The capitalist process of capital accumulation, through the production and distribution of manufacturing and service, takes place in cities and more and more attracting people and firms to cluster in mega-regions (urban clusters) and urban corridors (“linear systems of urban spaces linked through transportation networks”). These urban configurations are “becoming the new engines of both global and regional economies”. (UN-Habitat, 2010, p.55).The forces that lead to agglomeration are usually referred to as agglomeration economies. This essay presents an overview on the impacts of agglomeration economies in the development of cities, including aspects from capital accumulation.
Agglomeration economies: a theoretical framework and its relation with cities
The concept and implication of agglomeration economies is inextricably linked to the capitalist system process of capital accumulation. Since 1776 when Adam Smith published The Wealth of Nations demonstrating activities which exhibit increasing returns to scale, the notion derived from the scale economies - the reduction in unit cost as the size of a facility and inputs increase -, has permeated the studies on productivity and economic growth.
Almost naturally, entrepreneurs are driven to exploit economies of scale in production both internally and outside the company. Internal scale economies - within firm - means the cost advantages that a company receives for production in large plants by reducing average costs and by purchasing inputs at volume discounts. Whereas external scale economies, also known as agglomeration economies, are considered the benefits of scale that arise in the environment outside of a firm or industry and may be recognized through the localization and urbanization economies.
Thereby, localization economies are the forces acting on firms in a single industry together. It arise from the existence of a large number of companies in the same industry and the same place, taking advantage of spatial proximity and immediate access to competitors of the same sector, allowing firms to stay abreast of market information in negotiating with customers and suppliers. In contrast, the economies of urbanization arise from a larger number of different industries in the same place, so that the forces promoted by the economies of urbanization causes firms to locate near to one another.
Therefore, agglomeration economies are the “economic forces that cause firms to locate close to one another in clusters ” (O´Sullivan, 2007, p.34). The benefits of clusters, identified by the pioneering Alfred Marshall (1920), are recognized nowadays as localization economies. Among the advantages were access to a pool of specialized workers; quick access to supplies of inputs; and access to knowledge relevant for the firm.
In fact, these three main benefits of agglomeration externalities are responsible for generating localization and urbanization economies. In turn, agglomeration economies – through input sharing; labour pooling coupled with skills matching; and knowledge spillovers – generate higher productivity, lower production costs, access to new markets and technologies, increasing the bargaining power and exchange of experience, contributing to the development of private sector (Fernandes, 2008).
Additionally, a growing empirical literature has established that the spatial concentration of manufacturing activity enhances productivity and growth of firms, contributing to the generation of employment and income. So that, a self-reinforcing process of agglomeration, that begins with the expanding local market further raises industry productivity.
Yet, agglomeration externalities may also affect negatively the development of cities, because of diseconomies. Cities exist because they are areas with high levels of productivity, which might occur because people come to places that are innately more productive or because density itself enhances productivity because of agglomeration economies (Glaeser and Gottlieb, 2009, p.20). In this sense, from the figure below, Martin, P. et al (2008) identified that the relationship between productivity gains and agglomeration is bell-shaped and it is possible to estimate the peak agglomeration that maximizes the productivity gains.
Figure: Productivity gain and agglomeration
Source: Martin, P. et al, 2008.
Thus, although agglomeration provides productivity gains, affecting positively the development of cities, there are also diseconomies or congestion costs, such as the saturation of transport infrastructure, rising land rents, pollution, etc., which, somehow, must prevail at some level of agglomeration.
Agglomeration economies and its impacts on cities and capital accumulation
One may consider that maintenance the level and quality of the firms’ production, as well as attracting new businesses - to generate positive consequences in offering jobs and income - must be a major concern for local governments. However, the way cities may organize their local policies to maximize productivity gains and block the drawbacks generated by the diseconomies of agglomeration is still a huge challenge for local governments.
Especially because the balance between agglomeration economies and maximization of gains from productivity, not only depends on regulations by governmental public policies, through the improvement of the infrastructure system, for example. Instead, the scenario of attracting investments to particular cities with higher agglomeration economies shapes the profile of the hierarchy of cities protagonists in the development and production of manufacturing, services and capital accumulation, the basis of the capitalist system. Therefore, it is possible to observe the effects of agglomeration economies in cities across the micro and macroeconomic scope.
The micro and macroeconomic circumstances upon the problem of agglomeration economies in metropolitan regions is interpreted by Harvey (1989, p.8) from the observation of how productive investments themselves articulate to generate economies and its relation to specific territories. According the author, “the production of goods and services is often dependent not on single decisions of economic units (such as the large multinationals to bring a branch plant to town, often with very limited local spillover effects), but upon the way in which economies can be generated by bringing together diverse activities within a restricted space of interaction so as to facilitate highly efficient and interactive production systems”.
Certainly, the urban hierarchy, as well as the imbalance of production and trade relations between North and South contributes in shaping the macroeconomic scenario of capital accumulation, which impact in the existence of agglomeration economies of regions and affect the development of cities. Urban hierarchy describes and explains the dynamics of production, distribution, exchange, consumption and financial urban networks (Rosenthal and Strange, 2001).
And traditionally, the model of North-South trade and economic growth generates inequalities, which impact negatively in the exploration pattern of agglomeration economies in cities in South. As explained by Dinopoulos and Segerstrom (2006), “both innovation and imitation rates are endogenously determined as well as the degree of wage inequality between Northern and Southern workers. Northern firms devote resources to innovative R&D to discover higher quality products and Southern firms devote resources to imitative R&D to copy state-of-the-art quality Northern products”.
In fact, both processes - formation of urban hierarchies, as well as the production and trade relations between North and South - are complementary and help in explaining the capital accumulation and the consolidation of mega-cities. In these areas firms are clustered (in one or more industries) and the agglomeration economies are constantly reinforced, which is vital for the capital accumulation. Therefore, it is possible to affirm that the pattern of accumulation of capital between the North and South, which impacts in the formation of urban hierarchy, affects the development of cities and drives where foreign direct investment takes place, facilitating or hindering the existence of agglomeration economies in cities.
In the microeconomic aspect, one may consider that the benefits of high economic growth of certain regions, provided largely by the positive effects of business clusters and agglomeration economies, are not necessarily shared by all residents, especially in large cities in developing countries, starting by the income inequality, in which it is generated mainly by the disparity in human capital accumulation.
The highly competitive nature of the land market has impacted cities rather negatively, driving poor people, as well as firms, to suburbs, resulting in long commuting distances. Indeed, the fact of insufficient capacity of public policy from local governments - especially housing policy focused on low-income population and business allocation policy in special central zones in revitalized areas - contributes to the swelling of the periphery, outside the formal city, where infrastructure is deficient, with people thronging the slums and the reproduction of squatter settlements.
As consequence, it is increasingly necessary efficient transit systems, for moving people and goods from the periphery to central areas, which many global mega-cities lack. This generates heavily congested traffic, noise and air pollution, impacting on the costs of transport and on health and severe long-term impact on environment. In fact, “high concentrations of activities in mega-cities also put infrastructures and services under severe strain” (UN-Habitat, 2010, p.57).
Conclusion
The theoretical literature on the micro-foundations of agglomeration economies has been demonstrated that agglomeration economies can arise from labour market pooling, input sharing and knowledge spillovers, which are the forces that influence the formation of clusters.
The process of clustering has increased the foreign direct investments (FDI) in regions where have large agglomeration economies. It has transformed these territories at unimaginable speeds. FDI in developing countries, especially in transport system infrastructure, are one of the main factors in this urban shift process. As commented by an UN-Habitat document (2010, p.55), “urban corridors are changing the functionality of cities and even towns both large and small, in the process stimulating business, real estate development and land values along their ribbonlike development areas. They are also improving inter-connectivity and creating new forms of interdependence among cities, leading to regional economic development growth”.
This process also causes diseconomies. One may consider that mega-regions and urban corridors are creating a new urban hierarchy, with significant impacts in the way cities develop. Especially relating to the offering of jobs and production, between different regions, but also with respect to the costs generated by the agglomeration of people and firms to the environment.
In conclusion, the scope, range and complexity of issues faced by these regional urban systems require innovative coordination mechanisms for urban management and governance.
Reference List
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UN-HABITAT 2010. The state of Asian cities 2010/2011. Fukuoka, Japan. Retrieved on January 02, 2012. http://www.unhabitat.org/pmss/listItemDetails.aspx?publicationID=3078
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