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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

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World Development Report 2009

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World development report 2009 l.jpg

World Development Report 2009

Findings and emerging messages on

Territorial Development


What the report proposes l.jpg

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


How it changes the way we see development l.jpg

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


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Three spatial scales

Shanghai, China and East Asia represent the local, national, and international spatial scales, respectively

Moscow Workshop


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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 Sub-Saharan Africa and Central Asia

    • Mainly small countries that have not grown.

Moscow Workshop


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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

Moscow Workshop


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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


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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


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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.

Moscow Workshop


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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

Moscow Workshop


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

Moscow Workshop


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Concentration

in leading areas

With development, spatial concentration of economic activity initially rises, then levels off

Moscow Workshop


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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 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)

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With development, spatial concentration of economic activity rises, then levels off : Evidence from time series

At magnified scale < US$10000 Full sample: 10 countries

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

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

Convergence

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Spatial disparities in income widen and remain high before converging slowly historical evidence l.jpg

Spatial disparities in income widen and remain high, before converging slowly: Historical evidence

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Spatial disparities in income remained high in the canada and france for over two generations l.jpg

Spatial disparities in income remained high in the Canada and France for over two generations

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Spatial disparity in welfare widens and remains high before slowly converges contemporary evidence l.jpg

Spatial disparity in welfare widens and remains high, before slowly converges: Contemporary evidence

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Most developing countries are experiencing income divergence

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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


Despite income divergence non monetary welfare measures converged l.jpg

Despite income divergence, non-monetary welfare measures converged

Poverty IncidenceAccess 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.

Moscow Workshop


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An example

Moscow Workshop


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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


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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

  • Scissor effect between the geography of production and income

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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

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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

Moscow Workshop


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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

Moscow Workshop


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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?

Moscow Workshop


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Large variations in population densities across and within countries

Moscow Workshop


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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.

Moscow Workshop


In brazil the poverty ratio is high in the north but most poor people live along the coast l.jpg

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

Moscow Workshop


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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

Moscow Workshop


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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).

Moscow Workshop


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Reducing Distance: The policy framework in action

Division

Density

Moscow Workshop


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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)

Moscow Workshop


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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

Division

Density

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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)

Moscow Workshop


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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.

Moscow Workshop


And many infrastructure projects to connect lagging areas have been wasteful bridges to nowhere l.jpg

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


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Reducing Distance: The policy framework in action

Division

Density

Moscow Workshop


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Incentives are effective when they exploit geographic advantages

China’s Special Economic Zones strategically opened up the country to external markets

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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


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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 involvespatial equity-efficiency tradeoffs

Moscow Workshop


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Reducing Distance: An instrument per challenge

Division

Density

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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.

Moscow Workshop


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