Economic Growth
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Economic Growth

New Directions in Theory and Policy

Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie

This enlightening and significant volume focuses on the nature, causes and features of economic growth across a wide range of countries and regions. Covering a variety of growth related topics – from theoretical analyses of economic growth in general to empirical analyses of growth in the OECD, transition economies and developing economies – the distinguished cast of contributors addresses some of the most important contemporary issues and developments in the field.
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Chapter 11: Increasing Returns and the Distribution of Manufacturing Productivity in the EU Regions

Bernard Fingleton and Enrique López-Bazo


Bernard Fingleton and Enrique López-Bazo 1 INTRODUCTION Despite the diffusion of new technologies to many rural or low productivity regions, differences in manufacturing productivity levels and growth rates persist across the EU. In this paper we set up a model to account for these growth rate variations, and use the model to estimate the impact on long-run equilibrium productivity levels of alternative assumptions about returns to scale. Our model is influenced by the new wave of theory in urban and geographical economics, which for the first time allows a general equilibrium solution within the context of increasing returns to scale. Our analysis shows that the increasing returns hypothesis stands up to empirical scrutiny, and therefore adds to the growing body of evidence (see for example Hanson, 1997; Brülhart, 1998; Ottaviano and Puga, 1998; Fingleton, 2001a,b, 2003; Henderson and Thisse, 2003; Brakman et al., 2004) supporting the new theory, although, almost irrespective of their theoretical provenance, many regional economists and economic geographers would agree that increasing returns are a fundamental prerequisite for a proper understanding of regional disparities. However, if we restricted ourselves entirely to our chosen theoretical context, we would be in deep trouble analytically. Geographical economics theory, at least in its most elemental form, is difficult to turn into empirical models without sacrificing formal elegance, because it is apparent that pecuniary externalities are by themselves insufficient for an unbiased econometric specification. To help us go down this road in...

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