economic geography: spatial interactions in the world economy venables (2005)

Economic Geography: spatial interactions in the world economy

Venables (2005)

Globalizzazione

• ha a che fare con variazioni dei costi della distanza

• => COSTI che influenzano la distribuzione geografica delle attività produttive

Geografia:

1. ‘first nature’ = geografia fisica (tra cui dotazioni)

2. ‘second nature’ = interazione degli agenti economici nello spazio (Globalizzazione)

Questions• Two questions:

• 1: given the location of the maincentres of economic activity, how do economic activity and levels of income depend on proximity to these centres?

• 2: what drives the existence and determines the location of centres of activity?

(both questions are valid at different scales)

Way to find…..answers

• understanding of the costs of distance;

• describing the mechanisms that cause activity to cluster;

1. Costs of distance

• The distance is not the same if we cross the border or if not! 1000km FR-GER different from 1000km within France;

• Distance values different for different goods: ICT make possible to digitalize some activities shipping costs near 0

BUT share of expenditure going on digitally supplied services is quite small (once digitalized the price gets low)

Expenditure has shifted where trade across wide distances is difficult (personal services, creative industries, design and media: activities where proximity and face to face is still important)

1. Costs of distance for remote economies

Distance implies:1. increasing import prices2. depressing export earnings

• Need to identify not only the market access of locations (Harris,1954) but also the costs of imported goods and equipment.

• Reeding and Venables (2003) halving the market access of a country (doubling the distance) reduces per capita income by around 25%

Localization and trade costs: theory• Income and production structure at the country

level depend on: • 1: country’s endowments; • 2: relationships with other countries;

H-O and Ricardo-Viner => countries tend to exports goods intensive in their abundant factors. Globalizazion?

• Trade liberalization allows countries to exploit their comparative advantage

• Goods and factors are substitutes (particularly with respect to mobility)

CRS Crucial hypothesis

Implications of costs of distanceHypothesis on returns to scale is crucial:• The assumptions of neo-classical economics

imply that activities will be dispersed, and spread quite evenly across locations (backyard capitalism)

• CRScale: production will be broken up to supply local demands;

• IRScal: trade-off between producing everywhere (low trade costs but small scale) and producing in few locations (high trade costs and low production costs)

• Efficiency f[extent of the market FF(geography)]

Imperfect competion in IT

• Differentiated products where each firm produces at IRS each firm produces 1 variety number of firms = number of varieties

• Monopoly power (p-MaC) (substituibility of each variety with others)

• Free entry profits go to O p=AvC• Monopolistic competition from IRS (many

varieties), but each firms cannot produce more than 1 variety (numbers of varieties are limited by the number of firms, therefore also welfare)

Imperfect competion in IT

• IT (imports and exports) can increase welfare: 1. firms expand the scale of production; 2. consumers can buy more varieties

• Effects from IT:1. Scale effect2. Procompetitive effect (from scale effect AvC↓ P ↓)3. Firms exits: from 2n to N(<2n)4. Intra industry trade5. More varieties6. Home market effect (from IRS and t>0) exporters of a

good are countries which have a higher internal demand for that good

Agglomeration mechanisms (1) IRS forces firms to choose where to locate production (it is more profitable to produce in a place with good market access than one with a bad one) :

• 2 locations (countries or cities), one with larger N than the other, • trade between the two is possible but costly.• the larger location then has better market access (more consumers

can be accessed at low cost) and will be the more attractive location for production.

Firms are attracted to the location wages ↑ (and the prices of other inputs such as land) until, in equilibrium, both locations are equally profitable but the larger one pays higher wages.

The advantages of good market access have been shifted to workers and other factors of production

(Krugman, 1991)Positive feedback: big Nmore firmshigher Wmore workersN ↑

Important implications

1. Size matters; particularly if labour is mobile; (if other factors in fixed quantity than a dispertion force operates along with the agglomeration one)

2. even if locations are ex ante identical, ex post they can be very different. ‘Cumulative causation’ forces operate so that very small differences in initial conditions can translate into large differences in outcomes, as initial advantage is reinforced by the actions of economic agents;

3. there is path dependence and ‘lock-in’. Once established, an agglomeration will be robust to changes in the environment.

More agglomeration mechanisms

• Linkages between firms. Venables (1996) Fims which supply intermediates want to locate close to their customers (downstream firms) and firms using intermediates want to locate close to their suppliers

Backward linkages (demand from downstream firms)Forward linkages (supply from intermediate producers to

downstream activities)• Thick labour market (many firms for a specific skills and

many workers empowered with that skills)• Geographically concentrated technological externalities

(regional and urban literature)

Krugman and Venables (1995)

• N and S with the same L (immobile)

• 2 sectors, agricolture (perfectly competitive), manifacturing (IRS monopolistic competition)

• Forward and backward linkages (firms using manufactured products with labour to produce output for use by other firms as well as for final production)


• From A, there 4 forces at work:• Moving from S to N firms:1. raise W in N [? (-)]2. increase supply to N consum. [? (-)]3. backward linkage: increase the size of N market

(demand for intermediates) [? (+)]4. forward linkage: reduces the costs of

intermediates in N [? (+)]The relative importance of these forces changes

with TRADE COSTS

19th century: changes in the geography

Rise of the New World, and within this the particular dominance of the US. By 1913, the US was a leading industrial producer and a successful manufacturing exporter (1860 large primary product exporter).

• why did the US rather than Latin America become the area that overtook the UK and the rest of Europe in real GDP/person?

• why did the US also become the only non-European country to establish a position as a net manufactured exporter? (Canada and Latin America net importers)


• Economic historicians: differing role of institutions and rent-seeking in North and South America and the political economy configurations from which they emerged (different colonization experiences, initial factor endowments, institutions and policies)

• But, SIZE and IRS mattered

19th century: changes in geography


• The growth of the New World economies was boosted by massive factor flows from the Old World. LARGE INTERNATIONAL MIGRATION. Between 1870 and 1910 this augmented the New World labor force by 40% while at the same time reducing the Old World labor force by 13%.

• The impacts on labor force size in some individual countries were much larger -, for example, an increase of 86% in Argentina and a fall of 45% in Ireland - while the United States inflow amounted to 24% and Britain's outflow to 11% of the 1910 labor force

• The UK was the principal capital exporter and outflows averaged almost 5 per cent of GDP; 34 % of all British foreign investment went to North America compared with 17 % to Latin America (Simon, 1968).


Model apt to explain the following stylised facts:

1. The continuing wage advantage of North America relative to the UK and to other New World economies, despite migration flows;

2. the rise of manufacturing in the US, overturning its apparent comparative advantage in agricultural products;

3. the failure of manufacturing to develop in other New World economies

Neoclassical explanations not satisfactory

The late 20th century

• The interwar period is well-known to have been a period of globalization backlash. This was an epoch of trade wars, international capital controls and also a time when transport costs ceased to fall.

• Falling transport and communications costs continued to be a driver of globalization:

1. development of new technologies(ICT)2. reduction in transit times (development of air travel

(and airfreight) and containerization)3. growing value of trade=growing volumes of trade in

parts and components• East Asian Success (growth of manufactured exports

and production)


• Neoclassical theories of economic growth predict convergence of incomes based on the catch-up of countries with initially low levels of (broad) capital and output per worker in a world of universally available technology

• (Barro and Sala-i-Martin, 1995): conditional convergence allowing some role for differences in rates of factor accumulation

• (Pritchett, 1997): actual experience of the world in the twentieth century has, however, been described recently as 'divergence big time‘

• (Quah, 1997): twin peaks


• If we add many countries to the Krugman-Venables story of figure 1, the approach predicts that during phase III convergence will not be uniform, but instead take the form of countries, in sequence, making a relatively rapid transit from the ‘poor club’ to the ‘rich club’

• Puga and Venables (1996) modelled a situation of a large number of identical countries, with manufacturing initially agglomerated in just one of them.

• exogenous growth in demand for manufactures wage in the country with the agglomeration.

• wage gap becomes too large to be sustainable, and industry starts to move to other countries.

• moving to all other countries is unstable: if one country gets just slightly ahead then cumulative causation causes this one to take off and the others to fall back.

• The model therefore predicts rapid transit by one country from the poor club to the rich club.

Manufacturing VA share of GDP (5year MA)

economic geography: spatial interactions in the world economy venables (2005)

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