Regional economic concentration and growth: The effects of agglomeration in different types of regions

Abstract

The regional relationships between agglomeration and economic growth are expected to be different in different types of regions. In the literature of the new economic geography it is common to stress the importance of access to cities with agglomeration of economic activities in the form of firms and households in order to be able to explain regional growth. However, it is also well known that many rural areas are performing fairly well in terms of employment and economic opportunities. The purpose of the present research is to analyze if concentration of population drives economic growth or if it is the other way around. A second question is if this relationship between concentration of population and growth is different in different types of regions. In order to shed light on these two questions the economic performance of three types of Swedish regions (metropolitan-, cities-and rural regions) is related to changes in population densities. In the empirical analysis the Shannon index is used in the measurement of regional concentration. By considering the effect of previous levels of the Shannon index on average wages we extract information on how regional concentration affects regional economic growth (expressed as growth in average wages). In the empirical analysis we employ a VAR Granger causality approach on regional Swedish yearly data from 1987 to 2006. From this analysis we are able to conclude that there are strong empirical indications that geographic agglomeration of population unidirectionally drives economic growth in metropolitan- and city regions. Concerning the rural regions no such indication is found in either direction. This is a fairly strong indication that urban regions are more dependent on economies of agglomeration compared to rural areas.