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Transcript
Module 18
Economic Geography and the Regions of Russia
Masahisa Fujita, Kazuhiro Kumo and Natalia Zubarevich
Key messages of this module:
1. Geographical factors play critical roles in characterizing regional economies.
The federal cities, Moscow and Saint-Petersburg, are growing with tertialization,
owing to their large market. The meaning of exporting industry in each region would
be magnified under the integration processes into the world economy. Open trade
policy, which would be required after WTO accession, can be expected to reinforce
these tendencies.
2. Open trade policy will affect all types of advanced regions and cities, and it is
the main positive impact of WTO accession. The strongest are getting stronger, the
weakest continue to stay backward. We can expect that the boundary seaport areas
will expand. A clustering of activities in European Russia will be observed in the near
future. Concentration of population in European Russia is going on. Spatial trends of
economic activities are more complicated. In Russia economic activities depend on
world market price on mineral recourses. As a result, oil, gas and metal producing
Siberian regions are growing faster after the end of the 1990s. The other growing
regions are boundary seaport regions and big agglomerations located in European
Russia.
3. There are significant regional disparities in income and poverty. Income
disparities and poverty can be reduced by several means: ecnomic development in the
poorest regions, income redistribution between the regions or migration within
Russia. Redistribution does not encourage regional development based on a region's
comparative advantage, but most would favor some redistribution for poverty
alleviation. So a mix of all three methods would appear to be appropriate. The search
for the appropriate mix of policy instruments to reduce poverty constitutes a highly
complex economic management task that remains to be resolved by the Russian
Federation.
1
Definition of key terms and concepts:
The effects of agglomeration economies:
If related firms and organizations are geographically concentrated, economic efficiency would be
improved and this phenomenon is called as agglomeration economies. Agglomeration economies
would be realized through the following factors: (1) expansion of production scale would decrease
total costs; (2) transportation of goods and information flows would be more efficient; (3) labor
resources, capital equipment and know-how, etc. would be accumulated; and (4) technological
competition among adjacent enterprises would be induced.
Economic integration and broadly-defined transport costs
International trade incurs other costs such as tariff, risks from unstable exchange rates,
psychological costs, cultural gaps and so on. All of these are regarded as broadly- defined
transport costs, and they have been continuously decreasing through the human history because of
the progress in transport technology and communication networks. Especially in recent years,
development of airway networks, advancement in telecommunication technology and
liberalization of international trade and other institutional reforms have been decreasing
transport costs drastically.
Negative and positive lock-in effects
If some level of concentration of economic activity emerges in a city, the existence of
agglomeration itself has self-reinforcement effects and other economic agents would newly be
attracted there. This can be regarded as positive lock-in effects. In other cases one can think that
agglomeration would impede the evolution of economic structure of a city in the long run as can
be seen in the cases of one-firm cities which specialize in fading industries.
Key issues to be discussed:
Geographical re-organization of economic activity in Russia through WTO Accession
Processes:
Concentration processes of economic activity in Moscow regions through
agglomeration economies and decreases in transport costs;
Integration into the world economy and the growth of resource-mining regions;
Negative lock-in effects of one-firm cities;
Intensification of regional disparity fostered by economic integration;
2
Module 18 Economic Geography and the Regions of Russia
Masahisa Fujita, Kazuhiro Kumo and Natalia Zubarevich
1. Introduction
The aim of this module is to describe the effects of geographical factors on
location patterns of economic activity. Economic integration processes must facilitate
realization of the borderless economy; hence, we might have to take regions or cities as
the analytical units rather than national economies.
Inter-city or interregional competition is one of the main topics in the field of
economic geography. Thus, in this session, recent development in the so-called ‘new
economic geography’, which would give some policy implications for regional
governments under globalization, is reviewed in first. Then we discuss what kind of
spatial dynamics could be expected in Russia, which has a vast territory and is
characterized by uneven distribution of the industrial power and natural resources.
Geographical distribution of industrial activity in Russia was distorted by the
former socialist government. The essence of ‘new economic geography’ will show what
kind of structural changes in industrial location patterns can be realized because of
economic integration and liberalization in the long-run.
2. New Economic Geography: Conceptual Outlines
Geographical factors must have critical effects on economic development.
Especially in recent years, economic geography, which aims at explaining the
geographical organization of economic activities in an economy, gained a renewed
interest among an increasing number of economists. Their work is commonly called the
‘new economic geography’, which emphasizes agglomeration forces generated through
the interaction of increasing returns and the effects of transport costs. The work on the
‘new economic geography’ has been fostered by the recent trends towards increasingly
borderless world economy, including the integration of national economies within new
trading blocks such as the European Union and the North American Free Trade Area.
The most striking feature of today’s economic development patterns is the
concentration of economic activities in cities. Given the recent progress towards a
borderless economy, cities have been enhancing their importance as basic units of
international economic systems, as well as of domestic systems. Regional or urban
development patterns hinge increasingly more on economies of agglomeration than the
location advantages due to first nature such as climate and mineral deposits.
Recent economic growth of cities is fostered mainly by agglomeration effects
generated from self-reinforcing advantages. Interactions of three basic factors, (1)
variety or heterogeneity in goods and economic agents, (2) economies of scale and (3)
transport costs (broadly defined), would yield dense trade and communication networks.
Spatial agglomeration forces of economic activity will be derived from these linkages in
a self-organizing manner. In the next subsection, such a mechanism of economic
3
agglomeration will be explained more concretely.
2.1 Mechanism of Economic Agglomeration through the Variety of Products and
Increasing Returns
If a large number of firms exist in a city, a greater number of varieties would be
produced there. This means that consumers in that city can enjoy more variety of goods
in comparison with consumers in other places. It may be reasonable to assume that
people would have tastes for variety. Thus, given the same nominal wage, the real
income of the consumers in this city would be higher than those in other cities. This
induces more consumers to migrate into this city. Then, the resulting increase in the
number of consumers creates a greater demand for consumer goods than other regions,
which therefore leads more firms to locate there. If economies of scale exist, there
would be an incentive to concentrate the production activity in one city to reduce fixed
costs per output. Additionally, because of the transport cost, it is more efficient to
produce in the city with a large market and ship the products to others. This implies the
availability of an even greater variety of consumer goods from the city. This argument is
summarized in Figure 1, which describes the circular causation for the agglomeration of
firms and consumers through forward linkages (the supply of greater variety of goods
increases the consumers’ real income) and backward linkages (a greater number of
consumers attracts more firms) (Fujita, 1996: Fujita & Krugman, 2004, p.145).
backward
linkage
more consumers
demand
locate in the city
effect
more firms locate
higher real income
forward
in the city
from a given nominal wage linkage
greater variety of
real income
consumer goods
effect
produced in the city
Figure 1. Circular causality in spatial agglomeration of firms (consumer-goods producers) and
consumers (Fujita, 1996)
This kind of circular causality can be applied not only to the interrelationship
between consumer-goods producers and consumers. If many producer-service firms
locate in the city, then a more variety of producer services would be supplied there.
Because of complementarities in services, this can improve the productivity of finalgoods producers in the city. Thus, more final-goods producers would locate there. This
means that even more specialized producer-service firms can be supported in the city. In
such a way as described above, both consumer-goods variety and intermediate-goods
variety can lead to spatial agglomeration. In addition, variety of people can be regarded
as one of the engines of agglomeration. A greater variety of people in a city results in
more information or knowledge; hence, this would lead to close location of innovative
4
firms, as can be imaged in the case of Silicon Valley.
Needless to say, this kind of mechanism can result in further growth of existing
economic agglomeration nodes. Recent trends in concentration of economic activity
such as the banking sector in Moscow can be regarded as one of the supporting
evidences of this agglomeration effect.
2.2 Positive and Negative Lock-in Effects of Agglomeration
We have to mention next about positive and negative lock-in effects, the critical
factors of the concentration process of economic activity. It offers an interesting
viewpoint on the role of natural geography in geographical distribution of economic
centers. Anyone who examines even casually the real geography of economic activity is
struck by the important degree of arbitrariness or, at best, historicity involved: Silicon
Valley exists because of the vision of one Stanford official two generations ago.
Furthermore, rivers and ports surely do matter. One should remember that many large
cities were once port cities. Once a new centre has become established, it grows through
a process of self-reinforcement, and may thus attain a scale at which the initial
advantages of the location become unimportant compared with the self-sustaining
advantages of the agglomeration itself. In an odd way, natural geography can matter so
much precisely because of the self-organizing character of the spatial economy (Fujita
& Krugman, 2004, p.147). If some level of concentration of economic activity emerges
in a city, the existence of agglomeration itself has lock-in effects and other economic
agents will newly be attracted there. This can be regarded as positive lock-in effects.
But in other cases one can think that agglomeration would impede the evolution of
economic structure of a city in the long run.
Some Russian regions specializing in manufacturing activity have been in heavy
stagnation after the collapse of the Soviet Union. It is natural that a decline in demand
for certain goods may stagnate regions specializing in producing those goods. In the
early industrialization period, regional specialization could contribute to economic
growth. The legacy of specialization policy during the Soviet era, however, may exert
negative lock-in effects on Russian regions in some cases.
2.3 The Source of Regional Change: Decrease in Transport Costs
Transport costs can be regarded as the main engine of regional economic change
in the ‘new economic geography’. In this regard ‘transport costs’ are defined in a broad
sense, including not only monetary costs but also other non-monetary burdens.
International trade incurs other costs such as tariff, risks from unstable exchange rates,
psychological costs, cultural gaps and so on. All of these are regarded as broadlydefined transport costs, and they have been continuously decreasing through the human
history because of the progress in transport technology and communication networks.
Especially in recent years, development of airway networks, advancement in
telecommunication technology and liberalization of international trade and other
institutional reforms have been decreasing transport costs drastically.
Although the role which transport costs play in industrial location patterns is
5
complex one, a simple explanation will be helpful for understanding. If transport costs
were very high and the market demands (people) were dispersed, small industrial nodes
should be constructed across territories to avoid shipping costs of final goods. Then if
transport costs decreased gradually, however, some of the neighboring markets could
work as a unified one because of their contiguity. In this unified market agglomeration
forces will be strengthened. The circular causation described in Figure 1 would start
working and cities would be formed. The larger agglomeration would supply more
variety of goods and a core-periphery type spatial system might be formed. Thus, if
transport costs decreases further, at least at the initial stage more people and firms
would be gravitated towards a larger city (see Appendix I and II for details).
Broadly-defined transport costs include institutional costs, troubles in the
business routine, and transaction costs and so on. The effects of transport costs
described above would, however, be realized in the long-term spatial processes.
Transport costs themselves have been decreasing historically. WTO accession implies
the decrease of cross-border transport costs. In addition, each region must not apply its
own trade policy, and this may lead to decrease of interregional transaction costs. The
theoretical insight above provides an implication on what changes will be expected in
location patterns of economic activity in Russia.
3. Economic Geography and the Regions of Russia
All vast countries including Russia are internally heterogeneous and their
regions differ substantially in terms of social and economic development. There is a
multitude of differentiating factors including climatic conditions, availability of
resources, demographic trends, history of population spread, and economic
development. In the past, Soviet economic geographers paid most attention to location
of natural resources and climatic conditions. The role of these factors remains important
for Russia where rich natural resources and accumulated industrial capital helped
survive the transition at less social and political costs. The transfer of an economic
system to a market economy, however, has made it obvious that regional development is
also dependent on other historically inherited factors leading to negative outcomes.
The ‘new economic geography’ provides essential insights to the Russian
regional economy. In this section, we discuss three specific issues: (1) possible changes
in the urban system, (2) negative lock-in effects of industrial specialization and (3)
possible concentration processes of economic activity in Russia. We can expect
concentration processes of economic activity into European parts of the Russian
Federation, considering such factors as described in the previous section. Realized
regional economic transformation patterns may give us some kind of supporting
evidences for regional clustering.
3.1 Migration Dynamics and Urban Systems in Russia
3.1.1 Urban systems
The recent work by the Russian Country Economic Memorandum (CEM)
6
pointed out that Russian cities did not follow the ‘rank-size rule’. The size distribution
of cities in many industrialized countries appears to approximately follow the rank size
rule. The number of cities will be larger the smaller the size of the city is. Although it is
not confirmed by theoretical frameworks, a plot of the logarithm of city sizes against the
logarithm of their ranks (with the largest having a rank equal to one) generally follows a
straight line; hence, this empirical pattern is called the rank-size rule (See Figure 2A and
2B). (This could be implied by the hierarchical urban system described in Appendix II.)
According to this rule, one would expect to see several Russian cites in the 2-6 million
range, but there are none (Figure 2C).
ln(Populati
on)
16.00
ln(Populatio
n)
15.00
US cities > 50,000
slope = –0.71
15.00
French cities > 40,000
slope = –0.65
14.00
14.00
13.00
13.00
12.00
12.00
11.00
11.00
10.00
0.00
10.00
0.00
2.00
4.00
ln(Rank)
6.00
8.00
1.00
2.00
3.00
ln(Rank)
4.00
5.00
B. The size distribution of French cities in 2000
A. The size distribution of United States cities in 2000
Russian cities > 40,000
slope = –0.98
ln(Population)
17.00
16.00
15.00
14.00
13.00
12.00
11.00
y = -0.9845x + 16.5
10.00
0.00
1.00
2.00
ln(Rank)
3.00
4.00
5.00
6.00
C. The size distribution of Russian cities in 2000
Figure 2. The Size Distribution of Cities in Selected Countries. Source: CEM, 2003, p.10 and p.12.
The two largest cities, Moscow and St Petersburg, which have both served as
Russia’s capital in the last 100 years, are both “too small” in the sense that the rank-size
rule would predict population figures of about 13 and 7 million. All other major cities
with a population exceeding 1 million people are also off the line. While there are an
excessive number of cities with a population of 500,000 to 1,500,000 people, larger
cities with a population of 1.5 million to 4 million are few. As a rule this is due to
administratively imposed limitations on the growth of major cities which was
characteristic of the Soviet era. Scarcity of major urban agglomerations creates
difficulties for spatial development as the country lacks powerful centers organizing
territories around them1.
1
The real gap is not so large because the definition of cities differs. Population of U.S. cities was
defined by metropolitan areas but that of Russian cities was measured by official city boundaries
7
Cities serve as development centers for adjacent territories therefore their
accessibility and density of spatial distribution are extremely important. The European
part of Russia accounts for 77% of the nation's cities with the average distance between
any two cities of 70+ kilometers. In eastern regions of Russia, average distance between
any two cities is in excess of 225 kilometers. Small numbers of towns and cities have
become a negative factor under the transition to a market economy. Territorial mobility
of population has decreased and shuttle migration within urban agglomerations are
underdeveloped (with the exception of the Moscow agglomeration), therefore the
population cannot not find better employment and make full use of its potential.
New economic geography gives us important implications in understanding
urban systems in Russia. Russia’s (and the Former Soviet Union’s) distinctive
characteristic is its vast territories and scarce transport networks. Combining these
factors, the policy maker, who was requested to realize ‘optimum location patterns’, was
forced to locate small cities (production centers) across territories to meet the demand
scattered in the country. Remember that concentration of economic activity could be
realized only if economies of agglomeration compensate the transport cost to ship
manufactured goods from the industrial center to peripheral regions. Not only socialist
policy implemented during the Soviet era but also natural geographical factors critically
affect the realized size distribution of cities in Russia. The size distribution of cities,
however, can be changed in the long-run, especially after economic liberalization.
3.1.2 New Directions of Migration and Changes in Population Distribution
For many decades Russia served as a migration donor for other republics
within the USSR but since mid-1970s the vector of migration has changed. One of the
reasons for inward migration of Russians from Trans-Caucasia and Central Asia is a
rapid growth of autochthon population resulting in a higher demand for jobs leading to
demographic substitution of Russians. After disintegration of the USSR a sharp increase
of net migration inflows was observed in the Russian Federation. Net migration inflow
in 1991-2000 was 4.5 million people (this official statistics clearly falls short of the real
immigration figures due to inadequate registration practices). By the year 2001 however
annual immigration reduced to 124,000 people and stabilized at a low level. It is
becoming ever more obvious that the wave of reverse migrations is coming to an end.
Immigrants from the CIS have been settling in "Russian" regions of the
Northern Caucasus, along the lower Volga and central regions of Russia. Since mid1990s, migration from Kazakhstan to the South of West Siberia has been on the rise.
Those were "stress" migrations and immigrants settled in regions close to national
borders and wherever housing was cheaper but not in the regions where social and
economic situation was better. On the contrary, migration of CIS labor that has been
growing since mid-1990s possesses of an economic nature and is directed towards
only. The effects of in-migration restriction imposed on large cities during the Soviet era were,
however, evident from the huge population inflows into Moscow after the 1990s.
8
major cities and regions where production of natural resources for export is
concentrated and consequently labor market is more developed and wages are higher.
Internal migration has radically changed and the inward movement of
population to eastern and northern regions of Russia that has been in place for many
years was replaced by migration outflows as wages paid in these areas no longer
compensated for increasing costs of living and many industries have proven ineffective.
Over 1989-2001 the population of northern regions has reduced from 9.7 million to 8.8
million. The largest net migration outflow was witnessed in northern regions of the Far
East where in 1990-2002 two-thirds of the population have left the Chukot Autonomous
District, and 50% have migrated from the Magadan Oblast. Those migrating were the
younger and the better educated population. Figure 3 shows clear contrast in migration
patterns before and after the collapse of the Soviet Union. People flow into
comparatively warm south-west regions of Russia during the transitional period. In a
long term gradual geographical evolution caused by decrease in transport costs will
make urban systems in Russia something like other advanced countries. The vast
territories and a severe climate, however, must be the obstacles of these processes.
Figure 3 Net Migration Rate (0/00) in Each Region in 1985 and in 2000. Source: Kumo (2003b)
In the 1990s net inward migration was marked in the regions with more
favorable climatic conditions and a higher density of population with the exception of
oil and gas producing autonomous districts in the Tyumen Oblast. Therefore the
transition to a market economy has restored concentration of population in more
favorable southwestern and central regions of Russia. Migrations have become to reflect
the dynamics of economic situation more precisely as net outward migration
commenced in the poorer outlying Oblasts in central Russia and increased in
underdeveloped republics in the Northern Caucasus: this movement of population was
directed towards major urban agglomerations. The northern Autonomous District where
oil production was on the rise has become more attractive for migrants.
Nefedova and Travish (1998) demonstrated that during the transition relative
prosperity was to be found in the cities with a still larger population (over 250,000
people). This group includes administrative centers of subjects of the Russian
Federation (with the exception of autonomous districts) and major industrial cities. In
this regard, we may be able to expect that industrial activity will be concentrated in
9
existing agglomeration nodes, and the hierarchical structure of urban systems will be
intensified in the future.
3.2 Geographical Distribution of Industry: What Changes and What Remains
Unchanged
During the transition, inherited factors of spatial development have been
complimented by the impact of new market institutions and Russia's inclusion in global
economy. Influenced by this combination of factors, not only dynamics of regional
development but also the spatial structure of economy have changed and new trends for
concentration and polarization have emerged. These trends and structural
transformations that have taken shape during transition are quite sustainable and will
affect regional development even following Russia's admission to the WTO.
3.2.1 Manufacturing Industry: Growth of Resource-Mining Regions
In the 20th century, central and northwestern regions of Russia have been the
heart of national industry where major manufacturing industries have been
concentrated. During transition the spatial structure of Russian industry has changed
under the influence of varying dynamics of separate industries. The crisis of 1990s has
had the strongest impact in the least developed regions. In industrialized regions in
central and northwestern Russia production fell three-fold. In major cities, industrial
decline was similarly sharp (down to 29..32% of previous output) but industrial crisis
was ameliorated by development of tertiary sector.
In raw material-exporting industries the decline was not as sharp as in
manufacturing industries. Since 1994, the situation began to stabilize in new exporting
regions specializing in metallurgy and petrochemical industry. The products of these
regions have entered foreign markets. Varying rates of decline in industries have caused
the following structural changes: monoindustrial specialization has increased in
exporting regions; specialization of machine-building and textile-producing regions has
become less pronounced; the process of de-industrialization of underdeveloped regions
and capital cities has commenced; while in capital cities it was compensated by the
growth of tertiary sector, in underdeveloped regions the structure of economy was reorientated towards agriculture.
The growth wave, which started in 1999, swept over machine-building regions
of the Center and North-West of Russia and the Urals where large orders from exporting
companies have been received. The most stable growth was marked in Oblasts
surrounding federal cities (Moscow and Leningrad) as their convenient geographic
locations ensured an inflow of investments. Since the year 2000, growth has been
accelerating especially in oil-producing regions which is due to mounting oil prices in
the world market. Subsequent waves have been related to growth of real income of the
population and increasing demand for the products of food industry in southern regions
and major urban agglomerations, as well as improved situation in metallurgy.
In spite of positive dynamics, vast majority of regions achieved smaller
volumes of industrial output in 2002 than in 1990. The exporting regions (Tatar and
10
Yakut Republics, Tyumen and Astrakhan Oblasts, Krasnoyarsk Territory) were faster to
restore production than outsiders where the industrial decline hit its lowest in the first
half of 1990s. Those are republics and autonomous districts with underdeveloped
industry, regions specializing in machine-building and textile-producing (Voronezh,
Pskov, Penza and Ivanovo Oblasts). In Moscow, industrial production is replaced with
services and of remaining industries thanks to a huge demand in the market. Russian Far
East has had the lowest growth rate due to a multitude of problems typical of this most
remote and underdeveloped part of the country.
In industrial production, the role of regions specializing in extraction and
primary processing of natural resources for export increased; the contribution of most
manufacturing regions grew smaller and that of underdeveloped regions with
uncompetitive industries became practically negligible. Spatial concentration of Russian
industry is extremely high and still growing: the top 15 industrialized subjects of the
Russian Federation accounted for two-thirds of production in 2002 (Table 1). Among
leaders, regions specializing in raw materials export are predominant. Only two
manufacturing regions (St. Petersburg and Moscow Oblast) have increased their
respective shares in national industrial production compared to pre-default figures.
Table 1. Shares of major regions in industrial production (percentages)
Share in industrial Region
Share in industrial
production in 2002
production in 1997
1. Tyumen Oblast
13.3
1. Tyumen Oblast
9.1
2. Moscow City
6.9
2. Moscow City
6.9
3. Sverdlovsk Oblast
4.8
3. Sverdlovsk Oblast
4.6
4. Samara Oblast
4.7
4. Samara Oblast
4.0
5. Moscow Oblast
4.5
5. Chelyabinsk Oblast
3.8
6. Tatar Republic
4.3
6. Bashkir Republic
3.7
7. St. Petersburg
4.0
7. Tatar Republic
3.5
8. Krasnoyarsk Territory
3.8
8. Krasnoyarsk Territory
3.5
9. Chelyabinsk Oblast
3.8
9. Nizhny Novgorod Oblast
2.9
10. Bashkir Republic
3.2
10. Kemerovo Oblast
2.9
Subtotal for 10 RF subjects
53.3
Subtotal for 10 RF subjects
44.9
11. Nizhny Novgorod Oblast
2.8
11. Moscow Oblast
2.9
12. Kemerovo Oblast
2.8
12. Perm Oblast
2.7
13. Perm Oblast
2.8
13. City of St. Petersburg
2.7
14. Irkutsk Oblast
2.3
14. Irkutsk Oblast
2.2
15. Vologda Oblast
2.0
15. Vologda Oblast
1.8
Subtotal for 15 RF subjects
66.0
Subtotal for 15 RF subjects
57.2
* does not include additional estimates to reflect informal activities
Region
Changes in spatial structure of industry in favor of regions specializing in
extraction of natural resources for export have become permanent. While population is
leaving northern parts of Russia migrating to warmer regions, Russian industry on the
contrary is becoming "colder" because of natural resource location patterns.
Employment dynamics is in line with the trend for concentration of national industry in
the export-oriented and raw materials-oriented regions of the Urals and Siberia. At the
same time, de-industrialization of employment in southern regions and post-industrial
11
transformation of major cities continues.
3.2.2 Transformation of the Service Sector: Concentration into the Federal Cities
Lack of major agglomerations due to restrictions imposed on urban growth in
the Soviet era has become one of the barriers inhibiting real "tertialization" of
employment in Russia's peripheral regions. In the south of Russia and Oblasts in the
Central European Russia the growth of employment in the services sector has been
following the contingency model thus far with employment in retail trade prevailing.
Other federal districts demonstrate similar dynamics, albeit the change is slower. The
more important is the role of exporting industries for the economy of a region, the
slower is structural transformation of the services sector and employment in it.
Globalization of the world economy promotes fast service sector development.
In 1990s the share of service sector reached 49-52% of Russia's GDP2 due to a
substantial decline in industrial and agricultural sectors of economy. Real structural
transition to post-industrial development is most evident in the federal cities with
concentration of population, growth of income, higher demand for industrial and
consumer services. Moscow has seen a substantial increase of employment in finance,
insurance and banking. Moscow was the first to achieve maximal employment in the
services sector. In major exporting regions industry is prevalent and the services sector
is underdeveloped (accounting for 15-39% of GRP). Entrance of these raw materialproducing and exporting regions to global market helped mitigate the decline caused by
the crisis but this was achieved at the cost of a disproportionably large share of
manufacturing industry in GRP and slow modernization of economy.
Similar tendencies were typical of oil-producing countries of the Gulf and
Latin America in the 1970s and 1980s where the majority of governments eventually
failed to overcome structural disproportions and achieve outstripping growth of their
respective services sectors. These phenomena could be regarded as some examples of
negative lock-in effects. This aspect will be discussed later in this section.
3.2.3 Agricultural Activity: the North-South Dualism
In agriculture, spatial concentration of agricultural productivity commenced
much later while in the 1990s de-concentration trends caused by a range of factors were
prevalent. The most important factor was bigger productivity decline in regions with
more intensive agriculture that suffered more from an abrupt decrease in supplies of
machinery and equipment, fertilizers and productivity of labor. The second factor was
growing isolation of regional food markets. Regional barriers, restrictions on interregional exports, and poorly developed market infrastructure resulted in isolation of
producers within the boundaries of regional markets and de-concentration of
agricultural production: while in 1991 ten leading regions accounted for 30% of
agricultural production, by 1997 their share has reduced to 27%.
As the market developed and institutional barriers lowered, the situation began
2
World Bank research shows that official data is overstated (World Bank CEM-2004)
12
to improve. Regions with a more favorable climate for agriculture were faster to restore
productivity since the late 1990s. In the years 2001-2002 ten leading regions accounted
for more than 34% of Russia's agricultural production. Agricultural production followed
population movement to concentrate in areas with a more favorable climate.
Since the late 1990s market transformation of the agricultural sector accelerates
in areas adjacent to cities and the southern area of commercial grain production, while
remote peripheral regions and areas with unfavorable climatic conditions suffer from
aggravating degradation of the sector and marginalization of rural population. In the
Southern and Central Federal Districts employment has grown by 7-8% in 1995-2001
while in Central Russia most growth was accounted for by the more agrarian Oblasts in
the black soil area. In areas with marginal agricultural production, employment has
reduced most in the Far East and in the Northwestern Federal District. Therefore
agrarian production and agricultural workers concentrate in the area with most favorable
natural and climatic conditions. Growing numbers of agricultural workers in southern
areas of European Russia however does not stimulate productivity of labor.
3.2.4 Regional Specialization: Its Negative Lock-in Effects
When trying to explain why some regions specializing in manufacturing industry
are in stagnation and why the growth of tertiary sector in resource-mining regions is
hampered, we should take the lock-in effect of economic activity in certain regions into
consideration. One of the main principles of Soviet industrialization was regional
specialization. Technical factors in administration of the socialist economy contributed
to this policy, but it resulted in construction of many one-firm cities. The problem is that
economic transition causes changes in industrial structure from manufacture-based one
to service-oriented. This can lead to deterioration of one-firm cities, most of which
specialize in the manufacturing sector. Soviet economic policy had historically given
priorities to heavy industry and built up many machine-building cores. Although it
contributed to a rapid growth of newly constructed cities in the early Soviet period, now
in the transition processes some Russian cities are in serious stagnation.
Specialization itself has some positive effects on regional development.
However, it can not sustain long-run growth because of demand constraints. One-firm
city can not be a metropolis because its growth depends on the automobile market only.
A decline in market demand for certain goods may stagnate regions specializing in
production of those goods. Pursuing economies of scale and difficulties in
administrating diversified industry stimulated regional specialization policy during the
Soviet era. However, this has now become one of the obstacles to regional development.
This phenomenon is an example of negative lock-in effects of economic
agglomeration. The Soviet administration intended to build specialized cities to realize
economies of scale and to control the industrial sector easily. The aim itself cannot be
treated as meaningless one, but the industrial sector was insufficiently competitive and
lost its market even domestically after the 1990s. In the region where only one large
firm locates, there would be no other sources for capital accumulation; hence, the
existence of large specialized firms has become the obstacle for reconstruction. This
13
kind of problems will be discussed further in module 19.
3.2.5 The Issue of Cold: Legacy of the Soviet Union
Another outstanding characteristic of industrial location patterns in the former
Soviet Union was that people flowed into colder regions from warmer ones and many
big cities locate in very cold spots. According to mean January temperature, Russian
cities occupy nine of the world 10 coldest cities with over one million people (Hill and
Gaddy, 2003). Russia is a northern country in terms of its geographic location, spatial
distribution of population and localization of industry. In most countries of the world
population and industries have gradually concentrated in areas with a more favorable
climate while in the 19th and 20th centuries Russia was developing eastern and northern
regions with harsh climate but rich in mineral resources necessary for the national
economy. Overall in Soviet times the population of the Far East has grown five-fold and
of East Siberia, three-fold.
From the point of view of market economy, this situation resulted in a growth
of economic costs but it should be kept in mind that in the 20th century, the "cost of the
cold" issue was being ignored during the development of new regions with unfavorable
climate. Long years of population movement to the North and East are ascribed to
factors of military and strategic nature. In a geopolitically safe country such strategy
could not be an option, while for the then Russia it was the only possibility. Inertial
drive towards North and East survived in the 1960s through 1980s as Soviet economy
remained heavily militarized and encapsulated and needed new resources.
As a result, Russia became a colder country than in the early 20th century. In
Siberia, production costs are three to four times higher than in European Russia. The
economy of Siberian cities and towns in the oil and gas producing regions is fairly
effective, while in the cities where there is a substantial share of manufacturing
industries especially defense industries, the economy demonstrates zero or even
negative profitability. Introducing the principle of uniform distribution of production
assets during the transition to a market economy has gravely affected these cities and
towns, and high costs of production and remoteness of markets have manifested
themselves. Therefore inefficient location of material and labor resources inherited from
Soviet military and mobilization industrialization has become an obstacle to Russia's
development during the transition period. Northern areas accounting for 80% of natural
resource deposits and oil and gas production and over 60% of Russian export potential
need a more effective development strategy.
Of course it is natural that mining industries locate in the Far North regions of
Russia because industrial location could be critically affected by immobile factors such
as natural resources. At the same time it is obvious that the development policy
implemented during the Soviet era was inefficient due to the glut of labor supply in the
Far North regions caused by policy-induced migration inflows (Kumo, 2003b). Not a
few cities developed in the Far North regions during the Soviet era can be regarded as
impediments because they give negative lock-in effects to regional economies.
14
4. Integration into the World Economy and the Russian Regions
Economic system transition has resulted in noticeable concentration processes of
economic activity into the federal city, Moscow, and rapid growth of resource-mining
industries especially in West-Siberia regions. The effects of agglomeration economies
described in section 2 may suggest that the process will head to increasing concentration
in European areas. This may be confusing, but it is very natural that the existence of
natural resources in Siberia gives positive effects on regional growth. To see more
clearly how the location dynamics in Russia changes from dispersion to concentration
under globalization, it may be better to examine the international economic relation of
regions and the geographical distribution of high-tech based industry.
Major forms of globalization are trans-boundary flow of capital (foreign
investment), increasing openness of economy (foreign trade), development of global
communications and information networks (Internet) and development of global cities,
i.e. finance and economic centers influencing the entire world economy. Russian regions
and cities demonstrate these forms of globalization in widely varying degrees and
shows concentration processes of economic activity.
4.1 Foreign Direct Investment and Foreign Trade: Regional Polarization
The volume of FDI has been small so far but its distribution within Russia is
highly graphical (see Figure 4). Over 1996-2002, nearly 50% of foreign direct
investment went to the city of Moscow and Moscow Oblast; prior to default of 1998
Russia's capital city accounted for more than 60% of FDI. Concentration of investment
in Moscow resulted in outstripping growth of new services (business and financial
services) and modern consumer services; and stimulated change of consumption
structure and way of life due to growing income of population. Since late 1990s,
investment has been increasing in conveniently located regions (Leningrad Oblast and
Krasnodar Territory) and among raw material producing regions, only in Sakhalin
Oblast where PSA projects in oil production have been launched.
18.8%
City of Moscow
39.1%
2.2%
2.3%
2.6%
Moscow Oblast
Sakhalin
Krasnodar
Island
City
of
St.
Territory
Leningrad Oblast
3.6%
Petersburg
Tyumen
Oblast
4.1%
Samara Oblast
Novosibirsk Oblast
Other regions
8.7%
9.2%
9.4%
Figure 4 Percentage shares of Russian Federation subject in FDI in 1996-2002
Regional statistics of Russia's foreign trade is not quite adequate as a certain
part of exports is not recorded by region of production but by location of major
15
producers' headquarters. Therefore the share of Moscow City in the structure of Russian
exports is unusually high (25% in the year 2002) while the oil-producing Tyumen
Oblast accounts for a mere 18%. Prevalence of raw materials increased spatial
concentration of exports and nearly two-thirds of Russian exports is accounted for by 10
subjects of the Russian Federation.
Moscow City also accounts for the largest share of imports (35%) and sales of
imported goods in Russian regions. In the year 2002 the federal cities (Moscow and
Saint-Petersburg) accounted for nearly 50% of Russia's imports, and the top ten subjects
of the Russian Federation including regions on the national border having a developed
transport infrastructure, for more than 70% of imports.
Such superconcentration of trade and financial functions resulted in
outstripping growth of employment in tertiary sector and incomes of Moscow City
residents. Compared to Russia's capital, exporting regions offer few advantages as the
growth of population incomes is confined to smaller groups of those employed in
exporting industries and modernizing impact of globalization is less pronounced.
4.2 Information Technology: Dense Communication Networks in Large Cities
Information globalization in Russia is developing in the form of innovations'
diffusion spreading through an urban hierarchy from major cities to smaller cities.
According to Perfilyev (2003), prior to 1998 Internet users were largely concentrated in
the cities of Moscow and St. Petersburg. Since 1999 Internet usage was spreading
massively in major cities with a population of over 1 million people, and since late
2000, Internet access became common in cities with 500,000+ residents. Residents of
the largest cities with a population of 1,000,000+ people and of major cities in exporting
and foreign trade-oriented regions are the fastest in joining information globalization
thanks to their higher incomes and outstripping modernization of their ways of life.
Central-peripheral hierarchy also manifests itself in distribution of mobile
communications. According to Jason & Partners, in the year 2000 Moscow
agglomeration accounted for 60% of mobile phone users and the city of St. Petersburg
with Leningrad Oblast, for 11%. By mid-2003 the aggregate share of these two major
urban agglomerations has reduced to 48% while the share of regional subscribers has
increased from 29% to 52%. Coverage area has included regional capitals and cities
with export-oriented industries where residents' incomes are higher. Despite the high
rate of diffusion, development of global information and communication networks in
Russian regions encounters real barriers in the form of low incomes and nonmodernized ways of life of population. Residents of medium-sized and small cities and
towns together with rural population have dropped out from the global information
space and the gap between the central and peripheral regions is widening.
4.3 Trends in Regional Disparities
Economic liberalization resulted in the expansion of regional differentials in
Russia. The national economy is more concentrated than population: while ten most
populated subjects of the Russian Federation account for approximately one-third of
16
Russia's population, the ten subjects leading in economic terms jointly account for
nearly 54% of aggregate Russian GRP (see Table 2). Over 1994-2001 the share of ten
economic leaders has grown by nearly one-third but this increase is owing to Moscow
City and Tyumen Oblast alone. Unlike major industrial regions, economic leaders are
biased towards the European part Russia and Siberia is represented only by Tyumen
Oblast and Krasnoyarsk Territory. Small in terms of population and poorly developed
republics of Northern Caucasus and southern Siberia, and northern Oblasts in the Far
East are nearly invisible in the economic map: the ten economic outsiders (excluding
sparsely populated autonomous districts) account for a meager 1.2% of aggregate GRP.
Table 2. Percentage shares of major Russian regions in national GDP
2001
1. City of Moscow
20.7
1. City of Moscow
2. Tyumen Oblast
10.4
2. Tyumen Oblast
3. City of St. Petersburg
3.5
3. Sverdlovsk Oblast
4. Moscow Oblast
3.4
4. Moscow Oblast
5. Krasnoyarsk Territory
3.0
5. City of St. Petersburg
6. Tatar Republic
2.8
6. Samara Oblast
7. Sverdlovsk Oblast
2.7
7. Krasnoyarsk Territory
8. Samara Oblast
2.6
8. Nizhny Novgorod Oblast
9. Bashkir Republic
2.4
9. Bashkir Republic
10. Krasnodar Territory
2.4
10. Chelyabinsk Oblast
Total for 10 regions
53.9
Total for 10 regions
1994
10.2
6.3
3.8
3.6
3.2
3.2
3.0
2.8
2.7
2.7
41.5
In the year 2001, only 16 relatively prosperous subjects of the Russian
Federation have had a per capita GRP exceeding average national level (adjusted for
cost of living in a given region). Leaders included federal cities and "open" exportoriented regions accounting for more than 25% of Russia's population. Most Russian
regions demonstrate per capita GRP that is below average national level. Some 20
subjects have proven clear outsiders with less than 50% of average national per capita
GRP: those are underdeveloped republics and districts, and imports substitution regions
not included in global economic ties.
Per capita GRP allows comparison of regional economies but does not reflect
real household consumption as a substantial percentage of regional product is redistributed by the state. A better comparison is offered by the share of GRP consumed
by the population of a given region. Actual final consumption of households in the
national accounts system provides a less differentiated picture of regional disparities:
adjusted for cost of living, the disparity between the "richest" and "poorest" subjects of
the Russian Federation in the year 2001 amounted to 370% while this disparity
expressed through GRP was 610%.
4.4 Geographical Re-organization of Economic Activity in Russia
As examined in previous sections, we can see concentration processes of
economic activity into the European parts of Russia, especially in the federal city,
Moscow. If we consider about export-oriented or resource-mining regions, the situation
17
may seem to be confusing, as seen in section 3.2.1. The meaning of the first nature such
as the location pattern of natural resources may, however, lose its importance in the long
run in determining geographical distribution of industrial nodes; rather, we should
consider such factors as agglomeration economies or circular causality of industrial
location, which could be called as the second nature, when examining a possible spatial
dynamics of economic structure in the future.
Growth of the tertiary industry must reinforce concentration of economic
activity. Regions specializing in import-substitution industry in peripheral areas would
be stagnated because of their inferior transport conditions. As for exporting industries,
they cannot be concentrated because natural resource location patterns affect critically
on regional growth patterns. The main leading agglomeration center will be, needless to
say, the Moscow city since we have no human recourses for other centers’ growth
because of huge depopulation since the collapse of the Soviet Union. Moscow
agglomeration will be the leading growing area at least for the decade of 2000-2010 due
to migration from Russia’s regions and CIS countries.
This phenomenon partially means an adjustment process of inefficient regional
economic policy implemented during the Soviet era. The cost of adjustment will,
however, not be large. Rather we could gain from more efficient industrial location
patterns. Problems will be localized in textile and machinery building one-firm cities
and few machinery building regions. Benefits will be localized in the big urban
agglomerations, exporting regions and seaport/boundary regions. As for the Russia as a
whole the cost of adjustment is connected with the objective process of regional
polarization started in the beginning of the 1990s. WTO accession seems to add slight
polarizing effect only comparing with the objective process.
Open trade policy will affect all types of advanced regions and cities, and it is
the main positive impact of WTO accession. Russian spatial development is getting
more and more similar to all developing countries. The strongest are getting stronger,
the weakest continue to stay backward (for details, see Module 19). Several specialized
areas will show extraordinary economic growth. We can expect that the boundary
seaport areas will jump up (Leningrad oblast, Krasnodar region etc). This process has
already started from the end of the 1990s.
A clustering of activities in European Russia will be observed in the near
future. Concentration of population in European Russia is going on. Spatial trends of
economic activities are more complicated. In Russia economic activities depend on
world market price on mineral recourses. As a results oil, gas and metal producing
Siberian regions are growing faster after the end of the 1990s. The other growing
regions are boundary seaport regions and big agglomerations located in European
Russia.
5. Concluding Remarks and Policy Implication
The impacts of WTO accession vary from region to region. Geographical
factors play critical roles in characterizing regional economies. The federal cities,
Moscow and Saint-Petersburg, are growing with tertialization, owing to their large
18
market. People would vote with their feet which region is more desirable in a market
economy. The meaning of exporting industry in each region would be magnified under
the integration processes into the world economy. Regions which have such industries
as those receiving large orders from exporting companies are in favorable situations.
Natural resource mining centers also work well. Without some kind of policy
implementation, peripheral regions without any natural resources and export industries
must be stagnated and concentration of economic activity may be unavoidable. Regional
diversity has been growing since the collapse of the Former Soviet Union. Open trade
policy, which would be required after WTO accession, must reinforce these tendencies.
Thus, each regional government should enforce measures for promoting certain
industrial activities in its territory to avoid social tensions.
Implications for active policies are derived. For survival of Russian regions,
division of functions by region is required and the adequate policy implementation is
needed. Mining cities in the Far North regions should be supported and the assistance
for introducing labor-saving technology would be desired. Because the living costs in
cold regions are very high, it may be suitable for the federal government to promote
people to migrate from northern regions to the warmer ones. Although developing
transport networks will contribute to the realization of agglomeration economies, it
must cost too much because of Russia’s vast territories. Thus, so far as millions of
people live in remote cities, desired industrial composition should be examined to avoid
high transport costs incurred when shipping goods from a city to the others.
The scale of out-migration from the Far North regions is not small and in some
cases it has been regarded as a problematic phenomenon in previous studies (Mikheeva,
2001). The emergence of out-migration from these northern areas should be regarded,
however, as an outgrowth of the distortion accumulated during the Soviet era and as an
inevitable event. The Far North regions without any natural resources did not have any
foundation for supporting inhabitants, and the out-migration from there seemed to be
quite natural.
There are significant regional disparities in income and poverty. Income
disparities and poverty can be reduced by several means: ecnomic development in the
poorest regions, income redistribution between the regions or migration within Russia.
Redistribution does not encourage regional development based on a region's
comparative advantage, but most would favor some redistribution for poverty
alleviationi. So a mix of all three methods would appear to be appropriate. The search
for the appropriate mix of policy instruments to reduce poverty constitutes a highly
complex economic management task that remains to be resolved by the Russian
Federation.
References
Country Economic Memorandum (CEM) for the Russian Federation (2004),
From Transition To Development, the Document of the World Bank. (Draft)
Fujita, M. (1996), On the Self-Organization and Evolution of Economic
Geography, Japanese Economic Review, vol.47, no.1, pp.34-61.
19
Fujita, M., P. Krugman and T. Mori (1999), On the Evolution of Hierarchical
Urban Systems, European Economic Review, vol.43, no.1, pp.209-251.
Fujita, M., P. Krugman and A.J. Venables (1999), The Spatial Economy: Cities,
Regions and International Trade, MIT Press, Cambridge MA.
Fujita, M. (2002), Land, Infrastructure and Transport Policy from a Viewpoint
of the Spatial Economics, Institute of Land, Infrastructure and Transport, Tokyo.
Fujita, M. and P. Krugman (2004), The New Economic Geography: Past,
Present and the Future, Papers in Regional Science, vol.83, pp.139-164.
Fujita, M., (2004), Industrial Clustering Policies from a Viewpoint of the
Spatial Economics, in Ishikura, Y., M. Fujita, N. Maeda, H.Kanei and A.Yamazaki,
Industrial Clustering Strategy in Japan, Yu-hikaku, Tokyo, Chapter 6.
Hill, F. and C. Gaddy (2003), The Siberian Curse, The Brookings Institution,
Washington D.C.
Kumo, K. (2003a), Migration and Regional Development in the Soviet Union
and Russia: A Geographical Approach, Beck Publishers Russia, Moscow.
Kumo, K. (2003b), Migration and Regional Economies in Russia: Recent
Trends and Their Backgrounds, Far Eastern Studies, vol.2, pp.1-14.
Mikheeva, N.N. (2001), Dokhody Naseleniya Dal’nevostochnykh Regionov:
Sovremennye Tendentsii, Comprehensive Analysis on the Russian Far East, RussoJapanese Far Eastern Academic Forum, pp.133-141.
Nefedova T.G. and A.I. Travish. "Strong" and "weak" cities of Russia, Growth
poles and centers in regional development, Edited by Yu.G. Lipets., Moscow, IG RAN
publishers, 1998, pp. 136-143.
Perfilyev Yu. Russian Internet Space: Development and Structure. Moscow,
Gardariki publishers, 2003.
Travish A.I.. Geography of Russian crises, Izvestia RAN. Geography series,
1999. vol.2, pp. 7-16
Vardomsky L.V.. Issues of regional development in Russia under globalization ,
Russian regions and the Center: co-operation in economic space, Edited by Yu.G.
Lipets, Moscow, IG RAN publishers, 2000, pp. 13-17.
Venables, A. and Limao, N., Geographical disadvantage: a Heckscher–Ohlin–
von Thunen model of international specialisation, Journal of International Economics,
vol.58, 2002, pp.239-263.
20
Appendix 1
Transport Costs: The Source of Regional Change
The effects of transport costs on spatial economy are rather complex. For
simplicity we assume that transport costs among cities are extremely high. If some
activities such as agricultural production and their workers (demands) were tied in a
certain area and fixed at the initial location, other economic activities (manufacturing,
services etc.) should also be dispersed in accordance with the demand of land-intensive
activity; hence, agglomeration forces are not realized. When transport costs decreased
gradually, however, the circular causation described in Figure 1 would start working and
cities would be formed. The larger agglomeration would supply more variety of goods
and a core-periphery type spatial system might be formed. Thus, if transport costs
decreases further, more people and firms would be gravitated towards a larger city.
More decreases in transport costs attract more people to the larger city.
However, if transport costs further decrease, other factors must be considered: in
a large agglomeration center, wage rates and land rent would become high. That is,
congestion costs should be taken into account. Therefore manufacturing activity might
start relocating to peripheral areas in the country.
The effects of decrease in transport costs on economic activity vary from
industry to industry. It depends on the relative transport cost intensity across industries;
that is, if transport costs were low enough, some relatively footloose industries could
relocate their factories to remote regions or overseas in order to avoid congestion costs
incurred (Venables and Limao, 2002). This could imply, for example, the importance of
the liberalization of services and telecommunications for the welfare of remote regions.
Small information- technology oriented industries are now growing in Moscow and in
Saint-Petersburg as subcontractors of high-tech industries in Japan, the European Union
and the United States. In the future, Akademgorodok in Novosibirsk or other Siberian
cities might have a bright future by specializing in such I.T.-oriented industries.
One may think that during the Soviet period the transport costs were low and in
the 90s they jumped up. But artificially low freight rates in the former Soviet Union did
not contribute to concentration processes of economic activity in the USSR because
they were artificially high in other cases, as seen in restrictions policy on population
inflows into large cities. In this context, costs incurred other than monetary ones are of
importance.
21
Appendix II
The Market Potential Curve: Urban Systems and the Core-periphery Structure
Decrease in transport costs implies also the widening of market areas of
industries. Again, transport costs have been decreasing throughout the human history,
and we have to point out that the economic integration process itself means decreases in
transport costs in a broad sense.
market potential = relative profitability
A
B
0
C
1
2
.3
1: dairy necessities; 2: differentiated goods; 3: highly differentiated goods
Figure A1. The Potential Curve (Fujita, 2002)
What will happen if the market area of an industry widens? A useful concept is
‘the market potential curve’ utilized in the new economic geography. The potential
curve of an industry represents the relative profitability of each location for firms in that
industry. If the value is less than unity at a location, no firm will locate at that location.
An example is presented in Figure A1. A megalopolis is supposed to exist at location A.
There also exist inhabitants on the horizontal line, but not densely. Let us assume that
there are three goods in this world. Good 1 is one of daily necessities (bread), good 2 is
comparatively differentiated one (high price clothing), and good 3 is a highly
differentiated good (international banking services).
The potential curve of good 1 in Figure A1 means as follows: in city A there
already exist many bakeries. If a new bakery tries to enter the market, and if it does not
choose location A in order to avoid competition, the new bakery will choose a location
far from city A because a limited but certain size of the market exists in the hinterland.
That is, city A is a densely-populated mega city, and the accessibility to this big
market diminishes rapidly if the firm moves away from city A. Therefore the market
potential curve of good 1 drawn from the city A to the right side shows a downward
slope at the initial stage. However, in the area far enough from city A, consumers have a
poor accessibility to the bakeries in city A. Thus, people living far away from city A
prefer to get bread from adjacent bakeries; hence, the market potential in such an area
will be improved for the bakery which tries newly to enter the market. Thus, the
potential curve of good 1, which initially has a downward slope, shows an upturn. In
particular, at the location B or city B, it is possible for new firms to survive.
The shape of the potential curves is different from goods to goods according to
their characteristics. Shops dealing with non-differentiated goods such as bread have
22
only small market areas. Even consumers who buy bread at the nearest bakery, however,
would be willing to go to a distant department store to buy high-price clothing. The
market area of such differentiated goods is larger than that of daily necessities. If
another department store tries to enter and survive, it has to locate sufficiently apart
from city A, much far away from the new bakery at city B. Thus, the potential curve of
the differentiated good 2 shows an upward slope at a greater distance from city A than
that of good 1, and it reaches the zero-profit level only at city C. Highly differentiated
goods (for example, international banking services) would attract even those people
who live far away from city A. Hence, the potential curve of such goods is
monotonously diminishing, and the industry can locate only at the core, the city A.
If the transport cost decreases because of improved transport networks and
transport technologies, the market area of firms providing good 1 in city A would
become larger. Improvement in accessibility enables consumers locating far from city A
to buy good 1 at city A. Then a bakery which tries to enter the market has to locate at an
outer point of city B in order to avoid competition with firms in city A. This means that
some business functions of city B are absorbed by city A, and small cities near the core
city may decline.
Figure A1 also suggests that cities in an economy tend to form a hierarchical
system in a self-organizing manner. The core city has most critical functions of the
economy, providing all types of goods, while the second-order city provides good 1 and
good 2, and the third-order city provides only good 1. In other words, this selforganization process of a hierarchical urban system will lead to a core-periphery pattern
of industrial location (Fujita, Krugman and Mori, 1999).
The theoretical insight above provides an explanation to the concentration of
economic activities in Moscow and its surrounding areas, and to underdevelopment in
Central Asian states or Siberia. Moscow, the most populated city, can be regarded as the
core and other regions far away from Moscow as peripheral areas. The same coreperiphery patterns exist on the regional level, the biggest cities – regional centers
concentrate economic activities and smaller ones are peripheral areas.
23
Questions:
1. Please explain the following terms:
1.1 Broadly-defined transport costs;
1.2 Economies of agglomeration;
1.3 Lock-in effects;
2. How do economies of agglomeration contribute to the growth of large cities?
3. Why do decreases in transport costs lead to geographical re-organization of
economic activities?
4. Will Moscow agglomeration grow further? And why do you think so?
5. How did economic policies conducted during the Soviet era negatively affect on
geographical organization of economic activities in Russia?
6. How can WTO accession processes affect on core-periphery structure of the Russian
economy?
24