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Economic Geography as seen from Economics: Neglect, (Re)Discovery & (Missed) Opportunities. Harry Garretsen ( Spatial Economic Analysis (SEA) Lecture , RSA 2012 Delft). SEA journal : “… methods of spatial economics ”. Central theme RSA 2012 conference : spatial interactions.

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Economic Geography as seen from Economics:

Neglect, (Re)Discovery & (Missed) Opportunities

Harry Garretsen

(Spatial Economic Analysis (SEA) Lecture, RSA 2012 Delft)


SEA journal: “… methods of

spatial economics”

Central theme RSA 2012 conference: spatial interactions

Why me? →→→→→→→→

spatial interactions or dependencies
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?
  • Central theme: EG & spatial interactions….
  • …….. in economics prior to 1991
  • …….. 1991: New Economic Geography (NEG)
  • Krugman’s NEG: his 3 key ”Nobel” insights
  • 20 years on: missed opportunities??
  • Example: Urbanization in China
  • How to proceed with (N)EG?
The Litmus Test of EG

Does it matter where Delft

is located in The Netherlands?


space & location matter

spatial interactions in economics pre 1991
Spatial interactions in economics pre-1991
  • International economics?
  • Regional economics?
  • Urban Economics?
  • CONCLUSION: Neglect or, at best, partial analysis

Nobelprize 2008

Something changed between 1991 and 2008!!!

new economic geography geographical economics
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
neg 3 key insights i
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)
neg 3 key insights ii
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……..
neg 3 key insights iii
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????
neg 3key insights iv
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……………
neg 3 key insights v
NEG 3 Key Insights (V)
  • …… 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?]

So basically, α+T+λ give us……….

………….a very happy economist on October 13th 2008

neg after krugman 1991
NEG after Krugman (1991)
  • Reception of NEG in- andoutsideeconomics
  • NEG after 1991:

Theory?Extensions of core 1991 model?

Empirics? Real test of underlying model?

Policy Relevance? General vsspecificpolicies?

  • 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??
what happened i
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?
what happened ii
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??
what happened iii
What happened (III)?
  • General conclusion: policy in a lumpy world, role of threshold effects (Baldwin et al, 2003)
  • Specific policy conclusions rather difficult or based on “wrong” version of NEG model (main example: World Bank, World Development Report 2009)
lessons not learned
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)
two background papers for our example
Two background papers for our example
  • Bosker M, S Brakman, H. Garretsen & M Schramm:
  • “Adding Geography to the New Economic Geography”, Journal of Economic Geography, 10(6), pp. 793-823, 2010.
  • “The New Economic Geography of Prefecture Cities in China: The Relevance of Market Access and Labor Mobility for Agglomeration”, mimeo, February 2012
behavior of neg models in n region case
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
motivation for chinese cities study
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
set up of analysis
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)
conclusions based on china example
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
final words
Final words……..

How toproceed?

  • Economicscanbe of greateruseto analysis of EG/spatialinteractions,
  • Make betteruse of NEG whilerecognizingitslimitations
  • More collaboration or debate? (today’slecture……)

Crediblemodels in EconomicGeography at large?

(Garretsen& Martin, SEA, 2010)