Agglomeration and Market Interaction∗

The most salient feature of the spatial economy is the presence of a large variety of economic agglomerations. Our purpose is to review some of the main explanations of this universal phenomenon, as they are proposed in urban economics and modern economic geography. Because of space constraints, we restrict ourselves to the most recent contributions, referring the reader to our forthcoming book for a more complete description of the state of the art. Although using agglomeration as a generic term is convenient at a certain level of abstraction, it should be clear that the concept of economic agglomeration refers to very distinct real world situations. At one extreme lies the core-periphery structure corresponding to North-South dualism. For example, Hall and Jones (1999) observe that high income nations are clustered in small industrial cores in the Northern Hemisphere, whereas productivity per capita steadily declines with distance from these cores. As noted by many historians and development analysts, economic growth tends to be localized. This is especially well illustrated by the rapid growth of East Asia during the last few decades. We view East Asia as comprising Japan and nine other countries, that is, Republic of Korea, Taiwan, Hong