Three Empirical Essays on Concentration of Resources and Economic Growth

David Castells-Quintana

April 10, 2015

Vicente Royuela

This thesis focuses on the study of two global trends characteristic of modern economic development, namely increased agglomeration and inequalities within countries. The thesis contributes to the understanding of the evolution of both trends and their impact on economic growth in the long term, using multiple techniques for data analysis, and in the light of the theory and corresponding political debate. The starting point of the thesis is the idea that agglomeration and inequality represent two dimensions (spatial and personal) of concentration of resources within countries, which is associated with the process of economic development. The thesis consists of an introductory chapter, three main empirical chapters, a general conclusion, and three methodological appendices. The thesis is mainly a work of applied economics. For the analysis data has been collected for multiple variables and for a large sample of countries worldwide, with the aim of making international comparative analysis. The central dependent variable is the long-run national economic growth rate. Therefore, the analysis conducted is based mostly on the estimation of econometric models of economic growth. Both cross-sectional and panel data are used, covering the 1960-2010 period. Different estimation techniques are studied and applied (from Ordinary Least Squares, Estimates of Fixed Effects, Methodologies Control Functions: “Control Function Approach” Estimates of Fixed Effects with Instrumental Variables and estimates by GMM). As for the main contributions, beginning with chapter 2, the thesis shows that the benefits of spatial concentration of economic activity appear to depend on a relatively equal distribution of income. Thus, in high-income countries with unequal distribution of resources, geographic concentration appears to be associated with lower economic growth in the long term. Chapter 3 shows two opposing effects of income inequality on a single model of economic growth. On the one hand a negative effect, associated with inequality of opportunity. On the other hand, a positive effect, associated with unequal outcomes. Likewise, the analysis identifies the transmission channels between inequality and growth to which these two effects relate. Chapter 4 contributes to the debate on the relationship between economic growth and urban concentration, providing empirical evidence on the relevance of the urban environment. In particular, the quality of urban infrastructure is shown as critical to balance the benefits and costs of concentration in large cities. Finally, Chapter 5 discusses key findings and policy implications. In particular, the results contextualize the discussion on agglomeration not only in terms of the level of development, but also in terms of distributional problems, and physical aspects of the urban environment. Regarding the level of development, in the case of low-income countries there appears to be a trade-off between efficiency and equity, at least in the short term, due to the fact that increased urban concentration seems desirable for growth but may involve greater inequalities. For high-income countries, by contrast, a more balanced urban system, in which small and medium-sized cities play a key role, appears as a better strategy than intense urban concentration. In terms of distribution, for both high- and low-income, the fact that the benefits derived from agglomeration depend on income inequality highlights the importance of socio-economic and institutional factors in the debate on urban concentration. Finally, as regards the urban environment, the analysis confirms the concern about informal urban settlements (slums), representing a poverty trap for most of its residents, rather than a transient state in the process of structural change.