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Krugman on Economic Geography

Raj Nallari's picture

Dramatic decreases in costs of transport, communication and information technology should have reduced spatial disparities in economic activities and moved us to a ‘global village.’  Yet, we find that in both industrial and developing countries, economic activities are concentrated in a few centers and there are regional disparities.  For example, about 15 percent of world population live in temperate zones but produce 50 percent of world GDP.  In United States, counties that take up 2 percent of the land area produce more than half of U.S. GDP.  Similarly, poverty is concentrated in a few pockets in many countries.  It was Krugman (1991) who deduced that agglomeration economies accrue at plant level and hence firms are located in a single area nearer to consumer demand in urban areas with large populations and minimal transport costs.  In other words, location of economic activity matters and a tiny (initial) difference may soon lead to a concentration of economic activity around a center and ultimately to a formation of industry cluster in the same space.   Agglomeration economies accrue at plant level, industry level or city and regional level.


Given this phenomenon of economic concentration in one area and spatial disparities elsewhere, the key issue is “should rural labor move to jobs or should jobs move to rural areas?”  Finance and labor do not automatically move towards poorer areas. Available evidence from across the world suggests that policy makers should strive to remove impediments to capital and labor flows and reinforce agglomeration economies.  This can be done by policy makers encouraging labor movement by abolishing national minimum wages, cutting unemployment benefits and social benefits, and abolishing rent control to increase supply of housing.  Similarly, improving business climate, increasing access to finance, including microfinance and availability of credit to small enterprises, and developing infrastructure services before firms move in, are likely to affect the decisions of firms in location of their productive activities.   Strengthening the capacity of provincial and local governments in provision of essential services would be key to reduce economic concentration and spatial disparities.


Submitted by Economics Essay on
Interesting. I never really considered it before but it is true that many industries often end up where they are by accident. But there’s something to be said for the natural resources and where they’re located - coal, for instance. A significant part of the economies of Pennsylvania and West Virginia in particular have depended on this industry and will continue to. It’s a good thing when certain resources are located in one area, unable to move - gives each area an opportunity to grow because of what they naturally have to offer

Hi, Raj! Remember me? A lot of water has flowed over the dam, or under the bridge, since we were together in the Bank, say what? Glad to see that Krugman and his readers continue to benefit from my 1969 article in IMF Staff Papers, which argued that anything can be produced anywhere and exported from the area if it's not produced as a "commodity" but rather as something special to the place of production. For example, don't produce wine. Produce the juice of your chateau, and make it special. Kenyans are now doing this with coffee. Have a look at what I'm doing now ( ): plenty of grist there to feed your blog mill as it grinds along!

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