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Bridging the economic distance

GreenWatch Desk Opinion 2024-02-11, 10:56pm


Did you know that you can change geography by building a few train lines? By just organizing shipping a little better? Strange as this sounds this is in fact true, and it is what IMEC is all about. The India Middle East Europe Economic Corridor sounds like one of those things that only terminally insomniac bureaucrats could be interested in. And yet for all the narcolepsy it induces in the rest of us, it gives an insight into one of the most basic economic models of all.

There's something called the “gravity model of trade” and it says that trade varies by closeness and economy size. So, two big economies -- including city economies or smaller, not just national ones -- will trade with each other more than two small ones. Even as a percentage of their economies. Also, the closer those two economies are to each other the more trade will happen.
This is one economic theory that has been tested again and again, and empirically, it's entirely true. However there's one thing that is grossly misunderstood about it. This is an economic theory, not a geographical one. So, the distance mentioned is the economic distance, not geographical. This makes a massive difference.
It isn't true that two places which are geographically close trade a lot with each other. There might, for example, be some mountains in the way; or no roads; or it was always much easier, in earlier days, to transport anything bulky by river, or sea, than it was to take it by non-existent roads and bullock carts.
My favourite example of this is that Newcastle and Carlisle are about 80 miles from each other. But Newcastle was trading with London, 300 miles away, from the 1300s onwards and near not at all with Carlisle. Because trading by sea was much, much, cheaper and faster and 300 miles by sea back then was closer than 80 miles by those non-existent roads.
We can add in any similar example we want from other geographies -- trade within the Bengal that became Bangladesh was determined by river routes, not bullock carts after all.
But this difference between geographic difference and an economic one really matters. For example, one of the founding ideals of the European Union was that countries that are geographically close to each other should trade with each other. What the economists were saying is that we should reduce the economic distance between these countries -- lower tariffs and other legal trade barriers. More trade is good, and it makes the people who do it richer.
This is what IMEC is about. Now, while there's all sorts of politics mixed in with this, it's being proposed as an alternative to the Chinese Belt and Road Initiative and so on. Me, I'm entirely happy to leave the geopolitics to those who think that's an interesting thing to ... think about. More trade makes the people richer, more trade is a good thing in itself. So, activities that enable more trade are good in and of themselves.
That the Indian government is promoting this -- ah, well, that's geopolitics, obviously. But if we properly understand distance in this gravity model we can see that it will indeed be beneficial. If reducing transport costs is good, then so is reducing the other economic additions to trade costs. Those paperworks, those tariffs, the sheer difficulty of just doing business across national boundaries, they should be working to reduce those too.
Well, obviously they're not, because logic doesn't really have the same place in politics that it does in economics. It's good and true economic logic all the same and worth emphasizing to any politician you might care to argue with. If reducing economic distance for trade -- those transport links -- is a good thing then why isn't reducing the political barriers to trade, equally reducing the economic distance for trade, also a good thing? 
The answer will be some barrage of obfuscation, denial of base logic, muttering and smoke blowing. But, if you enjoy such things, then why not ask that question of the next politician you meet? Who knows, some of them might become so embarrassed by their arguments that they adopt good sense instead.