The Internal Geography of Trade (original) (raw)

Take a snapshot of the world at any time and it is clear that economic activity is unevenly distributed across places. In a dynamic context, however, neoclassical theory suggests that we should see convergence in per capita incomes over time, as factors move from high-to low-cost locations. The strong convergence in national incomes over the past 20 years seems to support this theory. Yet within many countries the opposite has been the case, with output and wealth increasingly being concentrated and cross-regional disparities apparently widening. This pattern of divergence appears to have become more acute in the recent era of globalization of trade and investment. Economic theory, including endogenous growth, the role of institutions, and, most importantly, the "new economic geography" (NEG), have made significant progress in explaining the emergence of core-periphery patterns behind this divergence. They point to the critical role of agglomeration, which confers benefits to metropolitan cores that have the advantages of large markets, deep labor pools, links to international markets, and clusters of diverse suppliers and institutions. Regions relatively near the metropolitan core are likely to benefit from spillovers and congestion-related dispersion. Regions further outside the core (that is, the periphery), however, are not only less able to take advantage of spillovers, but also more likely to be far removed from key infrastructural, institutional, and interpersonal links to regional and international markets. As a result, they face significant challenges to becoming competitive locations to host economic activity. Thus the geographical pattern of core and peripheral regions is increasingly manifest in an economic pattern of "leading" and "lagging" regions. The World Development Report Framework The World Bank's World Development Report 2009 (WDR 2009) brought the issue of economic geography strongly to the fore of the mainstream development agenda. The report argues that uneven patterns of economic activity and divergence in outcomes across regions are a natural consequence of processes