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Oxford University Centre for the Environment Gordon L. Clark & Richard Freeman* Oxford University and *Harvard University.

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Presentation on theme: "Oxford University Centre for the Environment Gordon L. Clark & Richard Freeman* Oxford University and *Harvard University."— Presentation transcript:

1 Oxford University Centre for the Environment Gordon L. Clark & Richard Freeman* Oxford University and *Harvard University

2 Oxford University Centre for the Environment 1. Introduction Being interested in urban and regional prospects For reasons of equity and social justice (broadly conceived) As well as for the intrinsic academic questions regarding community development in liberal market economies And, in particular: how are we to conceptualize the local and the global?

3 Oxford University Centre for the Environment 2. Rockefeller-Ford Project Assumed the existence of capital market imperfections in US cities (vis M. Porter etc) Including geographical ‘gaps’ in the map of capital investment As well as neglected rate of return ‘niches’ or opportunities in cities Subject to the usual caveats: information (price and quality) and scale (level of investment).

4 Oxford University Centre for the Environment 3. Intellectual Base-line We recognise the persistence of significant ‘local’ problems (of social welfare etc.) Being partly about poor employment options and future prospects Partly about dis-investment, industrial restructuring, and long-term development Being simultaneously about ‘local’ and ‘global’ capital market dynamics.

5 Oxford University Centre for the Environment 4. New Economic Geography One way to start is with solving the problem is with the NEG, referencing Glaeser Krugman, Scott and Storper, etc. Assuming increasing returns to scale/agglomeration economies As well as path dependence and clusters of innovation providing an inherited history and geography Which in combination provides a rationalé for a differentiated economic landscape.

6 Oxford University Centre for the Environment 5. Virtues and Vices of NEG Breaks with neoclassical assumptions regarding long- term income convergence and equilibrium Provides a story about the past, present, and future of communities Although reliant upon contestable assumptions (including the empirical plausibility of increasing returns) Perhaps only relevant to clusters of innovation: what about the rest of the US, the world, etc?.

7 Oxford University Centre for the Environment 6. Parallel Worlds – Geography of Trade Tangential to NEG, increasing evidence of trade fragmentation—outsourcing and offshoring Though found in Krugman, new insights being generated eg. vertical disintegration of the corporation Recognising changing realities: inexpensive logistics and decreasing ‘threshold’ economies of scale At the limit – implies a truly (fragmented) global economy.

8 Oxford University Centre for the Environment 7. Parallel Worlds – Geography of Finance Tangential to the efficient markets hypothesis, increasing evidence of ‘local’ capital market imperfections (eg. Coval and Moskowitz) Gathering momentum of research, often empirical in impulse rather than “proving “ the EMH Based upon assumptions of market imperfection especially information asymmetries and herd behaviour At the limit – implies a highly fragmented system of global capital markets.

9 Oxford University Centre for the Environment 8. Our Project (this paper) Seeks to reconcile the ‘new realities’ of (fragmented) trade and finance Working from the NEG to a rather different kind of intellectual synthesis allowing for the co-existence of the local and global Where we can be realistic about the opportunities and limits of ‘local’ pension fund investing Without having to necessarily invoke the government to underwrite urban and regional development.

10 Oxford University Centre for the Environment 9. Four Basic Assumptions Information asymmetries are characteristic of market economies (trade, finance, exchange etc.) Resolving asymmetries through search etc depends upon the expected risk-adjusted rate of return Where the co-existence of heterogeneous expectations is a prerequisite for trade and exchange And, in any event, complete information would drive down (to zero?) the rate of return on investment and transacting.

11 Oxford University Centre for the Environment 10. Time and Space Relevant market information is not randomly or uniformly distributed over space and time Agglomeration economies encourage more cost- effective and intensive information management and the search for ‘added value’ Customs and conventions vary over space and time as do national institutions à la La Porta et al. (1998) The production of information is, itself, an industry with markets and intermediaries (promoting very different solutions, local and global).

12 Oxford University Centre for the Environment 11. To Illustrate In The Wealth of Nations, Adam Smith (Book IV, Ch II, p.30-31) poses a problem relevant to today How is trade to be ‘governed’ given the lack of adequate information re. ‘distant’ partners’ motives? Using a simple example—an Amsterdam-based merchant trading fruit and wine from Lisbon with corn from Koningsberg And a set of simple assumptions regarding information, the costs of trade, and SR v LR.

13 Oxford University Centre for the Environment 12. Adam Smith’s Solution He suggests we switch a portion of the Lisbon- Koningsberg trade through Amsterdam (even if expensive) Use the Amsterdam location as a site of information collection re. quality and quantity of commodities, the true market expectations etc. Use the knowledge to impose discipline on the distant partners including the threat of cancellation Subject to, of course, the rate of return--some trade may be so competitive that the Amsterdam solution is not possible (and trade not desirable—staying at home becomes the best option).

14 Oxford University Centre for the Environment 13. Modern Finance I This ‘solution’ resonates with the recent research on the geography of finance (eg. Coval and Moskowitsz) Assuming a differentiated landscape of market information, the value of search intensity, and risk- adjusted rates of return Where ‘Amsterdam’ is not only a trading site but also a dominant financial centre with intermediaries With a pivotal role in the system of European trade is owed to the concentration of investment capital (a role now held by London).

15 Oxford University Centre for the Environment 14. Modern Finance II Notice, two logical implications that follow from this case-study: home bias and risk management As Smith remarked, ‘home bias’ is an inevitable result when information asymmetries reinforce site-specific solutions Equally, Smith’s ‘solution’ is, in the modern idiom, all about enterprise-wide risk management Portfolio diversification, underpinned by secured loans, could accomplish the same result—and generate a growing market in extensive fragmented trade.

16 Oxford University Centre for the Environment 15. Modern Trade Of course, 21 st century trade is far more complex—its really Krugman’s trade theory combined with fragmentation But, there remain important implications from the Smith model—eg. even today, trade is highly sensitive to information asymmetries (vis the map of trade) Could argue that fragmentation is made possible by advanced internal risk management devices plus financial intermediation In fact, could argue that there is a recursive relationship between trade and finance.

17 Oxford University Centre for the Environment 16. Conclusions First, NEG can be reconciled with the geography of finance if the problem with trade is reconceptualized Second, any attempt at reconciliation must focus upon the tension between the ‘local’ and the ‘global’ Third, there is a vital distinction to be made between intensive and extensive networks of finance and trade Fourth, community development prospects should be understood in terms squarely in the middle of these dualisms.

18 Oxford University Centre for the Environment 17. Bibliography Clark, G.L. and D. Wójcik (2007) The Geography of Finance. Oxford: Oxford University Press Coval, J.D. and T.J. Moskowitz (2001) The geography of investment: informed trading and asset prices. Journal of Political Economy 109:811-41 Grossman, S. and J. Stiglitz (1980) On the impossibility of informationally efficient markets. American Economic Review 70:393-408 Jones, R.W. and H. Kierzkowski (2004) International fragmentation and the new economic geography. HEI Working Paper 11/2004. Geneva: Graduate Institute of International Studies.


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