Agglomeration in the global economy: A survey of the 'new economic geography'

In this paper we are concernedwith understanding large scale agglomerations, creating differences between entire regions. What is at the origin of such inequalities? How will the spatial distribution of economic activities change as countries and regions become more integrated? Will economic integration lead to a higher or lower degree of spatial agglomeration? And are all activities likely to evolve similarly, or will integration have a different impact on different sectors? This paper reviews recent papers addressing those questions with a common set of tools, involving a combination of monopolistic competition a la Spence (1976) and Dixit and Stiglitz (1977) and 'iceberg' trade costs a la Samuelson (1954). These tools, while peculiar, are the best available for dealing with increasing returns, trade costs, migration, and input-output linkages between firms in an analytically tractable general equilibrium framework. An excellent recent survey of how this approach relates to work base don either technological externalities or spatial competition is provided by Fujita and Thisse (1966). The remainder of the paper is organised as follows. The next section focuses on comparative advantage and market access considerations, highlighted respectively by traditional and more recent trade theory. Section 3 describes how pecuniary externalities can create a cumulative causation process that leads to the agglomeration of industry as regions integrate. Section 4 incorporates congestion effcts caused by higher prices for non-tradeable factors and goods. It shows that the same forces that explain the agglomeration of industry at early stages of integration can explain the spread of industry to less developed regions when integration goes far enough. A final section summarisesthe main conclusions, reviews the first empirical papers in the area, and suggests some directions for future research.