Economic Geography and the Unequal Development of Regions

Jean-Claude Prager, Jacques-François Thisse

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136310546
• Edition: 1
• Topic: Business
• Subtopic: Sviluppo di business
• Index: Business

Behind the mystery of economic growth stands another mystery: why do some places fare better than others? Casual evidence shows that sizable differences exist at very different spatial scales (countries, regions and cities). This book aims to discuss the main economic reasons for the existence of peaks and troughs in the spatial distribution of wealth and people, with a special emphasis on the role of large cities and regional agglomerations in the process of economic development.

1   The world is anything but flat

This book reviews and discusses the main economic reasons for the existence of peaks and troughs in the spatial distribution of population and wealth. Ever since the beginning of the Industrial Revolution, what makes some countries rich and others poor has been a central question in economics and history (Landes, 2000; Helpman, 2004). In comparison, little attention has been paid to the reasons why some regions, or other subnational entities, are rich while others are not. Another long-neglected topic is the impact of distance on the diffusion of economic development within and across countries. In other words, behind the mystery of economic growth stands another mystery: why do some places fare better than others? Why is inequality found at all spatial scales, from the international and regional to the urban and local?

Firms and people are not concentrated on the head of a pin, nor are they spread evenly over a featureless plane. On the contrary, they are distributed very unequally across localities, regions, and countries, generating contour lines that vary with time and place. As a result, economic activity within countries is concentrated in a fairly limited number of cities and regions. Furthermore, economic growth is and has always been geographically unequal, on all spatial scales. At the global scale, in 1980 the European Union (EU-15) accounted for 29 percent of world gross domestic product (GDP), the North American Free Trade Area (NAFTA) for 27 percent, and East Asia for 14 percent. These three blocs thus produced 70 percent of world GDP. Twenty years later, the share of the EU-15 had fallen to 25 percent, while that of NAFTA had increased to 35 percent and that of East Asia to 23 percent. Together, they accounted for 83 percent of world GDP in 2000.

Sizable spatial differences also exist within countries and take the concrete form of large cities and regional agglomerations. For example, in 2008 the capital region of the Republic of Korea, which covers 11.8 percent of the country’s surface area and includes 48.6 percent of the population, produces 47.8 percent of Korea’s GDP. In France, the contrast is even greater: the metropolitan area of Paris, which accounts for 2.2 percent of the country’s area and 18.2 percent of its population, produces 28.3 percent of its GDP. Similarly, in Brazil, the world’s fifth-largest country in surface area, 33.9 percent of GDP is produced by 21.6 percent of the population in the state of Sao Paulo, which occupies only 2.9 percent of the country’s area.

In recent years, however, the media have embraced a very different idea: that we now live in a world where distance—which has historically been a major impediment to urbanization and trade—no longer matters. The spectacular and steady drop in transport costs since the mid-nineteenth century, compounded by the decline of protectionism in the post-World War II era and, more recently, by the near-disappearance of communication costs, is said to have freed economic agents from the need to be located near one another. Thus, it is asserted, the combined impact of technology and globalization has made the traditional geography of economic activity obsolete, and yesterday’s world of peaks and troughs has miraculously become “flat,” while cities have become a thing of the past.

Recent empirical and theoretical work in economic geography shows a very different reality. While it is true that the importance of proximity to natural resources has declined considerably, thus giving firms and households more freedom to locate where they wish, this does not mean that distance and location have disappeared from economic life. Quite the contrary, economic geography indicates that new forces, hitherto outweighed by natural factors, are shaping an economic landscape that, with its many barriers and large inequalities, is anything but flat.

Paradoxically, the huge drop in transport and communication costs is precisely what has allowed these new forces to emerge and subsequently fostered the greater productivity that characterizes large cities.¹ Since geography remains an essential component of developed countries’ competitiveness and growth, we find it reasonable to believe that this observation applies still more strongly to developing countries. Given the shortcomings of their transport and communication infrastructure, these countries are still heavily subject to the “tyranny of distance.”

All in all, it may be asserted that the spatial distribution of firms and people influences the current and potential well-being of people, while economic growth in turn shapes the geography of human activity. It therefore seems reasonable to believe that economic geography, which seeks to explain the location of economic activity, can improve our understanding of the mechanisms that lead to economic development in some regions and to stagnation in others.

In particular, how can economic geography help to improve local growth policies in both the most advanced countries and developing countries? This is a far-reaching question, because in the accelerated globalization of the past decade, many regions and countries have been under severe pressure or simply left behind—notably the least-developed countries, where poverty seems to be taking root as a permanent mark of the combined misfortunes inflicted by history and geography.

Similarly, what insights can be drawn from the highly varied experiences of urbanization in the last two centuries? Historians are still debating the “causes” of the Industrial Revolution. While they are unanimous in designating market development as a key factor in the economic take-off of Western Europe and the United States, they also attribute an important role to other institutions that encouraged the accumulation of knowledge and its application to the development of new technologies (Mokyr, 2002). For the expected effects of urban growth to deliver on their promises, cultural and social conditions must be conducive to economic initiative and the spread of knowledge.

For centuries, prohibitive transport costs prevented the growth of cities and trade. Few towns had populations exceeding a few thousand inhabitants, and national urbanization rates were very low. Trade took place between towns and their agricultural hinterlands, while markets were often local and seldom interregional (Bairoch, 1988). Nonetheless, cities, at least some of them, have been the focal points of social and technological progress (Hohenberg and Lees, 1985). Is it not somewhat naive, however, to expect that the agglomeration of activities generated by market mechanisms alone could, in and of itself, initiate and sustain economic development?

Chinese cities, though older and larger than their European counterparts, did not play the same role of innovation centers, perhaps because they were more heavily controlled by the highly centralized imperial government than cities in Western Europe were (Balazs, 1968). In addition, as economic growth depends on the intermingling of people and ideas, the closure of the Chinese empire under the Ming dynasty further impeded cities from playing their role as drivers and, in so doing, hampered the country’s capacity for innovation. Large cities need not be vibrant, whereas small ones need not be dormant. After all, at the height of the Renaissance, Florence had only 40,000 inhabitants.

Many hidden forces are at work in human settlements of different sizes and natures, and they must be thoroughly explored if agglomeration economies are to play their role in developing-country cities. This question is all the more important because, according to the United Nations Population Fund, “In 2008, the world reaches an invisible but momentous milestone: For the first time in history, more than half its human population, 3.3 billion people, will be living in urban areas.”

Lastly, and perhaps most importantly, the former Third World is breaking apart. A growing number of countries have started up the path to economic development and urbanization, whereas others are stagnating or declining. In this process, emerging countries’ experiences are more likely to be relevant for poor countries than is the urban history of rich countries. Among other things, the growing diversity of situations requires analyses and policies that differ from one group of countries to another, according to the latter’s level of economic development.

Caution is therefore needed. Many policies have proved to be counterproductive, and even disastrous, for economic growth because they failed to take account of information gleaned from other countries’ experiences or relevant theoretical analyses. It should be stressed, however, that there is not a single “one-size-fits-all” portfolio of policies—neither in theory nor in practice. Successful growth policies are often combinations of ideas borrowed from different bodies of theory. It is our belief, however, that economic geography will be useful in designing new development policies.

Our objective is to provide an overview of what has been accomplished in new economic geography and urban economics that could explain the role of cities and regional agglomerations in the development process. We also borrow ideas and concepts from economic history and from the cornucopia of local development policies. In so doing, we hope to shed light on what we understand and do not understand about the relationships between geography and economic development. We cover both developed and developing countries, because the main forces shaping the economic space are similar in both cases. There are differences as well, however, because of the diversity of environments in which these forces operate.

The organization of the book reflects these choices. It is divided into three complementary chapters. Chapter 2 presents the major results of economic geography and points out various links between this field and development economics. Chapter 3 discusses the main spatial determinants of growth. Chapter 4 tackles the subject matter from a different standpoint: that of doctrines and policies. Specifically, it explores the strengths and weaknesses of economic geography as a set of economic principles that may be used to analyze economic underdevelopment.

Development is an elusive concept. It may refer to the standard of living, the productivity of the economy, the level of health and education prevailing within a population, or any index that aims to evaluate the well-being of people. The wealth of a country is typically evaluated by the level of its GDP, while its economic potential for development is approximated by the rate at which its GDP increases. These two concepts are well defined and measurable. Although they are not comprehensive enough to account for the whole process of economic progress, we find it convenient to use them as proxies. We will be more precise, however, when we come to more specific facets of economic development.

2 Economic geography

Facts and theories

The shaping of the space-economy

High population density fosters the division of labor

What are the main geographical forces that affect the economic and social development of a given region or country? The first was identified by Adam Smith more than two centuries ago: “the extent of the division of labor is limited by the size of the market.” The market is defined here as the range of customers that producers can supply through existing transport technologies. This suggests that the high population density prevailing in cities allows a degree of task specialization that is not found in rural areas, since such density ensures that there will be outlets to support local craftsmen and workshops. To a large extent, city dwellers produce neither the food they eat nor the energy they consume. In exchange for the farm products and energy they need, they must therefore supply goods and services that are not produced in rural areas. The production of such commodities requires greater task specialization than is typically found in the countryside.

In addition, a city is its own primary outlet, since the inhabitants consume a high proportion of the goods and services produced there. In other words, the city itself is the main component of its market. This observation is relevant because most services are by nature non-transportable and must be consumed where they are produced. Since the export base often accounts for only a small share of a city’s activities, local services are a crucial factor in urban growth.

To justify acquisition of the skills required for such task specialization, cities and their hinterlands must therefore be of a certain size. To put it simply, a sufficiently large and relatively concentrated population is needed. Once this condition has been met, a finer division of labor generates an urban surplus that can be shipped to the city’s rural hinterland and sometimes to other cities specializing in the production of different goods. The combination of these two forces generates surpluses of various natures and origins, which in turn are traded between the rural and urban populations. In most cases, this process has been slow because it is subject to many contingencies: these surpluses leave the subsistence economy and enter the trade economy, which requires much more complex institutions than those of the rural community, especially the use of money.

Economists, geographers, and historians all agree that the existence of cities has vastly increased the efficiency of trade, industry, and government, raising it to a level unattainable with a scattered population. Adam Smith’s example of farmers in the Scottish Highlands, who had to work at a large number of different activities in order to survive, provides a contrario an illustration of the validity of this observation. Moreover, this example has current relevance, since what Smith said about farmers in the Highlands still describes the situation of many farmers in developing countries whose settlements are too small for a deep division of labor to take place (Plateau, 2000; Banerjee and Duflo, 2007).

The decline in transport costs spurred the urbanization of Europe in the nineteenth century

For centuries, the vast majority of cities were small in size. Although they lived in symbiosis with their hinterlands, they often had little commerce with the rest of the world. The main constraint on the size of cities was the cost of shipping the foodstuffs that their inhabitants needed (Bairoch, 1988). A second constraint soon emerged: the overharvesting of the nearby forests that supplied the energy for urban heating. A third factor hindering the growth of cities was the quality of transport infrastructure, which was often very poor, so that most people got around on foot. Although long-distance trade has existed since very ancient times for goods of very high value—the Silk Road is a prominent example—distance was for centuries a fundamental obstacle to commercial and cultural exchange. Many producers traded only on local, or at best regional, markets. Transport and time costs were prohibitive, pushing up sale prices and restricting trade considerably. This explains why cities were often established along rivers or on the seacoast: water-borne transport has always been much less expensive than land transport.

Very few big cities existed before the Industrial Revolution, and all of these were embedded in dense international trade networks. Access to numerous navigable routes and political centralization allowed a handful of large cities to emerge: Xian and Luoyang in China under the Han Dynasty, Rome under the Empire, Edo in Japan under the Tokugawa, and Paris and London in modern times. In these very special cases, food could be transported in from distant producing areas, while the goods made by urban craftsmen and factories could be sold on distant markets. Apart from these few giants, the dominant pattern of economic geography was still that of scattered human settlements, living just at or only slightly above the subsistence level. In other words, urban markets, though large enough to foster the beginnings of specialization, were still too small for division of labor to have its full effect. It is thus not surprising that the general level of urbanization remained very low for many centuries.

According to Bairoch (1988), the urban population in Europe grew very slowly as a share of total population, rising from 10 percent in 1300 to only 12 percent in 1800, but there were very large differences between countries (for example, using an urbanization threshold of 5,000 inhabitants, the urbanization rate in the Netherlands was 12 times that in Finland). Agricultural sector productivity was not sufficiently high to free up enough workers to allow existing cities to expand or new cities to be created. This factor, combined with high transport costs, explains the low level of urbanization across the world.

We can therefore conclude that distance has historically been the main obstacle to the formation of large cities displaying a fine division of labor. Until the introduction of steam, transport costs stayed surprisingly high for people accustomed to consuming goods from all over the world. Nineteenth-century France is a good case in point. For example, shipping coal from Saint-Étienne to the ironworks of Champagne—a distance of 545 kilometers—multiplied the price by five. The coal produced in Saarland was sold for 9.50 francs a ton locally, but the price in Saint-Dizier, located 220 kilometers away, was 51.50 francs a ton, with transport costs accounting for 82 percent of the total price (Léon, 1976).

This situation changed completely with the Industrial Revolution. Cipolla (1962, p. 13) begins his book on the economic history of the world population with these thought-provoking words:

Fast and cheap transportation has been one of the main products of the Industrial Revolution. Distances have been shortened at an astonishing pace. Day by day the world seems smaller and smaller and societies that for millennia practically ignored each other are suddenly put in contact—or in conflict.

In the same vein, Baechler (1995, vol. 2) observes that:

it may be the transport sector that has seen the most astounding changes. These are all the more remarkable in that they are not merely changes in quantity, however enormous, but changes of level that take us to new worlds.

These views are confirmed by Bairoch (1997, vol. 2), who provides an estimate of the drop in transport costs: “Overall, it can be estimated that from 1800 ...