Regional development policies: Place-based or people-centred?

Indermit Gill, 9 October 2010

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Economic policy and economic geography are very much live issues, even if Paul Krugman (2010) suggested that the heyday of the New Economic Geography is past (Combes et al. 2008, Brülhart 2009).

2009 saw three major reports on the nexus:

  • A report authored by Fabrizio Barca (2009) for the EU made the case for “tackling persistent underutilisation of potential and reducing persistent social exclusion in specific places through external interventions…”
  • An OECD report (2009) argued that persistent disparities between regions imply unused growth potential, reckoning that since “per capita GDP in the top-ranked region of a[n OECD] country is at least double that of the lowest-ranked region”, it is better on efficiency and equity grounds for policies to target the lagging regions for growth-enhancing policies.
  • The World Bank’s World Development Report Reshaping Economic Geography (2008) proposed policies that recognise the spatially unbalanced nature of economic growth.

Reality check: Economic growth will be unbalanced

The OECD and Barca reports are kind-hearted and well intentioned. But they do not face up to a fundamental fact. Prosperity does not come to every place at once, and to some places it does not come at all.

It is difficult for any caring person to accept this fact, but a quick look at any nation for any period since the industrial revolution confirms this. Policymakers, as responsible stewards of public money, must make policies based on clear-headed assessments of how growth and development actually take place. Any realistic analysis shows that economic activity is not evenly spread – definitely not in large middle-income countries such as Mexico, not in mid-sized but more developed countries such as Poland, nor even in small advanced economies such as Belgium.

Take a look at these two maps of economic density (GDP per sq km) in central Europe and a closer image of Poland’s economic geography (Figures 1 and 2). What these maps show is that at any geographic scale – global, regional, or national –economic activity is uneven, often spiky. And this pattern persists when countries attain high incomes. Economic density maps of Germany, France, Japan, and the US are also spiky.

Figure 1. Economic activity in central Europe – An uneven topography

Source: World Bank GIS Laboratory.

Figure 2. Economic activity in Poland – Unevenly distributed among places

Source: World Bank GIS Laboratory.

Old wine in new bottles

Regional development policies have tried to encourage – even coerce – enterprises to move away from the leading regions where economic activity has become concentrated, and locate in lagging regions. Over time, these policies have become somewhat more enlightened. Instead of discouraging enterprises from locating in leading areas, they now claim to encourage economic activity in lagging regions, to “exploit their unused potential.” This is a belated recognition of the power of economic concentration. Less charitable observers call these “new” place-based policies “old wine in new bottles”.

Integrate, integrate, integrate

This poses an apparent dilemma. Should policymakers abandon lagging regions, at least until a country accumulates so much wealth that it can waste some of it on incentives for economic activity in these places? The 2009 World Development Report provides a better solution. Policymakers should instead promote economic integration of lagging with leading places.

Even for those who have recognised the futility of providing economic incentives for staying and striving in lagging regions – such as the discouraged regional development specialists who worked for decades in Italy’s Mezzogiorno – the temptation is to think of highways, railroads, and airports as the main instrument of integration. The World Development Report emphasises that the most potent instruments for integration are spatially blind improvements in institutions; put more simply, the provision of essential services such as education, health, and public security. The OECD report acknowledges, “the positive impact of infrastructure investment on growth depends, for example, on education levels…”. But then it goes on to provide an obscure qualification: “The key appears to be how assets are used, how different stakeholders interact and how synergies are exploited in different types of regions.”

The World Development Report takes a clearer stand. Its main message is that economic growth will be unbalanced, and to try to spread out economic activity – too much, too far, or too soon – is to discourage it. But development can still be inclusive, in that even people who start their lives far away from economic opportunity can benefit from the growing concentration of economic activity in a few places. And the way to get both the benefits of uneven growth and inclusive development is through economic integration.

The notion of economic integration should be central to the debate on regional development, but the discussions have generally become narrowly focused on places that are not doing well. The World Development Report reframes this debate in a way that better conforms to the reality of development. The reality is that it is the interaction between leading and lagging places is the key to economic development. The reality is that spatially targeted interventions are just a small part of what governments can do to help places that are not doing well. The reality is that, besides place-based interventions, governments have far more potent instruments for integration. They can build the institutions that unify all places, and put in place infrastructure that connects some places to others.

The Report calls for rebalancing these policy discussions to include all the instruments of integration – institutions that unify, infrastructure that connects, and interventions that target. And it shows how to use the insights from centuries of experience and decades of analysis to tailor the use of these policy instruments to address integration challenges that range from the straightforward to the complicated (see Table 1).

Table 1. Regional development policies calibrated to integrate countries

 
Country type
 
Sparsely populated lagging regions
Densely populated lagging regions in united countries
Densely populated lagging regions in divided countries
What policies should facilitate
Labour and capital mobility
Labour and capital mobility
Market integration for goods and services
 
Labour and capital mobility
Market integration for goods and services
Selected economic activities in lagging regions
Policy Priorities
 
 
Spatially blind “institutions”
 
Fluid land and labour markets, security, education and health, safe water and sanitation
Fluid land and labour markets, security, education and health, safe water and sanitation
Fluid land and labour markets, security, education and health, safe water and sanitation
Spatially connective “infrastructure”
 
 
Interregional transport infrastructure
Information and communication services
 
Interregional transport infrastructure
Information and communication services
Local roads
Spatially targeted “incentives”
 
 
 
 
 
Incentives to agriculture and agro-based industry
Irrigation systems
Workforce training

Source: World Development Report 2009, Chapter 8.

The bedrock of regional development policies should be spatially blind provision of essential public services and balanced regulation of land, labour, and product markets. On this foundation of common institutions, well-chosen investments in connective infrastructure should be used to reduce the distance of people to prospering places. If history, language, or culture prevents people in lagging regions from accessing the economic opportunities in leading places, place-based economic incentives can help. But both logic and experience show that place-based incentives only succeed when they are accompanied by efforts to strengthen institutions and infrastructure.

Follow the Irish

The experience of Ireland is especially educational for the new and future member states of the EU. Between 1977 and 2008, Ireland’s GDP per capita grew from less than 75% of the EU average to more than 125%. Despite the crisis, Ireland remains among the ten countries with the highest per capita income in the world. What is behind Ireland’s success? Among other things, recognising the national benefits of spatial concentration, and coordinated efforts to promote domestic integration through a sensible blend of spatially blind social services and well-placed investments in infrastructure.

Since joining the EU in 1973, Ireland received approximately €17 billion in EU Structural and Cohesion Funds through the end of 2003. In the first two rounds of EU funding, the entire country was classified as an Objective One area. Between 1993 and 2003 cohesion funds supported 120 infrastructure projects at the cost of about €2 billion. The choice of projects was based on a national development plan, which focused on investments in economic infrastructure that stimulated national economic growth.

The Irish invested aggressively in education, training, and lifelong learning in all of Ireland to provide investors with a good business environment countrywide. Today, Ireland is one of the top ten countries for doing business. Infrastructure improvements were more selective. These included investments in leading regions and in connecting leading and lagging areas, such as the M50 (Dublin Ring Road), M1 (Dublin-Belfast), and improvements in the N4 (Dublin-Sligo), N7 (Dublin- Limerick), and N11 (Dublin-Rosslare). With its skilled labour force and good logistics, Ireland has become a popular destination for American firms wishing to reach European markets, and a popular destination for European workers.

Contrast the Irish approach to cohesion funds with the “Iberian approach”. Ireland’s rapid convergence toward the incomes of Europe’s leaders was accompanied by a rising spatial concentration of economic activity. Compared with the other cohesion countries – Greece, Portugal, and Spain – Ireland’s economic concentration rose much more (see the Figure 3 below). But its per capita income grew much faster too. In 1977 Greece, Ireland, and Spain had per capita incomes of about $9,000; Portugal’s was about $6,000. By 2002 Portugal had an income of $11,000, and Greece and Spain close to $15,000. Ireland’s per capita income had risen to $27,500. By 2008, it was more than $45,000, among the highest in the EU.

Figure 3. As Ireland converged internationally, domestic concentration increased

Sources: Dall’Erba (2003) and World Bank (2008)

Today, almost all regions in the new member nations in Eastern Europe qualify for EU financial support. They should consider the Irish example of using the funds for international convergence and not – until later stages – for spatially balanced economic growth within their borders. As the old member states of Western Europe struggle to find new drivers of growth and greater efficiency in public spending, they too would do well to shift from place-based incentives to people-centred policies that help harness the benefits of agglomeration, mobility, and specialisation.

References

Barca, Fabrizio (2009), An Agenda for a Reformed Cohesion Policy: A Place Based Approach to Meeting European Union Challenges and Expectations, Brussels.

Brülhart, Marius (2009), “Is the new economic geography passé?”, VoxEU.org, 7 January.

Combes, Pierre-Philippe, Miren Lafourcade, Jacques-François Thisse, Jean-Claude Toutain (2008), “Long-run spatial inequality in France: Evolution and determinants”, VoxEU.org, 5 December.

Dall'Erba, Sandy (2003), "The Efficiency-Equity Trade-off as an Explanation of the Mitigated Success of the European Regional Development Policies", University of Illinois Working Paper. Urbana, IL.

Krugman, Paul (2010), “The new economic geography, now middle-aged”, Presentation for the Association of American Geographers, 16 April.

OECD (2009), Regions Matter: Economic Recovery, Innovation and Sustainable Growth. Paris.

World Bank (2008), World Development Report 2009: Reshaping Economic Geography, Washington, DC .
 

Topics: Development, Europe's nations and regions
Tags: development, Eastern Europe, income inequality, Ireland

Comments

Response to Indermit Gill

The Place Based Approach: A Response to Mr. Gill
 
Fabrizio Barca
Ministry of Economy and Finance, Italy
 
and
 
Philip McCann
University of Groningen, The Netherlands
 
A recent communication by Indermit Gill from the World Bank entitled “Regional development policies: Place-based or people-centred?” available at the website: http://www.voxeu.org/index.php?q=node/5644 suggests that the place-based arguments put forward by the 2009 Barca Report An Agenda for a Reformed Cohesion Policy and also the OECD 2009a Report Regions Matter: Economic Recovery, Innovation and Sustainable Growth really reflect the ‘caring’ beliefs and values of ‘kind-hearted’ and ‘well-intentioned’ people who wish to spread wealth and prosperity across all communities. In reality Mr Gill argues that these people do not understand the hard and unpalatable realities of the role played by economic geography in growth and development processes, and that such people should really face up to the facts. His argument is that the mechanisms of economic geography, as described in the 2009 World Development Report Reshaping Economic Geography published by the World Bank, imply that place-based approaches are old regional policies in “new bottles” and that a space-blind sectoral approach is the only realistic way forward for promoting economic integration and development.
Apart from noting at this stage that, as with the 2009 World Development Report, the contributors involved in the two reports criticized by Mr Gill, as well as another OECD 2009b report How Regions Grow, include many of the world’s most famous economic geographers and spatial economists, the objectives of this note are threefold: firstly, to demonstrate that Mr. Gill’s interpretation of the policy implications of the report produced by his own institution is naïve at best; secondly, to clarify the fact that Mr. Gill misrepresents the place-based approach, reflecting a poor understanding of the determinants of under-development and of the relationships between institutions and economic geography; and thirdly to demonstrate that place-based approaches allow for a much more targeted and sophisticated policy response to the political economy of economic geography, than the catch-all recommendations offered by Mr. Gill.
 
On the first point, the 2009 World Development Report Reshaping Economic Geography was a fine piece of work, but the note by Mr Gill oversimplifies the messages contained in the report and its background material, making it appear like “old wine in new … maps”. The crucial message to come out of the report was that geography matters for development. Institutional reforms, if homogeneous and space-blind, can help in seconding the invisible hand of geography. In order to bring home this message, the text of Reshaping Economic Geography is therefore filled with maps and diagrams showing that the world is ‘spiky’ (to use Richard Florida’s terminology), in the sense that economic activity is highly uneven in spatial terms. But who denies that today? Who denies the “spatially unbalanced nature of economic growth” – to use the words with which Mr. Gill characterizes the WB contribution?[1] The fact that place matters and context matters, fundamentally, for all forms of development and growth, has been well understood by geographers and sociologists for well over a century. In contrast, for most economists, an awareness of this has only slowly started to emerge since the seminal work of Paul Krugman in the early 1990s. Indeed, both the European Commission and the OECD, the targets of Mr Gill’s critique, also produce similar spiky economic geography diagrams.
But acknowledging that the world is spiky does not imply that policy regarding cities and regions should automatically be space-blind and sectoral in nature, irrespective of the context. No reading of the economic geography literature points in that direction. It depends on the relationships between institutions and economic geography which differ markedly between locations. Development is not simply about fostering general institutions, nor is it just about encouraging the growth of large cities. It is about fostering the right kinds of institutions and the right kinds of spatial economic arrangements in the right places. But this itself requires an understanding of the profound contextual role played by history, culture, politics, transport networks, land use planning, and land tenure systems, on the existing and emergent institutional and governance structures and systems of places.
 
Here the thesis of the Geography Report runs into an ill-producing paradox. It calls – once again by reading Mr.Gill’s summary – for the “provision of essential services such as education, health and public security” and for the “balanced regulation of land, labour and product markets”. Up until this point, who disagrees? But then it claims that this provision should be “spatially blind”, and relegates the “spatially targeted” interventions to “incentives to firms and training” in some regions. The paradox is that the institutional reforms which the report calls for do almost always have – even when they are self-proclaimed “blind” – relevant space-effects, due to the very effect of geography and social contexts. Furthermore, most of the institutional interventions are implicitly, sometimes covertly, aimed at given spaces. They are often taken – many land regulations, decisions concerning transport, health, environmental, security infrastructures - under the pressure of powerful corporate lobbies of the potential agglomerations. No surprise and nothing wrong about it! Agglomerations are not only the effects of climate or “natural” (i.e. uncoordinated) economic forces; they are also the effect of billions of dollars-rupies-euros-renminbi of tax-payers money used by Governments to boost agglomerations. There is no blindness in these decisions. Which is why calling for blindness is equivalent to making any policy action unaccountable, a-democratic and ineffective.
 
Let’s do a reality check for developing countries which are the focus of the report. Even fundamental institutional reforms in many of these countries, as has been long advocated by the World Bank itself, are no guarantee whatsoever of development, precisely because of the complex problems associated with economic geography (Venables 2010). It may well be the case that in many countries urban expansion is the only realistic policy option for growth and development. However, such a policy recommendation must come with a clear health warning. Interregional labour mobility often occurs in response to differences in average wage levels, and the market failures associated with this notoriously inefficient and selective process give rise to the massive over-expansion of urban areas, which once engendered are largely irreversible by market mechanisms alone. The tragic social and environmental consequences of these highly inefficient factor adjustment processes are obvious in many developing countries to those who are willing to visit barrios, slums, or favellas. Few people who live there are likely to be cheerleaders for a space-blind sectoral-type thinking. The point here is that simple factor mobility mechanisms are insufficient to respond to the complex institutional challenges associated with economic geography, and where such policies are recommended, it reflects an implicit admission that institutional reforms of the type long since advocated by the World Bank are often largely futile. While some North American urban economists like to positively characterize barrios, slums, or favellas as areas of entrepreneurship and innovation, rather than as areas of oppression or squalor, few of these commentators have ever lived for long periods in such places. Geography and context matters for one’s perspective, and geographers, sociologists and political scientists all know this is true, whereas unfortunately most economists choose to ignore this reality.
 
A place-based approach is exactly the appropriate framework to address these problems. Unfortunately – this is the second point - Mr. Gill’s description of a place-based approach as representing basically a policy which manipulates where people and firms should be - is at best a serious misunderstanding . A place-based approach explicitly tackles these issues head-on by considering how institutional structures and governance systems influence the economic geography and vice-versa, and makes the most of what we have learned from years of development policies; namely that institutions capable of supporting a “healthy, sustainable market-based system” are “highly specific to local conditions”[2]. A place-based approach considers what bundles of public goods are appropriate to break under-development. Indeed, a place-based approach also allows for better sectoral approaches to be deployed, by bringing to light their space effects and integrating them into the appropriate mixes for place. It is certainly not – as argued by Mr. Gill – an approach aimed at places rather than persons: it is an approach aimed at persons living in given places, with the aim to make them freer to choose whether to stay or go and where to go.
 
The place-based approach starts from two premises. First, the very public interventions that are needed for agglomerations to flourish are taken by a State that it is profoundly ignorant about the consequences of its action. As economic geography has shown, we know very little about the locally efficient limits of an agglomeration and even more so about its globally efficient limits, i.e. whether any positive effect it might have where it is taking place is greater than any negative effect elsewhere. This ignorance recommends for transparency, open public debate, a frank proclamation and an analysis of all space-effects. Which is what a place-based approach is about. This is the opposite of what Mr. Gill calls for; and the opposite of the alarming call of some sections of the WB Report for public action to “follow” the decisions of large corporations[3]. Second, many under-development traps depend on the lack of either the capacity or unwillingness – due to redistributive effects[4] - of local elites to choose the appropriate institutions: this calls, once again, for exogenous place-oriented interventions from the outside to destabilize the internal equilibrium of places and to promote a process of change.
 
Good development policy must be able to circumvent the rent-seeking behaviour of local elites, and overcome the problems of what economists call moral hazard, adverse selection and opportunism. In other words it must be able to overcome any forms of self-serving and counter-productive local institutional behaviour which might thwart the success of policy initiatives. At the same time, good policy must also encourage institutional reforms, foster the appropriate multi-level governance innovations, and create a policy space and a public discourse where all public interventions aimed at agglomerations are also discussed. This can only be achieved by designing incentive systems which mobilise all local actors in a manner which promotes constructive and mutually reinforcing behaviour. This is what extracting local knowledge and building on local capacity is all about, and the potential gains from such approach are enormous. This is the third point.
 
Recent work by the OECD demonstrates that some two-thirds of both GDP and also GDP growth potential comes from non-core regions. As such, small productivity improvements across a wide range of non-core regions provide an enormous national growth potential. Extracting this untapped potential is critical from both a social cohesion perspective and also from a territorial cohesion perspective. It is also critical from a national perspective, because as Nicholas Kaldor observed some forty years ago, these regions tend not to face capacity constraints and therefore have the advantage over many core regions in that expansion in these regions has no inflationary impacts. In contrast, while the world-leading global city regions account for one third of OECD-wide growth, and this ratio varies little between OECD countries, their possibilities for further expansion are greatly limited in many cases because of land-use constraints. Moreover, even without such constraints, on the basis of mainly US econometric estimates, the doubling of the size of a city provides a productivity premium of some 5-7%. As such, even adopting a very naïve interpretation of these results (which we obviously caution against) suggests that massive population increases in urban areas such as The Randstad, Copenhagen, London, Paris, Tokyo or Sydney, would not provide a massive productivity gain for society as a whole. What such population increases would surely do, however, is to impose enormous strains on all aspects of society and also on the natural and built environment underpinning the national urban structure. Even a cursory understanding of the relationship between city-size distributions and productivity in OECD countries suggests that it is not even remotely necessary in many cases. While the evolving rural-urban relationships mean that significant urban population increases might be possible and meaningful in cities such as Warsaw or Prague, the same is not true for the cities of The Netherlands, and alternative regional development policies must be considered.
 
This is very important in the context of many OECD countries where institutional systems are already highly developed, where the richest cities are not large but often are small to medium sized highly-networked cities, where rural-urban migration possibilities have been almost exhausted in many cases, and where the legacy effects of heterogeneous cultural, legal, land-tenure, and political systems, preclude Mr. Gill-type policy responses. A place-based approach not only says that geography matters, but that geographical context in its broader social, cultural, historical, legal and political economy, sense, rather than simply in a cartographical sense, really does matter for policy. From this perspective, if we consider the Iberian and Irish examples employed by Mr Gill, many observers with a detailed place-based knowledge of these parts of the world would not recognise such simple characterizations, and once again would in no way infer that space-neutral sector policies are the logical lessons to emerge from the experience of these countries.
 
A place-based approach provides precisely the analytical lens required to properly tailor policy analysis, design and delivery to the context. Such an approach has already been recently used to very good effect by the OECD exactly in the case of The Netherlands (OECD 2010). Moreover, a place-based approach also provides for a much sophisticated consideration of the urban problems faced by countries such as Brazil, South Africa and India than does the 2009 World Development Report. The over-expansion of the massive cities in these countries now represents the greatest long-term social and environmental challenge faced by these societies, and a place-based approach provide ways forward for considering what might be the most appropriate long-term development trajectories.
 
 
References
 
Acemoglou, D., 2009, The Crisis of 2008:Structural Lessons for and from Economics, in CEPR Policy Insight. n. 28  
 
Acemoglou, D., Johnson, S. And Robinson J.A., 2005, Institutions as the Fundamental Cause of Long-Run Growth, in Aghion, P., and Durlauf, S.N., (eds.), Handbook of Economic Growth, North Holland, Elsevier Academic Press, vol. 1ª, pp. 385-472.
 
Barca, F., 2009, An Agenda for a Reformed Cohesion Policy, European Commission, Brussels
 
Rodrik, D., 1999, “Where did all the growth go? External shocks, social conflicts and growth collapses”, Journal of Economic Growth, 4.4
 
OECD, 2009a, Regions Matter: Economic Recovery, Innovation and Sustainable Growth, Organisation for Economic Cooperation and Development, Paris
 
OECD 2009b, How Regions Grow, Organisation for Economic Cooperation and Development, Paris
 
OECD 2010, National Place-based Policies in The Netherlands, Organisation for Economic Cooperation and Development, paris
 
Venables, A.J., 2010, “Economic Geography and African Development”, Papers in Regional Science, 89.3, 469-483
 

[1] Pictorial representations of a spiky world are really only surprising to two groups of people: namely those who have no understanding of economic geography, and who therefore believe that Thomas Friedman’s the World is Flat thesis is largely correct; and secondly, those development economists, including ironically many in the World Bank itself, who for decades have ignored the role of geography.

[2] See D. Rodrik 1999.

[3] See for example Box 4.6 of the Report. On how the recent economic crisis has reminded us of how wrong was to put the full faith of the State on the capacity of  large corporations to offer an holistic synthesis of all stakeholders’s interests, see D. Acemoglou (2009). 

[4] See D. Acemoglou, S.Johnson, and J.A. Robinson 2005).

 

Indermit Gill
Chief Economist of the Europe and Central Asia Region, World Bank