THE NEW ECONOMIC GEOGRAPHY AND

REGIONAL DEVELOPMENT POLICIES

byHarry W. Richardson

Scope

• Relevance of the New Economic Geography (NEG)

• The UK Experience• Implications for South Korea

Krugman and the New Economic Geography

• NEG started in 1991• The key idea was to substitute formal models for

the more descriptive traditional geography and to bring the latter into the economic mainstream

• Krugman’s analysis lacked an empirical dimension, although this has been partially remedied by others

• Over the years, the original model has become more complex via integration with international trade and finance

NEG (cont.)

• Hypothesis: Strong increasing returns encourage production concentration in one or a few cities that can supply the rest of at least a relatively small country because of low transport costs

• NEG argues that centripetal forces outweigh the centrifugal

• NEG theory overemphasizes manufacturing. Developed economies are increasingly service-oriented

NEG (cont.)

• In his Nobel Prize speech this year Krugman disavowed NEG, arguing that its validity has declined over time because of deindustrialization

• This has been criticized by the argument that NEG is still valid in developing countries

Focus

• Here I primarily deal with the original 1991 version of NEG because it is more relevant to the regional policy discussion

• The increasing returns to scale benefits to larger cities are reinforced by easier access to international trade/finance and lower transport costs

• The effects should be stronger in spatially small countries with a dominant primate city such as South Korea

Major Findings• NEG suggests that a successful dispersed

regional development policy is probably infeasible, despite the fact that some cities in Korea are now growing faster than Seoul

• Continued growth of Seoul is important for global competitiveness

• Government office dispersal (a favored argument in Korea in recent years) is only marginally effective

NEG and unbalanced growth

• Even prior to NEG, the economics literature emphasized unbalanced growth, although often in terms of sectors rather than space– Perroux’s propulsive industries– Boudeville’s growth pole– Schumpeter’s “creative destruction”– Baumol’s macroeconomics of unbalanced

growth (see also Rauch)– Theory of leading and lagging sectors

Similarities between UK and Korea

• Both countries are small geographically• Both have top-down systems of

governance• Both are taking steps to cope with livability

issues and community participation, although Korea still lags behind

• Both have very tough Greenbelt policies, but both GBs are cracking under development pressures

Spatial Policies in the UK

• Began in 1928. Have been through many changes in the past eight decades

• In early decades focused on relocating manufacturing jobs to stagnant regions to reduce unemployment

• “Balanced regional development” never a goal. Unemployment rates continue to be much higher in the long-term Assisted Areas than in London and the South East

Generalizations about UK Spatial Policies

• Despite 80 years, largely ineffective. Insufficient resources allocated. Spatial inequities remain very wide

• Too much inconsistency: changes in policy instruments, changes in Assisted Area boundaries, and changes in governments (Labour is more interventionist especially in the Attlee Administration, 1945-51, and the Blair Administration, 1997-2007, and has stronger political support in Assisted Areas, whereas the Conservatives are more hands-off)

• However, there has been some convergence in policy attitudes among political parties in the past few years

Role of London• Some attempt to constrain job growth up to the late

1960s• Strategy abandoned because of negative consequences

on some Inner London neighborhoods• Realization that a better approach was to promote

growth and use some of gains for redistributing resources to other parts of the country

• Recently, London ranked #3 as a “world city;” Seoul was ranked #17 (Cai and Zit, 2004). World city status not closely correlated with population size

• London much less primate (12% of UK population; Seoul MA about 40%)

Change in Scale: Region, Urban and Neighborhood

• With deindustrialization (even South Korea is becoming much more of a service economy), emphasis on interregional manufacturing shifts becomes pointless

• Stronger agglomeration economies in office sector, somewhat weakening the dispersion case

• In the UK, revitalization of large and older cities became a priority; hence shift to “urban regeneration”

• Where successful, an early consequence was intrametropolitan inequities which prompted attention to social exclusion and deprived neighborhoods (in early 2000s)

Change in Scale (cont.)• The shift from urban regeneration to

neighborhood revitalization implied a parallel shift from physical to social development

• Less emphasis on iconic structures by famous architects subsidized by National Lottery funds and more emphasis on community participation at the neighborhood level (major problem is local institutional capacity building)

• New Labour de-emphasized area-based policies in general by integrating them with national-level policies for education, health, jobs, social development, etc.

Dispersal of Government Offices

• 70,000 government jobs have been relocated since 1963 and perhaps another 20,000 more will move by 2020

• Government decentralization has been reinforced by devolution of political authority to Scotland, Wales and Northern Ireland

• Nevertheless, almost 30% of about 500,000 government jobs still remain in London and the surrounding region

Office Dispersal (cont.)• Also, ¾ of senior civil service jobs remain in London• 2/3 of the workers in relocated jobs were recruited locally• Less than 2% of total employment consists of Civil

service jobs, and only 1/7 of these have been relocated. Hence, the impact has been minimal (<0.3% of total jobs)

• The office dispersal process has slowed because there is now plenty of office space in central London (aggravated by the current recession)

Office Dispersal (cont.)

• Locational considerations have not driven the government relocation process – More attention paid to agglomeration

economies (e.g. concentration in clusters)- Labor skills match- Supply of office space– Public sector cost savings at lower cost

locations

Office Dispersal (cont.)

• Except for two cities (Newcastle and Liverpool), office relocations did not move on a major scale to the Assisted Areas

• In fact, they are quite dispersed, despite the case for clustering

• Regional policy objectives were only emphasized long ago (in the 1960s)

DISTRIBUTION OF CIVIL SERVANTS IN THE UK

Implications for Korea• Successful regional development policies are

difficult to implement, especially via a heavy reliance on government relocation

• The original Capital Relocation plan would have reinforced spatial concentration (given the THX); the fallback plan for a New Administrative City is not much better. Abandonment might be better, but the land has already been purchased

• There may be a case (on cost grounds) for relocation of some low-order back-office functions to provincial cities; this has been carried out in the US with some success in both the public and private sectors

Implications for Korea (cont.)• Seoul’s growth may have been compromised by a too

conservative response to Greenbelt relaxations

• The new New Town proposals look promising

• In the UK, 60% increase in GB housing 1994/6 to 1998/2003 (but from a small base)

• Case for abolition of GB, but the political compromise of balancing development needs and environmental concerns may be preferable

Implications for Korea (cont.)Costs of Regulation

• The World Bank has an international data base on the costs of business regulation (costs of opening and closing a business, enforcement of contracts, the size of the informal sector, etc.)

• Reducing these costs would increase global competitiveness

• South Korea is a high-cost regulator compared to the UK (and the US), but is comparable to its East Asian competitors (China, Japan, Russia)

Implications for Korea (cont.)

The Roh Administration emphasized government office relocation as its key regional policy instrument. The UK experience suggests that this is an inadequate approach

Implications for Korea (cont.)

• The lesson from London is that maintaining and promoting world city status is very important for global competitiveness. In East Asia, Shanghai and others are competing hard. This is the wrong time to undercut Seoul.

• Redistributing some of the benefits of successful growth is a superior strategy for promoting equity than reallocating jobs and resources in advance

Implications for Korea (cont.)• In the last few years Korea is beginning to pay

attention to social security, affordable housing and some other equity concerns, an appropriate step given increases in wealth

• Yet the emphasis on prestigious physical projects (e.g. the Cheonggye Cheon river restoration) continues rather than dealing with the more difficult task of social interventions

• Correcting social inequities (e.g. redistribution of income or via in-kind subsidies) can be much more cost-effective than focusing on spatial inequities

Implications for Korea (cont.)• The missing element in this discussion is the link

between reunification and regional development policies, not in the short run (given the current political environment) but possibly in the medium term. Seoul may need to look north more than south

• Again, promoting regional development is very difficult , but narrowing interpersonal inequities is not (given the political will). On the other hand, inequity problems are mild in South Korea compared with other countries (Gini = 0.35; income share ratio of top to bottom quintile = 7.8)

Conclusions: Questions for PCRD

• Is a more proactive regional development strategy desirable?• What degree of decentralization might be achieved by market

forces?• Which government interventions (including government relocation

and PCRD budget allocations) might be most effective?• Is there a risk of undermining Seoul’s global competitiveness?• Is promoting interpersonal equity a better strategy than focusing on

spatial equity?• Can the institutional changes embodied in the 5 + 2 supraregional

strategy change the interregional distribution of economic activity significantly?