The Spatial Impact of Globalisation in Germany Johannes Brcker - PDF document

The Spatial Impact of Globalisation in Germany Johannes Bröcker Henning Meier Christian-Albrechts-Universität zu Kiel Institute for Regional Research and Department of Economics 18th Uddevalla Symposium 2015 Sønderborg, June 11-13 Globalisation: German exports, share in GDP Index, =1 in 1993 1 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 1

Globalisation: German imports, share in GDP Index, =1 in 1993 2 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation • Research Question: What has been the impact on German regions? • Agenda 1. Theory 2. Model 3. Calibration 4. Results 5. Test 6. To do 3 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 2

Theory • Marius Brülhart, The spatial effects of trade openness: a survey, Review of World Economics 147 (2010), finds: 1. “Whether trade promotes concentration or dispersion depends on subtle modelling choices among which it is impossible to adjudicate a priori. 2. Second, empirical evidence mirrors the theoretical indeterminacy: a majority of cross-country studies find no significant effect of openness on urban concentration or regional inequality. 4 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Theory • Marius Brülhart, The spatial effects of trade openness: a survey, Review of World Economics 147 (2010), finds: 3. Third, the available models predict that, other things equal, regions with inherently less costly access to foreign markets, such as border or port regions, stand to reap the largest gains from trade liberalisation. This prediction is confirmed by the available evidence. Whether trade liberalisation raises or lowers regional inequality therefore depends on each country’s specific geography.” … and regional sector structures. 5 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 3

Theory • Three effects from increasing openness need to be considered (vice versa for decreasing openness): 1. Demand linkage: Right (or upward) shift of foreign demand for domestic goods drives output and factor prices up. 2. Supply linkage: Cheaper (better, more diversified) imports reduce input cost of firms and consumer prices. 3. Competition: Cheaper (better, more diversified) imports threaten domestic competitors. • Regional impact? It all depends … 6 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Model • Static, perfect competition “iceberg” SCGE, small (big) version • 15 (96) domestic regions, 22 (64) industries, 11 (82) foreign countries or groups of countries • One representative firm per each region-industry combination • One representative household per region, representing all domestic demand • Simplified interregional transfer system • Constant returns to scale technologies, NCES form, uniform across regions • NCES preferences, uniform across regions 7 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 4

Model The CES nest output of product j   0 F I , intermediate inputs I factors     , j 0.5 i i , k l ...  . . . . . . product labor capital i I  Arm i ... . . . . . . from region r  , j • Elasticities of substitution between labor and capital from Young (2013). k l  Arm i • Armington elasticities from Broda & Weinstein (2006). 8 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Model • After calibrating the model for 2010, I simulate the effect of changing foreign trade for all years 1993 to 2013. • Method 1:  I solve for hypothetical 2010 equilibria with trade (relative to GDP) as in years 1993, ..., 2013.  Thereby all parameters held fixed, except for recalibration of shift parameters of foreign demand and supply. • Method 2:  I backcast or forecast to all years 1993 to 2013  Thereby, all parameters are held fixed, except for recalibration of  shift parameters of foreign demand and supply  a Hicks-neutral productivity parameter . 9 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 5

Model • Shift parameters of foreign demand may represent both, change of demand in foreign countries and change of trade barriers. • Shift parameters of foreign supply may represent – change in foreign price – change in trade barriers – change in quality – change in variety. 10 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Calibration • Elasticities from literature • Shift parameters fixed by limited information calibration to reproduce 2010 benchmark with respect to: – employment by industry and region to calibrate Armington weights for domestic sources – national imports by foreign country or country group to calibrate Armington weights for foreign sources – national exports to calibrate shift parameters for foreign demand shift parameters – national accounts for shift parameters of technologies and preferences. 11 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 6

Calibration  i    i 0.27 Quantifying transport cost mark-up 1 ( v g ) rs rs • with – distance g rs on shortest route from r to s in kilometre land distance equivalents – concavity parameter 0.27 from Hummels (2001) .  ( i – product-specific weight , depending on weight-to- v ) value ratio v i for product i ; function estimated by Hummels (2001), weight-to-value ratios from German export statistics. 12 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Calibration     i i 0.27 1 ( v g ) Quantifying transport cost mark-up rs rs             •   g min t 0.14 s 90 lu rs R r s ( , ) a a a        a R r s ( , ) a R r s ( , ) a R r s ( , ) • with arcs a , routes R ( r,s ) from r to s , and, on respective arcs, – land distances t a from Open Source Routing Machine, – sea distances s a from BP Shipping Distance Tables, – number of loadings and unloadings lu a between sea and land. • Weight 0.14: Per seamile cost (sea) over per kilometre cost (land) of container transport, from Limao & Venables (2001). • Weight 90: Per load/unload cost of a container over per kilometer land transport cost of a container, from European Commission (2009). 13 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 7

Results • Globalisation effect on wages, wage 2013 relative to 1993, percentage point deviation from total Germany (5.9 %) -5.9  -3 -3  -2 -2  -1 -1  0 0  1 1  2 2  3 3  7.8 14 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Results • Globalisation effect on wages, percentage wage growth rate 1993-2013 versus log of wage 1993 simulated wage growth rate 1993-2013, percent 14 12 10 8 Pearson‘s r = 0.34 6 4 2 0 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 log of simulated wage rate 1993 15 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 8

Results • Globalisation effect on wages, wage relative to 1993, percentage point deviation from total Germany 2 1 0 Northern Germany Central Germany -1 Southern Germany Eastern Germany -2 -3 16 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Results • Globalisation effect on wages, wage relative to 1993, percentage point deviation from total Germany 2 1 Urban regions Intermediate regions Rural regions 0 -1 17 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 9

Results • Globalisation effect on wages, wage 2013 relative to 1993, percentage point deviation from total Germany Northern Central Southern Eastern Total Urban -1.2 -0.6 1.4 -4.6 -0.6 Intermediate 1.1 0.7 2.2 -0.7 1.2 Rural -0.7 -0.4 1.8 -2.2 -0.2 Total -0.1 -0.3 1.8 -2.8 18 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Results • Recovery from crisis, trade effect on wages, percentage changes 2009-2011 versus 2008-2009 simulated wage growth rate 2009-2011, percent 10 Braunschweig 9 8 7 6 Rheinpfalz 5 4 3 Berlin Osthessen 2 1 -8 -7 -6 -5 -4 -3 -2 -1 simulated wage growth rate 2008-2009, percent 19 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 10

Test w log of observed wage rate in region at time r t r t , w log of simulated wage rate in region at time r t r t ,  ˆ ( ) t White        ( ) I w w ( w w ) u 0.32 2.8 r t , r ,2010 r t , r ,2010 t r t ,          * ( ) II w w ( w w ) u 0.42 4.6 r t , r ,2010 r t , r ,2010 t r r t ,        ( III ) w w ( w w ) u 0.39 4.3   r t , r t , 1 r t , r t , 1 t r t ,          ( IV ) w w ( w w ) u 0.37 3.8   r t , r t , 1 r t , r t , 1 t r r , t * t = 2.1, robust against both, spatial and serial autocorrelation, following Cameron, Gelbach, and Miller, Journal of Business & Economic Statistics , 29 (2012). 20 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation Test w    w w  w  21 /25 Johannes Bröcker & Henning Meier, Impact of Globalisation 11