Lecture Topic 12' DIVERGENCE, GLOBALISATION AND LOCATION'

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Lecture Topic 12. DIVERGENCE, GLOBALISATION AND
LOCATION.
Review From traditional to endogenous growth
theory. Example of endogenising model
Modelling world history divergence,
globalisation and transport costs. Transport
costs as market imperfection. The pre-industrial
age. High transport costs as barrier to trade.
Symmetrical equilibrium. Core-periphery
pattern. Break point knife edge. Multiple
equilibria the tomahawk. From core-periphery
to globalisation. Symmetrical pattern of multiple
equilibria in reverse the double tomahawk.
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• Example of endogenous modeling Krugmans new
  economic geography preview.
• Model of location of global manufacturing.
• Historical trends modeled as long term decline in
  transport costs.

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• Initial symmetrical equilibrium between two
  locations with identical amount of manufacture.
• Very high transport costs (T) ? no trade.
• T ? ? even slight initial productivity advantage
  in manufacture ? tipping point.
• Manufacture increasingly concentrated in one of
  the two locations / core.
• The other location becomes a periphery.
• BUT T now fall yet further.
• ? FF desert former core to benefit from lower W
  costs in periphery.
• ? Globalisation.

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Review From traditional to endogenous growth
theory. Krugmans New Economic
Geography Modelling world history The
pre-industrial age. Core-periphery
pattern. From core-periphery to globalisation.
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Endogenising growth Construct models of
economic mechanisms explaining differences in
productivity in terms of economic variables.
Note Explanation in terms of rational
economic behavior. Two main routes (1) Lift or
modify assumption of decreasing MPK. (2) MPK
increasing. Note Both these are modeling
problems for OGT but are turned into
opportunities by EGT.
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BUT
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• Initial symmetrical equilibrium between two
  locations with identical amount of manufacture.
• Very high transport costs (T) ? no trade.

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? 1 0.5 0
T
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? 1 0.5 0
? 0.5 prevails in this range.
T

• Transport costs prohibitively high.
• Trade not feasible.

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Transport costs and history
? 1 0.5 0
T
Transport costs decrease over time.
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T ? ? even slight initial productivity advantage
in manufacture ? tipping point. Manufacture
increasingly concentrated in one of the two
locations / core. The other location becomes a
periphery.
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? 1 0.5 0
T
At a certain point, increasing trade leads to
symmetrical equilibrium becoming unstable.
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? 1 0.5 0
Break point!
T
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? 1 0.5 0
T

• Manufacturers desert one of the two continents.
• They concentrate in whichever gains even an
  infinitesimal advantage.

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? 1 All manufacture concentrated in Europe
? 1 0.5 0
Core-periphery pattern
Symmetrical equilibrium
T
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C-P becomes sustainable.
? 1 0.5 0
S
B
Symmetrical equilibrium no longer sustainable.
T
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? 1 0.5 0
S
B
T
Intermediate range between the two critical
points (S and B) either symmetrical equilibrium
or C-P equilibrium would be stable.
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? 1 0.5 0
S
B
T
In this intermediate range, an unstable
equilibrium is also possible (0.5 lt ? lt
1). Beyond it, symmetrical equilibrium remains
possible though would be unstable.
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? 1 0.5 0
S
B
S
T
To complete the model, we add a hypothetical
situation with the opposite C-P pattern.
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? 1 0.5 0
S
B
S
T

• To complete the model, we add a hypothetical
  situation with the opposite C-P pattern.
• i.e. the situation if Asia had become the core.
• There is now a complex system of five possible
  equilibria in the intermediate range
• Three stable and two unstable.
• With discontinuities.

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? 1 0.5 0
S
B
S
T
The tomahawk diagram.
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• BUT T now fall yet further.
• ? FF desert former core to benefit from lower W
  costs in periphery.
• ? Globalisation.
• History of the World Part 2.

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History of the world Part 2 From core-periphery
to globalisation.
? 1 0.5 0
S
B
B
S
T

• New break point emerges.

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History of the world Part 2 From core-periphery
to globalisation.
? 1 0.5 0
S
B
B
S
T

• New break point emerges.
• Symmetrical equilibrium becomes sustainable
  once again.

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History of the world Part 2 From core-periphery
to globalisation.
? 1 0.5 0
S
S
B
B
S
S
T

• New sustain points emerge.

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History of the world Part 2 From core-periphery
to globalisation.
? 1 0.5 0
S
S
B
B
S
S
T

• New sustain points emerge.
• As T falls further, C-P pattern ceases to be
  sustainable.

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History of the world Part 2 From core-periphery
to globalisation. The double tomahawk!
? 1 0.5 0
S
S
B
B
S
S
T

• The entire pattern of multiple equilibria
  re-emerges.

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History of the world Part 2 From core-periphery
to globalisation. The double tomahawk!
? 1 0.5 0
S
S
B
B
S
S
T

• The entire pattern of multiple equilibria
  re-emerges.
• The single tomahawk becomes double.

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History of the world Part 2 From core-periphery
to globalisation. The double tomahawk!
? 1 0.5 0
S
S
B
B
S
S
T

• The entire pattern of multiple equilibria
  re-emerges.
• The single tomahawk becomes double.
• We enter the era of globalisation.

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? 1 0.5 0
S
S
B
B
S
S
T
History of the World
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History of the World, Part 1 The continents
diverge.
? 1 0.5 0
S
S
B
B
S
S
T
History of the World
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History of the World, Part 1 The continents
diverge.
History of the World, Part 2 Globalisation the
divergence is dissolved.
? 1 0.5 0
S
S
B
B
S
S
T
History of the World
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History of the world summarised.

• Part 1 From symmetrical equilibrium to
  core-periphery
• Transport costs prohibitively high trade not
  feasible.
• Transport costs fall one continent gains an
  advantage and becomes core.
• The intermediate range multiple equilibria and
  critical points.
• Part 2 From core-periphery to globalisation.
• Transport costs fall further firms desert the
  core.
• Sequential and rapid development in the
  periphery.

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• Assessment of this model
• Very abstract real geographers do not like it.
• Absence of policy effects, learning effects.
• Could transport costs really be so central to
  these global processes?