Tag Archives: market access

The postman always rings twice: measuring market access and endowment in the German Empire through postal data

It’s all in the Mail: The Economic Geography of the German Empire

by

Florian PLOECKL (florian.ploeckl@adelaide.edu.au) University of Adelaide

ABSTRACT

Information exchange is a necessary prerequisite for economic exchange over space. This relationship implies that information exchange data corresponds to the location of economic activity and therefore also of population. Building on this relationship we use postal data to analyse the spatial structure of the population distribution in the German Empire of 1871. In particular we utilize local volume data of a number of postal information transmission services and a New Economic Geography model to create two index measures, Information Intensity and Amenity. These variables respectively influence the two mechanisms behind the urban population distribution, namely agglomeration forces and location endowments. By testing the influence of actual location characteristics on these indices we identify which location factors mattered for the population distribution and show that a number of characteristics worked through both mechanisms. The model is then used to determine counterfactual population distributions, which demonstrate the relative importance of particular factors, most notably the railroad whose removal shows a 34% lower urban population. A data set of large locations for the years 1877 to 1895 shows that market access increases drove the magnitude of the increase in urban population, while endowment changes shaped their relative pattern.

URL: http://econpapers.repec.org/scripts/search.pf?aus=Florian%20Ploeckl

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2015-04-11. The work by Florian Ploeckl lays in the expanding branch of historical economic geography, which looks at, broadly speaking, the role of geographical factors in regional development. In particular, the author looks at the effect of actual location characteristics on the information exchange and endowment (calculated through two indices) in the German Empire between 1877 and 1895. The empirical model used in the paper uses the indices that describe market access and endowments effects as dependent variables and test which geographic, institutional and cultural characteristics shaped them.

220px-Bundesarchiv_Bild_146-1990-023-06A,_Otto_von_Bismarck

Otto Von Bismarck (1815-1898), First Chancellor of Germany

The paper relies on detailed data on the postal system to measure the diffusion of information across 41 districts in the Empire. The creation, after the German unification, of a common and homogeneous postal system with the same rates across locations allows the author to use postal flows as proxy for “information intensity”.   This measure tells us the level of information exchange for each location considered. The author meticulously identifies business related correspondence for each location by selecting specific types of mail for the analysis and relating it to the general mail. The empirical exercise appears very well engineered and executed.

220px-Kaiserlich

 Kaiserliches Postamt sign, about 1900

The next step is to relate this indirect measure of economic activity to the access to markets for any given location. Following a well-established practice in the discipline, Ploeckl relies on the concept of market potential. Market potential is a measure of the centrality of a given location and can be constructed in two main ways. The first option, when trade volumes among locations are available, is a gravity model. This is the method used nowadays by economic geographers but also economic historians lucky enough to have access to internal trade flows (see Redding and Venables, 2004 for the former and Wolf, 2007 for the latter). This method basically looks at actual levels of trade and derives from these the potential for a location. The second option, used when trade flows are unknown, relies on the methodology proposed by Harris (1954) which uses GDP of the locations weighted by the inverse of distance to calculate the potential levels of trade across the locations given the size of their economies. Examples of this estimation procedure are Crafts (2005), Schulze (2007) and more recently Crafts and Klein (2012). This paper approaches the issue in a very innovative way, escaping the dichotomy that normally characterizes the calculation of market potential. As we understand, neither trade volumes nor regional GDP are available for Germany in this period. Therefore the author relies on the assumptions that “market potential translates in commercial transactions” and that “each transaction causes the same amount of mail” to claim that the measure from step 1 is able to capture the access to markets of the locations. The first assumption is shared with the broader group of scholars that use gravity models for market access and is perfectly reasonable when dealing with trade volumes. The use of quantitative evidence on correspondence to proxy for economic activity is not new in the literature: Crafts (1983) provided GDP estimates based, among the others, on letters per capita. The method proved to be quite misleading applied for instance to the Italian case (Esposto, 1997). Because of the indirect measure used in the paper, the relationship between information flows, market potential and actual exchange is of course much more questionable. However, it must be pointed out that the empirical effort in this paper makes its use of postal data more convincing compared to other more dated attempts.

The paper is also very interesting in that it finds a way to split market access into firm market access and consumer market access. This is a crucial point in the analysis of market forces as the two measures could well be following very different trajectories.

The last step is to calculate an endowment index based on real wages and the trade cost matrix across locations (the details on the methodology are explained in Ploeckl, 2012).

The bottom line results of the paper are that important factors like railroads and coal were important in the location of population (and therefore economic activity) both through the market channel and the endowment channel. The impact of these channels is quantified through counterfactual analysis, leading for instance to a 30% impact of the removal of the railroads on the population level.

Summing up, this paper contributes to a very hot debate on the determinants of the location of economic activity. It does so by finding an innovative empirical method to overcome the chronic lack of data in historical research. The limitations of these indirect methods should not, as usual, be neglected. However, the exercise appears more than reasonable and some features of these papers could find fruitful applications in a variety of other lines of research in historical economic geography.

REFERENCES

Crafts, N., 1983, Gross National Product in Europe 1970-1910: Some New Estimates, Explorations in Economic History, Vol. 20, No. 4, 387-401.

Crafts, N., 2005, Market Potential in British regions, 1871-1931, Regional Studies, Vol. 39, pp. 1159-1166.

Esposto, A., 1997, Estimate Regional Per Capita Income: Italy, 1861-1914, Journal of European Economic History, Vol. 26, No. 3, p.585-604.

Ploeckl, F., 2012, Endowments and Market Access; the Size of Towns in Historical Perspective: Saxony 1550-1834, Vol. 42, p. 607-618.

Redding, S. and A. Venables, 2004, Economic Geography and International Inequality, Journal of International Economics, Vol. 62, No. 1, pp. 53-82.

Schulze, M. S., 2007, Regional Income Dispersion and Market Potential in the Late Nineteenth Century Hapsburg Empire, LSE Working Papers no. 106/07.

Wolf, N., 2007, Endowments vs. Market Potential: What Explains the Relocation of Industry after the Polish Reunification in 1918?, Explorations in Economic History, Vol. 44, (2007), 22-42.

 

 

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Industrial Location and Path Dependency during the British Industrial Revolution

The Location of the UK Cotton Textiles Industry in 1838: a Quantitative Analysis

by

Nicholas CRAFTS (n.crafts@warwick.ac.uk)  University of Warwick

Nikolaus WOLF (nikolaus.wolf@wiwi.hu-berlin.de) Humboldt University

ABSTRACT

We examine the geography of cotton textiles in Britain in 1838 to test claims about why the industry came to be so heavily concentrated in Lancashire. Our analysis considers both first and second nature aspects of geography including the availability of water power, humidity, coal prices, market access and sunk costs. We show that some of these characteristics have substantial explanatory power. Moreover, we exploit the change from water to steam power to show that the persistent effect of first nature characteristics on industry location can be explained by a combination of sunk costs and agglomeration effects.

URL:  http://econpapers.repec.org/paper/heswpaper/0045.htm

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2013-09-13. Nick Crafts and Nikolaus Wolf, who have both provided significant contributions to the literature on industrial location, engage here in the analysis of the UK cotton textile industry. In particular cotton production during the Industrial Revolution was heavily concentrated in Lancashire, the region just north of Manchester. Moreover, this concentration persisted over the 19th century. The two authors are therefore interested in explaining both the original concentration and its persistence throughout time.

The paper presents a solid statistical work. The dataset comprises 1823 cotton mills and covers 148 locations in all of the UK. To explain the employment in textiles across these locations, the authors use information on coal prices, geography, climate and access to markets. All these measures are specific to each location and region fixed effects are included to avoid the omitted variable bias. Firms are assumed to be profit maximizers in their location decisions. The factors that influence the location decisions are considered into two broad groups: the “first nature” characteristics, which are considered exogenous to earlier location choices (i.e. climate) and the “second nature” characteristics which are endogenous (i.e. access to markets). Crafts and Wolf separate these two elements because they are interested in identifying the case of location choices that eventually modify the characteristic of the location itself (in particular market access).

They reckon that access to market can be so important that the cotton industry remained in a location in spite of higher variable costs because these were outweighed by better access to markets. Another way in which past choices can affect current choices is through sunk costs: once an investment in energy production was made in one location, it could hardly be moved to another location. However, it could often be adapted to new technology. The example provided is the switch from water to steam power, during which waterwheels were adapted to steam. This allowed some location that at that point did not have a fist nature advantage, to maintain their industries through path dependence.

hibbert-cotton-machines

Hibert, Platt & Son’s cotton machines.  Illustrated London News, 23 August 1851. 

On the empirical side, the paper uses a Poisson model to estimate the expected number of cotton mills and employed persons for each location as a function of the characteristics of the locations. The main findings are that water power production and number of patents registered increase the likelihood of location; coal prices had a surprisingly weak effect; agglomeration forces had a positive effect on the number of persons employed but a negative effect of the average size of the mills, suggesting that cotton industry was organized in a network of small specialized mills. This is confirmed by anecdotal evidence on Lancashire’s cotton industry. The authors also provide several robustness checks on their data to support their claims.

The paper then moves on to discussing why Lancashire achieved such a high concentration of cotton industries. The two authors explain that the high concentration was the result of a combination of first and second nature geography. To prove this statistically, Crafts and Wolf perform a counterfactual analysis in which they replace each characteristic with the average value of the UK and then impose a 10% change in the variables to compare their effect individually. Doing so, they come up with a “conversion table” that tells us what variation of the x variable is needed to offset a 10% variation of the y variable. The main results are that the location choices were driven both by first nature characteristics such as water power and second nature characteristics such as market access. The persistence of the location is liked to sunk costs and agglomeration economies, which allow some regions to maintain their industries in spite of the original advantage being vanished.

textile

An image of the Lewis Textile Museum in Blackburn, Lancashire.

To conclude, the contributions of this paper are several. First, it makes for the first time use of statistical techniques to explain the location of cotton industries, which were crucial during the British Industrial revolution. Doing so, it contributes to the wider debate about the determinants of the location of industries in general, proposing a methodology based on counterfactuals which allows to compare the relative strenghts of the different factors. Finally, the paper adresses the always ‘hot issue’ of path dependency in location choices, which is faced by any researcher in this particular field. The next step in the research, to which we look forward,  will be to estimate the model as a panel in order to cast more light on the persistence of location through time.