ECONOMY

742 economic geography
dramatically through time, and part of the economic geography story is that these
changes have been important in shaping the world economy. How are they changing
now? Some modes of interaction have become very much cheaper; falling air-freight
rates mean that around 30 per cent of US imports now go by air. However, studies
based on these data indicate an implicit willingness to pay for time saved at the rate
of around 0.5 per cent of the value of goods shipped for each day saved, indicating the
massive premium on proximity (Hummels 2001). Information and communication
technology means that some activities—those that can be digitized—can now be
shipped at essentially zero cost. However, the share of expenditure going on digitally
supplied services is extremely small, partly because once an activity is digitized it also
becomes cheap. Indeed the argument can be made that the economic importance of
distance has increased. This is because expenditure has shifted to sectors where trade
across wide distances is difficult, such as personal services, creative industries, design,
and media, all activities in which proximity and face-to-face contact are important.
What are the implications of these costs of spatial interaction for the economic
structure and income levels of remote economies? They have direct effects of increasing
import prices and depressing export earnings in remote economies. Impacts on
income and on the structure of activity can be derived by identifying the “market
access” of locations (Harris 1954). Recent studies take into account the fact that it is
not only market access, but also the costs of imported goods and equipment that are
important for income. 3 They find that distance-based measures of access to markets
and to suppliers are a statistically robust and quantitatively important determinant of
a country or region’s per capita income, even when other factors (such as institutions
and education) are controlled for. For example, Redding and Venables (2003) find
that halving the market access of a country—loosely interpreted as doubling the
distance between a country and its main markets—reduces per capita income by
around 25 per cent.
3 Agglomeration Mechanisms
.............................................................................
Given the cost of spatial interactions, what pattern of economic activity do we expect
to see in the world economy? The assumptions of neoclassical economics imply
that activities will be dispersed, and spread quite evenly across locations. This is
because production that is not subject to increasing returns to scale will be broken
up to supply local demands. In the limit, this is “backyard capitalism”—a little bit of
everything is produced in everyone’s backyard. Clearly, this is not a good description
of the world, and the key problem lies in the treatment of returns to scale. Only in
the presence of increasing returns is there a trade-off between producing everywhere
(low trade costs but small scale) and producing in few locations (high trade costs
³ See for example Leamer 1997; Hanson 1998; Redding and Venables 2004.