Economic Geography: The Integration of Regions and Nations

Why is economic development unequally distributed in space? This is the central question of the field that has become known as economic geography, and that has received wider recognition with the 2008 Nobel Prize in economics going to Paul Krugman. Combes, Mayer and Thisse have produced an advanced textbook that brings together the recent developments in this rapidly evolving literature. A key insight from economic geography is that regional inequalities arise from two competing forces: (i) agglomeration or centripetal forces attract mobile production factors to a centre because they earn a higher return when clustered together; and (ii) dispersion or centrifugal forces tend to work in the opposite direction because the market in the agglomeration becomes too crowded, causing factor remuneration to increase, or because some immobile production factors remain in the periphery. Recent contributions have highlighted a bell-shaped relationship between lower trade cost and spatial inequality. With lower trade cost, the agglomeration forces may initially prevail, leading to more spatial concentration. Beyond a certain threshold, falling trade cost and more integration can coincide with a re-dispersion of activities and a re-industrialisation of the periphery.