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...n turn limited by the extent of the market. In this approach firms seeking profitable locations will be drawn to locations with good market access and proximity to clusters of related activities, as well as locations with appropriate factor endowments. We show that this alternative view provides a broad brush picture that, in many respects, seems consistent with the historical record. 3 We then turn to look in more detail at several historical episodes. From the nineteenth century we focus on the rise of New-World economies and the development of urbanisation. We confront the central issue of early twentieth century economic history, namely how the United States came to overtake other regions, and argue that insights from new economic geography can shed important light on this change. From the late twentieth century we revisit the East Asian Miracle, the most spectacular shift of the center of gravity in the world economy since the rise of the United States. In pursuing the theme that geography matters for economic development we are consciously swimming against the tide of recent work both in economic history and in growth economics. Economic historians, notably in the new institutional economic history (North, 1990), have stressed the impact of incentive structures on investment and innovation and have argued that divergence stems from the path dependency of institutional arrangements. Endogenous growth models also tend to underline the centrality of microeconomic foundations for growth outcomes (Aghion and Howitt, 1998), while neoclassical growth economists still believe in ultimate (twenty first century) convergence, following a post Industrial Revolution interlude of divergence due to lags in the diffusion of best practice institutions, policies and technology (Lucas, 2000). Our position is that these conventional wisdoms are significantly modified by taking into account the way that changing costs of distance interact with economies of scale to shape the economic geography of the world. A stylised version of this alternative perspective can be outlined as follows. If trade costs are very high then economic activity must be dispersed, while if trade costs are very low then firms will not care whether they are close to markets and suppliers. At intermediate levels of trade costs, however, the likelihood of agglomeration is high. Agglomeration forces operating through linkages across a wide range of activities will cause the world to divide into an industrialized rich 'center' and de-industrialized poor 'periphery' even if there are no differences in institutional quality or economic policy. Over time a number of mechanisms, including falling trade costs and growing world demand for manufactures, will make a new location outside the center become competitive, so industry moves there and it now benefits from agglomeration effects. Following the initial agglomeration phase, development therefore takes the form of enlargement of the set of countries in the 'center'. This is not a process of steady convergence of poor countries to rich ones but rather the rapid transition of selected countries (close to and/or with good transport links to the 'center') from the poor to the rich club. 2. Location and Trade Costs: the historical record. In 1750 more than 50% of the world’s industrial output was produced in China and India, compared to some 18% in Western Europe. The following 80 years saw the Industrial Revolution, with Western Europe’s industrial output more than doubling and that of the UK increasing by a factor of seven. Over the same period industrial production in China and India continued to increase (by around 20%). It is not our purpose to analyse the origins of the industrial revolution but instead to study the changing economic geography of the world from this point on. The technological changes that resulted from the industrial revolution, notably in the form of the harnessing of steam power not only raised European industrial output but also facilitated large reductions in both inland and ocean transport costs associated with the coming of the railroad and the steamship. 4 2.1. Location of production; the three phases. Figure 1 shows the shares of world GDP attributable to major regions of the world economy at selected dates from 1820 onwards, and figure 2 gives shares of industrial production for the same regions from 1750 on. Three main phases are apparent in both figures, although more pronounced for industrial production than for GDP as a whole. The first phase is the rise of the UK and Western Europe as a whole and dramatic collapse of China and India from these start dates through to the latter part of the nineteenth century. This period saw not only a decline of industrial production in China and India relative to the rest of the world but also an absolute fall such that 1830s’ levels were not regained until the 1930s (Bairoch, 1982). The second phase is the rise of North America. Its share of world GDP and industrial output increased most rapidly from the American Civil War to the start of the Great Depression, peaking shortly after World War II. The third phase is revealed in the data for 1998, but has its origins in the post-war 'Golden Age' of growth, namely, the large and rapid increase in the shares of Japan, China and other East Asian countries in world GDP and industrial output.1 These phases correspond first to a concentration of activity in the UK and North-Western Europe (Phase I), and then to two different phases of dispersion, first to North America (Phase II), and then to parts of Asia (Phase III). Figure 3, which reports shares of world population, underlines the tendencies towards concentration especially in industrial production which became apparent during and after the nineteenth century. Whereas in the 1820s China and India accounted for a little over half the world's population and a little under half of world GDP and industrial production, by 1913 Western Europe and North America with about a fifth of the world's population produced over half of world GDP and nearly three-quarters of world industrial output. By 1998, with a rather smaller share of world population, these countries still accounted for well over half of world industrial output while China and India with over 40 per cent of population produced only about 8 per cent of industrial output. 5 Figure 4 reports manufacturing exports (from 1876-80 onwards). Here there is evidence of even more concentrated activity. In the late nineteenth century the UK looms very large with over a third of all exports even though only representing about 2.5 per cent of world population. It was then superseded as the world's leading exporter by the rise of North America that accounted for over a quarter of manufactured exports in 1955 with only about 6 per cent of world population. (Europe looks large in the figure relative to the US, essentially because intra-European trade is reported, in contrast to intra-US trade). The remarkable feature of the last decades of the twentieth century was the rise of Chinese, Japanese and other East Asian manufactured exports, representing a real breakthrough for newly industrializing countries. 2.2. The history of transport costs. While distance remains a barrier even at the start of the twenty first century, the continuing communications revolution has been one of the most outstanding features of the last two hundred years. Table 1 reports on the cost of ocean shipping for selected years since 1750. The period between 1830 and 1910 emerges as the era of very substantial decreases and by the late twentieth century ocean shipping rates in real terms were about a sixth of the level of the early nineteenth century.2 Table 1. Real Costs of Ocean Shipping (1910 = 100) 1750 298 1910 100 1790 376 1930 107 1830 287 1960 47 1870 196 1990 51 Sources: derived using Dollar (2001), Harley (1988), Isserlis (1938) Ocean shipping is only a small part of the story, however, especially for the nineteenth century. This was also a period of spectacu...