PenangasanExampleofEconomicGeography.docVIP

Penang as an Example of Economic Geography By Andrew Sheng, Board Member, Khazanah Nasional Berhad. The World Bank’s introduction of the concept of Economic Geography in its latest Wordl Development Report is an important step towards a better understanding of economic development. Recent advances in New Institutional Economics by Nobel Laureate Douglas North and others see economic development as a process of change and an evolution of social institutions on a path dependent trajectory. Neo-classical thinking looked at growth as a search for optimal usage of resource endowment – land, labour, capital and more recently, knowledge. What this framework neglected was the concepts of economy as institutions that have memory and geography. More recently, a number of disciplines have come together in what is collectively known as “Complexity Economics” to try and merge different social and physical science disciplines to explain human behaviour and social and institutional evolution. For example, from information technology came the understanding of the importance of networks, most notably the work of sociologist Manuel Castells on the emergence of the Network Society. Markets are now understood as networks, where Metcalfe’s Law applies, namely, the value of the network is proportional to the square of the number of users of the network. The network economy is characterized by hubs and clusters where network effects of inter-operability, economies of scale and positive and negative feedback apply. The World Bank’s concepts of density, distance and division are perhaps best seen in network terms. Penang is a wonderful example of the successes and failures of hubs in economic geography, because it was one of the first free trade ports to emerge in East Asia in the 18th century. Trade and commercial entrepots are basically hubs that enjoy clustering economies of scale. Such hubs compete in terms of three important characteristics, superior protection of