Download Benefiting from Unbalanced Growth

Chapter 2 Inclusive Growth for Latin America
Tito Yepes1
2.1. Introduction
1.
The World Development Report of 2009 establishes density, distance, and
division as dimensions challenging both the potential for higher economic growth and
equality of opportunities. Density and distance in particular are central to the discussion
on economic growth, as they are the reasons for its unbalance across locations. This
chapter aims to qualify density and distance within the Latin American context.
2.
Benefiting from unbalanced growth refers to the opportunities arising from
market forces that lead to a concentration of economic activity in a few locations. Policy
makers and political economy actors sometimes consider the concentration of economic
activities in a limited number of locations as constituting a challenge to progress. Here,
we illustrate that such concentration is a consequence of market forces beyond the control
of policymakers. We further suggest that geography transformation can lead to a higher
efficiency with respect to any given location’s economic activities, sometimes generating
higher concentration, and thus leading to higher economic growth. The provision of an
equality of opportunities for all of a country’s inhabitants, regardless of location, is
perfectly compatible with a high spatial concentration of economic growth, as discussed
in chapter 6.
3.
The reason that growth does not occur with balance is because of the productivity
differences that confront firms across locations. As different locations offer different
advantages for the efficient use of factors most firms competitively locate where it is
most advantageous to them. Productivity advantages in likewise differ across location,
depending on the nature of interaction between local agents or distance to other locations.
Locations cannot share the same space, likewise, they do not have the same number of
agents; consequently, by definition, locations offer different advantages.
1
The author thanks Darwin Marcelo for the excellent assistance provided in the elaboration of this chapter.
4.
Locations offer two types of productivity advantages: (1) agglomeration
economies if the advantage is due to cost saving interaction between firms located within
the location; and (2) logistics if the advantage is due to relative closeness to local and
distant consumers.2 We use agglomeration economies to qualify the benefits to growth
caused by population density. A higher density of population offers firms a higher
potential to observe agglomeration economies. Logistics is a qualification of distance that
refers to the total costs faced by firms in reaching their costumers, whether local or not,
inclusive of non-monetary costs. In large urban areas, advantages exist that do not require
agglomeration economies, as firms are able to access a large pool of costumers. Here we
consider this as part of the logistics—firms will attempt to minimize their costs for
accessing all costumers (local or otherwise), so if they set up in cities in order to access
more costumers, they benefit from better logistics compared with if they are located in
smaller urban areas.
Figure 2.1a. Spatial Sources of
Productivity Advantages and Unbalanced
Growth.
Stronger
Agglomeration
Economies
High
Growth
Low
Growth
Figure 2.1b. Productivity Advantages and
Types of Locations.
Stronger
Agglomeration
Economies
Advanced
urbanization
Intermediate
urbanization (Rural and
small urban)
Incipient
urbanization
Better
Logistics
Better
Logistics
Source: own elaboration based on the WDR09.
5.
In Figure 2 we represent how agglomeration economies and logistics can lead to
higher economic growth. The vertical axis in Figure 2.1a represents the strength of
agglomeration economies. If a location has weaknesses on that front, it may be able to
compensate with better logistics (the horizontal axis); the same is true in reverse—i.e., if
2
The migration of production factors across locations is a third source of higher productivity. Inasmuch as
such factors are not location specific, they are analyzed in another chapter of this report.
the case is relatively poor with respect to logistics. That said, with either weak
agglomeration economies or bad logistics, it becomes more difficult to achieve a high
economic growth rate. Locations with strong agglomeration economies and good
logistics should be able to grow faster than locations lacking with respect to the one or
the other.
6.
In theory, any location can develop both types of advantages. It only requires
creating the proper firms, firms that can consistently interact with others at the targeted
location, and make the necessary infrastructure investments for achieving good logistics.
Unfortunately, locations that already have firms and consumers are more likely to benefit
from policy interventions oriented to economic growth than areas with no prior
concentration of firms. Locations already hosting firms and consumers are more likely to
have some degree of interaction and some quality of logistics, though, respectively, not
necessarily strong or good.
7.
Furthermore, the more firms and consumers at a given location, the more likely
the firms will benefit from any kind of intervention (intended or not) with respect to
agglomeration economies or logistics. That’s why the densest locations are more likely to
observe higher economic growth. Growth is spatially unbalanced to the extent that
patterns of density and isolation are unbalanced, so are patterns of agglomeration
economies and logistics. Figure 2.1b provides a classification of locations based on
density. The circles are larger where population densities are higher and match areas
where growth is more likely to be higher.
8.
Policies can nonetheless reinforce both agglomeration economies and logistics.
However, one should be careful as to where and how to intervene. The farther a location
is from densely populated areas, the less effective will be any intervention. Also areas
within countries requiring or desiring policies aimed at improving their advantages are
numerous, forcing policymakers or the political economy to choose where to implement
such policies based on some criteria of potential opportunities
9.
The fact that agglomeration economies and logistics create unbalanced growth
may also bring about the phenomenon of lagging regions. Locations with structurally low
growth may show a low level of participation in the economy over a number of years,
and as a consequence, may become lagging regions if their of their population don’t
migrate to growth centers. With low local growth, there are fewer resources to be
distributed, and the challenges in allocating resources among many alternative locations
become complex. This can be potentially inefficient for growth.
10.
The fact that growth resulting from interventions aimed at promoting
agglomeration economies and improving logistics will more likely benefit denser
locations does not mean that other areas should be abandoned. However, more proper
instruments (such as institutions for providing universal access to basic services) should
be employed rather than those aimed at developing agglomeration economies or logistics
from scratch, which are unlikely to be efficient.
11.
The rest of the chapter provides a prospective review of unbalanced growth in
Latin America, and delineates policy actions through …
2.2. The Path to Distance
12.
The role of agglomeration economies and logistics in enhancing productivity and
scale is first determined by the initial location of towns and cities. Location is determined
by the conjunction of history with geographical factors. For instance, natural resources
may drive firms or farms to locate near one another, which may in turn help to develop
agglomeration economies and the institutional dynamics for lowering transportation
costs. Little explains why cities are located where they are today apart from historical
events and the existence of harbor natural resources.
13.
The geography of Latin America and the Caribbean is not uniform, neither the
patterns of population settlement. On the Atlantic side of South America, most areas
consist of plateaus, plains or low lands, while along the Andes, from Mexico to Chile,
most areas consist of hills or mountains. Figure 2.2a shows that a high proportion of the
territory in Middle American countries consists of hills or mountains; the same is true for
a high proportion of the Andean countries in South America. Conversely, the Atlantic
side is flatter. Some Caribbean islands contain a large proportion of highlands, such as
the Dominican Republic, Jamaica and Haiti.
14.
It appears that terrain characteristics have not had a major impact on present
density patterns. The comparison of terrain and agglomerations provides a quick
description of Latin America’s geography. Figure 2.2b provides a comparison of the
agglomeration index developed by the WDR 2009 for Latin American countries with the
index of proportion of territories with hills or mountains. The agglomeration index
perfects the measure of urbanization by correcting for contiguity of population
concentrations. Countries with a high agglomeration and with highlands include El
Salvador, Chile, Mexico, or Dominican Republic. In the extreme countries, such as
Guyana, Nicaragua and Paraguary, we find low agglomerations and relatively flat lands.
Figure 2.2b. Urban agglomeration
versus terrain.
0
50
100
Proportion of Territory with Hills or Mountains
SLV
CHL
CRI
80
HND
JAM
PAN
PER
60
GTM
ECU MEX
DOM
CUB
40
BOL
GUY
ARG
VEN
COL
NIC
20
Terrain : Hills and Mountains
Middle
America
.01
.02
Andean
HTI
BRA
SUR
PRY URY
0
Atlantic
South America
0
Density: Kernel
.03
100
Figure 2.2a. Proportion of territories
with hills and mountains.
20
40
60
80
Agglomeration Index
Source: based on WDR 2009.
15.
Categorization on the basis of terrain characteristics produces two very different
and (relatively far-apart) sides—the Andes and the Atlantic (Brazil, Argentina, Uruguay
and Paraguay). The main cities in the Andes are located far from the key waterways,
reflecting the sophisticated system of transport and production of the pre-Hispanic tribes.
In the case of the Incas, transport was based on routes connecting centers of civilization
along a north-south axis, running alongside the mountains. The Maya and Aztec societies
were organized into many groups or clans, whose agricultural production relied on the
high productivity of the Andes’ valleys.
16.
Pre-Hispanic tribes living alongside the Andes where located on the adjacent
flatlands, where the availability of water and arable land was relatively better and there
was scarce trade with tribes located far away (thus eliminating the need for sea
transportation). In most cases, the Spaniards founded their cities in locations where there
was already an indigenous settlement in order to be close to potential sources of precious
metals. In fact, it was trade in gold and silver and other commodities that drove most of
the exchange between Spain and the colonies, leading to transportation routes suited for
extraction rather than for linking the economy.
17.
The notable exception of the Andes corresponds to the case of Peru, where the
Incans had their capital. The fight between the Spaniards and Incans for control of the
territory lasted nearly fifty years. To carry out their conquest, the Spaniards were forced
to strengthen their sea port of Lima so as to effectively provide their armies with food and
ammunition. The Incan capital of Cuzco was destroyed in the end, permanently moving
the economic center of the country to Lima. Over the years, Lima benefited from the
silver trade originating in the Potosi mines, and became one of the main economic centers
in South America during the colonial period. Initially, Guayaquil in Ecuador, which was
meant to constitute the only shipyard in the Spanish colonies, was more prominent than
Lima. However the resources generated from silver exports saw Lima eventually become
more important.
18.
The trade flows during the colonial period reinforced the prominence of a few
coastal cities along the Andes. The Spaniards restricted trade with their colonies to
Spanish goods, banning from trading all Pacific ports outside Lima and Veracruz. Trade
went from Sevilla to Cartagena, and then to Portobelo (a port in Panama that was
destroyed by pirates in the seventeenth century), where it was transported by land to the
Pacific. From there, goods were shipped to Callao (Lima) and Veracruz (see Figure 2.3a).
All supplies from Europe were transported by land from Lima to Santiago and even up to
Buenos Aires and Montevideo. Some goods were transported from the one ocean to the
other and back, something which created an opportunity for smuggling and pirating on
the Atlantic side of South America. But trade other than that in metals was minimal, as
the colonies were generally self-sufficient. The Potosi mines represented the major source
of cargo, and is said to have produced two-thirds of the total silver exported to Spain
during the colonial period. This made Lima the most prominent city of the Viceroyalty of
Peru. Free trade was only opened in the late-eighteenth century.
Figure 2.3a. Routes of trade during the
seventeenth century.
Figure 2.3b. Location of the main cities of
Latin America.
Monterrey
Havana
Guadalajara
Mexico City
Santo Domingo
Guatemala
Tegucigalpa Caracas
Managua
San Jose
Panama
Guayaquil
Medellin
Bogota
Cali
Manaus
Quito
Belem
Fortaleza
Recife
Lima
Brasilia
Salvador
La Paz
Belo Horizonte
Rio de Janeiro
Asuncion
Sao Paulo
Curitiba
Cordoba
Porto Alegre
Rosario
Montevideo
Santiago
Buenos Aires
Source: Based on Clayton(1975), and Herbert Source: own elaboration.
and dos Santos (1973) 3.
19.
On the Atlantic side of South America, most of the key cities are located along the
coast—Rio de Janeiro, Buenos Aires and Montevideo—or close to it—Sao Paulo. They
evolved from ports and trading centers in countries that did not have large interior preHispanic cities (See Figure 2.3b). These cities were highly integrated with North
L. A. Clayton. “Trade and Navigation in the Seventeenth-Century Viceroyalty of Peru” in Journal of
Latin American Studies (Cambridge University Press), Vol. 7, No. 1, 1975.. Herbert S. Klein and Mario R.
dos Santos. “Las finanzas del Virreinato del Rio de la Plata en 1790 Desarrollo Económico, Vol. 13, No.
50, 1973. Published by: Instituto de Desarrollo Económico y Social.
3
American and European trade because of their natural capacity for large scale agriculture
and cattle production. Other interior cities, such as those in Argentina, developed later on
the basis of monopolies imposed by Spain that allowed them to compete, and as part of
an alternate route for the transport of silver from Peru, developed because of attacks on
Portobello (Panama). It is this route that determined the region’s name, the Viceroyalty of
La Plata, in 1776.
20.
The main cities in Brazil, Paraguay, Uruguay, and Argentina are closer to
waterways and, generally speaking, the transportation networks linking them are better
structured. It makes these cities more complementary to one another compared to the
cities of the Andes, which generally became self-sufficient. The main cities of the Andes
are best understood as hubs of their respective countries and sub-regions; they therefore
tend to be somewhat similar to one another in terms of function, as they all suffered from
isolation and some degree of autarky.
21.
The Central American countries also suffer from long (economically speaking)
distances from one another. These countries have followed very similar patterns of
development, making them very similar in terms of their economic development. Crosscountry infrastructure remains underdeveloped and fragile, with most efforts concentrated
on reaching either the Pacific or Atlantic Ocean rather than neighboring countries. Yet as
in the Andes and Mexico, the main population concentrations are relatively far from the
coasts, something which reflects the relative low development of trade between the main
pre-Hispanic tribes. During the colonial period, Central American cities tended to be
neglected; the Spaniards gave greater importance to Mexico City and Veracruz on
account of the nearby silver mines of Zacatecas and Guanajuato. Central American cities
were located far from the commerce centers located on either side of the region, whether
in Mexico or Panama.
22.
The Caribbean islands provide a natural scenario for testing for the existence of
agglomeration forces as drivers of economics growth. There exist few land borders with
other countries, and the concentration of their populations in the seaports developed
naturally. Still the concentration of economic activities is uneven, and it does not occur
on any side of the islands. Specific factors related to agglomeration, rather than pure
historical accident, may explain and justify the existence of agglomeration forces.
23.
For instance, in Jamaica, Montego Bay and Port Antonio experienced similar
initial conditions in developing into tourism hubs. However it is the former that
developed as the economic center of the country’s tourism industry. Today, because of
the low quality of the roads, it takes more time to go to Port Antonio than to Montego
Bay, despite the fact that the distance from Kingston is quadruple that from Montego
Bay. Roads in the country were developed as a function of the sugar and bauxite
production located nearby Montego Bay, which also saw the development of a rich
entrepreneurial class in connection with the commodities trade. Today Montego Bay has
120.000 inhabitants, with the highest income per capita in the country, world class
tourism facilities like the largest airport of the country, and expensive real estate
condominiums, restaurants and stores. Port Antonio in turn has only 15.000 inhabitants,
and its tourism strength is ecological, with a completely different set of facilities.
24.
The historical patterns of location and production of the pre-Hispanic tribes in the
rich valleys of the Andes; the patterns of trade imposed by the Spaniards during the
colonial period; and natural resources (like the silver mines of Potosi) and the huge
valleys found in the south constitute three major determinants of the location of major
Latin American cities. These factors established the distances observed today between
local production and consumption centers and international markets within the region and
abroad. Two general patterns are observed: cities close to the coast and with
complementarities on the Atlantic side of South America, and interior cities with
substitutability alongside the Andes.
25.
Linkages between neighboring countries are fewer in the Andes compared with
the Atlantic coast of South America. Except for Bolivia (landlocked) and Mexico (whose
trade is mostly with the United States), those countries alongside the Andes have the
lowest levels of trade with their neighbors. Compared with Argentina, Uruguay and
Paraguay, Brazil has highly diversified trade partnerships, making its trade with southern
neighbors less prominent (see Figure 2.4.).
Figure 2.4. Share of trade with neighboring countries.
(% of total trade)
80
70
60
50
40
30
20
10
C
Ve h ile
ne
zu
e
E c la
ua
d
Co or
lo
m
bi
a
Pe
ru
Bo
Co livi
a
st
a
Ri
c
Pa a
na
m
Ho
a
nd
u
r
G
ua as
te
m
al
Ni
ca a
ra
g
El
ua
Sa
lv
ad
or
M
ex
ico
Br
az
Ar
i
ge l
nt
in
a
Ur
ug
ua
Pa
y
ra
gu
ay
0
Source: WDR 2009 Annexes.
26.
The difficult logistics created by the Andes also have an impact on countries’
internal linkages, as illustrated by the case of Colombia. An analysis of regional
economic interaction shows that the major seven regions of the country compete with,
rather than complement, one another—growth in one of them results in a decrease in the
share in trade of the other regions Bonet (2003, 2005).4 If the coefficient between two
regions has a negative sign (See Table 2.1), it signals that there is a competitive
relationship; if the coefficient is positive, this means that there is a complementary
relationship. The regions with the largest shares in the country’s GDP—Bogotá, WestCentral, and Pacific—as well as that with the highest growth rate—New Departments—
4
Their analysis is based on Dendrinos-Sonis (1988, 1990), whose approach assesses the competition or
complementarity between a country’s sub-regions. In this case, they measure the relative share of GDP of
regions in Colombia over time, and examine whether the growth of some regions comes at the expense of
others, or respective growths are complementary. Elasticity is estimated for each pair of regions.
exhibit competitive relationships, such that their rapid growth results in a decrease in the
share of the other regions.
Table 2.1 Competitive and complementary relationships
among Colombia’s sub-regions.
NorthCentral
SouthCentral
Caribbean
Pacific
New
Depts.
Bogotá
WestCentral
Caribbean
+
+
+
+
-
-
-
North-Central
+
-
-
-
-
-
-
New Depts.
-
-
-
-
+
-
-
West-Central
-
-
-
-
-
-
-
South-Central
-
-
-
-
-
-
-
Pacific
-
-
-
-
-
-
+
Note: A positive sign indicates complementary and a negative sign, a competitive relationship.
Source: Bonet (2005).
27.
These low interregional links means that most economic sectors at a regional level
are self-sufficient, with most providers of forward and backward linkages concentrating
in the three richest cities in Colombia. Some analysts have pointed out that the high
transportation costs in Colombia, associated with weak infrastructure, are one of the
leading causes of the low spatial and sector interaction. Because transportation
weaknesses reduce the potential for economic growth, the obstacles for better
interregional links are greater (World Bank 2004c, 2005; Cardenas, et. al., 2005; and
Perez 2005).
28.
With respect to the Atlantic side, the linkages between regions are stronger. For
instance, Brazil’s Southeast initiates most of the supply chains for every region. Figure
2.5 shows that Brazil’s regions are very well connected, such Southeast forms the base
for almost the entire production chain, not only for itself, but for all the other regions as
well. Both with respect to backward and forward linkages, every region is sourced by
Southeast by at least 60%.
linkages (diagonally).
Furthermore, the Center and North miss within region
Figure 2.5. Interregional linkages in Brazil.
(Share of value by source)
b. Forward
a. Backward
80%
80%
60%
60%
40%
40%
20%
20%
South
0%
st
ea
uth
So
uth
So
r
nte
Ce
Ce nte
r
t
as
th e
No
th
No
No th
Source
e
Us
South
ea st
0%
st
ea
uth
So
uth
So
r
nte
Ce
Ce nte
r
th
No
st
ea
th
No
No th
e
Us
Source
Source: Based on the interregional I/O matrix in Hadad et al.
2.3. Benefiting from Density
29.
Latin American countries are diverse in terms of density and distances between
the main urban areas; consequently, they are diverse in terms of opportunities for growth.
The densest locations have accumulated higher participations in national economies,
while income differences across countries’ locations have remained persistent.
Notwithstanding, Latin America’s growth has benefited overall from density.
30.
The densest locations have accumulated the largest participations in national
economies because of their respective higher long-term growth. Figure 2.6 shows
population densities and participations in national production by countries’ sub-regions.
Participation in national production is the accumulation of growth rates over a number of
years. Sub-regions are grouped into four clusters5 according to their density and
5
Calculated using the Ward criterion, which minimizes the loss of information by minimizing the square distance
between each observation and the group centroid.
participation in GDP. Group 1 is made up of regions with incipient urbanization and very
low participation in the national economy—they qualified considered as lagging regions.
This group includes among others Colombia’s Pacific, Guatemala’s Petén, and Brazil’s
North.
4
1
1
2
3
4
2
3
0
Ln( Participation in National Product )
Figure 2.6. Density and participation in the national
economy.
Latin American countries’ sub-regions
-5
-4
-3
-2
-1
0
1
2
3
4
Ln( Population Density )
Source: own elaboration based on …
31.
On the other side of the distribution (Group 4) are those regions with advanced
urbanization—these region, such as Costa Rica’s central valley, Southeast Brazil,
Colombia’s central region, Peru’s coast, and Argentina’s Gran Buenos Aires, include
Latin America’s main cities. Between these two extremes, we have two classifications for
areas of intermediate urbanization. Group 2 is made up of regions that have low density
relative to areas of advanced urbanization, though benefiting from substantial
participation in national economies. This group includes Argentina’s Pampa, Bolivia’s La
Paz and Santa Cruz, Colombia’s east, Mexico’s northeast, and Nicaragua’s Atlantic
coast. Finally, we have Group 3, made up of areas that have high density and low
participation in national economies—among these are Colombia’s Atlantic coast and
Chile’s Valparaiso.
32.
Differences in income per capita across locations have been persistent for most
countries. There is limited evidence of regional convergence in income per capita within
Latin American countries. An IMF6 review shows that there are signs of income
convergence in Chile, Colombia, and Peru, but at a very slow pace. For example it would
take nearly 60 years to close half the gap between regions in Chile. Brazil has displayed
an even slower pace of convergence, and it is estimated that the regions in Argentina and
Mexico have not experienced any convergence at all. Furthermore, in some countries,
there have not even been short-term episodes of income convergence between subregions. Analyzing Argentina7 over a 31-year period, with sub-periods of about 10 years,
the estimated speeds of convergence yielded insignificant coefficients. In Colombia, there
is relative agreement as to the lack of long-term income convergence, though there is
some dissent concerning certain periods of catch-up in lagging regions. In the cases of
Mexico, Brazil, Peru, and Colombia, there is evidence of clubs or groups of sub-regions
that have been able to catch with one another internally, but with increasing disparities
between clubs.
33.
Urbanization or densification of specific locations has had a positive impact on
economic growth in most Latin American countries. Overall, Latin America has seen the
most rapid urbanization process ever recorded, surpassing every other developing region.
There exists a clear association between economic growth and urbanization in many of
the region’s countries. For instance, during the twentieth century, Brazil went through a
rapid process of urbanization that closely correlated with long-term trends in economic
growth (see Figure 2.7a). Urbanization helped to improve the productivity of factors that
later transmitted into economic growth. An analysis of statistical causality shows a
positive and persistent impact from urbanization on growth in Brazil (see Figure 2.7b, the
red line). The same exercise for different countries shows similar patterns when it is
significant. Bolivia shows the opposite effect, with urbanization having a negative and
persistent impact on growth.
6
Regional Convergence in Latin America. by María Isabel Serra, María Fernanda Pazmino, Genevieve Lindow,
Bennett Sutton, Gustavo Ramírez, The International Monetary Fund, 2006.
7 Garrido et al. (2000), Marina (2000), and Figueras et al. (2003).
Figure 2.7a. Long-run trends of
urbanization and growth in Brazil.
Figure 2.7b. Long-run trends of
urbanization and growth in Brazil.
0.08
BRASIL
MEXICO
0.06
COLOMBIA
Cumulative response: GROWTH
BOLIVIA
URUGUAY
0.04
0.02
0
-0.02
-0.04
-0.06
1
2
3
4
5
6
7
8
9
10
11
Years of Impact
2.4. Cities Transforming Under The Pressure of Density
34.
Cities are perhaps the most important and most visible manifestation of
economies of scale, and play a central role in economic growth. Firms located in cities
(especially larger and denser cities) could benefit from those advantages associated with
situations wherein there exits proximity between similar firms working in the same sector
(the localization of economies) as well as proximity to firms in other sectors (the
urbanization of economies). (Duranton and Puga 2003; Glaeser 2007). By bringing
together pools of entrepreneurs with similar economic interests, cities facilitate both the
creation of new ideas and the translation of ideas into production. Besides these
knowledge spillovers, by creating thick markets for labor, capital, and intermediate and
final goods, cities enable cost savings and efficiency.
35.
Cities are more competitive when firms are able to fully exploit the location
advantage provided by agglomeration economies and better logistics—that is, when firms
efficiently use the supply chain typical of the sector in which they operate, have easy
access to consumers, and show deep linkages (and spillovers) with firms of the same
or other sectors.
36.
Cities are also evidence of the existence of negative externalities. Size and
proximity
(which
are
inherent to
agglomeration economies)
often lead
to traffic congestion, pollution, and other drawbacks that can weaken a city’s
performance and possibly lead both firms and households to relocate to areas with better
environments for life and productivity. To remain competitive, cities need to maximize
their agglomeration economies while maintaining logistics that contain congestion costs,
thereby enhancing the productivity edge that firms gain by locating there.
37.
In Latin America, 29 cities in seven Latin American countries concentrate at least
one percent of national GDP. Figure 2.8 shows the economies of each of these 29 cities
and 7 countries (in total GDP at international prices) indexed relative to Sao Paulo. Sao
Paulo, Buenos Aires, and Mexico City are by far the largest economic centers, with Rio
de Janeiro occupying a strong but distant fourth place. However, Sao Paulo only ranks
ninth in per capita GDP. By this measure, México City is the wealthiest city, followed by
Monterrey and Brasilia. The economy of Sao Paulo by itself is larger than the national
GDP of every country in the region except Brazil, Mexico, Argentina, Venezuela, and
Colombia.
6.0
0.83
1.00
1.00
0.93
Figure 2.8. Relative GDP of selected cities and countries.
0.90
5.0
GDPj / GDP SAO PULO
0.70
0.43
0.60
0.28
0.24
0.24
0.22
0.17
0.17
0.16
0.15
0.15
0.14
0.14
0.12
0.10
0.07
0.02
0.05
0.02
La Paz
0.04
0.01
el Salvador
0.02
0.01
Antofagasta
4.0
3.0
2.0
1.0
Bolivia
Chile
El Salvador
São Paulo
Colombia
Mexico
São Paulo
Buenos Aires
Distrito Federal (Mx)
Rio de Janeiro
Bogotá D. C.
Monterrey
Belo Horizonte
Guadalajara
Campinas
Santiago
Rosario
Salvador
Juárez
Curitiba
DF (Br)
Cordoba
Puebla
Medellín
Recife
Cali
Mendoza
Fortaleza
Barranquilla
Concepción
Santa Cruz
Argentina
0.0
0.00
Brazil
0.10
Cochabamba
0.20
0.10
0.30
0.21
0.40
0.29
0.50
0.09
GDPi/GDP SAO PAULO
0.80
Sources: International Monetary Fund, World Economic Outlook Database (October 2007); Instituto Nacional de Estadística Geografía e
Informática de México (2000,2004); Instituto Nacional de Estadísticas y Censos de Argentina (1993, 2001); Instituto Brasileiro de Geografia e
Estatística (2004); Instituto Alexander Von Humboldt (2003) y Departamento Administrativo Nacional de Estadística de Colombia (2003); and
Sistema Nacional de Información Municipal de Chile (2006). Note: GDP indexed relative to Sao Paulo.
38.
Argentina and Chile have a high concentration of economic activity in their
capitals, although the second most major city in Chile also has substantial importance.
Brazil, Colombia, Mexico and Bolivia share a similar structure with many important
urban centers. Chile and Colombia’s cities are the best served in terms of access to basic
infrastructure services. Buenos Aires and Mexico City have relatively low levels of
service compared to their rank for other economic variables. By contrast, many cities
with middle- or even low-ranking GDP per capita, such as Sao Paulo, Santiago,
Antofagasta, Bogotá, and Cali, are at the top of the rankings for access to water.
39.
The most important six capital cities in Latin America concentrate nearly one fifth
(or more) of their country’s respective GDP and at least double the GDP share of their
country’s respective second most major city. The contribution of Buenos Aires (46%)
and Santiago (31%) are five times that of Rosario (9%) and Concepción (6%)
respectively; Bogotá’s contribution (24%) is 2.5 times Medellín (9%); México DF (22%)
is 3.1 times Monterrey (7%); and Sao Paulo (17%) is 2.3 times Rio de Janeiro (7%).
Bolivia has two main economic centers--La Paz (20%) and Santa Cruz de la Sierra
(21%).
Box 1. Basic indicators for the main cities of Latin America.
Source: Author’s elaboration based on national sources.
40.
The benefits that can be extracted from urbanization are, however, limited. As the
proportion of a population living in cities reaches a high level, the benefits in terms of
home market strengthening and agglomeration economies diminish. Major cities that
have contributed largely to job creation begin to face substantial problems of congestion
reflected in more difficult logistics, high land prices that discourage new firms from
locating there, and longer commutes for workers. Under such circumstances,
manufacturing firms begin to consider the possibility of relocating outside major cities,
provided they can continue to feed into its supply chain. Among the many towns
generally surrounding major cities, some will align their advantages and attract firms and
jobs. As such, core cities transform into services providers and hosts of firm interaction.
41.
Consequently, major economic centers do not contribute as much to national
growth as relatively well-located smaller cities become more competitive for new firms
and jobs. In the case of Brazil, major cities show lower growth rates compared with
smaller cities8. Apparently, the same process has been evident in other Latin American
countries in terms of the relationship between major cities and smaller ones (see Figure
2.9). Mexico City, Sao Paulo, and Santiago grew less than Monterrey, Curitiba and
Antofagasta respectively. Rio de Janeiro and Sao Paulo grew less (40% and 20%,
respectively) than the national growth rate for the period 1970-2000. By contrast, urban
areas of over 2 million people or less than 1 million grew by at least 20% more than the
national average in the same period.
1.
If Index>1, the urban area’s growth is higher then national. If the Index < 1, it is lower.
2.404
Figure 2.9. City growth over national growth.
a. Selected Latin American cities
b. Brazilian cities
2
42.
1.45
1.42
1.37
1.37
1.00
0.55
0.61
0.62
Bogotá
Concepción
Porto Alegre
Guadalajara
Santiago
Campinas
Fortaleza
Puebla
Belo Horizonte
Recife
Curitiba
Juares
Monterrey
DF (Br)
Antofagasta
0.92
0.52
São Paulo
1
2
1
4
3
1
2
3
1
1
2
1
1
1
2
2
1
3
0.44
Salvador
1
1
Distrito Federal (Mx)
0.50
0.91
0.85
1.00
0.00
GDP growth rates for 1970-2000, by city
1.96
1.15
1.15
1.50
1.21
2.00
Rio de Janeiro 0.24
City GDP Growth/Country GDP Growth
2.50
0.6
0.8
0.9 1.0
1.1 1.1 1.1 1.2 1.2 1.2 1.2 1.3
0
RJ SP REC PA BH SAL 1-2 CAM CUR FOR < 1 2-3
In Colombia, the densest locations observed the largest growth for the period
2000-2003. By contrast, the densest locations in Mexico and Brazil had lower growth
rates (negative); rather, high growth was concentrated in areas of intermediate density.
Consistent and representative data on product or GDP growth by municipality is
extremely difficult to find. Figure 2.10 shows the most comparable municipal data that it
was possible to collect on differences in growth by density. The municipalities for each
country are first collapsed into economic areas—for example, one economic area might
include all municipalities within a metropolitan area. Percentiles with equal participation
in national GDP are then made, so that they should be comparable in terms of their
contribution to national growth. The number of percentiles is lower in Colombia and
Mexico, as their capitals exhibit larger participations in national economies relative to
Brazil. The sizes of the circles reflect relative population densities.
Figure 2.10. GDP growth on the basis of density.
Brazil 1996 – 2003
Mexico 1999-2004
Colombia 2000-2003
%
%
7
4
P2
P3
P1
P2
1.5
P4
0.5
5
4
P1
P3
3
1
-1
P4
-0.5
P5
-3
Anual GDP Growth
Anual GDP Growth
2.5
Anual GPD Growth
%
P4
3
P3
P2
3
2
P1
2
-1.5
Source: Based on data from Alexander Von Humboldt Institute for Colombia, INEGI for
Mexico, and IPEA for Brazil.
43.
Large cities experience transitions over time towards services-led growth. Large
cities experience a pattern of change in economic activities, moving from manufacture
industries to service ones. Rapidly growing cities, such as Mexico City and Sao Paulo,
have seen an increase in participation for services and a steady decrease in participation
for manufacturing with respect to overall economic activity, as shown in Figure 2.11.
Over the last two decades, services (in particular financial and personal services) have
increased their share in overall economic activity by about 3 and 8 percentage points in
Mexico City and Sao Paulo, respectively. This pattern has been replicated by other major
Latin American cities, where the magnitude of manufacture industries has been shrinking
over time.
Figure 2.11. Share of manufacture and service sectors in value added.
Manufacture Industry
55.00%
Service Sector
53.78%
50.00%
50.00%
42.99%
45.00%
41.95%
30.00%
30.00%
25.00%
25.00%
20.00%
17.15%
16.92%
16.60%
13.30%
15.00%
15.00%
10.00%
Bogotá 1995-2005
Source:
46.29%
42.57% 42.62%
35.00%
35.00%
20.00%
45.00%
40.00%
38.91%
40.00%
54.08%
55.00%
México City MA
1999-2004
Sao Paulo Meso
1985-2003
Bogotá 1995-2005
México City MA
1999-2004
Sao Paulo Meso
1985-2003
44.
The transformation of economic activities has had important effects on the labor
market. When labor demand increases in areas where manufacturing takes place, it
becomes insufficient to absorb an increasing labor supply in the large cities. The
transition from manufacturing to services creates an enabling environment for
employment generation in the small and peripheral areas where manufacturing firms
relocate. In Brazil, small cities with a significant entry of manufacturing firms
experienced a faster pace of job creation during the nineties than the largest cities. This is
what happened in Curitiba, where jobs grew at about three times the pace as in
Metropolitan Sao Paulo (MRSP), as shown in Figure 2.12a. The transformation of jobs is
uniform regardless of types of skills in the manufacturing sector. While there was a
substantial increase in low skill jobs in the manufacturing sector in Brazil, Metropolitan
Sao Paulo (MRSP) saw a large decrease. The same was true for higher levels of skills,
though with sustained increases in personal and business services (see Figure 2.12b).
Figure 2.12a. Job growth in the 1990s in
Brazilian Cities.
Jobs' growth in 1990s
50%
Figure 2.12.b. Employment in
manufacturing firms by skill level.
% Changes in manufacturing employment (1996-2002)
25
40%
30%
Whole Decade
20
First Half
10
15
MR SP
Brazil
5
0
20%
-5
-10
10%
-15
Business services
Personal services
High-skilled
Medium-skilled
Low-skilled
Curitiba
Meso 1 to 2
Meso < 1
P. Alegre
Meso > 2
R. Janeiro
B.Horizonte
Fortaleza
Sao Paulo
Recife
Salvador
-10%
Campinas
-20
0%
Source: Based on IPEA data.
45.
The transition from manufacture to services prompts the relocation of
manufacturing firms outside large cities. During the transition, manufacturing firms
relocate in smaller areas outside and near large cities. Sao Paulo is a clear example of a
city in transition. Since the early seventies, Sao Paulo’s participation in Brazilian
manufacturing has fallen consistently, from 40 percent in 1970 to less than 20 percent in
2001 (Figure 2.13a). During this period, manufacturing firms did not move out of Sao
Paulo en masse but rather gradually increased their scale of production in other areas,
such that between 1970 and 2003 Sao Paulo’s annual industry growth was at least 5
percentage points lower than the annual growth rate of industry in the rest of the state as
well as that for all other states as a whole. Between 1970 and 2003, Sao Paulo’s industry
grew at 2 percent per annum on average. This was significantly lower than the annual
rates of growth of industry in the rest of the state (7.7 percent) and in all other states
combined (6.8 percent).
46.
The transition, and particularly the exit of manufacturing firms, was triggered by
decreasing returns to scale in large cities. Differences in returns to scale state that as cities
grow, the returns on economic activities in the manufacturing sector fade away faster
than the returns in other sectors, such as business services (Figure 2.13b). For a certain
range in population size, returns on manufacturing activities fall while returns to business
services continue to increase.
47.
Among the many factors influencing this transition, services themselves play a
key role. As major cities develop, the services sector develops as well. Services firms
fragment into areas of specialization, thus providing manufacturing firms opportunities to
focus on their own productivity. In small urban areas with lower scale of production,
firms generally carry their own services in-house—for instance, delivery and supply
chains. In major cities, however, these components break into new firms, thus freeing
manufacturing from the need to continue locating within the major city. Firms move out
as far as they can to benefit from cheap land, but not too far as they wish to continue
being fed by the supply chain.
Figure 2.13a. Sao Paulo state and Metropolitan:
share in Brazil manufacturing GDP.
Figure 2.13b. Returns to scale and city size.
Share of Brazilian Industrial GDP
Profitability
60%
The difference in returns to scale hypothesis
50%
40%
30%
Manufacturing
20%
State
10%
Metropolitan
size
0%
1940
1950
1960
1970
Source: IPEA data.
48.
Business
Services
1980
1990
2000
Source: own elaboration.
An econometric model confirms the negative effect from size in the participation
of Brazil’s largest cities (Rio de Janeiro and Sao Paulo) in national manufacturing GDP
(see Table 2.2.). An instrumental variables model with data for the period 1970-2001 uses
as a dependent variable the change in share in total GDP of each of the 130 sub-regions
of Brazil. This is a classification that collapses all municipalities into economic areas. A
second model uses only manufacturing GDP (as no data is available for other sectors).
The model is instrumented using levels in the year base in order to control for
endogoneity bias. The results show that when the largest cities are included in the sample,
the coefficient for city size (i.e., new inhabitants) is negative for manufacturing; the
coefficient, however, is not significant for total GDP. On the contrary, if Brazil’s largest
cities are dropped from the sample, the impact of size turns out to be positive and
significant for both manufacturing and total GDP. The results therefore confirm that
there is a negative impact from increases in population size on the manufacturing GDP of
Brazil’s largest cities, and, therefore, that sector transformation is a structural process, as
the evidence above suggests.
49.
The model also includes an indicator for changes in logistics (transport costs) and
another for the dynamics of agglomeration economies (economic growth). With respect
to logistics, the results suggest that better logistics—which is, in fact, the case in Brazil,
where transportation costs have been decreasing steadily over the last 30 years—should
promote a more even distribution of economic activities. This does not mean that it will
necessarily to a completely even distribution; only that, at minimum, economic activities
will not become totally concentrated in a few urban areas. Some sectors tend to become
highly concentrated, and then later spread out towards other sectors, thus allowing more
efficient spaces to take over manufacturing production. The existence of good logistics
seems to have a catalyzing effect, such that these more efficient spaces can adequately
feed off of the national supply chain. Regarding the dynamic effect of growth, which is a
representation of agglomeration economies, as expected, the results are not conclusive.
As agglomeration effects are not specific but rather take many forms, one should not
expect to observe a common process across locations.
Table 2.2. Models of participation in total and manufacturing GDP.
Share winners
All areas
only
Change in GDP Share
- **
Change in Transport Costs
New inhabitants
- **
+*
All without Rio de
Janeiro or Sao
Share losers only
Paulo
- **
- **
+ **
-*
32
0.87
134
0.26
- **
+ **
- **
- **
+ **
104
0.24
32
0.47
134
0.24
Economic Growth
Observations
R-squared
136
104
0.40
0.25
Change in Manufacturing Share
Change in Transport Costs
New inhabitants
Economic Growth
Observations
R-squared
* significant at 5%; ** significant at 1%
- **
-*
136
0.40
Change_in_Share = constant + change_in_transport + (chage_in_population GDP_growth = pib1970 pop1970)
50.
The role of agglomeration (or external) economies is to enhance the scale of
production for individual firms or farms, beyond the impact of factors within the control
of managers and farmers (known as internal economies). These can be classified (see
Table 2.3, extracted from the WDR09) into two broad categories, depending on whether
the interactions brought about by geographical proximity are within one industry
(localization) or between two or more industries (urbanization). The extent to which
firms gain from proximity depends on the unintentional sharing of inputs, information,
and labor. It also depends on improving the matches between production requirements
and types of land, labor, and intermediate inputs; also on to what extent new techniques
are learned and new products developed (WDR09, Chapter 4).
Table 2.3. Economies of scale due to agglomeration.
Shopping
Shoppers are attracted to places where there are many sellers.
Adam Smith´s
Outsourcing allows both upstream input suppliers and downstream
specialization
firms to profit from productivity gains caused by specialization.
Marshall´s labor
Workers with industry-specific skills are attracted to locations where
pooling
there is a greater concentration of the relevant industry. A worker is
Localization
Static
more likely to be able to find a new job in the same industry if his or
her employer experiences a downturn of fortunes. An individual firm
also benefits by being better able to hire labor when experiencing an
upturn in fortunes, especially if it coincides with a downturn for
other firms.
Dynamic
Marshall-Arrow-
Reductions in costs that arise from repeated and continuous
Romer´s learning
production activity over time and its spatial spillover.
by doing
Urbanization
Static
Jane Jacobs´
The more that different things are done locally, the more opportunity
innovation
there is for observing and adapting ideas from others.
Marshall´s labor
Workers in an industry bring innovations to firms in other industries;
pooling
this is similar to no. 6, but here, the benefit arises from the diversity
of industries in one location.
Adam Smith´s
This is similar to no. 5, above, the main difference being that the
division of labor
division of labor upstream is made possible by the existence of many
different downstream buying industries located in the same place.
Dynamic
Romer´s
The larger the market, the higher the profit, the more attractive the
endogenous
location to firms, the more jobs there are, the more labor pools there,
growth
the larger the market, and so on.
Pure agglomeration
Spreading fixed costs of infrastructure over more taxpayers;
diseconomies that arise from congestion and pollution.
Source: WDR09, adapted from Maureen Kilkenny (2006).
51.
The ultimate role of agglomeration economies is to help expand the production
level that is effectively sold in the market. That is the ultimate objective for all producers
in a competitive market under a rate of return of capital under an equilibrium. However,
the more they produce, the more they need to transport from their plant or farm to their
consumers. Therefore, economies of scale observe an inverse relationship with transport
and thus explain the importance of logistics in strengthening location advantage due to
agglomeration economies. It does not make sense for firms or farms to develop (and in
fact, they may well not develop) any arrangement of agglomeration economies if the
transportation costs from their location to their destination markets are not competitive
with alternative locations.
2.5. Rural Productivity Advantages without Density
52.
The tension between the development or strengthening of agglomeration
economies and the reduction of transportation costs is mediated by the role of the home
market. The larger and more affluent the home market in which firms and farms locate,
the higher the possibility of developing agglomeration economies, as transportation costs
for reaching costumers are at a minimum. As stated in the WDR09, agglomeration
economies are amplified by density (the home market) and attenuated by distance
(transportation costs).
53.
This traces the differences between urban and rural areas. Production in both
types of areas can develop agglomeration economies and suffer from reduced economies
of scale if transportation costs are too high. However, as urban activities make less use of
land, they can locate more easily near stronger (larger and affluent) home markets than
rural activities. Competition for land forces rural activities to locate far from markets,
thus making them more reliant on transportation costs relative to areas that have similar
productivities. Therefore, agglomeration economies do not develop as naturally in rural
areas as they do in urban areas. On the basis of proximity, firms in cities may develop
some sort of agglomeration economies. Farms in specific areas, on the other hand, may
need coordinated action in order to simultaneously solve the consolidation and logistics
problems of production and the development of agglomeration economies.
54.
Rural space is also uneven in terms of the concentration of economic activities.
Certain areas exhibit specialization in certain kinds of production, as land productivity is
higher for certain products. Productivity differentials, as drivers of the location of
economic activities and specialization in rural spaces, along with transportation costs, are
the foundation of economic geography. David Ricardo proposed that the best land in
terms of productivity will be paid a higher rent because of the competition between
potential users for exploiting its advantage. Either the owner should forgive that
additional pay off, or the tenant will have to extract the additional productivity in order to
pay for it. Competition between farmers will concentrate production in areas of higher
productivity, in as much as they will obtain benefits above the market rate of return for
capital in such areas. Some areas will be below market productivity for a particular
produce, thus leaving them vacant or in need of switching to a different kind of
production.
55.
With rural activities, productivity differentials are more evident given the natural
endowments of respective areas. However, there are factors other than pure natural
advantages that producers utilize in order to strengthen their competitiveness. Among
these are, for instance, the capacity to get organized in consolidating production sharing
costs for the just-in-time logistics of perishable products; likewise, to develop public and
necessary R&D and quality assurance institutions. In Latin America, there are good
examples of rural areas that have been growing fast despite missing the advantages of
density—this on top of pre-existing natural conditions. In most cases, institutional factors
and the development of good logistics have contributed to rural development.
56.
In Peru’s coastal area, weather conditions make asparagus production ideal. On
top of that, the government enacted a policy aimed at seeing the area move away from
traditional agriculture, through the development of R&D and quality assurance
institutions such as would improve the final product. It also contributed to the creation of
the Instituto Peruano del Espárrago and supported cold logistics operators. As a result, as
2003, the asparagus sector was responsible for the creation of fifty thousand jobs and
producing 24% of Peru’s agriculture exports, for a net-worth of over $200 million.
57.
In Brazil, during the eighties, the National Center for Research on Soya developed
new techniques allowing Soya cultivation in tropical areas. This was an improvement
over the traditional production then taking place in only the southern part of the country.
This technological change allowed areas made up of large flatlands, as found in the
Cerrado region, to participate in soya cultivation, which in turn saw Brazil achieve 24%
of the world’s soya production by 2002.
58.
In Colombia, the areas surrounding Bogota offer the ideal natural conditions for
the production of flowers, though in this, they do not differ that much from other regions
in Colombia as well as regions in such countries as Ecuador and Costa Rica. The
difference is that Bogota was able to put in place a sophisticated airport logistics, thus
allowing producers to reach costumers just in time for the high season. Effectively, these
producers were able to expand their scale of production and operations. This was made
possible in part by the free skies policy that exists with the US and the EU for cargo,
enacted by the government years earlier. Additionally, producers had organized
themselves with the support of export promotion agencies in order to reach destination
markets. In 2007, exports reached nearly $1 billion.