The effects of economic integration on regional growth, an evolutionary model

This paper will present a multi-region-multi-country model in which inter-regional knowledge spillovers determine the growth of regions. Key parameters in the model are the learning capability of a region, and the exogenous rate of knowledge generation (R&D). The intensity of spillovers depends on geographical distance between regions. The model is investigated by means of simulation techniques. What results is a core-periphery situation, the exact form of which depends on the assumed spatial structure. One surprising result of the analysis is that larger technological differences between regions may lead to smaller disparity in terms of the long-run spatial distribution of GDP per capita. The impact of economic integration is investigated by comparing two different aspects of the model. First, examining a fixed exchange rate system versus a system of flexible exchange rates results in conditions (constellations of parameters) under which fixed exchange rates (compared to flexible exchange rates) generate less disparity across regions. However, depending on the parameter values, fixed exchange rates may also generate more disparity, leading to the conclusion that the effect of monetary integration is ambiguous. Second, the impact of barriers to knowledge spillovers is analysed by assuming that cross border knowledge flows are hampered compared to inter-country flows. This results in the observation that reduced cross border flows have a large impact when regions are initially unequal with respect to their exogenous rate of knowledge generation or their learning capability. In these cases, the resulting trends in overall disparity are quite different from the trends established in a situation of no barriers to knowledge spillovers.