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Abstract:
This paper analyzes how the degree of regional integration affects regional differences in production structures and income levels. With high transport costs, industry is spread across regions to meet final consumer demand. As transport costs fall, increasing returns interacting with labor mobility and/or input-output linkages between firms create a tendency for the agglomeration of increasing returns activities. When workers migrate towards locations with more firms and higher real wages, this intensifies agglomeration. When, instead, workers do not move across regions, further reductions in transport costs make firms increasingly sensitive to wage differentials, leading industry to spread out again.

Abstract:
This paper analyses a model of economic development in which international inequalities in the location of industry and income are supported by the agglomeration of industry in a subset of countries. Economic development may not be a gradual process of convergence by all countries, but instead involves countries moving sequentially from the group of poor countries to the group of rich countries. The role of trade policy in promoting industrialization is studied. While both import substitution and unilateral trade liberalization may be "successful" in attracting industry, they attract different sectors and welfare levels are higher under trade liberalization.

Abstract:
European regions have experienced a polarisation of their unemployment rates between 1986 and 1996, as regions with intermediate rates have moved towards either extreme. This process has been driven by changes in regional employment, only partly offset by labour force changes. Regions' outcomes have closely followed those of neighbouring regions. This is only weakly explained by regions being part of the same Member State, having a similar skill composition, or broad sectoral specialisation. Even more surprisingly, foreign neighbours matter as much as domestic neighbours. All of this suggests a reorganisation of economic activities with increasing disregard for national borders.

Abstract:
Why are some cities specialised and others diversified? What are the advantages and disadvantages of urban specialisation and diversity? To what extent does the structure of cities, and the activities of firms and people in them, change over time? How does the sectoral composition of cities influence their evolution? To answer these and related questions, we first distil some key stylised facts from the empirical literature on cities and the composition of their activities. We then turn to a review of different theories looking at such issues, and study the extent to which these theories contribute to the understanding of the empirical regularities.

Abstract:
A new approach to analyzing the role of trade in promoting industrial development.

How do different trading arrangements influence the industrialization process of developing countries? Can preferential trading arrangements (PTAs) be superior to multilateral liberalization, or at least an alternative when multilateral liberalization proceeds slowly? If so, what form should the PTAs take? Are developing countries better advised to seek PTAs with industrial countries or among themselves?
Traditional analysis of these issues has been based on the ideas of trade creation and trade diversion. The problem with this analysis is that it starts from assuming a pattern of comparative advantage. This stands in sharp contrast to the apparently changing comparative advantage of newly industrialized countries. The experience of these countries suggests the need for an analysis in which the pattern of comparative advantage is not set in stone but is potentially flexible, and in which less developed countries can develop and converge in both income and economic structure to industrial economies.

Puga and Venables outline an alternative approach for analyzing the role of trade in promoting industrial development. There are few fundamental differences between countries that generate immutable patterns of comparative advantage. Instead the pattern of trade and development in the world economy is determined mainly by history. Cumulative causation has created concentrations of industrial activity in particular locations (industrial countries) and left other areas more dependent on primary activities. Economic development can be thought of as the spread of these concentrations from country to country. Different trading arrangements may have a major impact on this development process. By changing the attractiveness of countries as a base for manufacturing production they can potentially trigger or postpone industrial development.
This approach explains why firms are reluctant to move to economies that have lower wages and labor costs, and shows how trade liberalization can change the incentives to become established in developing countries. It provides a mechanism through which import liberalization can have a powerful effect in promoting industrialization. And it suggests that import liberalization may create or amplify differences between liberalizing countries with the possible political tensions this may create. While these features are consistent with the world economy, they fall short of providing convincing empirical support for the approach.

Using the approach, the authors derive a number of conclusions about the effects of trade liberalization. First, that unilaterally liberalizing imports of manufactures can promote development of the local manufacturing industry. The mechanism is forward linkages from imported intermediates, but this may be interpreted as part of a wider package of linkages coming from these imports. Second, the gains from liberalization through PTA membership are likely to exceed those obtained from unilateral action. South-South PTAs will be sensitive to the market size of member states, and North-South PTAs seem to offer better prospects for participating Southern economies, if not for North and excluded countries. Third, the effects of particular schemes (such as the division of benefits between Southern economies) will depend on the characteristics of the countries and cross-country differences in these characteristics.

This paper - a product of the International Trade Division, International Economics Department - was prepared for the research project on regional integration.

Abstract:
This handbook chapter studies the theoretical micro-foundations of urban agglomeration economies. We distinguish three types of micro-foundations, based on sharing, matching, and learning mechanisms. For each of these three categories, we develop one or more core models in detail and discuss the literature in relation to those models. This allows us to give a precise characterisation of some of the main theoretical underpinnings of urban agglomeration economies, to discuss modelling issues that arise when working with these tools, and to compare different sources of agglomeration economies in terms of the aggregate urban outcomes they produce as well as in terms of their normative implications.

Cities, agglomeration, increasing returns, micro-foundations

Abstract:
This handbook chapter studies the theoretical micro-foundations of urban agglomeration economies. We distinguish three types of micro-foundations, based on sharing, matching, and learning mechanisms. For each of these three categories, we develop one or more core models in detail and discuss the literature in relation to those models. This allows us to give a precise characterisation of some of the main theoretical underpinnings of urban agglomeration economies, to discuss modelling issues that arise when working with these tools, and to compare different sources of agglomeration economies in terms of the aggregate urban outcomes they produce as well as in terms of their normative implications.

Abstract:
Despite large regional policy expenditures, regional inequalities in Europe have not narrowed substantially over the last two decades, and by some measures have even widened. Income differences across States have fallen, but inequalities between regions within each State have risen. European States have developed increasingly different production structures and European regions have also become increasingly polarised in terms of their unemployment rates. This Paper describes these trends, and discusses how recent location theories can help us to explain them and reconsider the role of regional policies, and especially of transport infrastructure improvements, in such an environment.

Europe, inequalities, location, regional policy, transport infrastructure

Abstract:
No abstract available.

Abstract:
We document and then develop a model explaining and relating changes in firms' organization and in urban structure. Sharing of business services by headquarters and of sector-specific intermediates by production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a shift in urban structure, from a configuration where cities specialize by sector and host integrated headquarters and production plants, to a configuration where cities specialize by function, with headquarters from different sectors and business services clustered in a few large cities and production plants from each sector clustered in smaller separate cities.

Functional specialisation, cities, business services, headquarters

Abstract:
Increasingly, a small number of low-wage countries such as China and India are involved in innovation - not the 'big ideas', but the constant incremental innovations needed to stay ahead in business. We provide some evidence of this and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. We explain why levels of involvement in innovation vary across low-wage countries and even across firms in each low-wage country. We then draw out the implications of this for the location of production, trade, capital flows, earnings and living standards.

International trade, low-wage country innovation

Abstract:
Increasingly, a small number of low-wage countries such as China and India are involved in innovation - not 'big ideas' innovation, but the constant incremental innovations needed to stay ahead in business. We provide some evidence of this new phenomenon and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. We explain why levels of involvement in innovation vary across low-wage countries and even across firms within each low-wage country. We then draw out implications for the location of production, trade, capital flows, earnings and living standards.

Abstract:
The incremental innovations that underlie much of modern economic growth typically involve changes to one or more components of a complex product. This creates a tension. On the one hand, a principal would like an agent to contribute innovative components. On the other hand, ironing out incompatibilities between interdependent components can be a drain on the principal's energies. The principal can conserve her energies by tightly controlling the innovation process, but this may inadvertently stifle the agent's incentive to innovate. We show precisely how this tension between creating knowledge and controlling knowledge shapes organizational forms. The novel concepts introduced are illustrated with case studies of the flat panel cathode ray tube industry and Boeing's recent location decisions.

Incremental innovation, incomplete contracts, imperfect substitutability, appropriability

Abstract:
The incremental innovations that underly much of modern economic growth typically involve changes to one or more components of a complex product. This creates a tension. On the one hand, a principal would like an agent to contribute innovative components. On the other hand, ironing out incompatibilities between interdependent components can be a drain on the principal's energies. The principal can conserve her energies by tightly controlling the innovation process, but this may inadvertently stifle the agent's incentive to innovate. We show precisely how this tension between creating knowledge and controlling knowledge shapes organizational forms. The novel concepts introduced are illustrated with case studies of the flat panel cathode ray tube industry and Boeing's recent location decisions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Striking evidence is presented of a previously unremarked transformation of urban structure from mainly sectoral to mainly functional specialization. We offer an explanation showing that this transformation is inextricably interrelated with changes in firms' organization. A greater variety of business services for headquarters and of sector-specific intermediates for production plants within a city reduces costs, while congestion increases with city size. A fall in the costs of remote management leads to a transformation of the equilibrium urban and industrial structure. Cities shift from specializing by sector - with integrated headquarters and plants - to specializing mainly by function - with headquarters and business services clustered in larger cities, and plants clustered in smaller cities.

Abstract:
High unemployment and regional inequalities are major concerns for European policy-makers, but so far connections between policies dealing with unemployment and regional inequalities have been few and weak. We think that this should change. This paper documents a regional and transnational dimension to unemployment - i.e., geographical unemployment clusters that do not respect national boundaries. Since the mid 1980s, regions with high or low initial unemployment rates saw little change, while regions with intermediate unemployment moved towards extreme values. During this polarization, nearby regions tended to share similar outcomes due, we argue, to spatially related changes in labour demand. These spatially correlated demand shifts were due in part to initial clustering of low-skilled regions and badly performing industries, but a significant neighbour effect remains even after controlling for these, and the effect is as strong within as it is between nations. We believe this reflects agglomeration effects of economic integration. The new economic geography literature shows how integration fosters employment clusters that need not respect national borders. If regional labour forces do not adjust, regional unemployment polarization with neighbour effects can result. To account for these 'neighbour effects' a cross-regional and transnational dimension should be added to national anti-unemployment policies. Nations should consider policies that encourage regional wage setting, and short distance mobility, and the EU should consider including transnational considerations in its regional policy, since neighbour effects on unemployment mean that an anti-unemployment policy paid for by one region will benefit neighbouring regions. Since local politicians gain no votes or tax revenues from these 'spillovers', they are likely to underestimate the true benefit of the policy and thus tend to undertake too little of it.

Abstract:
There is controversy about whether geography matters mainly because of its contemporaneous impact on economic outcomes or because of its interaction with historical events. Looking at terrain ruggedness, we are able to estimate the importance of these two channels. Because rugged terrain hinders trade and most productive activities, it has a negative direct effect on income. However, in Africa rugged terrain afforded protection to those being raided during the slave trades. Since the slave trades retarded subsequent economic development, in Africa ruggedness has also had a historical indirect positive effect on income. Studying all countries worldwide, we find that both effects are significant statistically and that for Africa the indirect positive effect dominates the direct negative effect. Looking within Africa, we also provide evidence that the indirect effect operates through the slave trades.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Firms are more productive on average in larger cities. Two explanations have been offered: agglomeration economies (larger cities promote interactions that increase productivity) and firm selection (larger cities toughen competition allowing only the most productive to survive). To distinguish between them, we nest a generalised version of a seminal firm selection model and a standard model of agglomeration. Stronger selection in larger cities left-truncates the productivity distribution whereas stronger agglomeration right-shifts and dilates the distribution. We assess the relative importance of agglomeration and firm selection using French establishment-level data and a new quantile approach. Spatial productivity differences in France are mostly explained by agglomeration.

agglomeration, cities, firm selection, productivity

Abstract:
We provide empirical evidence on the role of labour market pooling in determining the spatial concentration of UK manufacturing establishments. This role arises because large concentrations of employment iron out idiosyncratic shocks and improve establishments' ability to adapt their employment to good and bad times. We measure the likely importance of labour pooling by calculating the fluctuations in employment of individual establishments relative to their sector and averaging by sector. Our results show that sectors whose establishments experience more idiosyncratic volatility are more spatially concentrated, even after controlling for a range of other industry characteristics that include a novel measure of the importance of localized intermediate suppliers.

labour market pooling, spatial concentration

Abstract:
Note: Below is a description of the paper and not the actual abstract.

This literature review uncovers common conclusions about the effects of integration on location. When high trade costs prevent strong spatial interactions, the size and characteristics of the local market and factor availability determine what is produced where. Initially economic integration diminishes the importance of such considerations, and for intermediate trade costs creates a "putty clay" geography: there is a priori great flexibility on where particular activities locate, but once spatial differences take shape, pecuniary externalities make these quite rigid. However, for low trade costs the weight of location shifts back to local underlying characteristics. But what matters then is good local availability, not of all goods and factors but of those whose mobility has been less improved by globalization.