Page 130 - Global Political Economy_Understanding The International Economic Order

NEW ECONO MIC TH EORIE S
inequalities among nations. Thus, the new growth theory implies that
the uneven growth ofnational economies, rather than their conver-
gence, is the characteristic pattern ofthe global economy.
To summarize, the new growth theory has important implications
for political economy and for the structure of both international and
domestic economies. It implies that the rate ofeconomic growth in
advanced economies need not decline, convergence between rich and
poor is not automatic, imperfect or oligopolistic competition will ap-
pear in many industries (especially high-tech industries) due to in-
creasing returns, and government policies can have a major and posi-
tive impact on an economy’s long-term rate ofeconomic growth. If,
as the theory assumes, there are increasing returns to scale, economies
do not inevitably reach a steady state ofeconomic growth; rather,
deliberate policy decisions by governments can encourage continued
capital accumulation and result in a higher rate ofself-sustaining eco-
nomic growth. 30

The New Economic Geography
Another new theory important to the study ofinternational political
31
economy (IPE) is “the new economic geography” (NEG). The cen-
tral question addressed by NEG is, Why do economic activities, espe-
cially in particular industries, tend to be heavily concentrated in cer-
tain geographic locations—cities or regions—and why do these
concentrations generally persist over very long periods? Indeed, the
existence and endurance ofcertain regional concentrations ofeco-
nomic activities provide a startling aspect ofthe geography ofeco-
nomic life. Regional economic clusters and their persistence cannot
normally be explained by the neoclassical emphasis on factor endow-
ments. Although the principle ofcomparative advantage argues that
the location ofan industry will be determined principally by factor
endowments, factor endowments do not and cannot explain the loca-
tion ofmany important industries. Although NEG does not deny the
relevance ofcomparative advantage or the economics oflocation, it
does argue that noneconomic factors, path dependence, chance, and
cumulative processes frequently account for the origins and concen-

30
Ibid., 571.
31
This section is based on Krugman, Geography and Trade, and other writings by
Krugman. Many ofthe key ideas on the spatial nature of economic activities have long
been stressed by noneconomists, especially regional geographers. Two ofKrugman’s
major contributions were to explain spatial concentrations through the use ofa model
based on economies ofscale and to introduce these ideas into the mainstream ofeco-
nomics.
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