and probably better than we did in the last 20 years but this is for  the politicians to discuss too but for us to perhaps here and their advice so perhaps in the  break which is coming now and shall we be very disciplinary to shorten it yeah to come back  if we don't have one a little bit you know a little bit drink the coffee a little bit quicker  yeah than than usual and use and use afterwards the lunch time to discuss some politics about  that perfect thank you very much many thanks to my to my presenter and my discussant Laura and John 었땐 voor juvenile law and Section constitution amendments to CPP膩의와 동의상위협회에
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