Download Lagging areas

World Development Report 2009
Findings and emerging messages on
Territorial Development
What the report
proposes
• Concentration of economic mass is inevitable and
generally desirable
– At least within countries
• But persistent spatial disparities in living standards
are neither desirable nor inevitable
– Not within countries, not between countries
• The key to get both concentration (of production) and
convergence (of welfare) is integration
– Both within and between countries
• When countries do this well, they will see unbalanced
growth and balanced development.
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How it changes the way
we see development
• Bumps—from smooth to uneven
– All places do not grow at the same time
– Don’t expect that “right policies” will equalize growth
in all places
• Curves—from linear to nonlinear
– When firms and people want to be where most other firms and
people are, differences can keep increasing
– Expect spatial disparities in production and living
standards to first rise, and then fall
• Spills—from neat to messy
– Rising congestion leads to spillover of benefits to those nearby
– Growth strategies which worked for earlier developers
are not necessarily the best for latecomers
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Three spatial scales
Shanghai, China and East Asia represent the local, national, and international
spatial scales, respectively
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Big challenges
• A billion in slums
– According to UN-Habitat, three quarters of the urban
population in least developed countries are in slums
– But absolute numbers in informal settlements are
larger in middle-income countries
• A billion in fragile lagging areas
– According to WDR 2003, about a billion people in
distant arid, rugged and forested lands
– Mainly large countries that have grown
• A billion in countries at the bottom of the global hierarchy
– According to Paul Collier, in 60 countries, mostly in SubSaharan Africa and Central Asia
– Mainly small countries that have not grown.
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Development in 3D
• Density—economic output or total
purchasing power per unit of surface area
– Market potential, highest in large settlements where
economic activity is concentrated
• Distance—ease of access to markets
– Areas within a country that are far from economically
dense centers are more likely to lag behind
• Division—barriers to market access
– Most relevant in an international context, where
impermeability of borders can be a problem
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Structure of Report
Part One:
Stylized
Facts
Part Two:
Market
Forces
Part Three:
Government
Policies
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Spatial Scale 1:
Area
Spatial Scale 2:
Country
1
2
3
:
Density
Rural-urban
:
Distance
Lagging-leading
:
Division
4
5
6
:
Scale economies
Agglomeration
7
Urbanization
:
Factor mobility
Migration
8
Area
development
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Spatial Scale 3:
Region
Poor-rich
:
Transport costs
Trade
9
Regional
integration
7
Main Points
• With development, differences between leading and
lagging areas in economic mass become sharper, while
those in social welfare becomes blurred
• Labor mobility is the strongest natural mechanism to
enhance agglomeration economies and facilitate
convergence
• Policies are needed to reduce differences in living
standards between lagging and leading areas
– Policies that integrate lagging and leading areas will help to unify
countries;
– But, forcing uniformity in economic production will be expensive
as well as an elusive policy objective.
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Economic activities concentrate
spatially while living standards
converge with development
• Spatial disparities in welfare are big, especially in
developing countries
– For the U.S., Canada and Japan, the income gap between
lagging and leading regions is about 20 percent.
– For a sample of 75 low and middle income countries, the gap is
about 70 percent
• Economic activities are spatially concentrated, and
more so in developed countries
– China’s coastal areas produce 50 percent of its output, on 20
percent of its land
– Greater Tokyo has 40 percent of Japan’s output on just 4 percent
of its land.
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Defining “Distance”
• Physical geography is not the only
determinant
– Economic: time and monetary costs to reach
markets can be reduced by improved
infrastructure (see India slide)
– Social aspects: psychic costs can be reduced
by human capital investments
• Destination of interest
– Dense economic mass or markets
– Distance-to-density: Accessibility to markets
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Euclidean vs. Economic
Distance
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Distance to Density
• Leading areas: dense economic mass
– Thick markets of labor, capital, goods, services, and
ideas
– Networks of linkages among producers, workers, input
suppliers, traders, and consumer
• Lagging areas: distant from density
– Higher poverty ratios, low productivity, high
unemployment
– Generally lower growth
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Vietnam’s poverty rate is higher in
the lagging inland, but poverty mass
is greater on the leading coasts
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Concentration
in leading areas
With development, spatial
concentration of economic activity
initially rises, then levels off
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Concentration
• Within most countries in the world, economic mass is
spatially concentrated
– 25% of nations, e.g., Botswana, Brazil, Norway, Russia, Thailand produce half
+ GDP on 5% land
– 50% of nations, e.g., Argentina, Saudi Arabia, Slovenia, Zambia, generate athird+ GDP on 5% land
• Spatial concentration of economic activity increases as
countries develop
– Evidence from time series
– Evidence from cross-section
• Administrative areas (national accounts)
• Statistical areas (household survey data)
• Geographic areas (Nordhaus’ geo-physically scaled economic data)
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With development, spatial concentration of
economic activity rises, then levels off :
Evidence from time series
At magnified scale < US$10000
10
10
France,1801-1999
8
9
Brazi,'60-'04
8
7
7
9
France,1801-1963
Brazil,'60-'04
6
Chile,'76-'04
Indonesia,
5
'89-'05 Philippines,'80-'05
4
concentration
concentration
Full sample: 10 countries
Netherlands,1850-1960
2
Thailand,'75-'04
5
Chile,'76-'04
canada,1890-2006
4
Netherlands,1850-2006
2
1
1
0
0
0 March 2000
4000
6000
8000
31,per2008
cap GDP (constant 2000 US$)
USA,'60-'00
6
3
3
Japan,'55-'00
0
10000
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10000
20000
30000
per cap GDP (constant 2000 US$)
40000
16
With development, spatial concentration of
economic activity rises, then levels off:
Evidence from a cross section of countries
3000
8000
13000
per capita GDP in 2000 US$
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Land Area:
10 longitude X 10 latitude
1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
%GDP confined in 5% of land
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-2000
Statistical Area:
Broad census regions
highest regional share of total
household consumption
highest provincial share of GDP
Administrative Area:
Province, state,
prefecture
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0 1000 2000 3000 4000 5000 6000 7000 8000
per capita GDP in 2000 US$
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0
5000 10000 15000 20000 25000 30000 35000
per cap GDP in 2000 US$
17
Convergence
Spatial disparities in living standards widen initially,
can remain high for long periods, but narrow as
economies reach higher levels of income
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spatial inequality (coeff of variation of regional
wages or income)
Spatial disparities in income widen and
remain high, before converging slowly:
Historical evidence
0.6
Sweden,1920-1961
0.5
Spain, 1860-1975
0.4
USA,1840-1960
0.3
Japan, 1955-1983
Habsburg Empire,1756-1910
0.2
0.1
UK,1871-1955
0
0
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2,000
4,000
6,000
8,000
10,000
12,000
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per capita GDP in constant intl Geary-Khamis dollar
14,000
16,000
19
France: regional inequality index based on
department agric wages
Canada: regional inequality index based on
provincial per cap gross value added
Spatial disparities in income remained
high in the Canada and France for over
two generations
2.5
2
1.5
1
0.5
0
1880
1900
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1920
1940
1960
2.5
2
1.5
1
0.5
0
1855
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1880
1905
1930
1955
20
Spatial disparity in welfare widens and
remains high, before slowly converges:
Contemporary evidence
Statistical Area:
Broad census regions
Land Area:
10 longitude X 10 latitude
8
max-min ratio of provincial per capita
GDP
max-min ratio of area per capita
household consumption
2.5
7
6
2
5
4
3
1.5
2
1
0
1
0
5000
per capita GDP (in 2000 US$)
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10000
0
5000
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10000
15000
20000
per capita GDP (in 2000 US$)
25000
30000
21
Most developing countries are
experiencing income divergence
China
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Thailand
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Indonesia
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Despite the
divergence…
…. the dynamics of spatial divergence are in
the form of a “race to the top”
• All sub-national areas in East Asian and E.
European & Central Asian countries grew in
average wage and household income
– even though by far the biggest gains have gone to the
already leading areas.
• All sub-national areas have experienced
improved welfare (e.g., poverty fell)
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Despite income divergence, nonmonetary welfare measures
converged
Poverty Incidence
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Access to sanitation
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What is different today?
The size of global market
• World Trade as a share of Global GDP today is more than
15 times that in 1820
• Successful development relies, more than ever, on an
outward-oriented strategy which works with the market by
focusing on leading areas to compete and trade.
• Rapid growth and transformation of internal economic
geography implies that spatial disparities will likely be
greater than in industrial countries during comparable
stages of development.
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An example
Britain in 1911
China in 2003
$4,709
$4,803
Leading area
London
Shanghai
Lagging area
East Anglia
Guizhou
Leading area’s per capita GDP as ratio of national
mean
1.7
3.3
Lagging area’s per capita GDP as ratio of national
mean
0.67
0.34
Per capita GDP (in constant International GearyKhamis$)
Shanghai in 2005 per cap GDP
$16,044
Equivalent to Britain’s per capita GDP in 1988
Guizhou in 2005 per cap GDP
$1,653
Equivalent to Britain’s per capita GDP in 1830
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• Should policies focus on
Choices for integrating
leading and lagging
areas
– Supporting market forces of out-migration from lagging areas (i.e.,
“moving people to jobs”)?
– Provide incentives to support economic development within lagging
areas (“moving jobs to people) ?
• Should specific instruments focus on
– Investing in places? Or
– Investing in people?
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Underlying principle – integration
can help unify countries
• National constitutions, which reflect political discourse
of countries, emphasize national unity as an important
objective.
• They focus on unity among people, and emphasize
equal access to health and education
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A Policy Framework
• Three sets of policies for integration
– Spatially blind policies (institutions)
• Help people move towards opportunities
• Improve welfare outcomes of people
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Spatially blind tax policies help France
benefit from concentrated production
and declining spatial disparities
France (NUTS2 Regions):
Increasing spatial concentration and decreasing spatial disparities
0.19000
0.0850
0.18500
0.0800
0.18000
0.0750
0.17500
0.0700
0.17000
0.0650
0.16500
0.0600
0.16000
Per capita GDP (CV)
0.15500
Per capita income (CV)
0.15000
0.0550
• Scissor effect
between the
geography of
production
and income
0.0500
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
Source: Martin 2005
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Spatially blind tax policies reduce
spatial inequalities in the United
States
Decrease in Spatial Inequality due to Spatially Blind Taxation
% change in spatial income
inequality between richest and
poorest states
5
0
-5
-10
-15
-20
-25
-30
1920
•
•
1930
1940
1950
1960
1970
1981
1990
2000
2003
Spatially blind income tax system reduces ex post income disparities across states
Data from IRS returns
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A Policy Framework
• Three sets of policies for integration
– Spatially blind policies (institutions)
– Spatially connecting policies (infrastructure)
• Inter regional transport investments reduce transaction costs
• Telecommunication investments increase information flows
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A Policy Framework
• Three sets of policies for integration
– Spatially blind policies (institutions)
– Spatially connecting policies (infrastructure)
– Spatially targeted policies to support growth in specific regions
(incentives)
• Fiscal incentives and subsidies
• Special economic zones
• Industry location regulations, investment climate
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Tailoring policies to overcome
country specific challenges
• Main challenge: overcoming distance between
lagging and leading areas
• Success in bringing distant areas closer to
markets requires adapting to country
circumstances
– Density: How sparse or densely populated are the
lagging areas?
– Division: How weak or strong are market forces of factor
mobility?
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Large variations in
population densities across
and within countries
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In China, lagging areas have
high poverty rates but fewer
poor people
In China, people have left places with inhospitable geography, such as the
Qinghai-Tibet Plateau with an elevation of 4,000m, or the highlands of the central
region with elevations of 2,000m above sea level.
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In Brazil, the poverty ratio is high in the
North, but most poor people live along
the coast
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In India, the poverty ratio is highest in the
heartland, and it is home to 60 percent of
the country’s poor
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Proposing a
taxonomy of countries
• Sparsely populated lagging areas (Russia,
Indonesia).
• Densely populated lagging areas in united countries
(Brazil, Mexico).
• Densely populated lagging areas in divided
countries (India, Nigeria).
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Reducing Distance: The policy
framework in action
Density
Division
Country
circumstance
United
Divided
Sparsely
populated
lagging areas
Institutions (e.g., spatially blind policies such as land
market reform, education, public service provision –
health, water supply, sanitation)
Densely populated
lagging areas
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Portable investments in human
capital help people move
towards opportunity
• Investing in education (human capital formation)
in “lagging” regions can increase the propensity
to migrate
– “Great migration” of African Americans out of the South
• Positive effects of schooling
– Female migration out of East Germany
• By 2004, only 90 women for every 100 men left in the East (see
map)
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Education helped women move
towards opportunity following
reunification in Germany
Number of women per 100 men in
the age group 18-29 in 2003.
• A shortage of women
in east Germany?
– Higher education
made it easier for
women to be
absorbed in labor
markets of the West
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Reducing Distance: The policy
framework in action
Density
Division
Country
circumstance
United
Sparsely
populated
lagging areas
Institutions (e.g., spatially blind policies such as land
market reform, education, public service provision –
health, water supply, sanitation)
Densely populated
lagging areas
Institutions and
infrastructure
(combination of
spatially blind and
integrative policies,
e.g., roads, ICT)
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Divided
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Infrastructure investments can integrate
lagging areas with national markets
Bangladesh
• Bridge over the Jamuna
River opened market access
for producers in the lagging
Northwest around the
Rajshahi division.
• Better market access helped
farmers diversify into high
value crops and reduced
input prices (Bayes 2007)
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But infrastructure investments
that reduce inter regional
transport costs often have
unintended consequences
• Local authorities in southern Italy actively lobbied for highway
projects in the 1950s
– Why? Proximity to a highway would yield great benefits to the local
economies.
• What happened? Subsequent investments that reduced
transportation cost between northern and southern Italy
accelerated the process of deindustrialization in the South.
– Why? Reduction in transport costs deprived firms in the Mezzogiorno from
the natural protection they had previously received from high trade barriers
• To the disappointment of local authorities, highway construction led
to increased concentration of production rather than dispersed
benefits.
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And many infrastructure projects to
connect lagging areas have been wasteful
“bridges to nowhere”
• US Transportation
Equity act
• $223 million to fund a
“bridge-to-nowhere” in
Alaska
• connecting Gravina
Island (population less
than 50) to the
metropolis of Ketchikan
(pop. 8,000)
• by a bridge nearly as
long as the Golden
Gate and higher than
the Brooklyn Bridge
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Reducing Distance: The policy
framework in action
Density
Division
Country
circumstance
United
Sparsely
populated
lagging areas
Institutions (e.g., spatially blind policies such as land
market reform, education, public service provision –
health, water supply, sanitation)
Densely populated
lagging areas
Institutions and
infrastructure
(combination of
spatially blind and
integrative policies,
e.g., roads, ICT)
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Divided
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Institutions, infrastructure
and incentives
(combination of spatially
blind, integrative, and
focused policies and
programs (e.g., local
roads, irrigation,
innovation, workforce
training, local
employment support)
49
Incentives are effective when they
exploit geographic advantages
China’s Special Economic Zones strategically opened up
Marchthe
31, 2008
Workshop
country to external Moscow
markets
50
But, incentives that fight market
forces are unlikely to succeed
• Western Europe
– Central government efforts of providing incentives to attract individual firms
in lagging areas and finance large scale infrastructure projects
• Brazil
– Federal government fiscal incentives to attract firms to the Northeast-interest rate subsidies, capital investment promotion, Free trade zones
• India
– Central government industrial licensing policy industry tried to stimulate
industry in lagging regions by banning heavy industry from metropolitan
regions and providing concessional finance to firms in lagging areas
• These spatially targeted interventions tried to offset agglomeration
economies that lead to concentration of firms and people
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Information Pre-requisites :
“Know thy economy”
• Invest in information on area-specific
comparative advantages
– natural, human and infrastructure endowments
– Perceptions of entrepreneurs on local bottlenecks
• Identify how different industries value market
access, localization, and urbanization
economies
– Relocation of economic activity that value
agglomeration and market access will need large
scale investments and involve spatial equityefficiency tradeoffs
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Reducing Distance: An
instrument per challenge
Density
Division
Country
circumstance
United
Sparsely
populated
lagging areas
Institutions (e.g., spatially blind policies such as land
market reform, education, public service provision –
health, water supply, sanitation)
Densely populated
lagging areas
Institutions and
infrastructure
(combination of
spatially blind and
integrative policies,
e.g., roads, ICT)
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Divided
Moscow Workshop
Institutions, infrastructure
and incentives
(combination of spatially
blind, integrative, and
focused policies and
programs (e.g., local
roads, irrigation,
innovation, workforce
training, local
employment support)
53
Summing up
• Consider the following rule: invest in activities that produce
the highest returns
• In leading areas, countries should prioritize investments in
places.
– Emphasize durable investments (e.g., transport and telecom) that
accelerate national economic growth
– Tilt investments to increase productivity of firms
• In lagging areas, countries should prioritize investments in
people.
– Emphasize portable investments (social services -- basic
education, health, water and sanitation) that accelerate poverty
reduction and stimulate mobility.
– Tilt investments to improve living standards of families.
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