“The World is Flat” claimed Pulitzer Prize winner Thomas Friedman, in 2006. Citing the role of communication and transport space-shrinking technologies, Friedman argued that geography mattered less than ever before in the global economy. Similarly, a few weeks ago, International Trade Secretary, Dr Liam Fox, declared that we live in a “post-geography trading world”. So are they right: is geography now an insignificance?
In 1962, Dutch Economist Jan Tinbergen developed an economic model known as the ‘gravity model of international trade’. Tinbergen argued countries are like planets in the solar system: attracted to one another in proportion to their size and proximity. Hence, the model uses a ‘gravity equation’ (based on Newton’s theory of gravitation) to predict trade flows from one country to another. It states that you get more trade flows between larger countries as well as countries that are closer together. Over the years, empirical trade data collected suggests that the model largely holds true. In other words, geography still matters when it comes to international trade.
One of the biggest reasons why some individuals believe geography is irrelevant when it comes to the economy is because of the growth of the Internet. Individuals from around the world can communicate and ‘trade’ regardless of physical distance; space has been eroded in that sense.
But the internet is underpinned by extensive infrastructure networks and data centres. These data centres require vast amounts of electricity, and this demand fluctuates throughout the day. Hence, the most suitable form of power generation is hydroelectric. Electricity production of this kind, however, generates great amounts of heat, which requires huge volumes of cooling water. Thus, data centres have their own locational requirements illustrating geography still matters.
Geography also matters for populations. In 2011, the total global population reached a remarkable milestone of 7 billion people, and the distribution of global population growth is highly uneven across time and space. If UN predictions hold true, virtually all the world’s population growth until 2030 will be captured by cities. Alternatively, similar predictions estimate that the majority of the developing world will be urbanised by 2050, as will almost 90 percent of the developed world.
Equally, economic activity is highly uneven across locations; global development is clustered, spiky and concentrated. Consider, the City of London, one of the world’s largest foreign exchange market resides here. One-fifth of the world’s foreign equity market is listed in the City. And the list of large companies in law, finance and professional services who choose to have their HQs here includes giants like Aviva, Unilever and Prudential.
Economic activity is clustered partly because of ‘traded interdependencies’, i.e. cost savings resulting from the clustering of firms, suppliers and consumers in one place. For example, reduced transport costs if two firms near each other have a shared supplier. ‘Untraded interdependencies’ are also very significant; these are the intangible benefits of economic clustering such as the growth of a pool of specialised labour, networking opportunities and knowledge spillover effects. The spatially uneven nature of economic activity thus serves to illustrate that geography still matters immensely in the global economy.
It is important that we see technology as an enabler of economic activity, and do not succumb to technological determinism; many factors are restructuring the global economy, not just technological change. Geography matters, and it’s delusional to think otherwise. Yet, some scholars and commentators continue to endorse lazy analysis: ‘geography no longer matters in the 21st century’. In reality, globalisation is transforming the way that geography matters, as opposed to making place irrelevant.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of The Social Jungle.