Friday 24 October 2008

The geography of recession

Conventional wisdom suggests that recessions tend to spread misery around. If this is true, we might expect the "north-south divide" to narrow over the coming months, particularly if sectors over represented in the south (financial services for example) are especially hard hit.

Is the fact that it's about to get "grim down south" likely to lead to a fundamental shift in the economic geography of the UK (as appears to be suggested by some commentators)? I'd make two points. First, this kind of discussion confuses changes with levels. A couple of quarters of negative growth will certainly be highly unpleasant for large numbers of people. A higher proportion of those directly affected may indeed live in the south. But these kind of changes still wont be enough to eliminate the gap in income levels. You would then need the working of the economy to reinforce these initial changes. But theories of economic geography tell us that it can take very large shocks to fundamentally alter existing geographical differences.

That brings me to my second point. Although there is some academic debate on this, the south was probably unusually hard hit in the early 1990s recession as well. A different shock, may be, but it reminds us that we have been here before and that the south is very capable of bouncing back from recession.

Overall, a fundamental long run shift in the economic geography of the UK is not impossible in response to the credit crunch but it does appear to be unlikely.

Monday 13 October 2008

Paul Krugman - Nobel Laureate

Paul Krugman has been awarded the 2008 Nobel Prize in Economics "for his analysis of trade patterns and location of economic activity".

Krugman is actually a pretty controversial character in the (small) world of academic economic geography. When he came up with the theory that lead to the "New Economic Geography", he managed effectively to ignore several decades worth of work in geography and to focus on mechanisms that were considered "old hat". Traditional geographers did not like this one bit.

But to many economists, this one included, Krugman's work was a revelation. Relative to much of the existing literature, Krugman started with individual firms and workers (not "regions") as actors. Economic interactions between firms and their consumers (demand linkages) were put at the core of understanding divergent outcomes. As transaction costs fell, relocation of these firms and works could change regional economic environments leading to different development for initially similar regions. Outcomes could be "path dependent" so that history matters and similar changes need not always lead to the same outcomes. And these outcomes could be sub-optimal in terms of terms of both efficiency and outcomes.

Krugman's work gives us all this in elegant mathematical models that increase our fundamental understanding of the forces that shape economic geography. His theories continue to inspire a generation of economists who are interested in understanding these forces. Together with developments in urban economics, Krugman's New Economic Geography revitalized research in to the nature, extent, causes and consequences of spatial disparities.

There is no doubt he will be controversial choice. He has been a vocal critic of Bush. Non-economists don't like him. Even some "purist" economists might have a problem with the decision. But for those of us interested in the application of rigorous economics to real world problems the award is a very welcome one.