Institut de Recerca en Economia Aplicada Regional i Pública Document de Treball 2020/10 1/35 pág.

Research Institute of Applied Economics Working Paper 2020/10 1/35 pág.

“Geography and Regional Economic Growth: The high cost of

deviating from nature”

Daniel Albalate, Germà Bel and Ferran A. Mazaira-Font

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WEBSITE: www.ub.edu/irea/ • CONTACT: [email protected]

The Research Institute of Applied Economics (IREA) in Barcelona was founded in 2005, as a research
institute in applied economics. Three consolidated research groups make up the institute: AQR, RISK
and GiM, and a large number of members are involved in the Institute. IREA focuses on four priority
lines of investigation: (i) the quantitative study of regional and urban economic activity and analysis of
regional and local economic policies, (ii) study of public economic activity in markets, particularly in the
fields of empirical evaluation of privatization, the regulation and competition in the markets of public
services using state of industrial economy, (iii) risk analysis in finance and insurance, and (iv) the
development of micro and macro econometrics applied for the analysis of economic activity, particularly
for quantitative evaluation of public policies.

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 Abstract

We analyze the role of nature and geography in determining economic and

social outcomes. We propose a theoretical model relating geography and
nature to economic growth, and examine that model using data from NUTS
2 European regions. By doing this, we identify the predictive power of first-
nature variables to explain regional population distribution. Then we analyze
the effects of misadjustment between the actual and predicted distribution of
populations on economic performance. Our results indicate that deviating
from first-nature outcomes has a significant negative effect on economic
growth. Furthermore, we find that departing from natural endowment has a
negative effect on social cohesion. The main policy implication emerging
from our analysis is that strategies that harmonize with nature and
geography yield better social welfare and human well-being than those
policies that conflict with them.

JEL classification: O43, O44, Q57, R11, R12.

Keywords: Geography, Population, Growth, Conditional convergence, Inequality.

Daniel Albalate: Department of Econometrics, Statistics and Applied Economics (Public Policy
Unit). Universitat de Barcelona. John Keynes 1-11, 08034 Barcelona. Spain. E-mail:
[email protected]

Germà Bel: Department of Econometrics, Statistics and Applied Economics (Public Policy Unit).
Universitat de Barcelona. John Keynes 1-11, 08034 Barcelona. Spain. E-mail: [email protected]

Ferran A. Mazaira-Font: Department of Econometrics, Statistics and Applied Economics (Public

Policy Unit). Universitat de Barcelona. John Keynes 1-11, 08034 Barcelona. Spain. E-mail:
[email protected]
 Geography and Regional Economic Growth: The high cost of deviating from nature

Throughout history, humanity has made unimaginable progress, not only overcoming
the obstacles or conditioning factors of nature and geography, but even putting them to use in
the service of its aspirations and interests. Indeed, communities have been able to survive,
develop and flourish in settlements with hostile climates, to overcome the limits set by water –
the barrier effects of large rivers and oceans – and the terrain, with its harshness and geological
complexity. The vast knowledge acquired and applied over time has led to technological
advancement and hence to the possibility of mankind adapting to its environment and vice
versa.
This progress has inspired several scholars to write of the end of geography (O’Brien
1992) and the death of distance (Cairncross 1995; 2001), and to describe the new era as that of
a placeless society, a shrinking, flat world (Friedman 2005), all due to advances in
transportation, information and communication technologies. At the same time, the most
isolated places in the world have become easily accessible. This has allowed the development
of prosperous settlements, now integrated into the global economy, that would otherwise have
been challenged by the limiting features attributable to their natural environments. Human life
has apparently become liberated from the constraints of space and frictional effects of distance
(Graham 1998).
Neglecting the ever-present role and restraints of nature and geography may be
premature. Regarding the so-called death of distance, Rietveld and Vickerman (2004) pointed
out that many economic activities have not become that ‘footloose’, due to transaction costs
and other reasons. In fact, proximity to higher-tiered urban centers continues to be an important
positive determinant of local job growth, despite the alleged death of distance (Partridge et al.
2008). International conflicts, past and current economic dilemmas and challenges worldwide
also exhibit a strong relationship with geography and nature, even now (Senese 2005; Starr
2005; Kaplan 2012).
The role of nature and geography has been and still is crucial to understanding many of
the social, political and economic outcomes and prospects of human settlements. From a
historical perspective, the capacity of the environment to support human life has commonly
been considered a major restraint on population growth, density and prosperity. This idea has
been discussed, for instance, by Machiavelli (1519), Botero (1588) and Montesquieu (1748),
and formed part of the famous demographic theory of Malthus (1798). Even earlier, Plato and
Aristotle expressed concerns about overpopulation and limited resources. Thus, thinkers and

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scholars alike have long spoken of the importance of place and natural constraints and
endowments for the location and density of human settlements and their effects on economic
prospects.
In economic geography models, agglomerations are expected to be located and to
develop according to a set of first-nature and second-nature determinants (Krugman 1993).
Among first-nature determinants, geography and nature play the most crucial role. Thus,
economic activity depends on the physical landscape, climate, access to the sea and to navigable
rivers, etc. Clearly though, human action and incentives define the second-nature determinants
that lead to increasing returns, due to scale and density economies, knowledge spillovers, etc.
(Krugman 1991). Labor migrations between regions are responses to market signals and they
determine the balance between agglomeration and dispersion forces (Krugman and Venables
1990). Locational advantages – attributable to geography and nature – favor the concentration
and mobility of human and economic settlements (Ellisson and Glaeser 1999; Glaeser and
Shapiro 2003; Black and Henderson 1998), leading to both the concentration of populations
and the growth of productivity (Beeson 2001; Mitchener and McLean 2003).
The most extensive strand in the literature exploring this relationship is the one
concerned with the role played by geography in relation to economic growth and development
(Diamond 1997; Gallup, Sachs, and Mellinger 1999; Sachs and Warner 2001). A recent article
by Mitton (2016) evaluates the determinants of economic development in 1,867 subnational
regions of 101 countries, focusing on within-country effects of geography and institutions.
Several geographic factors had significant explanatory power for within-country differences in
per-capita GDP, including terrain ruggedness, tropical climate, ocean access, temperature
range, storm risk and natural resources such as oil, diamonds, and iron. Beyond the constraints
imposed on economic prosperity, some authors have also argued that geography may have an
impact on institutions, another relevant set of economic determinants (Acemoglu, Johnson, and
Robinson 2001, 2002; Easterly and Levine, 2003). Moreover, this strand of the literature points
out that even though it is still a determining factor, once institutions are accounted for, the
contribution of geography as a determinant of economic growth is partially diminished
(Acemoglu, Johnson, and Robinson 2001, 2002; Easterly 2001; Rodrik, Subramanian, and
Trebbi 2004).
Geography and nature provide an endowment that may facilitate the location,
concentration and growth of some settlements or make these more difficult in the case of others.
This dependence can be tempered or even completely reversed by the intervention of human
capital accumulation that translates into knowledge and technical advances (Glaeser et al. 2004;

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Bhattacharyya 2009) and/or by means of institutions (Acemoglu, Johnson, and Robinson 2002),
which use a framework of incentives, regulations and investments.
In this article, we propose a theoretical model of the way in which features of geography
and nature can account for regional economic growth, due to their effects on population density
and distribution. This model is empirically examined using data from comparable European
regions. We identify the strong predictive power of first-nature variables in explaining regional
population density and capital city location, to the extent that we can estimate the degree of
geographic harmonization of the actual distribution compared to the predicted distribution. This
allows us to detect deviations produced by the forces of human action, led mainly by
institutions, and to evaluate the predicted consequences in terms of relative economic
performance. Our main results indicate that deviating from nature’s outcomes has a significant
negative effect on economic growth and may also produce larger inequalities. This result
suggests that societies that opt to accommodate to the provisions of nature, and consequently,
to exploit the opportunities of the best locations, rather than forcing a different distribution of
the population across regions, perform better.
The remainder of the article is organized as follows. Next, we propose the theoretical
model. After that we present the data and the empirical model that allows calculatating
deviations by considering actual versus predicted population density and capital city location,
across regions and countries. Then, we interpret the results focusing on the countries that
deviate the most. The economic cost of deviations is estimated in the subsequent section, where
an econometric convergence growth model is estimated. Finally, we discuss our main results
and conclude.

Regional economic model

The aim of this section is to provide a conceptual model for understanding how population
distribution and geography could impact economic growth.
Let us consider a closed economy formed by M regions. Let us assume that all of them occupy
an equal area (equal to 1 to normalize), have equal access to technology 𝐴 and a neoclassical
production function of the form:
𝑌 = 𝐹(𝑔 , 𝐾 , 𝐷 ) = 𝐺(𝑔 )𝐴𝐾 𝐷 (1)

where Ki is the capital of a region i, Di the total population living in the region (since area is
equal to one, this is density of population), gi its geographic endowment and G(g) a function

of geographic endowment such that > 0. Total production of the economy is

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 𝑌= 𝑌 (2)

Firms’ maximization problem

Let us consider that a large number of firms face the classic problem of profit maximization
under conditions of competitive labor and capital markets in every region i:
∏ = max 𝐹 (𝑔 , 𝐾, 𝐷) − 𝑅 𝐾 − 𝑤 𝐷 (3)
,

First-order conditions imply that capital and labor are paid their marginal contributions:
𝜕𝐹 𝜕𝐹
𝑤 = ,𝑅 = (4)
𝜕𝐷 𝜕𝐾
Capital markets
For there to be an equilibrium, assuming that financial markets are competitive and there are no
externalities, we need the return on capital to be equal in all regions. Proposition 1 shows that
there is equilibrium only in allocation of capital between the different regions.
Proposition 1
Let us note by K the total amount of capital in the economy. Let us also note by Ki = t iK, with 0
< ti < 1 and ∑ 𝑡 = 1, the capital of the region i. Then, given D1, ..., DM, there exist unique
values 𝑡 ∗ , … , 𝑡 ∗ such that Ri = Rj for all i and j. These values correspond to a proportional
allocation of capital with respect to production, that is:
𝑌
𝑡∗ =
𝑌
Proof:
Let us consider M = 2. By (1) and (4), return on capital is

𝑌
𝑅 =𝛼
𝐾
Let us note that Yi(t) = Yi(gi, tK, Di). Then,

𝑌 (𝑡 ) 𝑌 (𝑡 ) 𝑌 (𝑡 ) 𝑌 (1 − 𝑡 )
𝑅 =𝑅 ⇔ 𝛼 = 𝛼 ⇔ =
𝑡 𝐾 𝑡 𝐾 𝑡 𝐾 (1 − 𝑡 )𝐾
( )
Let us note that 𝑋 (𝑡) = . Notice that 𝑋 (𝑡) is decreasing, since

𝜕𝑌 (𝑡)
𝑡𝐾 − 𝑌 (𝑡) 𝛼𝑌 (𝑡) − 𝑌 (𝑡) 𝑌 (𝑡)
𝑋 (𝑡) = 𝜕𝐾 = = (𝛼 − 1) <0
𝑡 𝑡 𝑡

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 ( )
Using the same reasoning, 𝑋 (𝑡) = is increasing in t. Then, since limt→0 X1(t) = ∞ and

limt→1 X2(t) = ∞, there exists a unique t∗ such that X1(t∗) = X2(t∗)

Moreover,
𝑌 (𝑡 ∗ ) 𝑌 (1 − 𝑡 ∗ ) ∗ ∗ ∗ ∗ ∗
𝑌 (𝑡 ∗ )
= ⇔ 𝑌 (𝑡 ) = 𝑡 𝑌 (𝑡 ) + 𝑌 (1 − 𝑡 ) ⇔ 𝑡 =
𝑡∗ 1 − 𝑡∗ 𝑌

Consider now the case of M > 2. By induction hypothesis, let us assume that the results
hold for M regions. We want to see whether it holds if we consider an economy with M + 1. Let
us define,

𝑌 (𝑡𝑡 )
𝑋(𝑡) =
𝑡𝑡

Where 𝑡 , … , 𝑡 are the unique 𝑡 (which exist by induction hypothesis) such that ∑ 𝑡 = 1 and
( )
𝛽≡ = for all i and j. Notice that 𝑡 does not depend on t, because the last equality

holds for all 𝑡 ∈ (0,1).

As before, X is decreasing in t:
𝜕𝑌 (𝑡)
𝑡𝑡 𝐾 − 𝑡 𝑌 𝑡𝑌 𝛽𝑀
𝑋′(𝑡) = 𝜕𝐾 = (𝛼 − 1) = (𝛼 − 1) <0
(𝑡 𝑡) (𝑡 𝑡) 𝑡

( )
and limt→1 X(t) = ∞. Note that 𝑋 (𝑡) = . As in the case of two regions, there

exists t∗ such that X(t∗) = XM+1(t∗), and by the induction hypothesis, there exist t1, ..., tM, such
that Xi(tit∗) = XM+1(t∗)

Household maximization problem

Let us assume that households can choose where to locate and can move without any costs.
Let us assume that utility of region i is a function of the form:
𝑢 (𝑤 , 𝐷 ) = 𝑓(𝑤 + 𝜏 ) + 𝑒(𝐷 ) (5)
where f is a concave and strictly increasing function, wi is the net income per capita after
taxes in the region i, τi represents public transfers per capita at region i and e(Di) = aD2 + bDi
represents the externalities associated with density of population. Following theoretical models
in urban economics (e.g., O’Sullivan 2007; Duranton and Puga 2020) we assume that increasing

6
density in lowly populated areas has a positive effect (e.g., accessibility of a greater diversity
of goods and services), but at a certain point externalities become negative (e.g., congestion or a
rise in land prices). Thus, a < 0 and b > 0.
The household maximization challenge is to choose the region i that maximizes utility.
To illustrate which kind of equilibrium will be reached, let us consider, w.l.g., the case of two
regions.
Proposition 2
Let us note by Di, i = 1, 2, the population living in region i. Then, D = D1 + D2 and D1 = tD,
with t ∈ [0, 1]. The necessary and sufficient conditions for the existence of a Nash equilibrium
in population distribution between region 1 and 2, given capitals K1 and K2 are:
i) t = 1 and u1(D) > u2(0), or
ii) t = 0 and u1(0) < u2(D), or
( )
iii) t ∈ (0, 1) and <0

When one of the two regions is empty, the equilibrium is Pareto optimal if, and only if,
household utility of the non-empty region at D is higher than the maximum utility of the other
region.
Proof:
For there to be an equilibrium, expected utility gain from moving has to be non-positive. First,
for i) and ii), let us consider, w.l.g., that t = 1. If u1(D) < u2(0), then the whole population would
move to region 2, so t = 1 is an equilibrium if, and only if, u1(D) > u2(0). For iii), let us consider
that there is an equilibrium between regions 1 and 2, and people living in both. Since there
cannot be any utility gain from moving, utility in both regions has to be the same. Thus,
𝑢 ≡ 𝑢 (𝑡𝐷) = 𝑢 ((1 − 𝑡)𝐷)
( )
Let us consider, w.l.g., that > 0. Then, the marginal gain from moving from 2 to 1 is:

𝜕𝑢 (𝐷 ) 𝜕𝑢 (𝐷 )
𝑢 (𝐷 + 𝜀) − 𝑢 ≈ 𝑢 (𝐷 ) + 𝜀− 𝑢= 𝜀<0
𝜕𝐷 𝜕𝐷
or all ε > 0, small enough. Thus, households would be better off moving to region 1, and the
distribution would not hold to a Nash equilibrium.

Figures 1 and 2 present examples of the two equilibria for an economy with α = 0.3, g1
= 1, g2 = 1.1, K = 200, a = −5·10−3 and b = 3.75·10−2 . For the single region equilibrium, total
population is 30. The red dotted line represents the utility people would get if they lived in the
worst region.

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 Figure 1: Single region equilibrium where the whole population lives in the best region.

For the two-region equilibrium (Figure 2), total population is 100. The 10 percent
relative difference in geographic endowment translates into a 22 percent relative difference in
population density.

Figure 2: Two-region equilibrium.

Let us now discuss briefly how equilibria would change if there were moving costs c
and information asymmetries, so that people from one region could not know exactly what
their utility would be if they moved to the other region. Notice that they will remain in their
regions if the expected increase in utility is lower than the moving costs:
𝑢 + 𝜀 − 𝑢 < 𝑐, 𝑢 + 𝜀 − 𝑢 < 𝑐
where ε represents the information asymmetry, that is, the error of households in
region i when trying to anticipate what their utility would be after moving. Notice that
derivatives do not play any role in this case. Moreover, as shown in Figure 3, two-region

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equilibrium is no longer guaranteed to be Pareto efficient, since the fact that those who move
bear the whole cost of moving could deter people from doing so, even when the social gain
from the utility increase produced by reducing the over-population externality could be much
higher than the private cost of moving. In this situation, a government intervention could make
everybody better off by, for example, subsidizing the moving cost. In other words, a non-
Pareto efficient equilibrium with moving cost (left figure) can be Pareto improved (right figure)
if moving costs -grey area- are subsidized (or if people are forced to move). Utility gains derived
from the movement of people from blue region to red region correspond to red and blue
rectangles.

Figure 3. Two-region equilibrium and Pareto efficient equilibrium.

Implications
The model has three main implications. First, population distribution tends toward extreme
outcomes and over-population. Geographic differences may lead to empty and over-populated
regions, with respect to their optimal level. Moreover, relatively small differences in geographic
endowment can also lead to much larger differences in population density. Second, the model
predicts that areas with better geographic attributes will have higher densities of population (as
in Beeson 2001; Mitchener and McLean 2003), unless there is much more public expenditure
in worse areas or a historical legacy that cannot be overcome because of moving costs or
incomplete information. In both cases, the result will be a non-Pareto equilibrium with lower
utility and higher inequality. Third, more densely populated areas will tend to have higher output
and capital per capita (as in Krugman 1991).1

1
In Krugman the causality channel is due to externalities in production.

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 As a final remark, notice that in our model we have not considered any potential density-
related externality regarding production function (such as economies of scale). Nonetheless,
even with a simple neoclassical function, agglomerations emerge as an equilibrium as long as
there are concave externalities with a monotonic change on population well-being. Including
production externalities with a concave functional form, as for the households, will add an
additional agglomeration force to the equilibrium, further reinforcing the implications of the
model.

Data
In this section we present the data used to estimate the model on population density across
European regions, which is presented in the following section.
Level of aggregation
As the aim of our article is to identify to what extent geographic drivers explain differences in
population density, we need delimited regions to be small enough to consider their geographic
attributes as representative of the region, and large enough to preclude specific municipalities
or metropolitan areas that are particular agglomerations within a region. Therefore, we choose
the level of aggregation denoted by NUTS 2 from the Nomenclature of Territorial Units for
Statistics of Eurostat, which have populations of between 800,000 and three million. The
current NUTS 2016 classification, valid since 1 January 2018, lists 323 regions at NUTS 2
level.
We consider only EU member states, because other countries included in NUTS
classifications, such as Switzerland or Norway, are missing key data from Eurostat. We also
exclude EU territories located outside Europe, namely five from France (Overseas France),
three from Spain (Ceuta, Melilla and Canary Islands), and two from Portugal (Açores and
Madeira). Moreover, we include Bremen (DE50) in Lüneburg (DE93), Hamburg (DE60) in
Schleswig-Holstein (DEF0), and we group all five London NUTS regions into one single NUTS
2 area. We end up with 258 NUTS 2 specimens. We consider density of population as at January
1, 2019.
Geographic indicators
We consider several potential geographic drivers of population density (as in Mitton 2016):
temperature, rainfall, access to navigable waters and unevenness of the land.
Temperature
We use the daily heating and cooling degree days of each region. Degree days are used as an

10
indicator of energy demand for the heating or cooling of buildings by comparing the day’s
average outside temperature against the optimal threshold of 18°C. The heating degree day
(HDD) is the number of degrees below the threshold, the cooling degree day (CDD) the
number of degrees above it. We compute average HDDs and CDDs during the period 1977 to
2018, using data from Eurostat.
Daily rainfall
Average daily rainfall (l/m2) has been calculated using Copernicus Project data from 1977 to
2018.
Access to navigable waters
We have considered two main variables to capture access to navigable water. The first variable
is the distance in kilometers from the boundary of the region to the nearest sea (or ocean). The
second variable is direct accessibility to navigable rivers, that is, the kilometers of navigable
river per squared kilometer of the NUTS2. We consider navigable rivers as those rivers with
more than 100 segments or with a Strahler index higher than 5, according to the European
Environment Agency Spatialite file for rivers. Figure 4 shows the map of the navigable rivers
considered.

Figure 4. Main rivers in Europe.

Unevenness
We calculated unevenness as the interquartile range of the height of every LUCAS (Land Use
and Coverage Area frame Survey) grid point of each NUTS 2 area. LUCAS is a survey carried
out by Eurostat every three years to identify changes in land use and coverage. It contains
observations from over 1,000,000 points.

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Natural resources
We have considered as natural resources the presence of coal mines or oil refineries within the
boundaries of the region. Data have been obtained from the Refineries Sites in Europe Database
(Concawe Organitzation) and from the European Commission. Table 1 shows a description of the
geographic data.

Table 1: Summary of the data set

Variable Mean St. Dev
Daily HDD 7.93 2.35
Daily CDD 0.16 0.24
Daily rain (l/m2) 2.07 0.60
Distance to nearest sea (km) 116.67 145.55
River density (km river/km2) 17.34 17.83
Unevenness (km) 0.2440 0.2434
Natural resources (%) 39.45 48.97
N = 258

Geographic endowment
Our approach to determining the relationship between geographic variables and population
density is to build a linear regression model over the logarithm of the density of population, using
the geographic indicators described, that is:
𝐺𝐸(𝑖) ≡ log(𝐷𝑒𝑛𝑠𝑖𝑡𝑦 ) = ∑ 𝛼 𝐺𝐼 + 𝑢 (6)

where GE(i) refers to the geographic endowment given to the i-th NUTS 2 region, that is defined
as the logarithm of its density of population. GIi,j is the value of the j-th geographic indicator of
the NUTS 2 region i, and ui is the residual.
We exclude regions containing capital cities, since their population density can be
strongly biased by political intervention. As the theoretical model suggests that small
differences in geographic endowment can lead to substantial differences in density of
population, the geographic indicators are included in quadratic form. Moreover, we distinguish
between warmer and cooler seas by introducing an interaction between distance to the sea and
temperature. Table 2 shows the results of a model built by weighting regions by their area size,
so smaller regions are less important as the model is about density, and by selecting significant
variables at 15 percent or higher. We perform two estimations. First, a Bayesian estimation
using the brms package available in R (Bürkner 2017), without a prior to avoid introducing any
bias. The Bayesian estimation does not assume asymptotic properties of the estimates and

12
therefore is more suitable for significance tests on small sample sizes (Figure 5). Secondly, we
also provide OLS estimates. As can be seen in Table 2, estimates are almost identical.

Table 2: Geography endowment model

Bayesian estimation OLS
Variable name Estimate Std. Error Estimate Robust Std. Error
Constant 1.65874*** 0.42509 1.65620** 0.82357
HDD 0.13837*** 0.06235 0.13642 0.11530
HDD2 -0.01687*** 0.00289 -0.01680*** 0.00645
Rain 2.01921*** 0.31475 2.03330*** 0.63571
Rain2 -0.36743*** 0.06396 -0.37035*** 0.13885
Uneveness−1 0.02243*** 0.00431 0.02244*** 0.00503
Uneveness−2 -0.00004*** 0.00001 -0.00004*** 0.00001
Distance to the sea -0.01028*** 0.00214 -0.01031*** 0.00255
HDD: Distance to sea 0.00129*** 0.00024 0.00129*** 0.00029
Natural resources 0.29930*** 0.08413 0.29795*** 0.09853
Significance codes: ***: p< 0.01; **: p<0.05; *: p< 0.1.
N: 233 (capital regions not included)
Note: Errors weighted by area. R-squared: 0.7727. F-statistic: 84.2 (p-value: 0.000).

Figure 5: Distribution of the parameters of the model using a Bayesian estimation

Notice that CDDs are not important, and only HDDs matter. This is because Europe is a
relatively cold area, with an average of only 0.16 CDD versus 7.93 HDD. Notice also that only
distance to the sea is important in terms of access to navigable waters. It may seem counter-
intuitive that rivers are not relevant, but the explanation is that most regions have a navigable river
(72 percent of the regions, corresponding to 88 percent of the total European area). Since the
river network is very dense across Europe, it has no significant impact at a regional level.
However, as we will see later, rivers do determine distribution within a region, that is, where to
place a city within a region.

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Interpretation
Understanding why a model makes a certain prediction can be as crucial as the prediction’s
accuracy. It provides insight into how a model can be improved and supports understanding
of the process being modeled. To do so, we evaluate feature importance and plot the marginal
relation estimated by the model between explanatory features and the target (partial dependence
functions).
To evaluate feature importance, we estimate SHAP (SHapley Additive exPlanation;
Lundberg and Lee 2017, 2019) values. Given an observation 𝑥 = (𝑥 , … , 𝑥 ), the SHAP value of
feature j on the instance x corresponds to how the concrete value of feature j on x modifies the
output of the model with respect to other instances that share some of the features of x, but not
j. For a parametric model 𝐹(𝑥) = 𝑔(∑ 𝛼 𝑥 ), where 𝑔 is a function of the weighted features
of x, the SHAP value corresponds to: 𝜑 (𝑥) = 𝛼 (𝑥 − 𝐸 𝑋 ), where X is the set of
observations and 𝐸(𝑋 ) is the average value of the j feature on X. Then, noting by N the total
number of observations, we can estimate the relative importance of the feature j in the model
as
∑ |𝜑 (𝑥 )|
𝑅𝐼 =
∑ ∑ |𝜑 (𝑥 )|

Table 3 shows the relative importance of each driver.

Table 3: Relative importance of the geographic factors

Factor Relative importance
Temperature 44.56%
Rain 19.00%
Access to navigable waters 13.12%
Unevenness 11.81%
Natural resources 11.51%
NOTE: SHAPs weighted by area.

Temperature is by far the most important geographic factor explaining population

density. Access to navigable waters has a relatively low importance, although that might be a
singular characteristic of Europe, because most of the continent is made up of small surface
peninsulas, so navigable seas and oceans are relatively close everywhere.
Apart from overall feature importance, it is also pertinent to understand whether the
relationship between the target and a feature is linear, monotonic or more complex. Partial
dependence functions estimate the marginal effect that features have on the predicted outcome

14
of a model (Friedman, 2001). Therefore, they correspond to SHAP values. As we can see in
Figure 6, partial dependence plots show that geographic endowment decreases as the HDD
increases; that is, the colder the region, the less attractive it is. In terms of rainfall, the curve
suggests the more the better, but with diminishing returns.

Figure 6. Partial dependence plots for non-binary variables.

The distance to the sea impacts differently according to temperature. For warm regions
(in Figure 6, defined as having an HDD of less than 7, with an average of 4.99), such as
Mediterranean countries, the effect is more relevant and positive: the closer to the sea, the better.
For cold regions (in Figure 6, those regions with an HDD over 8, with an average of 9.61), the
effect is almost not relevant and being closer to the sea does not increase geographic
endowment. On the one hand, for cold countries with direct access to the sea, such as the UK or
Finland, it is not relevant because almost all NUTS 2 areas have access. Moreover, the sea may
not be always easily navigable, as it freezes. For cold countries without direct access to the sea,
such as Austria or the Czech Republic, because they are crossed by navigable rivers, geographic
dynamics are largely determined by the other factors.
Interestingly, as predicted by the theoretical framework presented above, geographic
endowment tends to produce extreme population density outcomes, as can be seen in the quadratic
relationships with respect to temperature and rainfall, or the inverse relationship with respect to
unevenness.
Assuming that the greater the number of people who want to live in an area, the higher is its
attractiveness, the geographic endowment (GE) can be interpreted as a proxy for the
attractiveness of a region (to European people) based on its geographic attributes. Obviously,

15
there are several other factors that may influence population density, such as historical events
(e.g., wars), cultural and religious differences or public investment. However, the GE constitutes
an ideal framework for assessing to what extent population is distributed according to geography
within a country and identifying the cause of misadjustment between current and expected
distribution, and which of those, if any, are a consequence of deviating from geography.

Analysis of population distribution by country

Our analysis of population distribution by country comprises two parts. First, we analyze
whether the choice of capital city is geographically optimal. Second, we estimate the degree of
geographic harmonization for each country by the percentage of the population that would have
to move to another region within the same country to achieve the expected distribution of
population according to the geographic endowment.
Capital cities
To evaluate the choice of the capital location, in terms of geography, we calculated the relative
potential of the NUTS 2 region in which the capital is situated with respect to the maximum
potential that could be achieved within the city. The potential of the capital city of the country C is
defined as:
𝑮𝑬(𝑪) (7)
𝑷𝒐𝒕𝒆𝒏𝒕𝒊𝒂𝒍(𝑪) = 𝟏𝟎𝟎
𝐦𝐚𝐱 𝑮𝑬(𝑵𝑼𝑻𝑺𝒊 )
𝑵𝑼𝑻𝑺𝒊 ∈𝑪

Table 4 presents the relative potential of the capitals of those countries considered in the
analysis, with the exception of countries that consists of a single NUTS 2 region. It also presents
the difference between the geographic factors of the capital and the average of those across the
country. Although access to navigable waters is captured in the model by distance, we also
included whether the capital city has a river. Rivers play an important role in deciding where to
place the city within a region: all but Madrid (Spain) have a navigable river.
As shown by the theoretical model developed above, capital cities, which are highly
populated areas with relatively high output per capita, are generally placed in nearly optimal
areas, as their endowment almost reaches the maximum potential of the country (91.8 over 100).
Madrid in Spain is the most notable exception, scoring only 59.5 over 100. It is placed in the very
middle of Spain and on the high Spanish plateau, completely isolated from the sea, in a relatively
colder and less rainy area.

16
Table 4: Capital attractiveness
Country Potential HDD Rain Sea dist Uneven. River
vs avg vs avg vs avg. vs avg.
Germany 100 0.8 0.2 53.2 146.1 Yes
Croatia 100 -0.3 -0.4 -110.8 -131.7 Yes
Portugal 100 0.6 -0.5 37.6 -216.9 Yes
Romania 100 -1.6 0.1 -27.8 -152.1 Yes
Italy 100 -1.1 0.1 -57.3 -286.6 Yes
Ireland 99.4 -1.4 -0.3 0.0 -129.0 Yes
Netherlands 97.7 -1.6 -0.5 -15.7 -86.6 Yes
United Kingdom 97.7 -0.3 0.1 -48.2 54.1 Yes
Bulgaria 95.6 0.0 0.2 -20.3 -6.8 Yes
Sweden 95.4 -0.9 0.2 0.0 -154.8 Yes
Slovenia 95.1 -1.1 -0.2 -5.0 -190.7 Yes
Denmark 94.1 -0.1 0.0 0.0 -4.3 Yes
Czechia 92.1 0.0 -0.4 27.7 -219.7 Yes
France 89.4 0.2 -0.1 -22.6 -39.7 Yes
Greece 89.1 0.0 -0.2 0.0 -0.8 Yes
Poland 88.6 -2.4 -1.1 113.2 -496.3 Yes
Austria 88.1 -0.7 -0.1 22.2 -169.8 Yes
Hungary 86.9 -0.1 -0.2 30.7 4.9 Yes
Belgium 86.7 -1.4 0.0 0.0 -18.3 Yes
Finland 85.0 -1.0 -0.2 -87.6 -188.9 Yes
Slovakia 80.2 -0,4 -0,1 -9,7 -32,0 Yes
Spain 59.5 0,4 -0,4 200,5 -171,2 No
Average 91.8 -0.6 -0.2 3.6 -112.3 Yes

Population misadjustment
The GE is an estimation of the logarithm of the density of population. Thus, it can be used to
estimate the expected density of population that every region should have if population were
distributed according to geographic characteristics. For each country, we estimate the theoretical
size of the population that should live in each region, subject to the constraint that total
population cannot change. Let us note by EP(NUTSi) the expected population of region i, and
by 𝐴 its area. Then,
𝒆𝑮𝑬(𝑵𝑼𝑻𝑺𝒊 ) 𝑨𝒊 (8)
𝑬𝑷(𝒊) = 𝟏𝟎𝟎 𝑷𝑪
∑𝑵 𝑪
𝒌 𝟏𝒆
𝑮𝑬(𝑵𝑼𝑻𝑺𝒌 ) 𝑨
𝒌

where country C is the country where the i region is located, 𝑘 = {1, … 𝑁 } are the
regions that in country C and PC is the total population of C.
Given the expected population of every region and the real population, we estimate the
percentage of total population that would have to move in order to achieve the expected
distribution. We also adjust for the capital bias. Capital bias is the result of differences in how

17
countries classify their capital city. Some countries, such as Belgium, consider the capital city
to be a NUTS 2 area. Others, such as Spain or France, consider the capital city with its
metropolitan area to comprise the NUTS 2 zone. While others, such as Croatia, include their
capital city in a NUTS 2 region that contains not only the city and its metropolitan area, but
also a significant part of the country. The larger the territory included in the NUTS 2 sector, the
lower the misadjustment due to the capital, since it is diluted among a larger area. To correct for
this, we adjust the estimation of population misadjustment by country, delimiting the NUTS 2
area of all capitals according to the boundaries of their metropolitan region, splitting the given
NUTS 2 zone into two regions, when needed.
Table 5 presents the results of population misadjustment. On average, 24.4 percent of the
population would have to move within their country in order to achieve a purely geography-
based distribution of population, in a range that extends from 14.4 percent (Bulgaria) to 35.6
percent (Spain). Without the correction for capital bias, results are very similar, with the
exception of Croatia and Ireland, whose misadjustment would be underestimated because they
include their capital within a NUTS 2 region far larger that the metropolitan area.

Table 5: Population misadjustment

% misadjustment adjusted by % misadjustment not adjusted by
Country capital effect capital effect
Bulgaria 14.4 9.6
Slovenia 15.1 10.5
Czechia 16.0 15.9
Romania 16.3 16.4
Poland 16.9 14.8
Finland 19.2 18.7
Croatia 20.6 7.5
Slovakia 22.9 22.9
Sweden 24.0 24.2
Belgium 24.1 23.1
Germany 24.2 26.3
Italy 24.2 21.3
Austria 24.7 23.4
France 25.3 25.3
Netherlands 26.4 27.0
Hungary 26.4 26.1
Denmark 28.9 28.5
Ireland 31.5 30.0
Portugal 32.4 32.4
United Kingdom 34.1 35.3
Greece 34.2 34.2
Spain 35.6 35.6
Average 24.4 23.1

18
 Figure 7 shows the comparison between current distribution of population and the
expected distribution according to geographic endowment. Figure 8 shows the necessary
change for regions to transition from current to expected distribution. That is, it shows the
percentage increase needed for the resident population of the NUTS 2 area to meet expected
population distribution. Green regions are those that are underpopulated with respect to the
expected distribution. Therefore, more people should live there so there should be a population
increase. Red regions are the opposite. They are overpopulated areas, whose population should
decrease so as to achieve the expected distribution. In Portugal, for example, we can see that
there is a highly overpopulated region, Lisbon (the dark red point), which would need to reduce
its current population by more than 50 percent, and two moderately overpopulated regions that
would need a decrease in current population of between 25 percent and 50 percent: the northern
region (Porto) and the southern region (Algarve).

Figure 7. Current population distribution in Europe (left) vs. expected according to

geographic endowment (right).

19
 Figure 8. Percentage change in population by NUTS2 that would be needed to adjust actual
population distribution with expected.

The theoretical model presented above introduced three potential drivers of greater
deviations in population distribution in the long run: information asymmetry, moving costs and
policy interventions. From results displayed in Table 5 and from Figures 7 and 8, the latter
seems to emerge as the most relevant, at least for those countries in which the misadjustment is
particularly high (above 30 percent): Spain, Greece, the United Kingdom, Portugal and Ireland.

These five countries share the trait of being peripheral in the context of the European
continent. Hence, they are more isolated, which implies that any policy altering population
distribution could be less affected by other countries’ policies.

In the case of Ireland and the United Kingdom, parallel processes of consolidation took
place as global hubs of large firms developed toward the end of the last century. Many

20
multinational firms relocated to the Dublin area in the 1980s and 1990s (Gunnigle and McGuire
2001), following Ireland’s entry into the European Union (then the EEC) in 1973, and corporate
tax reforms introduced in 1997 and 1999 by the minister of finance, Charlie McCreevy, lowered
corporate taxes from 32 percent to 12.5 percent and thus laid the framework for Ireland’s base
erosion and profit shifting tools (BEPS), considered among the world’s largest (Torslov, Wier
and Zucman 2020). As a result, the Greater Dublin area has experienced an impressive
population growth of 46 percent over the last 30 years (source
http://www.greaterdublindrainage.com/ ) while the rest of the state grew by 30 percent,
consolidating a secular trend for the preeminence of Dublin that dates back to the end of the
Irish War of Independence (1919-1921) and the Civil War (1922-1923).2

In the case of the United Kingdom, the deregulation of financial markets in the 1980s
(removal of controls on foreign exchange and fixed rate commissions, entry of foreign
companies, switch to electronic trading, etc.), helped to kick off a financial transformation,
dubbed the ‘Big Bang’, that cemented London as the global financial capital. Many financial
institutions relocated to London, and its metropolitan area experienced a population growth
similar to that of Greater Dublin. From 1991 to 2019 it grew by 34 percent, while the rest of the
UK population grew by 16 percent.3 This growth is far larger than that experienced in other
important European capital areas such as Paris, Berlin, Rome, or Amsterdam. Among the large
capital cities, only Madrid has experienced such a large growth of population (33 percent in
Madrid vs. 20 percent in the rest of Spain).

Spain, Greece and Portugal, besides the common trait of being peripheral countries in
the EU, share another characteristic: the three of them have French civil law systems and legal
origins (La Porta et al. 2008). This has determined a type of nation-building based on the French
model and a very centralized administrative tradition, which drive territorial policies
persistently targeted to reinforce the political and economic role of the capital city in the
country.4 The paradigmatic case is that of Spain, which has been analyzed in Bel (2011, 2012).
Other studies have documented the extreme degree of political centralization in Portugal

2
After the Civil War, Dublin was consolidated as the political capital. Its population grew from around
500,000 inhabitants in 1925 to 1,025,000 in 1991. Cork, which was the main city opposing the Anglo-
Irish Treaty (1921), lost political influence and economic relevance and its population only grew
112.000 inhabitants during the same period.
3
Data obtained from https://worldpopulationreview.com/ on June 6, 2020.
4
It is worth noting that even though it is not a peripheral country, France has a misadjustment rate of
25.3 percent, slightly above the average figure for Europe (24.4 percent). The fact that France is more
centrally located in the continental context may have palliated the effect of this type of nation-building,
and derived administrative tradition and territorial policies on population misadjustment.

21
(Magone 2011) and Greece (Ifantis 2004).5 One of the probable consequences of these nation-
building policies has been a particularly strong promotion of concentration of the population in
the capital city of the country, which is the most important factor explaining the extremely
intense misadjustment of population in these countries.

Economic consequences of population misadjustment

According to the theoretical model presented above, deviations from nature in terms of
population distribution lead to non-Pareto allocations of population, which may be perpetuated
due to the high cost of moving, incomplete information, and overinvestment in overpopulated
areas designed to compensate for overpopulation externalities. Hence, no matter the underlying
reason, greater deviations from nature are expected to be associated with lower utility and,
potentially, higher inequality. To test these two economic consequences of population
misadjustment, in this section we present an empirical estimation of the impact of population
misadjustment on economic growth and inequality.
Regional conditional convergence
Conditional convergence theory states that an economy grows faster the further it is from its
own steady-state value (Barro and Sala-i-Martin 1995), which is conditioned by different
covariates such as the saving rate or human capital (Mankiw, Romer, and Weil 1992). As it
allows for different steady states, it is a widely used framework for analysis of the long-term
drivers of economic growth (see, among others, Barro 1995; Sala-i-Martin 1997), and for
testing convergence between regions located in different countries (see, for example, Cartone,
Postiglione, and Hewings 2020).
To test whether population misadjustment has an effect on economic convergence, we
estimate a model of the form:

𝑔 = 𝛾 + 𝛾 q + 𝛾 𝑠 + 𝛾 ℎ + 𝛾 𝑝𝑚 + 𝛾 𝑐 + 𝜀 (9)

where 𝑔 is the GDP per capita growth rate of the region 𝑖 over the period 2000-2018,
𝑞 is the natural log of the initial GDP per capita, ℎ is the human capital, 𝑠 is the natural
logarithm of the saving rate, 𝑝𝑚 is the population misadjustment of the country in which the
region 𝑖 is situated (as at the year 2000), 𝑐 is a dummy variable equal to 1 when the capital city

5
In Lundell (2004), Spain, Greece and Portugal appear as the countries with the most centralized
systems of party candidate selection for elections in the (then) EU15.

22
is in the region i, and 𝜀 is the residual. Human capital is measured as the natural logarithm of
the percentage of the population aged between 25 and 64 years that has the highest education
level (ISCED level 5–8, corresponding to tertiary levels), and the saving and investment rate as
a share of GDP, as at the year 2000. Data have been obtained from Eurostat.
We present three different estimations of equation (9). In the first estimation, all regions
are weighted equally in the quadratic error minimization. In the second estimation, we weight
regions by total population. Therefore, regions with larger populations are considered to be
more representative, to contain more information. Finally, we also present an estimation that
weights regions according to their relative population within their respective countries. Hence
all countries contribute equally to the model.
Table 6 presents the results for the three estimations of the conditional convergence
model. We only provide OLS results because they are almost identical to Bayesian estimates.
It can be seen that population misadjustment has a negative impact on economic convergence.
This result is consistently statistically significant at 1 percent across models. Countries that
deviate farther from nature tend to have less growth and lower steady states. Therefore, the
greater the deviation the lower the speed of convergence and the inter-regional inequality
decrease, both non-weighted and weighted by population (Concept 1 and Concept 2 inequality,
as dubbed by Milanovic 2005), and the lower the total welfare of the population. Concretely,
for each 10 percentage points of misadjustment, annual growth is reduced by around 0.5 to 0.7
percentage points. Moreover, as expected from the theoretical model, the positive estimate of
the capital city parameter confirms that part of this effect consists of a rent transfer to over-
populated regions by means of a public intervention.
Finally, to gain a complete understanding of the convergence model beyond the
significance of the parameters, we estimate the relative importance of each variable included in
the model. We use again the methodology suggested by Lundberg and Lee (2017, 2019): SHAP
(SHapley Additive ExPlanation) values. Table 7 presents the relative importance of each
variable in the conditional convergence model. The initial GDP is the most relevant variable
and accounts for 50 percent to 60 percent of the total predictive power of the model, depending
on the estimation. Remarkably, the population misadjustment and the capital city effect jointly
account for around 30 percent of the total importance, being even more relevant than human
capital.

23
Table 6: Regression estimates for conditional convergence model from 2000 to 2018.

Equal Weighted Weighted by relative

Variable Weights by population population
Constant 5.17886*** 5.61842*** 4.46462***
(0.3598) (0.2787) (0.5991)
logGDP2000 -0.42146*** -0.47199*** -0.37592***
(0.0351) (0.0237) (0.0519)
Misadjustment -1.40105*** -1.24990*** -1.07203***
(0.1706) (0.2003) (0.2656)
LogEducation 0.11069*** 0.12838*** 0.05603+
(0.0244) (0.0265) (0.0381)
LogSavings 0.05482 0.01127 -0.03508
(0.0541) (0.0528) (0.1102)
CapitalCity 0.16702*** 0.14164*** 0.09247*
(0.0506) (0.0319) (0.0566)
R2 0.6313 0.6921 0.5811
F 82.18 107.9 66.6
N = 246. 9 regions (6 from Poland, 3 from UK) excluded because of missingness of data.
Robust standard errors in brackets. ***: p< 0.01; **: p< 0.05; *: p< 0.1, +: p<0.15
NOTES:
a) Estimations excluding Ireland, that changed their GDP calculations in 2015 which resulted in a >10% increase that
year, lead to results with higher predictive power (especially for the first and third estimation, where the R squared
increase up to ~0.72) and a <1% signification of the capital parameter in the third estimation. The estimated parameters
are modified by less than 10% (relatively)
b) Including population growth, depreciation and technological progress as a covariate (as in Cartone, Postiglione and
Hewings, 2020) does not modify the results (less than 10%, relatively), since the variable is not significant. However, 8
additional regions would be removed because of missing data.

Table 7: Relative importance based on SHAP value

Variable Equal Weighted Weighted by relative
weights By population population
2000
logGDP 52.5% 56.1% 60.6%
Misadjustment 23.4% 19.9% 23.1%
LogEducation 15.4% 17.0% 10.1%
LogSavings 0 0 0
CapitalCity 8.7% 7.0% 6.2%

Income inequality
Apart from the effect on economic growth and regional convergence, we also test whether
countries that deviate farther from nature exhibit higher within-country income inequality
(Concept 3 inequality, as dubbed by Milanovic 2005). As per the theoretical model, greater
deviations are expected to be associated with higher income inequality to compensate (at least
partially) for over-population externalities.
Table 8 presents the estimation of a model to test the relationship between inequality
(measured as the GINI market income, obtained from Eurostat) and population misadjustment.

24
The relationship is significant and positive, implying that greater deviation from nature is
associated with higher inequality.

Table 8: GINI market income vs population misadjustment

Bayesian estimation OLS
Variable name Estimate Std. Error Estimate Robust Std. Error
Constant 41.8873*** 3.4752 41.9160*** 3.5740
HDD 0.3277** 0.1377 0.3263** 0.1383
Significance codes: ***: p< 0.01; **: p<0.05; *: p< 0.1.
N: 22 countries
R-squared: 0.2321. F-statistic: 6.045

Discussion
Our results provide empirical evidence that large population misadjustments with respect to
geographic endowment come at a cost. As expected from our model, the farther a country
deviates from the expected population distribution based on its geographic endowment, the
lower its regional convergence and the higher its economic inequality will be. Remarkably, part
of the effect consists of a rent transfer to the capital city.

These results, together with those obtained in the section “Analysis of the population
distribution by country; Population misadjustment”, suggest a potential novel causality channel
by which institutions affect economic performance.

Recent economic growth literature has emphasized the role of institutions in economic
growth and development (Acemoglu, Johnson, and Robinson 2002; Acemoglu and Robinson,
2005; Rodrik, Subramanian, and Trebbi 2004; Mitton, 2016, among others). ‘Institutions’ is a
broad term that includes the diverse, complex interaction of individuals, firms, states, legislation
and social norms which make up a society’s social, economic, legal and political organization
(see North 1981).6 According to Acemoglu and Johnson (2005), these institutions are intimately
linked to the distribution of political power in society and, as such, regulate the relationship
between ordinary private citizens and elites with access to political power. Rodrik,
Subramanian, and Trebbi (2004) propose a taxonomy of four categories of institutions that can
impact economic performance. Institutions are 1) market-creating; 2) market regulating; 3)
market stabilizing, and 4) market-legitimizing.

6
The definition of institutions in North (1981: 201-202) is “a set of rules, compliance procedures, and
moral and ethical behavioral norms designed to constrain the behavior of individuals in the interest of
maximizing the wealth or utility of principals.”

25
 Thus, institutions have enough mechanisms to reverse the outcomes of nature and
induce or promote the population distribution that best serves specific societal goals. As we
showed, by using a framework of incentives, regulations and investments, institutions are the
most relevant drivers of a population distribution equilibrium with extreme deviations from
nature (as in Acemoglu, Johnson, and Robinson 2002). In turn, population distribution
influences economic growth and income distribution: by privileging certain regions with
respect to others, institutions not only transfer rents to the privileged region, but also harm
overall economic growth.

On the one hand, for the three European continental countries with the most extreme
misadjustments (Spain, Portugal and Greece) the deviation is the result of an intentional
political intervention by central government, based on the desire to maintain control over the
territory by privileging their capital regions (Madrid, Lisbon, and Athens, respectively).
Political intervention in the design of policies such as transportation infrastructure, prioritizing
objectives related to the administrative and political concentration of power, and largely
neglecting productivity-related objectives, has probably prevented the development of an
efficient distribution system in the economy, thus damaging potential economic growth. This
is shown in the evidence obtained, for example, in the case of Spain, in Albalate, Bel and Fageda
(2012) and Bertoméu-Sánchez and Estache (2017). The result of such intense forced deviations
from nature is, according to our econometric results, detrimental to economic performance.

On the other hand, the high concentrations of population in London and Dublin, which
explain the greater misadjustment of the United Kingdom and Ireland, seem to be a consequence
of public policies intended to promote the development of market forces and private industry
located in those regions, taking advantage of the role of agglomeration economies with
localized accumulated capital. However, this concentration may have come at the expense of
other regions. For instance, in the case of the United Kingdom, as stated by Ronen Palan: “The
Bank of England consistently pursued policies that favored the City’s position as a world
financial center, even when such policies were seen as harmful to the UK’s mainland
manufacturing needs.” (Palan 2010: 165). Inner London's GDP per capita was 328% of the
European Union average in 2010, compared with 70 percent in West Wales - the biggest gap in
any EU state, according to Eurostat.

Rising inequality and economic performance differences between regions have become
a relevant policy debate, and a desire to redress the balance is expressed all the way up to the
top. In 2014, even the prime minister, David Cameron, said that for too long the UK economy

26
had been “too London-focused and too centralised”.7 He had already written, in 2009, that
“Over the last century Britain has become one of the most centralized countries in the developed
world.”8

Conclusion
The expansion of knowledge and technological innovations in transportation and
communication have led to claims of the end of geography; a world in which distance would
not play any significant role in decisions about human settlements. In this article, we have
analyzed whether the features of nature and geography still play a relevant role in economic
and social outcomes, by facilitating or limiting location, concentration and growth of human
settlements.

We have proposed a theoretical model to represent the way in which geography and
nature can account for regional economic growth, through their effects on population density
and distribution. This model has been empirically examined using data from NUTS 2 European
regions. This has allowed us to identify a strong predictive power of first-nature variables to
explain the regional distribution of populations, and to estimate the degree of geographic
harmonization of the actual distribution of population compared to the predicted distribution.

After estimating the misadjustments between actual and predicted regional population
distribution, we have analyzed their impact on relative economic performance, together with
the impact of institution-related factors, such as the conditional of being the capital of the
country. Our main results suggest that deviating from nature’s outcomes has a significant
negative effect on economic growth and can increase inequalities. Hence, societies that choose
to exploit the opportunities of the best locations, according to natural endowment, rather than
promoting a different distribution of the population across regions by means of institutional
intervention, achieve better economic performance and more social cohesion. That is, policies
that harmonize with nature and geography yield better social welfare and human well-being
than those policies that conflict with them.

7
This statement was acknowledged in the news article, “Regions to get £6 billion in government
funding“, BBC News/Business, July 7, 2014. Retrieved on June 6, 2020
(https://www.bbc.com/news/business-28190016).
8
David Cameron, “A radical power shift” The Guardian, February 17, 2009. Retrieved online on June
6, 2020 (https://www.theguardian.com/commentisfree/2009/feb/17/cameron-decentralisation-local-
government).

27
Appendix

Variable Description Source Link

Population Population by NUTS2, in 2000 Eurostat https://ec.europa.eu/eurostat/web/products-datasets/-
and 2018 /demo_r_pjangroup
Area Area of the NUTS2 Eurostat https://ec.europa.eu/eurostat/web/gisco/geodata/reference
-data/administrative-units-statistical-units/nuts
HDD Average daily number of degrees Eurostat https://ec.europa.eu/eurostat/web/products-datasets/-
below 18ºC from 1977 to 2018 /nrg_chddr2_a
CDD Average daily number of degrees Eurostat https://ec.europa.eu/eurostat/web/products-datasets/-
above 18ºC from 1977 to 2018 /nrg_chddr2_a
Daily Average daily rainfall (l/m2) from Copernicus https://surfobs.climate.copernicus.eu/dataaccess/access_e
rainfall 1977 to 2018 Project obs.php
River Kilometers of navigable river per EEA https://www.eea.europa.eu/data-and-maps/data/european-
density km2 catchments-and-rivers-network/rivers/spatialite-file
Distance to Nearest distance from the Google
sea boundary of the region to the sea Maps
Terrain Interquartile range of the height LUCAS- https://ec.europa.eu/eurostat/web/lucas/data/lucas-grid
unevenness (in km) of every LUCAS grid Eurostat
point of each NUTS 2 area
Natural Dummy variable indicating European https://www.concawe.eu/refineries-map/;
resources whether there are coal mines or oil
Comission https://ec.europa.eu/jrc/en/publication/eur-scientific-and-
refineries within the region and technical-research-reports/eu-coal-regions-opportunities-
Concawe and-challenges-ahead
Regional Regional GDP per capita (PPP), in Eurostat https://ec.europa.eu/eurostat/web/products-datasets/-
GDP per 2000 and 2018 /tgs00004
capita
Human Natural logarithm of the Eurostat https://ec.europa.eu/eurostat/web/products-
capital percentage of the population aged datasets/product?code=edat_lfse_04
between 25 and 64 years that has
the highest education level
(ISCED level 5–8), in 2000
Saving rate Natural logarithm of the Eurostat https://ec.europa.eu/eurostat/web/products-
percentage of the gross fixed datasets/product?code=nama_10r_2gfcf
capital formation (as a % of the
regional GDP) by NUTS2, in 2000

28
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