World Development Report 2009

1. World Development Report 2009 Findings and emerging messages on Territorial Development

2. 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. Moscow Workshop

3. 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 Moscow Workshop

4. Three spatial scales Shanghai, China and East Asia represent the local, national, and international spatial scales, respectively Moscow Workshop

5. 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 Sub-Saharan Africa and Central Asia • Mainly small countries that have not grown. Moscow Workshop

6. 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 Moscow Workshop

7. Spatial Scale 1: Spatial Scale 2: Spatial Scale 3: Country Region Area 1 2 3 Part One: Division Density Distance : : : Stylized Poor - rich Rural - urban Lagging - leading Facts 4 5 6 Part Two: Factor mobility Scale economies Transport costs : : : Market Migration Agglomeration Trade Forces 7 8 9 Part Three: Urbanization Area Regional Government developm ent integration Policies Structure of Report Moscow Workshop

8. 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. Moscow Workshop

9. 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. Moscow Workshop

10. 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 Moscow Workshop

11. Euclidean vs. Economic Distance Moscow Workshop

12. 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 Moscow Workshop

13. Vietnam’s poverty rate is higher in the lagging inland, but poverty mass is greater on the leading coasts Moscow Workshop

14. Concentration in leading areas With development, spatial concentration of economic activity initially rises, then levels off Moscow Workshop

15. 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 a-third+ 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) Moscow Workshop

16. With development, spatial concentration of economic activity rises, then levels off : Evidence from time series At magnified scale < US$10000 Full sample: 10 countries Moscow Workshop

17. With development, spatial concentration of economic activity rises, then levels off: Evidence from a cross section of countries Moscow Workshop

18. Spatial disparities in living standards widen initially, can remain high for long periods, but narrow as economies reach higher levels of income Convergence Moscow Workshop

19. Spatial disparities in income widen and remain high, before converging slowly: Historical evidence Moscow Workshop

20. Spatial disparities in income remained high in the Canada and France for over two generations Moscow Workshop

21. Spatial disparity in welfare widens and remains high, before slowly converges: Contemporary evidence Moscow Workshop

22. Most developing countries are experiencing income divergence Moscow Workshop

23. Despite the divergence… …. the dynamics of spatial divergence are in the form of a “race to the top” • Allsub-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. • Allsub-national areas have experienced improved welfare (e.g., poverty fell) Moscow Workshop

24. Despite income divergence, non-monetary welfare measures converged Poverty Incidence Access to sanitation Moscow Workshop

25. 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. Moscow Workshop

26. An example Moscow Workshop

27. Choices for integrating leading and lagging areas • Should policies focus on • 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? Moscow Workshop

28. 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 Moscow Workshop

29. A Policy Framework • Three sets of policies for integration • Spatially blind policies (institutions) • Help people move towards opportunities • Improve welfare outcomes of people Moscow Workshop

30. Spatially blind tax policies help France benefit from concentrated production and declining spatial disparities • Scissor effect between the geography of production and income Moscow Workshop

31. Spatially blind tax policies reduce spatial inequalities in the United States • Spatially blind income tax system reduces ex post income disparities across states • Data from IRS returns Moscow Workshop

32. 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 Moscow Workshop

33. 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 Moscow Workshop

34. 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? Moscow Workshop

35. Large variations in population densities across and within countries Moscow Workshop

36. 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. Moscow Workshop

37. In Brazil, the poverty ratio is high in the North, but most poor people live along the coast Moscow Workshop

38. In India, the poverty ratio is highest in the heartland, and it is home to 60 percent of the country’s poor Moscow Workshop

39. 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). Moscow Workshop

40. Reducing Distance: The policy framework in action Division Density Moscow Workshop

41. 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) Moscow Workshop

42. 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 Moscow Workshop

43. Reducing Distance: The policy framework in action Division Density Moscow Workshop

44. 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) Moscow Workshop

45. 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. Moscow Workshop

46. 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 Moscow Workshop

47. Reducing Distance: The policy framework in action Division Density Moscow Workshop

48. Incentives are effective when they exploit geographic advantages China’s Special Economic Zones strategically opened up the country to external markets Moscow Workshop

49. 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 Moscow Workshop

50. 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 involvespatial equity-efficiency tradeoffs Moscow Workshop