UCL ECON1005' THE WORLD ECONOMY' Hugh Goodacre'

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UCL ECON1005. THE WORLD ECONOMY. Hugh
Goodacre. 5. DIVERGENCE, GLOBALISATION AND
LOCATION.
Modelling world history divergence,
globalisation and transport costs. The
pre-industrial age. Core-periphery
pattern. From core-periphery to globalisation.
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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.
• Useful example of new neo-classical modelling
  techniques pioneered by Stiglitz and others
• Endogenise issues / market imperfections
  previously taken as exogenous.
• In this case the market imperfections are
  transport costs.
• In a perfect market there would not be any!

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• Preview
• Initial symmetrical equilibrium between two
  economies with identical amount of manufacture.
• Very high transport costs (T) ? no trade.
• T ? ? even slight initial productivity advantage
  in manufacture ? tipping point.
• Manufacture becomes increasingly concentrated in
  one of the two economies / core.
• The other economy 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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World history

• Two economies
• Economy 1.
• Economy 2.
• Manufactures footloose.
• Initially
• Each has exactly half the worlds manufacture.
• Manufacturers deterred from migrating between
  continents due to high transport costs.

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Plotting world history. Axes
? 1 0.5 0
? The proportion of the worlds manufacture
located in Economy 1 (i.e. 0 lt ? lt 1).
T Transport costs / all transaction costs over
space
T
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? 1 All manufacture concentrated in Economy 1
? 1 0.5 0
? 0.5 Manufacture distributed exactly equally
between Economy 1 and Economy 2. i.e. the
initial situation.
T
? 0 All manufacture concentrated in Economy 2
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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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Symmetrical equilibrium Each economy has
exactly half the worlds manufacture. This
equilibrium is stable where T is high.
? 1 0.5 0
T
i.e. History proceeds from right to left.
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? 1 0.5 0
Break point (B)
T
T falls. Trade becomes feasible. Break
point Symmetrical equilibrium becomes unstable
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Beyond this point, even the slightest
perturbation of the even spread can lead to a
catastrophic outcome.
? 1 0.5 0
B
T
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? 1 0.5 0
T

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

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• From symmetrical equilibrium to core-periphery
• Initially
• High transport costs ? international
  competition between manufacturing firms not
  possible.
• Transport costs begin to fall
• Benefits of concentration of manufacture come
  into play
• Economies of scale.
• Forward and backward linkages
• Proximity to suppliers of inputs
• Proximity to buyers / markets

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The break point One economy gains an initial
advantage Manufacturing begins to move into the
advantaged economy. Cumulative causation sets in
/ linkages attract yet more manufacture. Manufactu
ring eventually becomes concentrated exclusively
in the advantaged economy the core. The other
economy is reduced to an agricultural periphery.
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? 1 All manufacture concentrated in Economy 1
? 1 0.5 0
Core-periphery pattern / stable equilibrium
? 0.5 Symmetrical equilibrium
T
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Two critical points and intermediate range
? 1 0.5 0
S
B
Break point Symmetrical equilibrium no longer
sustainable.
T
Intermediate range between the two critical
points
either symmetrical equilibrium or C-P equilibrium
would be stable.
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In the intermediate range, an unstable
equilibrium is also possible (0.5 lt ? lt 1).
? 1 0.5 0
S
B
T
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. i.e. the
situation if Economy 2 had become the core. The
tomahawk diagram.
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There is now a complex system of multiple
equilibria For a given value of T, the possible
equilibria are
? 1 0.5 0
S
B
S
T
Range where symm. equ. is no longer
sustainable Two stable and one unstable.
Intermediate range Three stable and two unstable.
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History of the world Part 2 From core-periphery
to globalisation.

• Advantages of dispersion
• Access to markets and input supplies
  (linkages).
• Lower real wages in periphery.
• T falls further over time.
• Advantages of concentration begin to lose
  dominance over advantages of dispersion.
• At sufficiently low levels of T, the model goes
  into reverse
• Firms defect to the periphery to benefit from
  advantages of dispersion.
• i.e. Reverse flow of manufacturing activity
  from core countries to the global periphery.

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

• As T falls further, new break point emerges.
• Symmetrical equilibrium becomes sustainable
  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

• Next, new sustain points emerge C-P no longer
  sustainable.
• Entire pattern of multiple equilibria
  re-emerges.
• Double tomahawk era of globalisation.

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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 (break point) and becomes core.
• The intermediate range multiple equilibria and
  critical points (break and sustain points,
  tomahawk).
• Part 2 From core-periphery to globalisation.
• Transport costs fall further firms desert the
  core.
• Symmetrical pattern of multiple equilibria in
  reverse double tomahawk.

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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?

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Course overview and themes I. ECONOMIC GROWTH.
Changing perspectives
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Unemployment in the UK, 1880-2005.
Stagflation 1970s
Post-war Keynesianism
Classical revival
Note 3 successive dominant currents in post-war
macro
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PART I. ECONOMIC GROWTH Growth
accounting Growth, convergence, steady
state Endogenous growth theory Divergence,
globalisation and location PART II.
INTERNATIONAL TRADE Classical trade theory Free
trade and protection From post-war Keynesianism
to Washington Consensus. Post Washington
Consensus Current issues in international
trade PART III. EMERGING ECONOMIES AND THEIR
GLOBAL IMPACT Emerging economies and global
growth The global labour market Perspectives on
globalisation Global inflation rates Global
imbalances
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• Themes.
• Keynesian critique of classical (micro / S-side)
  economics (applicable to a special case only).
• Micro modelling (including contemporary
  elaborations) can only be as realistic as the
  assumptions upon which it is based.
• Validity of entire framework of todays macro
  (Philips Curve, economic cycles, etc.) being
  tested in current conditions (emerging economies,
  financial implosion).