Is Agglomeration really Good for Growth? Global Efficiency, Interregional Equity and Uneven Growth

According to the New Economic Geography and Growth (NEGG) literature (Baldwin et al. (2004)), spatial concentration of industrial activities increases growth at the regional and aggregate level without generating regional growth differentials. This view is not supported by the data. We extend the canonical model with an additional sector producing non-tradable goods which benefits from localized knowledge spillovers coming from R&D performing industrial sector. This departure, motivated by the evidence, introduces an anti-growth effect of agglomeration for both the deindustrializing and the industrializing regions and leads to two novel results: 1) when agglomeration takes place, growth is lower in the periphery; 2) agglomeration may have a negative effect on the growth rate of real income, both at the regional and at the aggregate level. In particular, the economy as a whole might suffer a dynamic loss from agglomeration when: 1) the spatial range of the technological spillovers within the R&D sector; 2) the external benefit of local and foreign knowledge capital on non-tradable sector productivity; 3) the expenditure share on non-tradable goods are all large enough. These results are consistent with the empirical evidence reporting regional real income divergence and according to which the trade-off between aggregate growth and interregional equity loses relevance in more advanced stages of development. Our conclusions have relevant policy implications as they suggest that, contrary to the standard view, current EU and US regional policies favouring industrial dispersion might be welfare-improving both at the regional and the aggregate level and may reduce regional income disparities.