ECONOMY

anthony j. venables 747
The model is intended to be suggestive of some of the forces driving the “great
divergence” of the nineteenth and twentieth centuries. Between 1750 and 1880 western
Europe’s share of world manufacturing production went from less than 20 per cent
to more than 65 per cent; together with North America, their share approached
75 per cent in the interwar period, before falling back to around 50 per cent by the
beginning of the twenty-first century. Per capita incomes diverged, and are only now
showing—for some regions—convergence. The model provides a single mechanism
that can capture both these phases. Falling transport costs in a setting in which there
are agglomeration forces in industry means that one region—the North—comes to
deindustrialize the South and create inequality in the world economy. Only once
transport costs become low enough—the globalization phase—does industry flow
back and income convergence take place.
Of course, other mechanisms are also important, and there is probably a complementarity
between mechanisms. Levels of education and institutional quality are
determinants of income, but are in turn determined by income. The incentives to
invest in education or develop institutions that support modern economic activity
are low in an economy that is unable to compete with imports from the Northern
manufacturing cluster.
4.2 Migration and the New World
The nineteenth century saw mass emigration from Europe to the new worlds of the
Americas and Australasia. Just one of these booming regions—the northeast of the
USA—made a successful transition from agriculture to manufacturing. Why was this
so? The historical literature gives a number of explanations, largely based around
institutional quality. Differing colonial legacies are important (North, Summerhill,
and Weingast 2000), as are the different patterns of land tenure supported by climatic
as well as colonial factors (Engerman and Sokoloff 1997). What additional and complementary
mechanisms are provided by new economic geography?
Once again, it is helpful to think in a very stylized way in order to draw out some
possibilities. 6 Suppose that there is an established economic center with manufacturing
activity (Europe) and some number of other locations (in the New World) that
can trade with the center. The new locations have high land–labor ratios, so export
primary products and import manufactures. This endowment ratio also means that
they offer high wages, attracting an inflow of migrants. The question is, at what
stage—if at all—do these new economies attract manufacturing activity? The answer
depends on trade costs (including tariff policies), market size, and competition
from other sources of supply. Suppose that all New World economies are identical
to each other, and all attracting immigrants at the same rate. Then there comes a
point at which the local market is large enough to support manufacturing. However,
simultaneous growth of manufacturing in all of these regions is not a possible
⁶ ThisdrawsonCraftsandVenables2003.