NEW EHES Working paper: “Market potential estimates in history: a survey of methods and an application to Spain, 1867-1930”

The distribution of economic activity in Spain by night.

New Economic Geography (NEG) stresses the role of accessibility as an explanatory factor of the spatial 
distribution of economic activity. According to this theoretical framework, when transport costs decline, production (mainly that characterised by increasing returns and imperfect competition) will tend to agglomerate in locations with a better access to demand. Hence, from a regional perspective, a rise in inequality may be expected to occur during the early stages of economic growth. To empirically test this prediction and others emanating from NEG models a sound measure of accessibility is needed. Economic historians have increasingly contributed on this topic seeking to explain a variety of experiences ranging from Victorian Britain to interwar Poland, the Habsburg Empire or the US at the turn of the 20thcentury. In this study, the focus is placed on Spain, a country characterised by large regional disparities still today. Here, accessibility for the Spanish provinces is calculated using the Harris market potential equation, an indicator with a long-standing tradition among geographers and economists.

The period under study, going from 1867 to 1930, seems particularly relevant. First, industrialisation was going through the early stages. In addition, transport costs fell significantly leading to an increasing integration of the domestic market. The gradual expansion of railways (with a radial design of the network) and the improvement in coastal shipping navigation with the transition from sail to steam had a notable impact on the decline of transport costs. This was particularly important in a mountainous country like Spain where roads where scarce and in a poor state of conservation and which lacked of navigable rivers. Finally, trade policy also underwent changes all across Europe (and indeed in Spain), especially during the interwar period, affecting the relevance of the domestic and external markets. As a result of this changing context, the relative accessibility of regions may have experienced an asymmetric impact which may have had consequences on the economic fortune of Spain’s provinces.
The study finds that the main variations in the spatial distribution of market potential were experienced in the second half of the 19thcentury, a period characterised by a marked centrifugal tendency. By 1900, a clear distinction in terms of accessibility between coastal and inland provinces, with the former showing a higher market potential than their inland counterparts, had emerged. The only exception was Madrid, located at the geographical centre of the Peninsula but with a market potential similar to that of the coastal regions. Thus, with the integration of the domestic market, the geographical periphery of Spain had become the core in terms of economic potential, and, in turn, inland central provinces suffered an increase in their relative remoteness. Interestingly, once established, this dual structure showed a considerable degree of persistence during the first decades of the 20thcentury.
These changes in market potential can be considered as being a factor that turned out to have persistent effects on the spatial distribution of economic activity in Spain. The period under study witnessed a notable increase in the concentration of manufacturing in a limited number of regions and an upswing of regional inequality. Overall, the availability of an indicator of accessibility like the market potential becomes a key tool for undertaking empirical exercises in order to further examine the roots of the current spatial disparities through the lens of NEG. 

Julio Martinez-Galarraga is associate
professor at Universitat de València

The working paper can be found here: