Introduction

The core model of geographical economics has been introduced, explained, and extended in chapters 3 and 4 of this book. In our analysis of various applications in chapters 5 to 11, we have typically investigated relatively small modifications of the core model, notably only those affecting the cost function and thus the production structure of the core model. This has been done on purpose: not just for didactic reasons (each time returning to the familiar ground of the core model), but also to demonstrate that (seemingly) small changes in the core model can drastically increase its applicability and have interesting and sometimes far-reaching consequences. In our discussions of these adaptations of the core model one important question has been unduly neglected, however: what on balance are the strong and weak points of geographical economics? What is the verdict on geographical economics after its introduction in 1991?

The closing chapter of this book therefore deals with the criticism and value added of geographical economics. This is, inevitably, a subjective undertaking, but it gives us the opportunity to express our own views on the advantages and disadvantages of geographical economics. We are now in a position to evaluate the contribution of geographical economics to understanding the location of economic activity. We start with some of the main criticisms in section 12.2, and then react to these criticisms in the next section. In doing so, we clarify our own position.

Introduction

So far we have not paid much attention in this book to the role of dynamics in geographical economics. Instead, we have focused attention on the relationship between a long-run equilibrium and the structural parameters, given an initial distribution of labor and production. We argued, in chapter 3, that the novelty of the core model of geographical economics is the endogenous determination of market size, fostered by the migration of mobile workers to regions with higher real wages. The dynamics underlying the adjustment path – that is, how we evolve over time (see our remarks below on “time”) from an initial distribution to a final distribution, and the intricacies of economic growth and development – have been virtually absent from the analysis so far. This chapter partially fills this void. In doing so, we distinguish between three types of dynamics, increasing in complexity and in real-world importance:

1. (i) adjustment dynamics;

2. (ii) simulation dynamics; and

3. (iii) growth and development

(i) Adjustment dynamics. This type of dynamics analyzes the adjustment path over time, from an initial distribution of manufacturing production between regions to a final long-run equilibrium, by showing the sequence of short-run equilibria leading to the long-run equilibrium. The driving force behind this adjustment process in the core model of geographical economics is, therefore, the migration decisions of individuals moving towards regions with higher real wages, the differences arising from the tensions between the home market effect and the price index effect in this sequence of short-run equilibria.

Introduction

It happened on October 12, 1999 – at least, according to the United Nations (UN). That was the day the human population of planet Earth officially reached 6 billion. Of course, given the inaccuracy of the data, the UN could have been off by 100 million people or so. Every day some 100 million billion sperm are released and 400,000 babies are born, whereas “only” 140,000 persons die. Consequently, the world population is growing rapidly, especially since the second half of the twentieth century.

Given the average population density in the world, of about fifty people per square kilometer (Km2), if you are part of a family with two children, your family could have about eight hectares (or twenty acres) at its disposal. The great majority of our readers will probably look around in amazement as they realize that they do not own an area close to this size. The reason is simple: the world population is unevenly distributed. But why?

There may be many reasons why people cluster together. Sociological: you like to interact with other human beings. Psychological: you are afraid of being alone. Historical: your grandfather used to live where you live now. Cultural: the atmosphere here is unlike anywhere else in the world. Geographical: the scenery is breathtaking and the beach is wonderful. We will at best cursorily discuss the above reasons for clustering. Instead, we focus attention in this book on the economic rationale behind clustering, known technically as agglomeration.

Introduction

So far we have paid little attention to the policy implications (if any) that arise from geographical economics. Can geographical economics be used for policy analysis? This chapter addresses this important question. Two opposing views on the usefulness of geographical economics for policy purposes come to the fore. According to the first view (see Baldwin et al., 2003, and Ottaviano, 2003), it is useful to take the core models literally regarding the main policy implications they show. The idea is that, by sticking to the simple models of chapters 3 and 4, the policy differences between geographical economics and other approaches are most clearly visible. The dangers of taking the core models too seriously for policy purposes have, however, been emphasized by both economists (Neary, 2001) and geographers (Martin, 1999). While not neglecting this second view (see also chapter 12), we mainly follow the first view and try to draw out the policy implications from the core models, if only because these models are by now familiar to the reader.

This chapter is organized as follows. In the next section (based largely on Ottaviano, 2003), we briefly discuss the general policy implications of the core model of geographical economics. We single out three policy issues:

1. (i). government taxation and spending;

2. (ii). changing the infrastructure and transport costs; and

3. (iii). the welfare implications.

In section 11.3 regional policy in the form of tax competition is discussed.

Introduction

Globalization has many faces. Perhaps the most salient feature of globalization is that it appears that the world becomes smaller as transport costs are reduced, trade barriers disappear, the exchange of information becomes less expensive, and information itself becomes an internationally traded good. According to some commentators, such as Thomas Friedman (2005), the world has even become flat. Although a more even spreading of economic activity is certainly possible, the geographical economics approach also indicates that globalization or economic integration in general may imply a spiky or lumpy world with a growing income gap between rich and poor nations, and in which, due to decreases in trade costs, center–periphery structures become the rule instead of the exception.

Among the major actors in the present era of globalization are no doubt the multinational enterprises, or multinationals for short. These firms are probably the most mobile among all firms, with sufficient “international” knowledge to seize a profitable opportunity when it presents itself. Without specific cultural ties to individual nations, they can seemingly move in and out of countries rapidly, with only economic incentives to act upon. The footloose nature of multinationals is strengthened by the fact that such firms increasingly no longer produce “under a single roof.” Baldwin (2006) calls this process “the second unbundling.” The first unbundling was initiated by the transportation revolution of the first Industrial Revolution (1750–1900), which made it possible to spatially separate production from consumption, thereby facilitating international specialization on an unprecedented scale.

Introduction

Until recently, the modern literature on geography and trade paid relatively little attention to the relationship between agglomerating and spreading forces on the one hand and the structure and volume of (international) trade on the other hand. International trade flows are undoubtedly determined largely by the spatial distribution of economic activity. When taking the core (symmetric) two-country model of chapter 3 as a point of departure, the predictions on the structure and size of trade flows are simple. If economic activity is evenly spread, food is not traded internationally, so there is only intra-industry trade in manufactures between the two countries. If there is complete agglomeration of manufacturing activity – the only other possible long-run outcome – there is exclusively inter-industry trade (food for manufactures) between the two countries.

Although these basic predictions are in line with empirical observations that trade is sizable between similar countries and dominated by intra-industry trade (see box 9.1, which gives some stylized facts on international trade flows), the basic framework is too extreme in its predictions and too rigid in its structure to allow for different types of international trade flows. The objective of this chapter is to demonstrate how international trade models may be combined with the geographical economics structure to allow for a diversified and rich explanation of international interactions.

Introduction

Head and Mayer (2004a: 2644; emphasis in original) argue that the empirical studies on the relevance of geographical economics of the kind that were discussed in chapter 5

This quote from the chapter entitled “The empirics of agglomeration and trade” by Head and Mayer in volume IV of The Handbook of Regional and Urban Economics nicely illustrates what is at stake in chapter 6. We discuss empirical work that deals with one central question: what do changes in the economic environment (e.g. large exogenous shocks, demand changes, or changes in trade costs) imply for the equilibrium degree of agglomeration? This question, as the above quote suggests, goes to the heart of geographical economics.

The differences in income levels, which characterise the present-day international economic order, are not self-evident. In the past these differences used to be much smaller. Around 1500 by far the greater part of the world population made its living in agriculture. Although some countries were richer than others, most people in most countries lived close to subsistence levels. The distribution of world income by region was therefore relatively equal (Bairoch, 1980; Cipolla, 1981: p. 220; Maddison, 2001). In contrast in the year 2000, the average income per capita in the twenty-seven richest countries was no less than fourteen times as high as that in the fifty-one poorest countries (see Table 1.1).

How did the present diversity of levels of economic development and welfare in the world economy come about? In order to examine possible answers to this question, this chapter will offer a rough outline of the history of European expansion and the development of the international economic order associated with it.

International economic order

Instead of presenting a formal definition of the slippery concept of international economic order, Box 2.1 identifies some of its important characteristics (Lewis, 1978b; Maddison, 1985; Maddison, 1989; Streeten, 1984).

As long as people work with their bare hands, their daily production will remain low. This sets a limit to the attainable level of economic welfare in a traditional agriculture-based economy. Higher standards of living can only be realised if production per worker increases. One of the principal ways to raise labour productivity is by providing workers with tools, implements and machines – in other words through capital accumulation.

Capital accumulation is intimately associated with the emergence of an industrial sector. Therefore, economic development is linked to structural change and industrialisation. This chapter focuses on structural change and the relationships between agriculture and industry in the course of economic development. It provides a setting for the discussion of industrialisation in Chapter 9 and agricultural development in Chapter 10.

The point of departure is the fact that in the process of economic development the share of the agricultural sector in production and employment declines and the share of the industrial sector increases. However, this does not mean that the agricultural sector should be neglected. This chapter argues for a positive view of the contributions of the agricultural sector to the wider process of development. The argument consists of two main elements. First, successful industrialisation processes are usually preceded by increases in agricultural productivity. Second, in later stages of development a stagnating agricultural sector can be an obstacle to further development of the entire economy. Therefore, a balanced approach to agriculture and industry is called for.