3. International Geographical Peripherality and Competitive Advantage
From the perspectives of both trade and growth, the arguments implying falling international transactions costs broadly provide encouraging lessons for the New Zealand economy. The reason for this is that falling international transactions costs reduce the wedge between export origin (f.o.b.)[2] and destination (c.i.f.)[3] prices, thereby allowing geographically peripheral economies more efficient access to international markets, both in terms of production and consumption. New Zealand businesses will be better able to compete internationally because lower transactions costs will allow them to benefit to a greater extent from the comparative advantage provided by the relatively low domestic factor prices.
This could be manifest in either of two ways. Firstly, New Zealand businesses could charge significantly higher f.o.b. export prices, while still ensuring internationally competitive c.i.f. prices. Under this scenario, although New Zealand’s export demand will remain largely unchanged, the returns to all domestic production factors will increase, thereby increasing New Zealand’s GDP per capita for a given total c.i.f. export revenues. Alternatively, New Zealand firms could limit the growth of f.o.b. export prices in the face of falling international transactions costs, thereby allowing for lower c.i.f. prices in all export locations. The effect here will be a general increase in New Zealand’s f.o.b. export revenues, for given domestic factor costs. Under this scenario, New Zealand businesses will also generate greater returns to all of the domestic factors. In both of these cases, therefore, the returns to the domestic capital employed, the levels of domestic wages, and GDP per head levels in New Zealand will all increase. From the perspective of New Zealand, the only real difference between these two scenarios is that the export trade creation effects are rather differ, and these differences depend on the global price sensitivity of New Zealand’s exports.
In terms of economic growth, the effects of any reductions in international transactions costs depend firstly, on whether such reductions are stepwise or continuous, and secondly on the existence of economies of scale. If any reductions in international transactions costs are simply a stepwise, once-and-for-all phenomenon, geographically peripheral economies will not be expected to experience growth effects which are consistently different from more centrally located areas.
On the other hand, if reductions in international transactions costs are broadly a continuous phenomenon, as would be expected with steady technological progress, geographically peripheral areas would be expected to consistently generate economic growth levels which above those of geographically central economies. This resulting strong growth performance would then encourage in the inflow of production factors into New Zealand seeking higher factor rewards, which itself will encourage further growth. This argument is the basis of the Borts and Stein (1964) and Barro and Sala-i-Martin (1992) convergence models, which were initially applied to the processes of economic integration across the large geographical areas of the USA and EU, respectively.
However, orthodox neo-classical models of economic growth, factor allocation and trade, assume that these convergence processes are more generally applicable to an ever-increasingly integrated world. Consequently, these arguments imply that geographically peripheral economies such as New Zealand will experience a relatively high growth performance as we face steady reductions in international transaction costs. Obviously, the converse arguments also hold in situations where we face steadily increasing international transactions costs. However, given that most evidence tends to suggest that international transactions costs are falling steadily over time, these arguments provide countries such as New Zealand with reasons to be optimistic.
These generally optimistic observations associated with falls in international transactions costs hold as long as the aggregate production functions of New Zealand and its major competing economies experience largely constant returns to scale. However, the ‘new international trade’ (Helpman and Krugman 1985; Krugman and Venables 1990) and ‘new economic geography’ literature (Fujita et al. 1999) suggests that the spatial patterns of economic growth will be quite different, depending on the extent to which varying levels of economies of scale are operative in different locations.
The new international trade and new economic geography literature suggests that if individual economies experience economies of scale, falling international transactions costs will benefit the larger and more centrally-located economies, at the expense of the geographically peripheral economies. The primary reason for this is that these models assume that market size and centrality provides for a greater level of industry diversity within a local area. This local diversity leads to a greater variety of products which are affordable to both local household and industrial consumers, in comparison with other areas.
In microeconomic terms, within the new economic geography schema, the hypothesised outcomes of this phenomenon are that local firms are able to exploit economies of scale and local consumers are able to achieve higher levels of satisfaction than is the case with other less diversified areas. Under these conditions, the new international trade and new economic geography literature therefore implies that high international transactions costs act in manner which is analogous to that of high trade tariffs, in which the peripheral economies are protected from the external competitive pressures of the larger more central economies. In such protected situations, domestic producers are allowed to continue in business, because the high transactions costs and trade barriers rule out the competitive advantages of the larger or more centrally-located external producers.
On this type of argument, generally falling international transactions costs will not be advantageous to New Zealand, because domestic New Zealand businesses will become progressively more open to competition for overseas competitors (Krugman 1996). As such, although the global trading system as a whole will benefit from such falls, the relative distribution of such benefits will not favour New Zealand, unless New Zealand can itself generate significant exhibit economies of scale. These arguments provide countries such as New Zealand with reasons to be rather pessimistic.
In the face of generally falling international transactions costs, the key question therefore raised by these new international trade and new economic geography arguments is, are the major competitor economies of New Zealand more or less likely to exhibit economies of scale than New Zealand? Alternatively, in situations where international transactions costs have increased, is New Zealand in a position to take advantage of the natural geographical concentration effects of such cost increases? To answer these questions it is necessary to discuss economic growth behaviour at much smaller geographical scales and dimensions than are implied by the international trading system; namely that of the scale of the individual country and more particularly, at the scale of the individual metropolitan urban area within the individual country economy.
