Migration, imperfect competition and structural adjustment : essays on the economy of the Åland Islands

This dissertation studies the issues and problems of the Åland Islands related to European integration and globalisation. These are migration (essay 1), competition in the domestic (local) market of Åland (essays 2 and 3), and the economy-wide consequences of changes in shipping and alcohol policy in the Nordic countries and in the European Union (essay 4). The analyses are conducted with an econometric examination of micro level data (essays 1 and 2) and with a dynamic applied general equilibrium model (essays 3 and 4) that was constructed during the course of this study. Essay 1 examines the characteristics of migration flows to and from the Åland Islands. Estimated migration equations are well in line with the current theories and earlier empirical results. In addition, it is shown that the local unemployment rate affects mainly the migration tendency of non-natives. However, the probability of living in Åland has a decreasing time trend for native Ålanders, while the opposite is true for the persons born in mainland Finland. Essay 2 tries to explain the high price level of groceries in Åland by comparing individual price observations in Åland to those in the southwestern part of mainland Finland. Lack of scale economies, as well as high concentration levels in retailing and in the food processing industry, are some of the suggested explanations. In addition, transport costs and VAT border administration are Åland-specific, yet minor factors in raising prices. There are not many policy options available for rectifying the situation, but added competition in the local market through relaxed entry barriers could be one measure. Essay 3 introduces a dynamic imperfect competition CGE model. One of the major contributions of the model is the introduction of migration that makes economic growth endogenous in the model. An increase in the threat of entry from outside the home region is simulated with the model. This would increase the concentration of local industries, but also would increase consumer welfare. Essay 4 studies the economy-wide consequences of changes in shipping and alcohol policy of the EU and the Nordic countries. The Finnish Government’s decision to increase subsidies to shipping from 2005 onward seems to compensate quite well for the decreased profitability of tax-free sales onboard. New subsidies increase two-fold the budgetary net transfers from Finland to Åland