Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Shifts in Economic Geography and Their Causes

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Shifts in Economic Geography and Their Causes

Article excerpt

Rcent decades have seen momentous changes in the economic geography of the world. Political transitions and economic lib eralization have brought formerly closed countries into the world economy. In Richard Freeman's phrase, this has amounted to a "doubling of the world labor force." The collapse of communism in the Soviet bloc brings 260 million workers into the world labor force, the opening up of China adds a further 760 million, and Indian liberalization 440 million. At the same time technological change has continued to reduce the cost of interactions within and between countries. Any product that can be digitized can now be shipped at (almost) zero cost. Airfreight accounts for a third of U.S. imports by value, and 25 percent of African exports are now airfreighted. For the U.S., the value of time saved by airfreight and containerization has been estimated as some 12-13 percent of the value of goods shipped (Hummels 2000).

Some of these changes-falling trade and communications costs-have been going on for centuries, although interrupted by periods of increasing tariffs and closure of economies. Some have possibly come to an end. Technical change in shipping is no longer faster than technical change in goods shipped, so freight rates relative to shipment value are no longer falling. Transporting goods is oil and security intensive, two inputs the costs of which are likely to increase in coming years. Digital transmission costs can fall no lower than zero, although no doubt the quality and range of electronic communication will continue to improve.

Accompanying technological innovation has been business innovation. Multinational firms have expanded rapidly, with foreign direct investment growing at approximately twice the rate of world trade, which itself has grown at twice the rate of world income. New forms of trade have emerged with the growth of outsourcing and production networks. Accompanying these changes in spatial interactions have been changes in the location of activity. The historical record is illustrated in Chart 1, based on Maddison (2001), and giving shares of world GDP accruing to different regions. Although highly aggregate, the figure indicates four phases. The initial dominance of Asia, followed by the rapid growth of Europe during and after the industrial revolution. Then the subsequent rise of North America, and now the resurgence of Asia, accelerating during recent decades. Part of the change is due to population, but much the larger part is due to changes in per capita income-the "great divergence," which saw the ratio of per capita incomes of the richest to poorest nations increased from around 8:1 in 1870 to more than 50:1 in 2000.

Economic geography has changed at all spatial scales-not just the aggregate regions of Chart 1, but also within regions and countries. The most important of these subnational changes is urbanization. A majority of human beings are now urbanized, and China alone expects to see a doubling of its urban population to nearly 1 billion people by 2030. Population movements are not just rural to urban. They are often associated also with movement to booming coastal regions, and people leaving lagging regions in the interior or more remote areas of countries.

This sketch describes some of the forces driving change in the world economy and some of the ensuing changes in economic geography. It also challenges our understanding of the location of economic activity and of the determinants of changes in the pattern of location.

The first question is: Why are economic activity and prosperity spread so unevenly? Is an American really 50 or 100 times more productive than an Ediiopian? Even within the UK, why are the earnings of a Londoner 70 percent higher than those of someone from Stoke-onTrent (and 40 percent higher after controlling for both education and occupational mix). Standard neoclassical economic theory suggests that while differences may arise as some countries or regions gain initial advantage, they should be rapidly arbitraged away. …

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