Saturday, November 15, 2008

The triumph of Krugman’s Economic Geography over Porter’s Industry Clusters

(WARNING: Readers of the following may experience minor bouts of dizziness resulting from a re-balancing of mental perceptions of what governments can and cannot do. These symptoms should ease after a day or two. Should they persist, consult any handbook on new international trade theory for relief.)

He is probably the foremost economics blogger to win the Nobel Prize for his theoretical work on international trade and economic geography. Princeton Professor, Dr Paul Krugman in a succinct, yet elegant manner, explains both the sectoral and spatial implications of global production, something that Porter attempts with 800+ pages but fails at achieving the same level of clarity.

Both men began their work at relatively the same period in the late 70s. Of the two, it was Porter who gained prominence and notoriety in the speaker’s circuit for his depiction of competitive forces, which can be regarded as industrial organization for dummies.

While Krugman sought to explain the specialization of regions in producing certain goods deductively through mathematical reasoning, Porter used induction, studying specific cases of concentrated clusters of industry activity. The result is that Krugman provides a policy tool that is easily wielded unlike Porter’s bulky analysis.

Mercantilist Revival

Applied to the firm, Porter’s notion of strategic competition has its use. But when public policy tries to appropriate the same approach to cities, regions and countries, it loses validity according to Krugman. In fact, he calls those who seek to improve the competitiveness of a place to the detriment of all others Mercantilists.

The notion that we can drive up exports by competing as firms do through Strategic Trade Policy is beset with all the pitfalls of selective government intervention. Although it may have had a few instances of success, when applied more broadly the impacts are too minute, while the chances of getting it wrong and the costs associated with failure are too big to ignore.

Porter takes us through several hundred years of history in which nothing is guaranteed to reiterate even if conditions could somehow be duplicated today. Around the world, there are thousands of government supported science parks and export processing zones intended for cluster development, but a few successful ones truly produce value creating innovation. They are usually informal networks that came about more from benign neglect than through selective intervention, i.e. the software hubs of Bangalore India did not have a decent ICT infrastructure during its genesis.

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