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Economic Geography as seen from Economics:
Neglect, (Re)Discovery & (Missed) Opportunities
Harry Garretsen (Spatial Economic Analysis (SEA) Lecture, RSA 2012 Delft)
.
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SEA journal: “… methods of
spatial economics”
Central theme RSA 2012 conference: spatial interactions
Why me? →→→→→→→→
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Spatial interactions or dependencies…….. › ……..central to the field of economic geography
(EG)..
› …....aims to explain (uneven) spatial development…..
› ………various analytical approaches………
› This lecture: what does economics have to offer to the analysis of spatial interactions and hence to EG?
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OUTLINE
1. Central theme: EG & spatial interactions….2. …….. in economics prior to 19913. …….. 1991: New Economic Geography (NEG)4. Krugman’s NEG: his 3 key ”Nobel” insights
5. 20 years on: missed opportunities??6. Example: Urbanization in China7. How to proceed with (N)EG?
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Does it matter where Delft
is located in The Netherlands?
YES:
space & location matter
The Litmus Test of EG
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Spatial interactions in economics pre-1991
› International economics?
› Regional economics?
› Urban Economics?
› CONCLUSION: Neglect or, at best, partial analysis
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Something changed between 1991 and 2008!!!
Krugman:
Nobelprize 2008
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New Economic Geography/Geographical Economics
› Three main insights make for core NEG model
› NEG what’s in a name? NEG vs geographical
economics
› This model sets the scene for remainder lecture
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NEG 3 key insights (I)
› NEG’s core model: Krugman (1991, JPE)› NEG originates in international trade theory,
not in urban/regional economics› We proceed in 3 steps: Krugman (1979, 1980,
1991) › International trade theory in 1979: old (=18th
century) theory (Ricardo) at odds with facts› Theory: inter-industry trade; facts: intra-
industry trade (it’s not “cloth for wine” anymore)
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Manufacturing intra-industry trade; 1988-2000, selected countries Manufacturing intra-industry trade (% of total manufacturing); 1988-2000
25
50
75
1991 1994 1997 2000year
% in
tra-in
dust
ry tr
ade
Hungary
Japan
South Korea
Mexico
USA
Germany
Australia
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NEG 3 Key Insights (II)
› Krugman (1979): introduce internal increasing returns to scale
› Model of imperfect competition (Dixit and Stiglitz, 1977)
› Rationale for (intra-industry) trade, but no role for geography yet……..
ii xl
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Average costs under increasing returns to scale
Averagecosts
Output
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NEG 3 Key Insights (III)
› Krugman 1980: add transport costs to IRS
› Assume two countries, a and b: Sa >Sb (market size S for A larger than B);
› And assume transport costs T>0; if α >(T x Sb), then locate firm in larger
market
› “Home market effect”: geography matters› But: why should Sa>Sb to begin with????
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NEG 3Key Insights (IV)
› Krugman (1991): 1st NEG model: add factor (=labour) mobility to T and IRS
› Also external IRS (pecuniary or market size externality)
› Big Q: where will footloose firms&workers locate?
› Answer: it depends……………
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NEG 3 Key Insights (V)
› ……..it depends on relative strength of agglomeration and spreading forces
› Agglomeration forces: home market effect, price index effect
› Spreading forces: competition effect› “Tug of War”: key model parameters, notably
level of transp. costs, T [Where’s the novelty of Krugman 1991?]
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Sustain points
Break point
Transport costs T10
1
1
0.5
Stable equilibria
Unstable equilibria
B
S0
S1
Basin of attraction for spreading equilibrium
Basin of attraction for agglomeration in region 1
Basin of attraction for agglomeration in region 2
Panel a
Sustain points
Break point
Transport costs T10
1
1
0.5
Stable equilibria
Unstable equilibria
B
S0
S1
Basin of attraction for spreading equilibrium
Basin of attraction for agglomeration in region 1
Basin of attraction for agglomeration in region 2
Sustain points
Break point
Transport costs T10
1
1
0.5
Stable equilibria
Unstable equilibria
B
S0
S1
Basin of attraction for spreading equilibrium
Basin of attraction for agglomeration in region 1
Basin of attraction for agglomeration in region 2
Panel a
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………….a very happy economist on October 13th 2008
So basically, α+T+λ give us……….
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NEG after Krugman (1991)
› Reception of NEG in- and outside economics
› NEG after 1991:
Theory? Extensions of core 1991 model?
Empirics? Real test of underlying model?
Policy Relevance? General vs specific policies?
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Reception…….
› Economics: initial wave of research; NEG has done its job, no longer separate sub-field of research?
› Outside economics: Not new, bad economics and real lack of geography
› Krugman (2011): Middle-aged NEG does not look too well??
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What happened? (I)
› THEORY: focus on mix of agglomeration and spreading forces, but too little progress? (n-region problem?, simulations?)
› EMPIRICS: outburst of NEG inspired empirical research, but where’s the real test of NEG?
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1.0
0.5
1.0 1.2 1.4 T
2
1
1 = 2
1, 2
1 = 2
1.0
0.5
1.0 1.2 1.4 T
2
1
1 = 2
1, 2
1 = 2
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What happened? (II)› Empirical research: focus on short run
instead of long run version of NEG!!!› “Krugman (1980) beats Krugman (1991)”
› Market potential/access: not relevant on regional level??
/1
1
11
R
sssrsr ITYW
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What happened (III)?
› POLICY RELEVANCE? (see THEORY+EMPIRICS):
1. General conclusion: policy in a lumpy world, role of threshold effects (Baldwin et al, 2003)
2. Specific policy conclusions rather difficult or based on “wrong” version of NEG model (main example: World Bank, World Development Report 2009)
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a. Effective average tax rate, 19 OECD countries
0.0
0.2
0.4
0.6
1980 1985 1990 1995 2000year
effe
ctiv
e av
erag
e ta
x ra
te
0.00
0.05
0.10
0.15
average(left scale)
minimum; Ireland (left scale)
maximum; Germany (left scale)
Japan
standard deviation (right scale)
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The Wiggle Diagram
share of firms in North
rN/rS
0 1
tN-tSA
C
DB
(i) geo ec. intermediate trade costs
(ii) geo ec. high trade costs
(iii) standard tax competition
share of firms in North
rN/rS
0 1
tN-tSA
C
DB
(i) geo ec. intermediate trade costs
(ii) geo ec. high trade costs
(iii) standard tax competition
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Lessons (Not) Learned
› Lack of theoretical progress & wrong focus in empirical research: main message of NEG got lost!!
› So what? [assuming(!) mainstream economics can add to understanding of spatial interactions]
› Example: Urbanization in China (to show comparative advantage of NEG)
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Two background papers for our example› Bosker M, S Brakman, H. Garretsen & M Schramm:
1. “Adding Geography to the New Economic Geography”, Journal of Economic Geography, 10(6), pp. 793-823, 2010.
2. “The New Economic Geography of Prefecture Cities in China: The Relevance of Market Access and Labor Mobility for Agglomeration”, mimeo, February 2012
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Behavior of NEG models in n-region case
› Does “real world”with many regions which are not equi-distant and differ in size resemble anything like the “Tomahawk” or “Bell-Shaped Curve” from the 2 region NEG models?
› Answer: (qualified) YES
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Transport costs and the long run equilibrium when distance matters, n=194
a. With inter-regional labor mobility
0
0.2
0.4
0.6
0.8
1
0.4 1.4 2.4transport costs
He
rfin
da
hl i
nd
ex
b. Without inter-regional labor mobility
0
0.01
0.02
0.0 0.7 1.4transport costs
Her
finda
hl in
dex
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Transport costs, distance, initial conditions, n=194
a. With inter-regional labor mobility
0
0.2
0.4
0.6
0.8
1
0 5 10transport costs
Her
finda
hl in
dex
b. Without inter-regional labor mobility
0
0.01
0.02
0 7 14transport costs
Her
finda
hl in
dex
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Motivation for Chinese cities study› Are Chinese cities too small? (despite rapid
urbanization)….› … if so: does China, does not benefit fully from
agglomeration economies?
› Main culprit: Hukou system (restricted interregional labour mobility)
› What will happen with increassed labour mobility?› Krugman (2011): China=NEG; “what if” questions
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Set up of analysis
› NEG model (extensive mix of agglomeration and (!) spreading forces (housing rents))
› Use wage equation to estimate structural model parameters (notably “freeness of trade”)
› Model simulations (with real migration dynamics)
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Initial (2000) distribution
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Conclusions based on China example
› Use strong (and novel) points of NEG approach: agglomeration is endogenous; NEG provides answers to “what if” questions
› Comparative advantage of NEG, but this advantage is not used very well
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Final words……..
How to proceed? 1.Economics can be of greater use to analysis of EG/spatial interactions, 2.Make better use of NEG while recognizing its limitations
3.More collaboration or debate? (today’s lecture……) Credible models in Economic Geography at large? (Garretsen& Martin, SEA, 2010)