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Eleven Basic Readings:

Nobel Prize Lecture, December 8, 2008
by Paul Krugman
Princeton University, Woodrow Wilson School, Princeton, NJ 08544-1013, USA.
1.- The increasing returns revolution in trade and geography

Thirty years have passed since a small group of theorists began applying concepts and tools from industrial organization to the analysis of international trade. The new models of trade that emerged from that work didn’t supplant traditional trade theory so much as supplement it, creating an integrated view that made sense of aspects of world trade that had previously posed major puzzles. The “new trade theory” – an unfortunate phrase, now quite often referred to as “the old new trade theory” – also helped build a bridge between the analysis of trade between countries and the location of production within countries. In this paper I will try to retrace the steps and, perhaps even more important, the state of mind that made this intellectual transformation possible. At the end I’ll also ask about the relevance of those once-revolutionary insights in a world economy that, as I’ll explain, is arguably more classical now than it was when the revolution in trade theory began.

From The New York Times - October 15, 2008
2.- The conscience of a liberal
By Paul Krugman

About the work
Really, I don’t want to talk about me when the world is melting down, but I have had a number of requests for an informal explanation of what I got you-know-what for. So here’s an attempt.
It’s really about two related things: the “new trade theory” and the “new economic geography.”
OK, so what was the “old” trade theory? It’s what you probably learned if you took intro economics. Countries are different – they have different levels of productivity in particular industries, they have different resources, and those differences drive trade. Tropical countries grow and export bananas, temperate countries grow and export wheat. Countries with highly educated workers export high-tech goods, countries with less educated workers export shirts and pajamas.
The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?

From Journal of Political Economy, 1991, vol. 99, no. 3
By Paul Krugman
3.- Increasing returns and economic geography

This paper develops a simple model that shows how a country can endogeneously become differentiated into an industrialized "core" and an agricultural "periphery". In order to realize scale economies while minimizing transport costs, manufacturing firms tend to locate in the region with larger demand, but the location of demand itself depends on the distribution of manufacturing. Emergence of a core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income.

From The American Economic Review, Vol. 70, No. 5, December 1980
4.- Scale Economies, Product Differentiation, and the Pattern of Trade
By Paul Krugman

For some time now there has been considerable skepticism about the ability of comparative cost theory to explain the actual pattern of international trade. Neither the extensive trade among the industrial countries, nor the prevalence in this trade of two-way exchanges of differentiated products, make much sense in terms of standard theory. As a result, many people have concluded that a new framework for analyzing trade is needed. The main elements of such a framework -economies of scale, the possibility of product differentiation, and imperfect competition- have been discussed by such authors as Bela Balassa, Herbert Grubel (1967, 1970), and Irving Kravis, and have been "in the air" for many years...

From The Quarterly Journal of Economics
Vol. CX Issue 4 November 1995
5.- Globalization and the inequality of nations
P. Krugmand and J. Venables
A monopolistically competitive manufacturing sector produces goods used for final consumption and as intermediates. Intermediate usage creates cost and demand linkages between firms and a tendency for manufacturing agglomeration. How does globalization affect the location of manufacturing and gains from trade? At high transport costs all countries have some manufacturing, but when transport costs fall below a critical value, a core-periphery spontaneously forms, and nations that find themselves in the periphery suffer a decline in real income. At still lower transport costs there is convergence of real incomes, in which peripheral nations gain and core nations may lose.
6.- The new economic geography: Past, present and the future
Masahisa Fujita, Paul Krugman - November 2002

This article presents a summary of our conversation on the past, present and future of the new economic geography, which took place with the help of an interlocutor in San Juan, Puerto Rico in November 2002. Following the introduction, we explain what the new economic geography is, and we describe some basic models. The discussion of its various critical aspects is presented subsequently, and the article concludes with the discussion of future issues and challenges facing the field.

7.- New Economic Geography – Critical reflections, regional policy implications and further developments –
Hans-Friedrich Eckey, Reinhold Kosfeld - 2004

The standard model of New Economic Geography (NEG) presents a synthesis of polarization and neo-classical theories. Within a monopolistic competition framework it aims to explain processes of concentration and deconcentration of manufacturing in a two-sector economy. In this paper the effects of several assumptions of spatial agglomeration processes are addressed. In particular, we investigate the effects of transport costs for agricultural goods, spatial spillovers, the presence of non-tradable services and limited mobility of the labour force. It becomes clear that the tendency towards deconcentration of manufacturing is more marked
• the higher the transport costs for agricultural goods,
• the stronger the positive spillovers across the regions,
• the more income spent on services,
• the more limited the mobility of the labour force.

8.- New Economic Geography
(Written for Palgrave Dictionary of Economics)

Anthony J. Venables - London School of Economics and CEPR - 2005

New economic geography provides an integrated and micro-founded approach to spatial economics. It emphasises the role of clustering forces in generating an uneven distribution of economic activity and income across space. The approach has been applied to the economics of cities, the emergence of regional disparities, and the origins of international inequalities.

INSTITUTE OF DEVELOPING ECONOMIES From the Institute of Developing Economies - Tokyo Discussion paper No. 27
9.- Frontiers of the New Economic Geography
Masahisa Fujita and Tomoya Mori April 20, 2005

This paper presents an overview of recent development in the new economic geography (NEG), and discusses possible directions of its future development. Since there already exist several surveys on this topic, we focus on the selected features of the NEG which are important yet have attracted insufficient attention, and also on the recent refinements and extensions of the framework.

From the World Institute for Development Economic Research
10.- New Challenges for Industrial Policy
Wim Naudé - September 2010

This paper calls for a fresh look at industrial policies in the light of recent trends and developments in the global economy. In particular, five new challenges and their implications for industrial policies are discussed. These have been neglected in the debate on industrial policy and include (i) the increasing globalization of the world economy, most pertinently the rise of global production sharing, (ii) the recent crises in food, fuel and financial markets, (iii) climate change, (iv) the rise of China and India, and (v) the rise of the ‘entrepreneurial economy’. Directions for further research are outlined. This paper is a follow-up to the earlier WIDER Working Paper entitled ‘Industrial Policy: Old and New Issues’.

11.- Industrial Policy: Old and New Issues
Wim Naudé - September 2010

The debate on industrial policy (IP) has been characterized by a number of contractions over the concept of industrial policy, its merits, contents and application. The purpose of this exploratory paper is to review the debate on IP. Outlining the concept and instruments of industrial policy, the paper reviews the evolution of IP over time, and discusses the current tension between the theory and practice of IP. Contrasting ‘old’ and ‘new’ issues in the debate, a tentative conclusion is that a fragile consensus on IP is within reach. This implies that the future debate—the ‘new’ issues—on IP will need to be increasingly concerned with (i) the ‘how’ of IP rather than the ‘why’, and (ii) with the new challenges and trends that will shape the content of IP.

From Carnegie Endowment for International Peace
Asia Program No115 - November 2010
Reinterpreting China's success through the New Economic Geography
Yukon Huang

China has in recent years capitalized on its huge, diverse population and geographical expanse to transform itself into the world’s most efficient assembler and exporter of a wide range of manufactured goods. In achieving this development, it has followed a strategy essentially based on the New Economic Geography, which explains how lower transportation costs and concentration of economic activities foster economies of scale and explosive urbanization. But now China’s transformation has reached a turning point. Various forces are starting to reshape China’s socioeconomic landscape in ways that should help harmonize its growth with that of the global economy and that will influence the answers provided to four major policy questions concerning growth, equity, and exchange rates that are now dominating the debate over China’s future. If China can build on its recent success in stimulating its economy to also put in place a more flexible exchange rate system that will allow the yuan to adjust gradually to market forces—as an additional tool to manage its economy—these four questions can be answered as follows:...

Public Disclosure Authorized by the World Bank - 47242
Reshaping Economic Geography in East Asia
Edited by Yukon Huang and Alessandro Magnoli Bocchi - 2009

a companion volume to theWorld Development Report 2009, brings together noted scholars to address the spatial distribution of economic growth in Asia. It reveals how the new economic geography is reshaping development objectives: from initiatives to foster growth via enhanced agglomeration and connectivity to the world economy, to programs that channel resources to lagging regions. Key themes include how East Asian governments have dealt with agglomeration economies, urbanization, and regional disparities; improving connectivity with infrastructure investments; and eliminating barriers both inside and outside borders to favor the movement of labor, goods, and services. This volume will be of great interest to readers working in the areas of economic policy, poverty reduction and urban-rural development strategies, and transport-led infrastructure policy.

From the World Bank - Public Disclosure Authorized - 56794
Changing the Industrial Geography in Asia.
The Impact of China and India

Shahid Yusuf and Kaoru Nabeshima - 2010

During a 13-year period extending from roughly 1995 to 2008, the world economy experienced an upheaval resulting from a great burst of globalization that brought the 20th century to a close. The new century is being ushered in by a second upheaval following a severe financial crisis that plunged the global economy into recession in 2008–09. Through an analysis of industrial trends, patterns, and national manufacturing capabilities that emerged after 1985, this volume examines the consequences of the first upheaval for Asia’s industrial geography and explores the likely outcomes of the second upheaval for industrial development and trade across the Asia region.
The first upheaval witnessed a massive migration of manufacturing industries and certain business services from advanced countries to developing economies. This migration transformed East and parts of South Asia into the industrial heartland of the world. The second upheaval, which could continue for a decade or more, will most likely consolidate Asia’s industrial preeminence; in addition, it could result in the redistribution and concentration of industrial activities in the two most populous and fastest-growing economies in Asia—China and India. The growth of Asia’s share of global manufacturing activities and major business services is already tilting the balance of economic power in Asia’s favor (Grether and Mathys 2006). In 1973, one-quarter of purchasing power parity (PPP) adjusted world gross domestic product (GDP) came from Asia while 51 percent came from the West. By comparison, as of 2003, Asia’s share had risen to 43 percent, surpassing the West’s 40 percent share (see table 1.1).

Public Disclosure Autorized - 39986
From The World Bank - 18 Sept. 2006
An East Asian Renaissance: Ideas for Economic Growth

East Asia – a region that has transformed itself since the financial crisis of the 90s by creating more competitive and innovative economies – must now turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success.

From Dialogue on Globalization No. 42 - April 2009
Re-Defining the Global Economy

From Adam Smith’s single reference to the “invisible hand” in The Wealth of Nations, one would be hard pressed—even delusional—to derive a theory of the selfsufficiency of the market economy. Quite the contrary. As the headline of a commentary by Harvard economist/philosopher Amartya Sen proclaimed in the Financial Times on 11 March 2009, “Adam Smith’s market never stood alone”. Indeed by understanding that the self-interested individual may sometimes be “led by an invisible hand to promote an end which was no part of his intention”1, the founder of modern economics laid open the possibility that the invisible hand could yield either positive or negative, unintended results.

From The New Economic Geography: Effects and Policy Implications.
A Symposium Sponsored by The Federal Reserve Bank of Kansas City. - August 24-26, 2006.

Shifts in Economic Geography and Their Causes
ANTHONY J. VENABLES - Professor, London School of Economics

New Economic Geography (perhaps better called geographical economics)...objective is to offer an integrated theory of location, capable of explaining divergence as well as convergence in economic performance. The key building block is the recognition that proximity is good for productivity; dense configurations of economic activity work better than sparse or fragmented ones. Mobile factors - firms and possibly workers - will locate in order to take advantage of higher productivity, and this creates a positive feedback. Firms and workers go where productivty is high, and by so doing tend to further raise productivity, creating an uneven distribution of activity and spacial income disparities. There are several analytical challenges here...

Discussant: DOUGLAS A. IRWIN
Professor, Dartmouth College

Since Tony has done such a fine job exploring the various dimensions of economic geography, I would like to focus on two related issues:
(1) what can or should countries do about these changes in economic geography, and
(2) should we fear these changes in economic geography?...full text

General Discussion
The Rise of Offshoring: It's Not Wine for Cloth Anymore
GENE M. GROSSMAN - Professor, Princeton University
ESTEBAN ROSSI-HANSBERG - Professor, Princeton University

...the core of international trade theory continues to be dominated by thinking about production and exchange of complete goods. Our understanding of the effects of international integration on prices, production patterns, and factor income comes primarily from analysing models in which good -sometimes used as intermediate inputs, but often serving final consumer demand- are produced entirely in one location. But times are changing. Revolutionary progress in communication and information technologies has enabled an historic (and ongoing) breakup of the production process...

Discussant: JOHN B. TAYLOR - Professor, Stanford University

I agree with the authors that we need to modernize Adam Smith's example of the pin factory to reflect the modern world of offshoring. In fact, I think such real-world examples are solely needed to fully flesh out, test, and assess alternative models of offshoring...full text here

General Discussion
Patterns of International Capital Flows and Their Implications for Economic Development
RAGHURAM G. RAJAN - Economic Counsellor and Director of Research, International Monetary Fund

Economic theory posits that capital should, on net, flow from richer to poorer countries. Specifically, in the benchmark neoclassical model, capital should flow from countries that have relatively high capital-to-labour ratios to countries that have relatively low ratios. In an influential paper, Lucas (1990, "Why doesn't capital flow from rich to poor countries?", American Economic Review, vol. 80, No. 2, pp 92-6) notes that flows of capital from the north to the south are nowhere near the levels predicted by theory. Financial globalization has taken off in the decade and a half since Lucas wrote his paper, with a substantial increase in cross-border capital flows. Nonindustrial countries, especially the group of emerging market economies, have become much more integrated into international financial markets...We show that the paradox has, if anything, intensified over time, with capital, in fact, flowing from poor to rich countries. This perverse patterns of flows has been particularly striking since the beginning of this decade. Foreign direct investment (FDI) flows have, in general, behaved more in line with theory, flowing from richer to poorer countries. But the pattern of overall flows is ultimately what is relevant in terms of financing of investment in a country...

Discussant: SUSAN M. COLLINS
Professor, Georgetown University and Senior Fellow, Brookings Institution
General Discussion
Luncheon Address
The New Global Economic Geography
STANLEY FISCHER - Governor, Bank of Israel

The new economic geography versus urban economics: an evaluation using local wage rates in Great Britain

By Bernard Fingleton Department of Land Economy, University of Cambridge, Cambridge - 2006
This paper tests two major competing theories explaining the spatial concentration of economic activity, namely new economic geography theory (NEG) which emphasizes varying market potential, and urban economics theory (UE) in which the main emphasis is on producer service linkages. Using wage rate variations across small regions of Great Britain, the paper finds that it is UE theory rather than NEG theory that has most explanatory power. Evidence for this comes from encompassing both models within an artificial nesting model. Despite the popularity of NEG theory, this paper shows that although NEG works well using regional data, there is evidence that it does not necessarily provide the best explanation of local wage variations, since producer services inputs associated with UE theory and labour efficiency variations are important effects at a local level, and these are excluded from the formal NEG model.

Post-Recession America: A new economic geography?
by James W. Hughes and Joseph J. Seneca - 2010

America is just now starting to invent its post-recession economic future. The Great 2007–2009 Recession was the worst economic downturn since the Great Depression.1 That is not surprising since the two largest absolute annual privatesector employment losses since payroll statistics were first compiled in 1939 took place in 2009 and 2008.2 But what is surprising is that the Great Recession may also turn out to have been the great equalizer across the nation’s states and regions. A number of America’s former economic high-flyers were grievously wounded during the downturn and their weaknesses exposed. As a result, conventional assumptions about their future economic prospects—as consistent national growth leaders—may now come into question.

Multinational Firms’ Location and the New Economic Geography
Edited by Jean-Louis Mucchielli - 2004.

The choice of location for the production plants of multinational firms is an important issue, not least because this decision is accompanied by so many fears brought into public debate.This book analyses how foreign direct investors choose their locations, whilst exploring the forces which shape international economic geography. Although these two issues are, to some extent, interrelated, researchers have only recently acknowledged the similarity of economic geography and international business approaches to the empirical assessment of likely causes of the degree of spatial concentration observed in many modern industries.

Bridging the gap between growth theory and the new economic geography: The spatial Ramsey model
R. Boucekkiney,  C.  Camachoz and B.Zoux - September 2007

We study a Ramsey problem in infinite and continuous time and space. The problem is discounted both temporally and spatially. Capital flows to locations with higher marginal return. We show that the problem amounts to optimal control of parabolic partial differential equations (PDEs). We rely on the existing related mathematical literature to derive the Pontryagin conditions. Using explicit representations of the solutions to the PDEs, we first show that the resulting dynamic system gives rise to an ill-posed problem in the sense of Hadamard (1923). We then turn to the spatial Ramsey problem with linear utility. The obtained properties are significantly different from those of the non-spatial linear Ramsey model due to the spatial dynamics induced by capital mobility.

From Finance and Development - December 2008
The Economic Geography of Regional Integration
Uwe Deichmann and Indermit Gill.

With the future of the Doha Round uncertain, there has been a sharp increase in the number of bilateral and regional trade agreements. This has revived long-running arguments in international economics between those promoting global trade agreements and those favoring regional approaches. But in many ways this has been the wrong debate, especially for the world’s smallest, poorest, and most geographically disadvantaged countries, such as those in Africa and Central Asia.One reason is that the difference between trade agreements and more general mechanisms for integration is often misunderstood. Regional integration includes a multitude of steps that increase the competitiveness of participating countries, not just preferential trade access. Second, this debate often implies a false choice between regional versus global integration. Both are necessary because they support different objectives. Regional integration helps small and remote countries scale up supply capacity in regional production networks. This, in turn, allows these countries to access global markets...

The empirics of the new economic geography
Stephen J. Redding - April 2009

Although a rich and extensive body of theoretical research on new economic geography has emerged, empirical research remains comparatively less well developed. This paper reviews the existing empirical literature on the predictions of new economic geography models for the distribution of income and production across space. The discussion highlights connections with other research in regional and urban economics, identification issues, potential alternative explanations and possible areas for further research.

The New Economic Geography: Effects and Policy Implications.
A Symposium Sponsored by The Federal Reserve Bank of Kansas City.
August 24-26, 2006.
Jackson Hole, Wyoming, United States of America.     Symposium home

Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world. The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion. 

  • 2010 "Macroeconomic Challenges: The Decade Ahead"
  • 2009 "Financial Stability and Macroeconomic Policy"
  • 2008 "Maintaining Stability in a Changing Financial System"
  • 2007 "Housing, Housing Finance, and Monetary Policy"
  • 2006 "The New Economic Geography: Effects and Policy Implications"
  • 2005, "The Greenspan Era: Lessons for the Future"
  • 2004, "Global Demographic Change: Economic Impacts and Policy Challenges"
  • 2003, "Monetary Policy and Uncertainty: Adapting to a Changing Economy"
  • 2002, "Rethinking Stabilization Policy"
  • 2001, "Economic Policy for the Information Economy"
  • 2000, "Global Economic Integration: Opportunities and Challenges"
  • 1999, "New Challenges for Monetary Policy"
  • 1998, "Income Inequality Issues and Policy Options"
  • 1997, "Maintaining Financial Stability in a Global Economy"
  • 1996, "Achieving Price Stability"
  • 1995, "Budget Deficits and Debt: Issues and Options"
  • 1994, "Reducing Unemployment: Current Issues and Policy Options"
  • 1993, "Changing Capital Markets: Implications for Monetary Policy"
  • 1992, "Policies for Long-Run Economic Growth"
  • 1991, "Policy Implications of Trade and Currency Zones"
  • 1990, "Central Banking Issues in Emerging Market-Oriented Economies"
  • 1989, "Monetary Policy Issues in the 1990's"
  • 1988, "Financial Market Volatility"
  • 1987, "Restructuring The Financial System"
  • 1986, "Debt, Financial Stability, and Public Policy"
  • 1985, "Competing in the World Marketplace: The Challenge for American Agriculture"
  • 1985, "The U.S. Dollar - Recent Developments, Outlook, and Policy Options"
  • 1984, "Price Stability and Public Policy"
  • 1983, "Industrial Change and Public Policy"
  • 1982, "Monetary Policy Issues in the 1980's"
  • 1981, "Modeling Agriculture for Policy Analysis in the 1980's"
  • 1980, "Future Sources of Loanable Funds for Agricultural Banks"
  • 1979, "Western Water Resources: Coming Problems and the Policy Alternatives"
  • 1978, "World Agricultural Trade: The Potential for Growth"
On elites
The Group of Twenty

"The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. The inaugural meeting of the G-20 took place in Berlin, on December 1516, 1999, hosted by German and Canadian finance ministers.
The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe."

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