The awarding of this year’s Nobel Memorial Prize in Economics to Paul Krugman is a tribute not just to the elegance of Krugman’s pathbreaking contributions to international trade and economic geography, but also to his ability to apply cutting-edge economics to real-world problems. Two pieces by Arvind Panagariya and Arvind Subramanian explain Paul’s varied contributions to economics. Simply put, he turned traditional trade theory on its head by showing that countries trade with each other not just because they have different endowments of factors such as labor and land, but also because people like variety (Germans buy French cars; French people drink German wine).
Also, production could be concentrated in some regions within countries (or even between countries) because of economies of scale and “agglomeration externalities”—clusters can be more productive if located near each other, as happened in Silicon Valley, California. In thinking about their implications for Africa, I was struck by how many of Paul’s ideas were brought to life in this year’s (forthcoming) World Development Report, Reshaping Economic Geography. Although the report will be published in November, earlier drafts show how Africa, especially those parts that consist of many small countries, could gain by concentrating production in certain locations, while ensuring goods and people can move easily among locations.
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