Jacques-François ThisseCORE-UCLouvain (Belgium)

Paris School of Economics (France)

Does Geography Matter for Economic Development?

Does Geography Matter for Economic Development?

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Yes

because, regardless of the spatial scale, there is

no such a thing as a homogeneous economic

space

Yes

because, regardless of the spatial scale, there is

no such a thing as a homogeneous economic

space

The world is The world is notnot flat flat

and and

the report of the “death of the report of the “death of distance” distance”

is is prematurepremature

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What drive What drive

spatial inequality?spatial inequality?

Increasing returns to Increasing returns to scalescale

● ● internal to firmsinternal to firms

●● external to firms and external to firms and workers workers

Trade-off between Trade-off between increasing returnsincreasing returns and and

transport coststransport 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 What is the optimal decision?decision?

Lowering transport and Lowering transport and

trade costs fosters the trade costs fosters the

geographical geographical

concentrationconcentration of economic of economic

activitiesactivities

What happened within Europe What happened within Europe

in the nineteenth century?in the nineteenth century?

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The Great DivergenceThe Great Divergence

Fast and cheap transportationFast and cheap transportation has been one has been one ofof

the main products of the Industrial the main products of the Industrial Revolution.Revolution.

Distances have been shortened at anDistances have been shortened at an

astonishing pace. Day by day the world astonishing pace. Day by day the world seemsseems

smaller and smaller and smaller and smaller and societies that for societies that for

millennia practically ignored each other aremillennia practically ignored each other are

suddenly put in contactsuddenly put in contact - or in conflict - or in conflict

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

Between Between 18001800 and and 19101910, , the lowering of the real the lowering of the real

average prices of average prices of transportation was on the transportation was on the order of order of 1010 to to 11 (Bairoch)(Bairoch)

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Per capita GDP of European countries expressed in 1960 U.S. dollars and pricesCountries 1800 1830 1850 1870 1890 1900 1913

Austria-Hungary 200 240 275 310 370 425 510

Belgium 200 240 335 450 55 650 815

Bulgaria 175 185 205 225 260 275 285

Denmark 205 225 280 365 525 655 885

Finland 180 190 230 300 370 430 525

France 205 275 345 450 525 610 670

Germany 200 240 305 425 540 645 790

Greece 190 195 220 255 300 310 335

Italy 220 240 260 300 315 345 455

Netherlands 270 320 385 470 570 610 740

Norway 185 225 285 340 430 475 615

Portugal 230 250 275 290 295 320 335

Romania 190 195 205 225 265 300 370

Russia 170 180 190 220 210 260 340

Serbia 185 200 215 235 260 270 300

Spain 210 250 295 315 325 365 400

Sweden 195 235 270 315 405 495 705

Switzerland 190 240 340 485 645 730 895

United Kingdom 240 355 470 650 815 915 1035

Mean 200 240 285 350 400 465 550

Relative standard deviation

12% 18% 23% 31% 38% 39% 42%

1800 1830 1850 1870 1890 1900 1913

Slope 0. 090 0. 195 0. 283 0. 371 0. 426 0. 437 0. 436

Standard-deviation 0. 028 0. 029 0. 028 0. 032 0. 052 0. 058 0. 078

R2 0. 376 0. 717 0. 857 0. 883 0. 796 0. 764 0. 647

distance to the UK matters more distance to the UK matters more and moreand more

(a correlation)(a correlation)13

Elasticity of GDP per capita w.r.t. to Elasticity of GDP per capita w.r.t. to distance to the UKdistance to the UK

Even today Even today “distance”“distance”

remains a major remains a major

impediment to interactionimpediment to interaction

so we better trade with so we better trade with

our our neighborsneighbors

“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 The economy, all-invading, mingling togethertogether

currencies and commodities, tended to currencies and commodities, tended to promotepromote

unityunity of a kind in a world where of a kind in a world where everything elseeverything else

seemed to be conspiring to create seemed to be conspiring to create clearlyclearly

distinguisheddistinguished blocs blocs

Fernand Braudel, The Perspective of the World

Empirical evidence shows Empirical evidence shows the existence of strongthe existence of strong

“agglomeration economies”“agglomeration economies”

egg-and-chicken problemegg-and-chicken problem

• SharingSharing

• MatchingMatching

• LearningLearning

employment employment densitydensity≠

population densitypopulation density

the impact of employment the impact of employment densitydensity

on labor productivityon labor productivity ranges ranges from from 3%3% to to 11%11%

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proximity proximity matters a lot matters a lot

in the informal sectorin the informal sector

(cultural, ethnical, linguistic, (cultural, ethnical, linguistic,

religious,…)religious,…)

“ “division”division” matters matters

the EU is a good case in the EU is a good case in pointpoint

so density and proximity so density and proximity are notare not sufficientsufficient to boost to boost

developmentdevelopment

the role of the role of non-marketnon-market institutions ininstitutions in

the Industrial Revolutionthe Industrial Revolution

spillovers….(diffusion)spillovers….(diffusion)

the the capabilitycapability of territories to of territories to benefit from the diffusion of benefit from the diffusion of knowledge varies a lot from knowledge varies a lot from

one place one place

to anotherto another

the principles of economicthe principles of economicgeography must be geography must be

accounted foraccounted for

butbut

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this doesn’t mean that their this doesn’t mean that their concrete application will be concrete application will be the same the same everywhereeverywhere at at anyany

timetime

lower disparities on the lower disparities on the internationalinternational (interregional) (interregional) level may be accompanied level may be accompanied by larger disparities on the by larger disparities on the

intra-nationalintra-national (intra-regional) (intra-regional) levellevel

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Thank you for your

attention