Lecture at the Faculty of Economics, Sriwijaya University on May 24, 2022

What can we learn from spatial

economics? Implications for
regional development
Nobuaki Hamaguchi
Research Institute for Economics and Business Administration
Kobe University
What is spatial economics?
• SPACE – THE FINAL FRONTIER in economics?
• Too obvious to argue its importance: We make important decisions
about locations everyday! Economic development has always been
geographically uneven.
• But researches in economics had ignored the space: Where firms are
located and people live and commute to work; how goods and services
are traded across locations?
• Because the space presents complex problems to solve: How do we
characterize an “equilibrium” or multiple “equilibria” in a space?
• Spatial economics deals with bringing location, transport, and
land into economics. (Proost and Thisse 2019)
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Which issues are addressed in spatial economics?
(Proost and Thisse 2019)
• Why are economic activities unevenly distributed across space at different
spatial scales?
• Does the steady drop in transport costs since the mid-nineteenth century,
compounded by the near-disappearance of communication costs, imply
that distance and location have disappeared from economic life?
• Why do lasting and sizable regional disparities exist in many countries?
• Why do firms locate in areas where labor and land are expensive?
• Does building interregional transport infrastructures help to reduce
inequality across space?
• Why do cities exist and why do they differ in size?
• Why are workers better paid and housing more expensive in large than in
small cities?
• Are workers sorted by skills across cities?
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Why we should care about spatial economics?
• Both transport and communication cost have dropped
significantly. Then, does the space still matter?
• Economic activities are still, or even more concentrated in
limited locations in the world, promoting the emergence of
global metropolises.
• What can people be paying Manhattan or downtown Chicago
rents for, if not for being near other people? (Lucas 1988)

• Transport, location, and land are essential factors to understand

our economic life and to draw implications for policies.

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 How is a spatial equilibrium established?
• Spatial equilibrium is a state in which no consumer
(producer) can improve his/her welfare (increase
profit) by changing a location.

• Spatial equilibrium arises from the balance of

opposing forces: the agglomeration force and the
dispersion force. It forms a stable spatial structure.

• In this way, a spatial structure is understood as the

result of self-organization from economic
interactions in the market, but not determined only
by external factors (natural geography and history,
etc.)

• Hence, a hierarchical spatial structure with the

“core” and the “periphery can emerge on a
featureless plane.

Fujita, Hamaguchi, and Kameyama (2021) 4

 How is a spatial equilibrium established?
Agglomeration forces are generated by
the synergetic effect of diversity and
positive feedback associated with scale
economy, leading to a concentration
• Consumption
• People/knowledge
Diversity
in • Intermediate goods
• Infrastructure

Home market effect Price index effect

(producers seek better (consumers seek
accessibility to large Mutually transport cost saving to Dispersion forces are derived
number of consumers)
reinforcing in the
presence of
buy all available goods) from competition on land and
Scale economy
transport cost
Taste for diversity other immobile factors, which
cause congestions.
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Fujita, Hamaguchi, and Kameyama (2021)
 How is a new spatial equilibrium self-organized?
• The spatial structure will be affected by
gradual external changes but it will be
maintained (lock-in) until the external
environment change reaches a critical
level and disbalance the agglomeration
and dispersion forces.
• Large-scale external shocks can trigger
a catastrophic change.
• The spatial structure will become
instable and transit to a new structure.
The choice of new structure is
constrained by the previous structure
(path-dependence).
• This structural transformation continues
uninterruptedly. Fujita, Hamaguchi, and Kameyama (2021)6
 Transformation of Japanese spatial structure from
tri-centric Pacific Belt to Tokyo monopolar system
• Strong population • Moderate
Environmental changes from growth in rural area population growth • Population decline
• Demographic dynamics & intense mobility • Manufact. export and aging
to urban centers from rural area • Maunufact. hollowing-
• Industrial structure • Industrialization • Infrastructure out and service/
transformation along the Pacific development knowledge economy
• Transportation Belt • Medium economic • Low economic growth
• High economic growth
infrastructure development growth

Tokyo monopolar concentration

Concentration of highly
Concentration of
educated in Tokyo area
HQs in Tokyo area = wider income gap

External shocks from

• Yen evaluation
• Great East Japan
Earthquake
• Covid-19 Pandemic

Fujita, Hamaguchi, and Kameyama (2021) 7

 50 km radius
1955 2000

Tokyo Special
Districts Zone

Municipal shares of workers commuting

Source: Tani (2007) based on population census
to the Tokyo Special Districts Zone 8
General implications from spatial economics
As the transportation and communication technology develop
1. Economic activities agglomerate at the country-level
2. They disperse to a wider area at the local-level
3. These processes develop concomitantly.
4. If the process 1 does not occur, the country lacks a density necessary
for higher productivity
5. If the process 2 does not occur, the agglomerated area suffers
productivity (amenity) loss due to congestions and faces a limitation
for further growth.

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The 4 quadrants
story for Indonesia
Annual growth
Initial income and economic growth 2010-2021
10%

9%
Agglomeration economies
Initial income and economic growth 1974-2004
8%
are relevant in Indonesia

7%

6%

Jakarta
5%

4% Kepulauan Riau

Papua Barat
3% Papua
Source: Hill, et al (2008) Riau Kalimantan Timur
2%
Observations:
• Regional convergence overall. 1%
• Continuing agglomeration to the core in Jakarta.
• Manufacturing investment in Riau Islands 0%
• Slumping petroleum economies? 0 20 40 60 80 100 120
• Nickel is hot in Sulavesi?
• Disaster impact in Ache? 10
Implications for regional policy in local areas
• Any attempts to de-concentrate counter to prevailing agglomeration
forces (minus-sum policies) are not productive.
• Reduction of migration cost increases productivity. Bryan and Morten
(2019) found that reducing migration barriers in Indonesia to the US
level leads to 7.1% productivity boosts.
• Cities tend to grow above optimum sizes because of lock in effect. If
agglomeration diseconomies are relevant, regional policies to
mitigate market failures is justified.
• Beyond market failures, regional policies can play a positive role to
enhance innovation, home-market effect, and price-index effect by
linking directly to growing external demand and knowledge
resources.

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The Uono-tana shopping arcade, Akashi City
• 350m shopping street with
roof top
• 400 years of the history of
local fish market
• 100 small shops and
restaurants
• Including 10 Akashi-yaki
shops on this street (out of
70 shops in the city)
Kobe
Akashi Osaka

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Akashi-yaki
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Discussion – Diversity is a key!
• Tourists are attracted by the diversity in seafood of Akashi City.
• Akashi City is also a part of the diversity of attractions in the
Kansa Area connected with a developed regional train
network: Kyoto (history and culture); Osaka (shopping and
entertainment); Kobe (higher-end gourmet and hot spring); and
Himeji (the most beautiful castle in Japan)
• Localized greater diversity enlarges demand (price index effect)
• Businesses and employment are sustained by the strong
external demand (home market effect).

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Jalan Mujahiddin
Palembang

A similar exemple
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References
• Bryan, G. and Morten M. (2019) The aggregate productivity effects of internal migration:
Evidence from Indonesia, Journal of Political Economy 127:5, 2229-2268.
• Fujita, M. Hamaguchi, N, Kameyama, Y. (2021) Spatial Economics for Building Back Better: The
Japanese Experience, Springer.
• Hill, H., Resosudarmo, B. P. & Vidyattama, Y. (2008) Indonesia’s changing economic geography,
Bulletin of Indonesian Economic Studies, 44:3, 407-435. DOI: 10.1080/00074910802395344
• Tani, K. (2007) Changes in migration and commuting flows in Japan’s major metropolitan areas
since the Taisho era, Nihon Toshi Shakaigaku Nempo 25, 23-36.
• Lucas, R.E. (1988). On the mechanics of economic development. Journal of Monetary Economics
22, 3-14.
• Proost, S., and Thisse, J.-F. (2019) "What can be learned from spatial economics?" Journal of
Economic Literature, 57 (3), 575-643. DOI: 10.1257/jel.20181414
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