A Sub-Regional Development Approach-Transport, International Trade, and Investment Modeled in Space

Abstract

The importance within the literature: Over recent years the theory of complex systems has been developed and applied among other things to economic and regional science (Allen, 1997). It leads to a view of co-evolutionary, spatial dynamics that is far from the traditional, and operational, models used in these areas that have been based on assumptions of market equilibrium. The economic and development literature is at last starting to focus on the spatial aspects of competition and trade. In modernizing economies, positive externalities emerge as a consequence of market interaction involving increasing return, agglomeration and network effects. Recent work by Fujita, Krugman and Venables (1999) has developed spatial versions of the earlier Dixit-Stiglitz (1977) model of monopolistic competition. Regional scientists have developed models that take into account the existence of multiple geographic centers, the irregularity of spatial forms, and their evolution at a low microeconomic level of resolution. However such models so far lack the supply-side and microeconomic foundations displayed in the work of Fujita et al..

The approach: The work presented here is based on an advanced economic version of earlier non-economic dynamic models worked on by regional scientists such as Allen (1997), and well summarized by Anas, Arnott and Small (1998). The work takes into account the recent work by Fujita et al., by using an explicit price system and an explicit description of rational economic decision-making. It relies as much as possible on Allen's earlier spatial computer models and calibrates the model for at least one highly relevant Asian economic trade and growth corridor. Theory is developed here in a way that it very much instructs practice.

The potential development relevance of the work the analysis of increasing return, agglomeration and network effects is important for their impact on trade, investment, growth and development. The application of models that relate such positive externality effects to actual representations of physical and institutional infrastructure results in a powerful tool for the development of economic and trade corridors. It facilitates a definition of the role of government. The model examines how changes in transportation costs and "attractivities" will influence the location and re-location of industries, services and related employment and social or poverty-alleviating effects. Accounting for location at a low level of resolution at a firm or other economic actor level, yields new insights into economic development phenomena that are normally analyzed in aspatial, macro models.

Keywords: Spatial economy, Economics of transformation, International trade and investment, Economic development and growth

JEL Classification: F12, L11, O18, R12