Civic commuity approaches to rural development in the South: Discussion

Journal of Agricultural and Applied Economics, Aug 2002 by Henry, Mark S

Consider technological improvements in transportation:

"It is a familiar point from the `new economic geography' that the impact of transportation costs on agglomeration tends to have an inverted U shape. At very high transport costs, there cannot be agglomeration: the world consists of self-sufficient peasants. At very low transport and communication costs, there is little incentive for agglomeration: necessary inputs can be delivered to wherever the factor costs are lowest. (This is what happened to the textile industry: improved transportation made it unnecessary for mills to remain in the established centers, and allowed them to move to lower-wage locations). It is only in an intermediate range that agglomeration is both possible and necessary" (Krugman 1999, p. 4).

The relation to the product cycle is that spinning off low-skill jobs or routine production to remote rural areas only makes sense if lower transport costs offset higher production costs in urban areas, making rural areas the lowest total cost region. Kilkenny makes the important point that unfettered market forces will likely generate a spatial distribution of economic activity that is suboptimal in terms of national welfare levels. Indeed, this is a theme from Hotelling's famous depiction of how ice cream vendors along a beachfront will tend to cluster in locations as the equilibrium outcome of spatial competition that is suboptimal from a national welfare perspective. Ergo, a justification for rural development policy is established.

Next, consider neoclassical models and the supply side. The first point to make is that models of economic growth across regions have undergone a dramatic change over the past decade largely because of Paul Krugman. His lectures, summarized in Geography and Trade (1991), introduced a new economic geography into the mainstream of economics by showing how a neoclassical model explaining the spatial distribution of economic activity can be constructed and how it differs from the earlier work of economic geographers and regional scientists. Tendencies for concentration of economic activity between these regions result from interactions of internal scale economies at the plant level, transport costs, and mobility of labor and capital. As Krugman puts it:

"Loosely speaking, firms want to concentrate production (because of scale economies) near markets and suppliers (because of transport costs); but access to markets and suppliers is best where other firms locate (because of market size effects). This circular logic can produce agglomerations-although it is opposed by the 'centrifugal' force of agriculture, which provides an offsetting incentive to locate in the region with fewer local competitors" (Krugman 1998, p. 166). The new economic geography (NEG) may have much to say about how rural economies in the South will be affected by the economics of industrial organization, transportation costs, and the current spatial distribution of markets and suppliers. For example,