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Diversity and Economic Development: Geography Matters

Diversity and Economic Development: Geography Matters. Nicholas Crafts WEHC, Kyoto, August 7, 2015. Diversity. It’s not a neoclassical world of β and σ convergence TFP gaps are big and technology is not universal Different locations Different trade specializations

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Diversity and Economic Development: Geography Matters

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  1. Diversity and Economic Development: Geography Matters Nicholas CraftsWEHC, Kyoto, August 7, 2015

  2. Diversity • It’s not a neoclassical world of β and σ convergence • TFP gaps are big and technology is not universal • Different locations • Different trade specializations • Different technologies

  3. Key Questions • Who wants to produce what, where and why? • What technology is invented and used by whom? • Why might globalization promote divergence?

  4. Research Avenues • 2 promising recent developments:New Economic GeographyDirected TechnicalChange • Ideas have run ahead of empirics; we need to put flesh on the bones • A future challenge will be to connect the two

  5. Changes in 19th-Century Economic Geography • Industrialization and de-industrialization in globalizing world • Concentration of world manufacturing production and, even more so, exports • Changes in location influenced by transport costs in the First Unbundling (Baldwin, 2012)

  6. Shares of World Industrial Production (%) Sources: Bairoch (1982) and UNIDO (2012)

  7. Shares of World GDP (%) Sources: Maddison (2010) and OECD (2012)

  8. Historiography • Lots of explanations for 19th century continental divergenceincluding: Imperialist exploitation (Mandel, 1975) Institutions (Acemoglu et al., 2002) Dutch Disease (Williamson, 2011) • Do NEG and DTC add anything?

  9. New Economic Geography: Key Ideas • 2nd Nature Geography matters • Agglomeration Benefits • Market Potential • Trade Costs • Globalization may imply divergence

  10. Globalization and the Inequality of Nations(Krugman & Venables, 1995) • Manufacturing goods are subject to increasing returns and are used both as final and as intermediate goods • As trade costs fall, self-reinforcing advantage of larger market leads to country-specific external economies of scale and lower costs for manufacturing in core relative to periphery • Eventually, if trade costs fall enough and/or wages in the core rise enough, manufacturing returns to (parts of) the periphery

  11. Location of Manufacturing • The ‘manufacturing belt’ in the United States is locked into place by market potential which interacts with scale and linkage effects (Klein & Crafts, 2012) • Catalonia industrializes to a much greater extent than the rest of Spain as a result of favourable market size (Roses, 2003) • Lancashire dominated the world cotton textile industry based on second nature geography (Crafts and Wolf, 2014)

  12. Market Potential and GDP 100 Years Ago • Similar impact on real GDP/person to late 20th century with elasticity of about 0.3 (Liu & Meissner, 2015) • Core Europe has much greater market potential than peripheral Asia (and Southern Europe) by the late 19th century • Changes in transport networks and shifting spatial distribution of GDP since 1820 ‘lock in’ Europe’s industrial-location advantage

  13. Market Potential (London, 1800 = 100) Source: Caruana-Galizia et al. (2015)

  14. Directed Technical ChangeAcemoglu (1998) (2002) • Endogenous-innovation model with bias in technical change reflecting factor endowments • Market-size and relative price effects: former dominates in 20th century but latter in 19th century? • Innovative effort based on expected profitability; innovations in ‘core’ inappropriate for ‘periphery’ and increase income gaps (Allen, 2012)

  15. The British Industrial Revolution(Allen, 2009) • “The Industrial Revolution was invented in Britain in the 18th century because it paid to invent it there” • The key is the number of potential adopters to justify fixed costs of R & D • Britain was uniquely well placed in terms of relative factor prices (wage/energy price) • Cotton textiles became a British exportable (Broadberry & Gupta, 2009) and Lancashire dominated world trade for 100 years

  16. Silver Wages, 1650-1849 (grams/day) Sources: Allen (2001); Broadberry and Gupta (2006).

  17. Real Price of Energy (grams of silver/mn. BTU) Source: Allen (2009)

  18. Connecting NEG and DTC • This is a future challenge – no book of blueprints • Clearly there are connections: geography potentially affects market size and relative factor prices and thus the direction of technical change (cf. the Habakkuk controversy) • Successful agglomerations (cf. Lancashire) and better market access (Head & Mayer, 2006) raise wages

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