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Regional Dimensions of Economic Development in Iran - A New Economic Geography Approach

36 Pages Posted: 21 Feb 2009 Last revised: 31 Aug 2009

Amir Farmanesh

World Bank; Harvard University - Harvard Kennedy School (HKS); University of Toronto

Date Written: February 1, 2009


This paper presents a spatial analysis of the regional dimensions of poverty and economic development across provinces of Iran. It offers one of the few estimations made in developing countries using this strand of New Economic Geography (NEG) models and provides a comparison of the results for Iran with those in previously studied developed countries.

The goal of this study is to offer an analysis of the effects of agglomeration and dispersion economies on the patterns of regional economic development in Iran based on the empirical estimation of two of the NEG models. First, it presents an estimation of a Market Potential Function (MPF), in which wages are associated with proximity to consumer markets. Second, it estimates an augmented MPF derived from the Krugman model of economic geography that estimates the importance of transportation costs and economies of scale.

The estimation results suggest that Iran shows a generally good fit to both models, satisfying their specifications. Compared to similar studies of developed countries, Iran shows smaller returns to scale. This might be a result of the nature of the technologies used in the non-farm private sector in Iran, which is less industrial and more traditional. Dispersion and decentralization of industries to achieve lower income inequality between provinces would create a level of loss, but less losses than they would be in Western countries.

The paper also found a significantly and consistently greater effect of market potential on wages in comparison to the effect estimated in similar analyses of other countries. This might be a result of the country relying on an underdeveloped transportation system between provinces in Iran. It is also a highly mountainous and geographically diverse country.

The overall result of this study corroborates the notion of centralization in the Iranian economy. The large wage variations explained by economic geography could cause significant internal migration, beyond that seen in western countries. Indeed, significant internal migration has been observed in Iran in past years.

Keywords: New Economic Geography, Spatial agglomeration, Market potential, Market structure, Increasing returns to scale, Transport costs, Iranian economy, Economic development in Iran, Income distribution in the provinces of Iran, Empirical evaluation

JEL Classification: F12, R12, O10, O15

Suggested Citation

Farmanesh, Amir, Regional Dimensions of Economic Development in Iran - A New Economic Geography Approach (February 1, 2009). Available at SSRN: or

Amir Farmanesh (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States


University of Toronto ( email )

Department of Statistical Sciences
5 King's College Road
Toronto, Ontario M5S 3G8


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