Regional Specialisation Of Markets In Europe - Essay Example

Europe: Regional Specialization And Markets - How Significant Was Market Integration For Growth, And Why Did It Occur? Discuss With Reference To At Least Two Countries. Market Integration For many years the market has been evolving and each day has often been met with the urge to make the market efficient. The urge for efficiency has led to the need to integrate. The reason for integration is for the markets to optimize their competence by maximizing effectiveness of price discovery and order interaction. Market integration is accepted as a principle in the financial market (McCleskey 2004, p97). Market integration is the core thing in any private and public activity. The markets are integrated by private economic elements that act in the interest of the producers, buyers, workers, consumers, traders of the investors. However, these activities have been affected by the current trends in the market. They are either partly impeded or bent in certain ways by the national policies or regulations. The definition of market integration is varied among policy makers and experts and it is based on a criterion of interest or a particular notion. The concept of market integration can be described as an indicator of processes of market inter-relationships that is characterized by tradability and as a result the movement of market prices to one side. The concept of market integration can also viewed as the outcome of the inter-market processes that are measured by the arbitrage conditions. A general definition of market integration is the outcome criterion where the existence of ideal competitive equilibrium between markets ensures that the markets that take full advantage of the price differences are off the market. Market integration requires the movement of goods and information across the time, form and space (Isaac 2007, p7). Thus, market integration processes are described by complex interactions between the private and public activities in respect to the market expansion (Pelkmans 1984, p2). The purpose of market integration is to remove national hindrances and it depends on transaction costs, political costs and transport costs. Regional Specialization As a region evolves in its transport sector, the impact on the regional economy is quite significant. The regional economy is impacted in the form of specialization. The changes in transport linkages, web and flow generate a change of the land pattern. Thus, transport changes have a comparative advantage that may bring about regional specialization. Regional specialization begins when there is transport linkage between two or more cities. Comparative advantage would then exist and one of the cities would develop its potential for high productivity in a certain product which would then expand in that city. The same scenario occurs for the other cities. Productivity differentials develop and there is emergence of price differentials and eventually trade begins. The key thing in regional specialization is the transport costs and price differentials (Gauthier, O’Kelly and Taaffe 1996, p47). There is a close relationship between the regional specialization, transport costs, and market areas. When the transport cost increases, the regional specialization tends to increase. When the transport cost is low, the regional specialization reaches its optimum level. The size of the market plays a crucial role in this scenario. When the transport cost decreases, the size of the market area increases and the number of market areas in a certain area decreases when the transport cost decreases. When the transport costs are high, the regional specialization is at its minimum and the area is thus characterized by a huge amount of market areas (Gauthier, O’Kelly and Taaffe 1996, p51). Significance of Market Integration in Europe and why it occurred Great discoveries of new trade routes in the late middle ages and the following centuries led to a major change in the European trade routes. In the 16th century, Europe was capable of establishing international trade through the ocean and they established a regular, direct and growing trade along the Atlantic and Indian Ocean routes with the Asians and Americans. The trade was triggered by increased differentiation in resources bequests (Crouzet 2001, p.50). There is not enough data to prove whether market integration progressed between the late middle ages and the 1800s. This is due to poor market integration at that period and the difference in prices of the same commodity in closely located areas. The evidence on pre-modern Europe is poor because the data on prices give a different reference to the same commodity and quality. In cases where the prices refer to the same kind of good as in cereals, the prices series differs and thus not reliable. Any improvement in the market relations could be as a result of the impact of the improvement of the quality of the available series of data (Malanima 2009, p190). Grain Prices As predicted by Malthus, the population of Europe was growing very fast and by 1730, the prices and rents were increasing at a faster rate. However, the people worked very hard to retain their standards of living and thus the emergence of industrial revolution. The economic restrictions imposed on food supplies were loosened. Thus between 1709 and 1710, there was no famine due to improved market integration, improved transport systems and interventions by the government. Introduction of new crops such as potatoes increased the food supplies and contributed to the maintenance of living standards in the population. Evidence (passage through the Sund) show that Western Europe was becoming less dependent on grain imports, a sign of the increase in its agricultural output. From the recent data, grain production in France increased concurrently with the general population from 22 million in 1700 to 28 million in 1789. This is attributed to the small improvements that were as a result of population pressure. In Britain, the scenario was different. Grain production growth was slower than the general population. However, agricultural improvements were significant than the neighboring nations. The slow grain growth made Britain to become an importer of grain; in the mid 18th century Britain was a great exporter of grains (Crouzet 2001, p92). Transportation Technological change brings about the decline in the transportation costs and other costs related to spoilage and storage. A decrease in freight cost is a major cause of price convergence and trade growth as seen in international and intercontinental markets. Market integration in the 15th century may be attributed to the three masted large water vessels. These vessels reduced the cost of transportation and thus opened an opportunity for long distance trading. After the 15th century, these technological changes remained limited. Some historians argue that the freight rates during the early modern eras in Europe do not reflect a significant decrease in the transportation costs. Freight costs and the commodity prices went simultaneously from the 14th century to the 18th century (Hatton, O’Rourke, Taylor and Williamson 2007, p61). It is worth noting that the community may have played a big role in the expansion of markets during the pre-modern Europe. The argument is that the pre-modern Europe indicates a closer relationship between the markets and communities in the process of development. A certain system of inter-community integration existed and was based on the enforcement of intra-community contract that saw the expansion of markets from the 11th to 14th century in Europe. The period was characterized by the impersonal exchange despite the legal system lacking for the transacting individuals. The Western Europe witnessed market integration and trade expansion as well as the reliance of contracts for future delivery, maritime insurance, credit and negotiable securities. The political system in France and Britain was conducive for the adoption of institution based Individual Legal Responsibility rather than the community based system. Community based system led to the trade expansion and the growth of the merchant community. The Individual Responsibility System could not thrive in Italy because of the political fragmentation (Aoki and Hayami 2001, p6). Regional Specialization in the Pre-Modern Europe The early modern growth proved very difficult to sustain in Europe. The regions and cities may have experienced a remarkable level of technological progress but the growth could not be sustained by the European nations at that period. The benefits if any could not be reflected in the economy. It is important to note that the pre-modern Europe was dominated by near-stagnation and regional divergence. Constraints may give a clue to the nature of growth in the pre-modern Europe. Economic growth during that period was limited by the lack of technological advancement, low level of specialization and the small size of the high-productivity niches. Any fluctuation greatly affected the merchants and traders profits. The behaviors of the pre-modern entrepreneurs are described to be that of risk avoiding rather than profit maximization, conspicuous consumption rather productive investment and leisure preference (Prak 2000, p90). The commercialization of the economy was determined by two forces; the central government and the commercial enterprises. The central government sought to acquire the village level economic resources and the commercial enterprises aimed at lowering the costs of the sources of production. The lowering of the business costs was very vital in the trading system. The Dutch trading system specialized in the bulk trading and the other major states were keen on formulating empire-building policies. These forms of trading systems offered logistic and financial needs of the states and vital economies of scales to the merchants and the bankers and these were carried over to the rest of the economy. In the 16th century, the low prices of products in Eastern Europe were brought relatively closer to the prevailing prices of the western and southern Europe (Vries 1976, p246). Some of the economies like the Spain failed to adapt to the new economic environment; to reduce the costs of its products due to the economic expansion. The failure is attributed to the failure of Habsburg imperial policy. It is worth noting that Spain found it difficult to maintain the world empires. It was clear that for her to succeed she must sacrifice economic flexibility and competition (Vries 1976, p249). The need for regional specialization is well illustrated by the French economy expansion in the Atlantic port cities. The cities offered an economic network with other countries other than the France nation alone. The cities prospered through the expansion of the Atlantic economy. However, the Seven Years War was major blow to the French economy (Vries 1976, p251). Conclusion The market integration during the pre-modern Europe was very important for the growth of the nations’ economy. The transition to industrial revolution was not smooth as it was affected by the sudden growth of economy and the inability of the governments to sustain the population and the economy. There is no much evidence to dictate if there was actual growth in the market integration because of the differences in prices of the same commodity in closely located areas. Regional specialization may have occurred but to a small extent. Most nations in the Europe Diaspora like France could not sustain the newly acquired cities. The reasons for market integration could have resulted from the population pressure and the urge for the population to sustain their living standards. References Aoki, M. & Hayami, Y. (2001) Communities and markets in economic development. New York, NY: Oxford University Press. Crouzet, F. (2001) A history of the European economy, 1000-2000. Virginia: University of Virginia Press. Gauthier, H. L., O’Kelly, M. E. & Taaffe, E. J. (1996) Geography of transportation. Upper Saddle River, NJ: Prentice-Hall, Inc. Hatton, T. J., O’Rourke, K. H., Taylor, A. M. & Williamson, J. G. (2007) The new comparative economic history: Essays in honor of Jeffrey G. Williamson. Cambridge, MA: MIT Press. Isaac, A. (2007) Market intergration analysis and time series econometrics – conceptual insights from Markov-Switching models. Dr. sc. Agr. Dissertation, Georg-August-University of Gottingen (Germany). Malanima, P. (2009) Pre-modern European economy: One thousand years (10th – 19th centuries). Danvers, MA: BRILL. McCleskey, S. (2004) Achieving market integration: Best execution, fragmentation and the free flow of capital. Oxford, UK: Butterworth-Heinemann. Pelkmans, J. (1984) Market integration in the European Community. Hingham, MA: Springer. Prak, M. R. (2000) Early modern capitalism: Economic and social change in Europe 1400-1800. London, UK: Routledge. Vries, J. D. (1976) Economy of Europe in an age of crisis, 1600-1750. Cambridge, MA: Cambridge University Press. Read More