14-May-15 | 1 Economic Geography as seen from Economics: Neglect, (Re)Discovery & (Missed) Opportunities Harry Garretsen (Spatial Economic Analysis (SEA) Lecture, RSA 2012 Delft).

14-May-15 | 2 SEA journal: “… methods of spatial economics” Central theme RSA 2012 conference: spatial interactions Why me? →→→→→→→→

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14-May-15 | 4 Spatial interactions or dependencies…….. ›……..central to the field of economic geography (EG).. ›…....aims to explain (uneven) spatial development….. ›………various analytical approaches……… ›This lecture: what does economics have to offer to the analysis of spatial interactions and hence to EG?

14-May-15 | 5 OUTLINE 1.Central theme: EG & spatial interactions…. 2.…….. in economics prior to …… : New Economic Geography (NEG) 4.Krugman’s NEG: his 3 key ”Nobel” insights 5.20 years on: missed opportunities?? 6.Example: Urbanization in China 7.How to proceed with (N)EG?

14-May-15 | 6 Does it matter where Delft is located in The Netherlands? YES: space & location matter The Litmus Test of EG

14-May-15 | 7 Spatial interactions in economics pre-1991 ›International economics? ›Regional economics? ›Urban Economics? ›CONCLUSION: Neglect or, at best, partial analysis

14-May-15 | 8 Something changed between 1991 and 2008!!! Krugman: Nobelprize 2008

14-May-15 | 9 New Economic Geography/Geographical Economics ›Three main insights make for core NEG model ›NEG what’s in a name? NEG vs geographical economics ›This model sets the scene for remainder lecture

14-May-15 | 10 NEG 3 key insights (I) ›NEG’s core model: Krugman (1991, JPE) ›NEG originates in international trade theory, not in urban/regional economics ›We proceed in 3 steps: Krugman (1979, 1980, 1991) ›International trade theory in 1979: old (=18th century) theory (Ricardo) at odds with facts ›Theory: inter-industry trade; facts: intra-industry trade (it’s not “cloth for wine” anymore)

14-May-15 | 11 Manufacturing intra-industry trade; , selected countries

14-May-15 | 12 NEG 3 Key Insights (II) ›Krugman (1979): introduce internal increasing returns to scale ›Model of imperfect competition (Dixit and Stiglitz, 1977) ›Rationale for (intra-industry) trade, but no role for geography yet……..

14-May-15 | 13 Average costs under increasing returns to scale

14-May-15 | 14 NEG 3 Key Insights (III) ›Krugman 1980: add transport costs to IRS ›Assume two countries, a and b: Sa >Sb (market size S for A larger than B); ›And assume transport costs T>0; if α >(T x Sb), then locate firm in larger market ›“Home market effect”: geography matters › But: why should Sa>Sb to begin with????

14-May-15 | 15 NEG 3Key Insights (IV) ›Krugman (1991): 1st NEG model: add factor (=labour) mobility to T and IRS ›Also external IRS (pecuniary or market size externality) ›Big Q: where will footloose firms&workers locate? ›Answer: it depends……………

14-May-15 | 16 NEG 3 Key Insights (V) ›……..it depends on relative strength of agglomeration and spreading forces ›Agglomeration forces: home market effect, price index effect ›Spreading forces: competition effect ›“Tug of War”: key model parameters, notably level of transp. costs, T [Where’s the novelty of Krugman 1991?]

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14-May-15 | 18 ………….a very happy economist on October 13th 2008 So basically, α+T+λ give us……….

14-May-15 | 19 NEG after Krugman (1991) ›Reception of NEG in- and outside economics ›NEG after 1991: Theory? Extensions of core 1991 model? Empirics? Real test of underlying model? Policy Relevance? General vs specific policies?

14-May-15 | 20 Reception……. ›Economics: initial wave of research; NEG has done its job, no longer separate sub-field of research? ›Outside economics: Not new, bad economics and real lack of geography ›Krugman (2011): Middle-aged NEG does not look too well??

14-May-15 | 21 What happened? (I) ›THEORY: focus on mix of agglomeration and spreading forces, but too little progress? (n-region problem?, simulations?) ›EMPIRICS: outburst of NEG inspired empirical research, but where’s the real test of NEG?

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14-May-15 | 23 What happened? (II) ›Empirical research: focus on short run instead of long run version of NEG!!! ›“Krugman (1980) beats Krugman (1991)” ›Market potential/access: not relevant on regional level??

14-May-15 | 24 What happened (III)? ›POLICY RELEVANCE? (see THEORY+EMPIRICS): 1. General conclusion: policy in a lumpy world, role of threshold effects (Baldwin et al, 2003) 2. Specific policy conclusions rather difficult or based on “wrong” version of NEG model (main example: World Bank, World Development Report 2009)

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14-May-15 | 26 The Wiggle Diagram

14-May-15 | 27 Lessons (Not) Learned ›Lack of theoretical progress & wrong focus in empirical research: main message of NEG got lost!! ›So what? [assuming(!) mainstream economics can add to understanding of spatial interactions] ›Example: Urbanization in China (to show comparative advantage of NEG)

14-May-15 | 28 Two background papers for our example ›Bosker M, S Brakman, H. Garretsen & M Schramm: 1.“Adding Geography to the New Economic Geography”, Journal of Economic Geography, 10(6), pp , “The New Economic Geography of Prefecture Cities in China: The Relevance of Market Access and Labor Mobility for Agglomeration”, mimeo, February 2012

14-May-15 | 29 Behavior of NEG models in n-region case ›Does “real world”with many regions which are not equi-distant and differ in size resemble anything like the “Tomahawk” or “Bell-Shaped Curve” from the 2 region NEG models? ›Answer: (qualified) YES

14-May-15 | 30 Transport costs and the long run equilibrium when distance matters, n=194

14-May-15 | 31 Transport costs, distance, initial conditions, n=194

14-May-15 | 32 Motivation for Chinese cities study ›Are Chinese cities too small? (despite rapid urbanization)…. ›… if so: does China, does not benefit fully from agglomeration economies? ›Main culprit: Hukou system (restricted interregional labour mobility) ›What will happen with increassed labour mobility? ›Krugman (2011): China=NEG; “what if” questions

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14-May-15 | 34 Set up of analysis ›NEG model (extensive mix of agglomeration and (!) spreading forces (housing rents)) ›Use wage equation to estimate structural model parameters (notably “freeness of trade”) ›Model simulations (with real migration dynamics)

14-May-15 | 35 Initial (2000) distribution

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14-May-15 | 37 Conclusions based on China example ›Use strong (and novel) points of NEG approach: agglomeration is endogenous; NEG provides answers to “what if” questions ›Comparative advantage of NEG, but this advantage is not used very well

14-May-15 | 38 Final words…….. How to proceed? 1.Economics can be of greater use to analysis of EG/spatial interactions, 2.Make better use of NEG while recognizing its limitations 3.More collaboration or debate? (today’s lecture……) Credible models in Economic Geography at large? (Garretsen& Martin, SEA, 2010)