Download Globalization in History

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 prices
2. 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 distance
Hypothesis 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
•
•
1.
2.
3.
4.
5.
6.
IT (imports and exports) can increase welfare: 1. firms
expand the scale of production; 2. consumers can buy
more varieties
Effects from IT:
Scale effect
Procompetitive effect (from scale effect AvC↓ P ↓)
Firms exits: from 2n to N(<2n)
Intra industry trade
More varieties
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 Nmore firmshigher Wmore workersN ↑
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)
Krugman and Venables (1996)
Krugman and Venables (1995)
• From A, there 4 forces at work:
• Moving from S to N firms:
1. raise W in N [p? (-)]
2. increase supply to N consum. [p? (-)]
3. backward linkage: increase the size of N market
(demand for intermediates)
[p? (+)]
4. forward linkage: reduces the costs of
intermediates in N
[p? (+)]
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 nonEuropean country to establish a position as a net
manufactured exporter? (Canada and Latin
America net importers)
19th century: changes in the geography
• 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
19th century: changes in geography
19th century: changes in the 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).
19th century: changes in the geography
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
•
•
1.
2.
3.
•
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:
development of new technologies(ICT)
reduction in transit times (development of air travel
(and airfreight) and containerization)
growing value of trade=growing volumes of trade in
parts and components
East Asian Success (growth of manufactured exports
and production)
The late 20th century
•
•
•
•
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
The late 20th century
The late 20th century
•
•
•
•
•
•
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)