This book is about the construction of a landscape. The landscape in question is the intensive agricultural terraced landscape of Konso in south-west Ethiopia. The book focuses on the role of culture in the construction of the landscape, and explores the significance for development of the landscape itself, and the social and cultural institutions that construct and maintain it. Through this study of one landscape and one people it is hoped that the processes and connections between different aspects of people's lives and their environments will be better understood, contributing to understandings of landscape production in general, and generating insights that will be of relevance to initiatives concerned with environmental conservation and the tackling of poverty.

Konso lends itself to this study. It is an excellent example of an indigenous and intensive agricultural landscape that has been maintained for at least four hundred years, despite what can only have been enormous social changes. The Konso hills rise to a height of 2000m out of the dry Rift Valley plains, and the rugged hillsides are scored with dry stone-walled bench terraces constructed meticulously by hand. Each terrace is divided into square-ridged basins and covered in a riot of crops such as sorghum, maize, millet, qat (the narcotic), cotton, coffee, beans, and sweet potatoes. Trees are also grown on the terraces. There are other hilly areas in the region: some are terraced or have other soil and water conservation structures, but none is worked as intensively as Konso (Amborn, 1989).

Positioning of the book

The purpose of this book is to offer an introduction to an important field in economics, entitled geographical economics, which sets out to explain the distribution of economic activity across space. In doing so, it endeavors to bring together and apply insights from various fields of economics. The book will therefore be of interest to students and scholars from international economics and business, as well as from economic geography, regional economics, and urban economics. The fact that we offer an “introduction” does not mean that we avoid models or shy away from difficult concepts; it indicates that we have attempted to write a book that is accessible to readers and students who are new to the field of geographical economics.

Although we introduce and discuss various modeling approaches, we keep the required technicalities to a minimum. Whenever possible we draw attention to important concepts and applications in special interest boxes, making ample use of examples and diagrams to explain the workings of the models. Chapter 3, which explains the structure of the core model of geographical economics, gives background derivations in technical notes. Throughout the book the required level of mathematical competence required does not go beyond simple optimization techniques that should be familiar to upper-level undergraduate and first-year graduate students, both in economics and in other fields of social sciences.

Introduction

Chapter 1 of this book has presented a number of stylized facts about the clustering of economic activity to justify our inquiry into the relationships between economics and geography. In chapters 2 to 4 we have mainly looked at this relationship from a theoretical point of view. In this chapter we start with a reminder that location matters. This chapter and the next focus on the empirics of geographical economics, in order to assess whether the spatial facts can be explained by geographical economics models as introduced in chapters 3 and 4.

We start with a brief review in section 5.2 of the main facts about the concentration and agglomeration of economic activity. This continues, and partly restates, our discussion of stylized facts of location in chapter 1. Against this background, section 5.3 answers the question of whether these facts can be reconciled with the various economic theories of location presented in chapters 2 to 4. To provide this answer, we summarize the main predictions about clustering (if any) that follow from the various theories, and conclude that the stylized facts are in accordance with multiple theories (and not only with geographical economics). This does not come as a great surprise, since many empirical studies about the concentration or the agglomeration of economic activity are, quite simply, not primarily concerned with the testing of specific theories.

Introduction

As we noted in the preface, it was a long time ago that Ohlin (1933) observed that the fields of trade theory on the one hand and regional and urban economics on the other hand had, in principle, the same research objectives. Both research areas want to answer the questions: “Who produces what, where, and why?” Despite Ohlin's observation, each field has continued to go its own way since the nineteenth century. Chapter 2 showed that trade theory assumes that countries are dimensionless points in space. Trade theorists are mostly interested in how market structure, production techniques, and consumer behavior interact (Neary, 2004). The resulting factor and commodity prices determine the pattern of international trade flows. Location is, at best, an exogenous factor, and usually does not play a role of any significance. Regional and urban economics, in contrast, takes market structure and prices as given and tries to find out which allocation of space is most efficient. The underlying behavior of consumers and producers, central in trade theory, is less important (Fujita and Thisse, 1996). Although both strands of literature produce valuable insights in their own right, trade theory and regional and urban economics are productively combined in geographical economics.

This chapter discusses and explains the core model of geographical economics, a small, general equilibrium model developed by Krugman (1991a, 1991b). As we shall see, the equilibrium equations of this model are non-linear.

Introduction

The central message of chapter 1 is that geography is important. Economic activity is not evenly distributed across space. On the contrary, clustering of economic activities can be found at various levels of aggregation: the considerable variation in economic size of cities or regions at the national level, or the uneven distribution of wealth and production at the global level. The question arises, of course, as to why location seems to be so important for economic activities. To answer this question, we need an analytical framework in which geography plays a part one way or another. In particular, we would like to show that the decisions of economic agents are partly determined by geography, and that they provide a framework in which the geography of the economy itself can be derived from the behavior of economic agents. This, in a nutshell, is what the approach developed in this book tries to do. We want to make absolutely clear from the start that this approach, referred to throughout this book as geographical economics but also known as new economic geography (see the preface), is by no means the first theory to address location issues. There is a long tradition that deals with the questions to be discussed in this chapter. The novelty of geographical economics as such is mainly in the way it tackles the relationship between economics and geography.

Introduction

In chapter 3 we developed and discussed the main features of the core model of geographical economics. Most importantly, the model provides a coherent framework: it is a miniature world in which the demand in one region for the manufactures of another region is not exogenously imposed but derived from the income generated in the region through production and exports. Although we set up the different aspects of the model as simple and tractable as possible, it turned out to be quite complex to study analytically.

This chapter builds on the analysis of chapter 3. First, we give a full analysis of the core model derived in chapter 3. Using simulations, we learn to understand what the long-run equilibria look like in the core model (thus endogenizing λr, the share of the manufacturing labor force in region r). As shown below, the so-called break point and sustain point will help us to summarize the long-run characteristics of the core model. Second, we show how these new insights regarding the core model of chapter 3 enable us to analyze some other important models in geographical economics. More specifically, we discuss three alternative models, each of which by now has also gained the reputation of being a “core” model of geographical economics.

1. (i) Intermediate goods model. In the absence of interregional labor mobility, the main agglomeration mechanism is connection to suppliers of intermediate goods.

2. (ii) Generalized model. Incorporating both the core model of chapter 3 and the intermediate goods model allows for a richer menu of long-run equilibria.

3. […]

Introduction

Typically, the long-run equilibrium allocation of footloose economic activity in the core model of geographical economics is characterized either by complete agglomeration or by spreading. Which equilibrium gets established depends critically on the initial distribution of the manufacturing labor force and a few structural parameters, notably the level of transport costs, the elasticity of substitution, and the share of income spent on manufactures. If transport costs, for example, are relatively low, the spreading equilibrium is unstable and agglomeration is the stable long-run equilibrium. Our simulations in chapter 4 with the core model of geographical economics clearly illustrate this (see figures 4.2 and 4.3). For many parameter settings the agglomeration forces are stronger than the spreading forces in the core model, which has only one spreading force: the demand for manufactured goods from the immobile labor force (the farm workers). We have also argued that the forces of agglomeration dominate in the multi-region version of the Krugman (1991a) model (the racetrack economy), such that economic activity is typically concentrated in one location, or only a few. Moreover, if the economy is concentrated in two or three locations, the distribution of economic activity is evenly spread among those locations.

These model outcomes are hard to reconcile with empirical observations. In reality we observe, at various levels of aggregation, multiple centers of economic activity that differ considerably in size (measured by the share of manufacturing production or the share of the mobile labor force).

Introduction

The core model of geographical economics has been introduced, explained, and extended in chapters 3 and 4 of this book. In our analysis of various applications in chapters 5 to 11, we have typically investigated relatively small modifications of the core model, notably only those affecting the cost function and thus the production structure of the core model. This has been done on purpose: not just for didactic reasons (each time returning to the familiar ground of the core model), but also to demonstrate that (seemingly) small changes in the core model can drastically increase its applicability and have interesting and sometimes far-reaching consequences. In our discussions of these adaptations of the core model one important question has been unduly neglected, however: what on balance are the strong and weak points of geographical economics? What is the verdict on geographical economics after its introduction in 1991?

The closing chapter of this book therefore deals with the criticism and value added of geographical economics. This is, inevitably, a subjective undertaking, but it gives us the opportunity to express our own views on the advantages and disadvantages of geographical economics. We are now in a position to evaluate the contribution of geographical economics to understanding the location of economic activity. We start with some of the main criticisms in section 12.2, and then react to these criticisms in the next section. In doing so, we clarify our own position.

Introduction

So far we have not paid much attention in this book to the role of dynamics in geographical economics. Instead, we have focused attention on the relationship between a long-run equilibrium and the structural parameters, given an initial distribution of labor and production. We argued, in chapter 3, that the novelty of the core model of geographical economics is the endogenous determination of market size, fostered by the migration of mobile workers to regions with higher real wages. The dynamics underlying the adjustment path – that is, how we evolve over time (see our remarks below on “time”) from an initial distribution to a final distribution, and the intricacies of economic growth and development – have been virtually absent from the analysis so far. This chapter partially fills this void. In doing so, we distinguish between three types of dynamics, increasing in complexity and in real-world importance:

1. (i) adjustment dynamics;

2. (ii) simulation dynamics; and

3. (iii) growth and development

(i) Adjustment dynamics. This type of dynamics analyzes the adjustment path over time, from an initial distribution of manufacturing production between regions to a final long-run equilibrium, by showing the sequence of short-run equilibria leading to the long-run equilibrium. The driving force behind this adjustment process in the core model of geographical economics is, therefore, the migration decisions of individuals moving towards regions with higher real wages, the differences arising from the tensions between the home market effect and the price index effect in this sequence of short-run equilibria.