Jacques-François Thisse CORE-UCLouvain (Belgium) Paris School of Economics (France) Does Geography Matter for Economic Development?

2 Yes because, regardless of the spatial scale, there is no such a thing as a homogeneous economic space

The world is not flat and the report of the death of distance is premature 3

What drive spatial inequality?

Increasing returns to scale internal to firms internal to firms external to firms and workers external to firms and workers

Trade-off between increasing returns and transport costs 2 regions (East and West) 1 or 2 facilities 1 facility: C + T 2 facilities: 2 C

2 C < C + T 2 facilities C + T < 2 C 1 facility What is the optimal decision?

Lowering transport and trade costs fosters the geographical concentration of economic activities

What happened within Europe in the nineteenth century? 9 The Great Divergence

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 C.M. Cipolla, The Economic History of World Population

Between 1800 and 1910, the lowering of the real average prices of transportation was on the order of 10 to 1 (Bairoch)

12 Per capita GDP of European countries expressed in 1960 U.S. dollars and prices Countries Austria-Hungary Belgium Bulgaria Denmark Finland France Germany Greece Italy Netherlands Norway Portugal Romania Russia Serbia Spain Sweden Switzerland United Kingdom Mean Relative standard deviation12%18%23%31%38%39%42%

distance to the UK matters more and more (a correlation) 13 Elasticity of GDP per capita w.r.t. to distance to the UK

Even today distance remains a major impediment to interaction so we better trade with our neighbors

The Four Ts (i) Transaction costs (ii) Tariff and non-tariff costs (iii) Transport costs (iv) Time costs (i) + (ii) + (iii) + (iv) = Trade Costs

The economy, all-invading, mingling together currencies and commodities, tended to promote unity of a kind in a world where everything else seemed to be conspiring to create clearly distinguished blocs Fernand Braudel, The Perspective of the World

Empirical evidence shows the existence of strong agglomeration economies egg-and-chicken problem

Sharing Sharing Matching Matching Learning Learning

employment density population density the impact of employment density on labor productivity ranges from 3% to 11% 19

proximity matters a lot in the informal sector

(cultural, ethnical, linguistic, religious,…) division matters division matters the EU is a good case in point

so density and proximity are not sufficient to boost development the role of non-market institutions in the Industrial Revolution

spillovers….(diffusion) the capability of territories to benefit from the diffusion of knowledge varies a lot from one place to another

the principles of economic geography must be accounted for but 24

this doesnt mean that their concrete application will be the same everywhere at any time

lower disparities on the international (interregional) level may be accompanied by larger disparities on the intra-national (intra-regional) level

27 Thank you for your attention