Jacques-François Thisse CORE-UCLouvain (Belgium) Paris School of Economics (France)

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

Yesbecause, 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

What drive spatial inequality?

Increasing returns to scale ● internal to firms ● 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

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

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

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

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)

Per capita GDP of European countries expressed in 1960 U.S. dollars and prices

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

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) =TradeCosts

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 • Matching • Learning

employment density≠population densitythe impact of employment densityon labor productivityranges from 3% to 11%

proximity matters a lot in the informal sector

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

so density and proximity are notsufficient 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 economicgeography must be accounted for • but

this doesn’t 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

Thank you for your attention

Jacques-François Thisse CORE-UCLouvain (Belgium) Paris School of Economics (France)