43738 Reshaping economic geography world development report 2009 Reshaping Economic Geography world development report 2009 Reshaping Economic Geography THE WORLD BANK Washington, DC © 2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Foreword xiii Acknowledgments xv Abbreviations and Data Notes xvi Geography in motion: The Report at a Glance--Density, Distance, and Division xix Overview 1 Place and prosperity 1 The world is not flat 8 Markets shape the economic landscape 12 Putting development in place 20 Navigating This Report 33 Scope 34 Terms 34 Structure 39 Geography in motion: Overcoming Distance in North America 44 Part One Seeing Development in 3-D 47 1 Density 48 Defining density 49 Economic concentration--the richer, the denser 56 Convergence--rural-urban and within cities 62 What's different for today's developers? 70 2 Distance 73 Defining distance 74 Economic concentration in leading areas 81 Divergence, then convergence--between leading and lagging areas 84 What's different for today's developers? 93 v vi CONTENTS 3 Division 96 Defining division 97 Economic concentration 105 Divergence, then convergence 109 Geography, globalization, and development 115 What's different for today's developers? 120 Geography in motion: Overcoming Division in Western Europe 122 Part Two Shaping Economic Geography 125 4 Scale Economies and Agglomeration 126 A guide to scale economies 129 A different realm 132 A portfolio of places 135 Apprehension of market forces 140 5 Factor Mobility and Migration 146 From mercantilism to globalization to autarky, and back again 147 Labor mobility: learning from a generation of analysis 158 Practical policies for managing migration 168 6 Transport Costs and Specialization 170 What has happened: two centuries of experience 173 Transport costs and scale economies: two decades of analysis 181 What to do: transport policies in the developing world 184 Transport: an increasingly important sector 192 Geography in motion: Distance and Division in East Asia 194 Part Three Reframing the Policy Debates 197 7 Concentration without Congestion: Policies for an inclusive urbanization 198 Principles for managing a portfolio of places 200 A framework for integration 202 The framework in action 216 A strategy for inclusive urbanization 229 8 Unity, Not Uniformity: Effective approaches to territorial development 230 People seek opportunities 231 Countries seek unity 234 Contents vii A policy framework for integrating lagging and leading areas 238 The framework in action 245 Avoiding Balkanization: the political benefits of economic integration 258 9 Winners without Borders: Integrating poor countries with world markets 260 Regional integration to scale up supply, global integration to scale up demand 262 Building integrated neighborhoods: a framework 265 The framework in action 273 Geography in motion: Density, Distance, and Division in Sub-Saharan Africa 283 Bibliographical Note 287 Endnotes 291 References 305 Selected Indicators 331 Table A1 Geography and access 332 Table A2 Urbanization 335 Table A3 Territorial development 338 Table A4 International integration 340 Table A5 Other indicators 343 Sources and definitions 346 Selected World Development Indicators 349 Data sources and methodology 349 Classification of economies and summary measures 350 Terminology and country coverage 350 Classification of economies by region and income, FY2009 351 Table 1 Key indicators of development 352 Table 2 Millennium Development Goals: eradicating poverty and improving lives 354 Table 3 Economic activity 356 Table 4 Trade, aid, and finance 358 Table 5 Key indicators for other economies 360 Technical notes 361 Index 369 viii CONTENTS Boxes 1 Three geographic scales: local, national, and 4.4 When sowing and reaping happen in different places: international 3 rising interdependence of cities 139 2 The three dimensions of development: density, distance, 4.5 Cities continue to thrive as telecommunication and division 6 costs fall 140 3 Intraindustry trade and intermediate inputs 20 4.6 Hong Kong, China: market forces led the way, 4 New insights from a generation of analysis 21 government followed 142 5 Concentration without congestion in western China: 4.7 Reinvention and renewal: how New York became a Chongqing and Chengdu 26 great city 143 0.1 What this Report is not about 34 5.1 Regional labor mobility has been falling in Sub-Saharan Africa 152 0.2 This Report's regions are more detailed than the World Bank's 36 5.2 Cross-border migration in the Greater Mekong Subregion 153 0.3 This Report's message is not anti-equity 39 5.3 From facilitating to restricting to (again) facilitating 0.4 Fresh insights from economic geography: labor mobility in China 154 concentration, convergence, and integration 41 5.4 Labor and social policies restrain migration in Eastern 1.1 Two laws and a rule: the empirical regularities of a Europe--not good for growth 160 country's city-size distribution 52 5.5 From Lewis to Lucas: the economic perspective on 1.2 The Republic of Korea's portfolio of places 53 migration has changed 161 1.3 Computing the agglomeration index 55 5.6 Implicit barriers to mobility: place-based entitlement 1.4 Africa's urbanization reflects industrialization 59 and divisions in India 163 1.5 Urbanization and narrowing rural-urban disparities 5.7 Why did the U.S. South take so long to catch up? in the Islamic Republic of Iran 63 Division. 165 1.6 Slums, then and now 68 5.8 Migrating to economic density: rational decisions or 1.7 Many of today's world-class cities were littered bright lights? 167 with slums 69 5.9 Too early to tell? The impact of African emigrants 2.1 Defining an area: impossible or NUTS? 78 on Africa 168 2.2 How developed and developing countries define 6.1 Biggest in the world: size and social obligations of lagging areas: a quick survey 79 Indian Railways 175 2.3 Dangerous disparities: when divisions aggravate 6.2 The jet engine 177 distance 80 6.3 The big box 178 2.4 Correcting geographic disparities in postwar Japan 87 6.4 Italy's intervento straordinario: an unexpected response to 2.5 Spatial inefficiency and the downfall of the falling transport costs 184 Soviet Union 90 6.5 Mobility with density in Hong Kong, China 185 3.1 A country's neighborhood matters: regional integration 6.6 Neighborhoods matter, but so do trade and transport and growth spillovers 102 policies 188 3.2 Bolivia and Chile's border--from wide to narrow? 102 6.7 Unclogging Latin America's arteries: transport costs now 3.3 The benefits of size 103 matter more than tariffs 192 3.4 Artificial states? 105 7.1 Are the policy messages of this Report antirural? 3.5 Market access and per capita incomes 108 No. 200 3.6 Neighborhoods matter: Southern Cone versus 7.2 Land reform to jump-start urbanization: aiding villeins in Southern Europe 115 Denmark 203 3.7 The influence of first-nature geography: is it possible to 7.3 Bombay fights the markets, and more than half of eradicate malaria? 117 Mumbai's residents live in slums 205 3.8 Integration takes a long time, and its benefits do not come 7.4 Widening the reach of New York City 208 overnight 119 7.5 Promoting concentration in Japan between 1860 and 1980: 4.1 Scale economies in an almost unreal world: the story of spatially connective policies for Tokyo-Yokohama and Dongguan, China 127 Osaka-Kobe 209 4.2 Sharing, matching, and learning 129 7.6 Climate change calls for a different urban form, not slower urbanization 211 4.3 Agglomeration economies in Indonesia 132 Contents ix 7.7 Speeded up, but still in sequence: spatial integration in 8.6 Low market access in Mexico's lagging south 244 twentieth-century Hong Kong, China 213 8.7 Universal primary education in Uganda increased access 7.8 Singapore: from slums to world city 215 to schools in the northern areas 248 7.9 Titling land for a sustainable rural-urban 8.8 Improving the spatial progressivity of Nigeria's transformation 219 intergovernmental transfers 249 7.10 Land markets in transition 219 8.9 Exporting by mail in Peru--connecting small producers 7.11 Strengthening land market institutions for rural-urban to markets 251 integration 220 8.10 Special economic zones bring growth if they exploit 7.12 Retrofitting transport infrastructure in Bangkok 223 advantages in natural and economic geographies 254 7.13 New cities: escapes from urban jungles, or cathedrals 9.1 Are the policy messages of this Report anti­global in the desert? 224 integration? No. 261 7.14 Rural-urban integration in Beijing, Guangzhou, and 9.2 Diversifying production through regional Shanghai 227 cooperation 263 7.15 Slum upgrading and prevention: what works? 229 9.3 Economic partnership agreements between the EU and African, Caribbean, and Pacific countries can be 8.1 Are the policy messages of this Report"anti-decentralization"? made better 265 No. 231 9.4 Integration in Central Asia 278 8.2 The German integration: convergence and concentration with mobile labor 235 9.5 Integrating the small and distant Pacific Islands with world markets 278 8.3 Constitutions call for unity, not uniformity 236 9.6 A contract with Africa? The give and take of the world's 8.4 An instrument per objective: Ireland used EU funds for biggest development challenge 282 international convergence 237 8.5 Taxation against spatial inequality? The U.S. federal income tax system 239 Figures G0.1 The Report can be read by part or by policy xxi 1.5 Developing countries have a pace of urbanization similar to 1 At all three geographic scales, the patterns of concentration that of early developers 58 of economic activity are similar 9 1.6 Density intensifies rapidly in the early phase of urbanization 2 At all three geographic scales, the patterns of convergence in before leveling off 59 living standards are similar 11 1.7 Shares of population living in urban agglomerations rise 3 Later developers face a different world 13 with the level of development 60 4 Intraindustry trade is high in North America, Western 1.8 Geographic concentration of population, gross Europe, Oceania, and East Asia 19 product, and household consumption rises sharply with development, then levels off 61 5 In charted waters: the pace of urbanization today has precedents 24 1.9 Rural-urban disparities in GDP per capita tend to be smaller in richer OECD countries 63 6 Quicker geographic convergence in basic living standards in Malaysia 27 1.10 Rural-urban gaps in per capita consumption become smaller with urbanization 65 7 Northeast, Southeast, and South Asia have been catching up to developed nations 30 1.11 Even at the subnational level, rural-urban disparities fall as density increases 66 0.1 A navigational aid for the reader 43 1.12 Slums grow with the pace of urbanization, and fall with its 1.1 From dichotomy to continuum: a portfolio of places 51 level 66 1.2 Almost a law: relative size distributions of settlements 1.13 Urbanization's speed has precedents 70 remain stable over time 51 1.14 The population increment in urban areas of today's 1.3 The agglomeration index helps to compare urbanization developing countries is much larger 71 across regions 57 2.1 Manufacturing activity flourishes in areas with shorter 1.4 The richer a country, the more concentrated its economic economic distance to density 77 mass 58 2.2 Rising density of economic mass accompanies development over decades, even centuries 83 x CONTENTS 2.3 Measures based on national accounts, household surveys, ys, 3.15 Divergence, then convergence in East Asia, 1950­ and geoscaled economic data confirm the historical pattern 2006 112 of a rising concentration of economic mass with the level of 3.16 The East Asian growth experience had two distinct development 84 phases 113 2.4 Spatial inequality rose and remained high before slowly 3.17 Western Asia and Eastern Europe have had little declining as economies approached $10,000 in GDP per integration--and little convergence 114 capita 86 3.18 Mexico and other LAC countries have not been catching up 2.5 Subnational disparities in income and wages persisted for with the United States 114 more than 70 years in Canada and France 86 G2.1 The stairway to success 123 2.6 Spatial disparities have narrowed slowly in Europe since G2.2 Border effects between the European Union and the United een World War II 87 States remain more than twice that within the European 2.7 Contemporary comparisons of countries indicate that Union 123 disparity in welfare among subnational areas fall with 4.1 The urban premium for household consumption can be economic development 88 considerable 141 2.8 Economic growth in East Asia and Eastern Europe is faster 5.1 International capital flows have surged since the than the world's growth 89 1970s 148 2.9 Disparities in per capita gross product have been rising 5.2 A large share of capital now flowsdirect investment large share of capital now as as direct investment 148148 between leading and lagging areas in Southeast Asia een 89 5.3 Migrants from East Asia, Latin America, and the Middle 2.10 Steady rise in inequality of per capita provincial gross East and North Africa go mainly to OECD countries, but product in China since 1990 89 most in South Asia and Sub-Saharan Africa stay close to 2.11 Income disparities between areas widened as Eastern een home 151 European nations moved from plan to market 91 5.4 In Latin America and the Caribbean internal migrants are 2.12 In Malaysia, geographic convergence in basic welfare more educated than those who stay behind 156 accompanied economic growth 92 5.5 Internal migrants are more schooled than workers in the 2.13 Today's developing countries face a more integrated places to which they move 157 world 93 5.6 Migration from developing countries is becomingoming more 3.1 The number of borders between nations tripled in the past een skilled 158 50 years 97 5.7 Internal labor mobility and economic growth often en go 3.2 Rich countries tend to have lower border restrictions 99 together 162 3.3 Tariffs are highest in Africa, South Asia, and Western 5.8 Internal migrants are more likely to work than Asia 99 natives 164 3.4 Capital restrictions are highest in Africa, South Asia, and 6.1 Intraindustry trade is becoming oming more important for all Central Asia 100 types of goods, but not in all world regions 171 3.5 Residents of richer countries face fewer visa er 6.2 Air freight costs are down less than ocean freight requirements 101 costs 179 3.6 Globally, language diversity is highest near the 6.3 The costs of communicating have fallen to a fraction of equator 104 what they were a decade ago 180 3.7 Concentration increases at the global level, then a leveling 6.4 Distance has become more of a deterrent, divisions ome er off 106 less 182 3.8 Only Asia's share in world GDP has risen noticeably since 6.5 Global intraindustry trade is no longer confined to rich 1980 107 countries 183 3.9 The effect of distance between Brazil and its trading een 6.6 Transport accounts for about one-seventh of CO2 partners has remained considerable 109 emissions 191 3.10 Education outcomes have improved ed 110 7.1 The growth of cities has been grossly overestimated 199 3.11 East and South Asia have been the only regions catching 7.2 The dimensions increase with the level of up 110 urbanization 201 3.12 Life expectancy decreased significantly in many African 8.1 France has benefited from increasing concentration of countries 111 economic production and declining spatial disparities in 3.13 Education has become more equal since the 1980s ome 111 disposable income 238 3.14 Slight global divergence in per capita incomes, 1950­ 8.2 Living standards can vary considerably between leading and een 2006 112 lagging areas 247 Contents xi Maps G0.1 Density--why it pays to be close to Tokyo xix 6.1 Busy seafaring in the North, little landfall in the G0.2 Distance--why Americans must be mobile xx South 172 G0.3 Division--what prevents progress in Africa does not in 6.2 Crossing borders or climbing walls? 187 Western Europe xx G3.1 Asia divided: conflict in the middle of the nineteenth G0.4 How markets view the world xxi century 195 1 The biggest development challenges--at the local, national, G3.2 Asia integrated: trade at the end of the twentieth and international geographic scales 4 century 196 2 Settlements of varying size facilitate different scale 7.1 The Republic of Korea--three areas at different stages of economies 14 urbanization 217 3 Migrating to reduce distance to density: Despite 7.2 China--three areas at different stages of the obstacles, Chinese workers have migrated in the urbanization 218 millions 16 7.3 Decentralization and localization economies in 4 Migrating to reduce distance to density: Brazil's young Daegu 221 workers move in thousands to get closer to economic 7.4 Changsha, Zhuzhou, and Xiangtan--spatially connective density 17 infrastructure in a two dimensional area 222 5 Migrating to reduce distance to density: Migration in India 7.5 Bogotá's TransMilenio has helped to integrate the has been less frenetic 17 poor 225 6 As urbanization advances, policies must evolve 25 7.6 Economic density in Seoul with good connections to other 7 Three types of countries, differing challenges for area cities 225 development 28 8.1 The poverty rate is high in China's western interior, but 8 Market access distinguishes world regions 31 most poor people live closer to economic density in the East 232 0.1 Three geographic scales--area, country, and region 35 8.2 The poverty rate is high in Brazil's Northeast and G1.1 The U.S. geographic center of population gravity moved Amazon areas, but the poor are massed in areas along the 1,371 kilometers between 1790 and 2000 44 coast 233 G1.2 America's large cities are in the Northeast and on the two 8.3 Both the poverty rate and poverty mass are high in some of coasts 45 India's lagging states 234 1.1 The landscape of economic mass is bumpy, even in a small 8.4 In the Russian Federation, population densities are country like Belgium 50 highest in the economically vibrant and warmer west, 1.2 Local divisions--spatial disparities within urban but a communist legacy has left some people in the cold settlements can be large 67 interior 242 2.1 Access to markets is not a straight line 75 8.5 In the Lao People's Democratic Republic, the poverty rate 2.2 Distances can be long even in the developed world 76 is high outside the capital region, but poor people are 2.3 Vietnam's poverty rate is higher in lagging inland areas, but scattered in remote communities 243 its poverty mass is greater in leading coastal areas 81 8.6 In the Arab Republic of Egypt, population densities are high 2.4 The poverty rate is high in distant eastern Honduras, but in lagging areas, and connective infrastructure is needed to the poor are concentrated in the two largest metropolitan help spatial integration 245 areas 82 9.1 Mobile phone coverage has spread rapidly in Africa 268 2.5 Exporting industries concentrate in coastal areas to 9.2 Density, distance, and division combine to determine access minimize distance to the global market 94 to markets 271 3.1 Global GDP is concentrated in a few world regions, 9.3 Potential access to major world markets distinguishes the 2006 97 developing world's regions 272 3.2 Some borders are much wider than others 98 9.4 Building regional infrastructure in Southern Africa 277 3.3 Forty-three countries do not have direct access to the 9.5 Twin cities for local integration 279 coast 103 9.6 West Africa has potential for cotton-led industrial 3.4 Language diversity is very high in Africa 104 development 280 G2.1 The division in Western Europe has gradually G4.1 Africa's borders were charted before World War I 285 dissipated 122 xii CONTENTS Tables 1 Density is most important locally, distance nationally, and 5.2 Close to home: the largest international flows of labor are division internationally 7 between neighboring countries 150 2 Agglomeration, migration, and specialization are the most 5.3 Rates of labor mobility vary widely across countries in the important forces--and land, labor, and intermediate inputs developing world 156 the most sensitive factor markets 22 5.4 Most migrants move for economic reasons, but many are 3 "An I for a D?" A rule of thumb for calibrating the policy pushed out by poor services 166 response 23 5.5 What does a practical policy toward migration do? 1.1 The size of urban settlements grows with Recognize agglomeration benefits. 169 development 61 6.1 Prices, costs, and profit margins are all high on Africa's 1.2 Rural-urban disparities in earnings, wealth, and transport corridors 187 consumption characterize development over the last two 6.2 Time costs for crossing borders are highest in Central Asia, centuries 64 Central Africa, East Africa, and Southern Africa 189 1.3 Rural-urban disparity in basic services narrows with 7.1 An instrument per dimension--a simple framework for development 65 urbanization policies 216 2.1 Administrative, statistical, and geographic area measures all 7.2 Interventions to integrate the urban poor 228 point to rising spatial concentrations of economic activity 8.1 An instrument per dimension--a framework for area, with development 85 territorial, or regional development policies 246 2.2 Spatial inequality varied through different phases of 8.2 The OECD's experience with incentives to stimulate lagging development 86 areas has been evolving 256 2.3 Household survey and subnational gross product data 8.3 A range of instruments has been used by governments corroborate the pattern of declining spatial disparities in to create economic mass in lagging areas, with modest welfare with development 88 results 257 3.1 The concentration of GDP and population growth shifted 8.4 Assessing the performance of area development between 1820 and 1998 106 policies 259 3.2 GDP per capita increased tenfold, 1500­1998 109 9.1 Few regional agreements provide for full mobility of 4.1 A dozen economies of scale 128 labor 266 4.2 Internal scale economies are low in light industries and high 9.2 Sub-Saharan Africa, South Asia, and the Middle East and in heavy industries 130 North Africa are most affected by unreliable infrastructure, 4.3 Scale economies amplify with density and attenuate with East Asia the least 267 distance 135 9.3 Regional "club goods" can easily be provided because 4.4 Thirty years of theoretical advance recognize the costless exclusion is possible 269 importance of scale economies 136 9.4 An instrument per dimension--a simple framework for 4.5 Agglomeration economies vary by city size and profile, and regional integration 273 by the industry life cycle 137 G4.1 The most distant and divided regions--trading and 5.1 In the late-nineteenth century most international migrants transport are expensive 285 came from better-off Europe 149 Foreword Production concentrates in big cities, leading provinces, and wealthy nations. Half the world's production fits onto 1.5 percent of its land. Cairo produces more than half of Egypt's GDP, using just 0.5 percent of its area. Brazil's three south-central states comprise 15 percent of its land, but more than half its production. And North America, the European Union, and Japan--with fewer than a billion people--account for three-quarters of the world's wealth. But economic concentration leaves out some populations. In Brazil, China, and India, for example, lagging states have poverty rates more than twice those in dynamic states. More than two-thirds of the developing world's poor live in villages. A billion people, liv- ing in the poorest and most isolated nations, mostly in Sub-Saharan Africa and South and Central Asia, survive on less than 2 percent of the world's wealth. These geographically disadvantaged people cope every day with the reality that develop- ment does not bring economic prosperity everywhere at once; markets favor some places over others. But dispersing production more broadly does not necessarily foster prosperity. Economically successful nations both facilitate the concentration of production and insti- tute policies that make people's living standards--in terms of nutrition, education, health, and sanitation--more uniform across space. Getting the benefits of both economic concen- tration and social convergence requires policy actions aimed at economic integration. Integration should begin with institutions that ensure access to basic services such as primary education, primary health care, adequate sanitation, and clean drinking water for everyone. As integration becomes more difficult, adaptive policies should include roads, rail- ways, airports, harbors, and communication systems that facilitate the movement of goods, services, people, and ideas locally, nationally, and internationally. For places where integration is hardest, for social or political reasons, the response should be commensurately comprehen- sive, with institutions that unite, infrastructure that connects, and interventions that target, such as slum upgrading programs or incentives for producers to locate in certain areas. Using these principles, World Development Report 2009, the 31st in the series, reframes the policy debates on urbanization, territorial development, and regional integration. The report analyzes the early experience of developed countries and draws practical implications for urbanization policies in today's developing countries. For the poorest countries in Africa and Asia that are landlocked or otherwise isolated from world markets, the Report discusses promising approaches to regional integration that combine institutional cooperation, shared infrastructure, and special incentives. In growing middle-income economies, general pros- perity can camouflage areas of persistent poverty. For such countries, the Report outlines strategies to foster domestic integration and help the poor in the least fortunate places. I expect that Reshaping Economic Geography will stimulate a much-needed discussion on the desirability of "balanced growth," which has proved elusive. And by informing some important policy debates, it will point the way toward more inclusive and sustain- able development. Robert B. Zoellick President xiii Acknowledgments This Report has been prepared by a team led by Indermit S. Gill, comprising Souleymane Coulibaly, Uwe Deichmann, Maria Emilia Freire, Chorching Goh, Andreas Kopp, Somik V. Lall, Claudio E. Montenegro, Truman Packard, and Hirotsugu Uchida. Important con- tributions were made by Homi Kharas, Marisela Montoliu Munoz, Andrew Nelson, Mark Roberts, Sebastian Vollmer, and Fang Xu. The team was assisted by Eduardo S.F. Alves, Brian Blankespoor, Maximilian Hirn, Siobhan Murray, and Catalina Tejada. Bruce Ross-Larson was the principal editor. The maps were created by the World Bank's Map Design Unit under the direction of Jeff Lecksell. Book production and printing were coordinated by the World Bank's Office of the Publisher, under the supervision of Stephen McGroarty, Susan Graham, Rick Ludwick, and Andres Ménèses. World Development Report 2009 is co-sponsored by the Development Economics Vice Presidency (DEC) and the Sustainable Development Network (SDN). The work was conducted under the joint guidance of François Bourguignon, Alan H. Gelb, and Justin Yifu Lin, DEC Senior Vice Presidents at various stages of the production and dissemination of this Report, and Katherine Sierra, SDN Vice President. Jean-Jacques Dethier, Jeffrey Lewis, Claudia Paz Sepulveda, Laszlo Lovei, and Antonio Estache also provided valuable comments. World Bank Presidents Robert B. Zoellick and Paul D. Wolfowitz provided guidance and advice, and Managing Directors Ngozi Okonjo-Iweala and Graeme Wheeler have been invaluable sources of encouragement to the team. Two panels of advisers provided excellent advice at all stages of the Report. The Aca- demic Panel was chaired by the Chief Economist and DEC Senior Vice President and con- sisted of François Bourguignon, Paul Collier, Masahisa Fujita, Vernon Henderson, Philippe Martin, Ravi Kanbur, Lord Nicholas Stern, and Anthony Venables. The Policymaker Panel was chaired by the SDN Vice President and consisted of Lobna Abdellatif Ahmed, Newai Gebreab, Jerzy Kwiecinski, Shantong Li, Katharina Mathernova, Charbel Nahas, Enrique Peñalosa, Carolina Renteria, Kamal Siddiqui, Jorge Wilheim, and Natalia Zubarevich. Many others outside and inside the World Bank contributed with comments and sug- gestions. The team benefited greatly from many consultations, meetings, and regional workshops held locally and in Côte d'Ivoire, Finland, France, Germany, India, Japan, Nor- way, Russia, South Africa, Sweden, Tanzania, Turkey, and the United Kingdom. The team wishes to thank participants in these and other workshops, videoconferences, and on-line discussions, which included academics, policy researchers, government officials, and staff of nongovernmental, civil society, and private sector organizations. The team would like to acknowledge the generous support of the United Kingdom's Department for International Development, the multi-donor Knowledge for Change Pro- gram, the Government of Norway, the Japan Policy and Human Resources Development Trust Fund, the Institute for Environment and Sustainability in the Joint Research Centre of the European Commission, Germany's Federal Ministry for Economic Cooperation and Development, and the William and Flora Hewlett Foundation. Rebecca Sugui served as senior executive assistant to the team, Ofelia Valladolid as pro- gram assistant, and Jason Victor and Maria Hazel Macadangdang as team assistants. Evan- geline Santo Domingo served as resource management assistant. xv Abbreviations and Data Notes ACP Africa, Caribbean, and Pacific AMU Arab Maghreb Union ASEAN Association Southeast Asian Nations BELDES Municipal Infrastructure Support Project (Turkey) CACM Central American Common Market CARICOM Caribbean Community CEFTA Central European Free Trade Agreement CESIN Center for International Earth Science Information Network CKLN Caribbean Knowledge and Learning Network DR-CAFTA Dominican Republic­Central America Free Trade Agreement EAC East African Community EAP East Asia and the Pacific ECA Europe and Central Asia ECOWAS Economic Community of West African States ECSC European Coal and Steel Community ECTEL Eastern Caribbean Telecommunications Authority EEC European Economic Community EMU European Monetary Union ENEA École Nationale d'Économie Appliquée (Dakar) ENSEA École Nationale de Statistique et d'Economie Appliquée (Abidjan) EPA economic partnership agreements EU European Union FDI foreign direct investment FEU forty-foot equivalent units GATS General Agreement on Trade in Services GDP gross domestic product GIS geographic information system GNI gross national income GRP gross regional product GRUMP Global Rural-Urban Mapping Project IBRD International Bank for Reconstruction and Development ICT information and communication technology IDA International Development Association IIED International Institute for Environment and Development (UK) INEGI Instituto Nacional de Estadística y Geografía IOM International Organization of Immigration ISSEA Institut Sous-Régional de Statistique et d'Économie Appliquée (Yaoundé) IT information technology KÖYDES Village Infrastructure Support Project (Turkey) xvi Abbreviations and Data Notes xvii MERCOSUR Southern Common Market (Latin America) NAFTA North American Free Trade Agreement NEPAD New Partnership for Africa's Development NSDP National Slum Development Program (India) NUTS Nomenclature of Territorial Units for Statistics OECD Organisation for Economic Co-operation and Development OEEC Organization for European Cooperation PAFTA Pan-Arab Free Trade Area PPS purchasing power standard R&D research and development RASCOM Regional African Satellite Communication Organization SADC Southern African Development Community SAR South Asia region SASEC South Asia Sub-regional Economic Cooperation SEZ special economic zone SIC Standard Industrial Classification. SPARTECA South Pacific Regional Trade and Economic Cooperation Agreement TEU twenty-foot equivalent units TFP total factor productivity UPE universal primary education VAMBAY Valmiki Ambedkar Awas Yojana WAEMU West African Economic and Monetary Union WTO World Trade Organization Data notes The countries included in regional and income groupings in this Report are listed in the Classification of Economies table at the beginning of the Selected World Development Indicators. Income classifications are based on gross national income (GNP) per capita; thresholds for income classifications in this edition may be found in the Introduction to Selected World Development Indicators. Group averages reported in the figures and tables are unweighted averages of the countries in the group, unless noted to the contrary. The use of the word countries to refer to economies implies no judgment by the World Bank about the legal or other status of a territory. The term developing countries includes low- and middle-income economies and thus may include economies in transition from central planning, as a matter of convenience. The terms industrialized countries or devel- oped countries may be used as a matter of convenience to denote high-income economies. Dollar figures are current U.S. dollars, unless otherwise specified. Billion means 1,000 million; trillion means 1,000 billion. Geography in motion The Report at a Glance--Density, Distance, and Division Growing cities, ever more mobile people, and increasingly specialized products are integral to development. These changes have been most noticeable in North America, Western Europe, and Northeast Asia. But countries in East and South Asia and Eastern Europe are now experiencing changes that are similar in their scope and speed. World Development Report 2009: Reshaping Eco- nomic Geography concludes that such transformations will remain essential for economic success in other parts of the developing world and should be encouraged. Seeing development in 3-D the start of winter in some parts of the cans change states every year, migrating These transformations bring prosper- country, so flights often are canceled. to reduce their distance to economic ity, but they do not happen without But Americans put up with the pain of opportunity. The most striking feature risk and sacrifice. Look at three of the leaving friends and family, because eco- of this map is distance. world's most prosperous places: nomic activity is concentrated in a few Across the Atlantic, in Western parts of the country (see map G0.2). To Europe, another massive movement · The first is Tokyo, the largest city in get a part of this wealth, you have to get takes place every day--not of people the world with 35 million people, closer to it. That is why 8 million Ameri- but of products. One example is Airbus, a quarter of Japan's population, packed into less than 4 percent of its Map G0.1 Density--why it pays to be close to Tokyo Economic production per square kilometer in Japan land. · The second is the United States, the largest economy in the world and perhaps also the most mobile, where Sapporo about 35 million people change resi- JAPAN dences each year. · The third is Western Europe, the most connected continent in the world today, where countries trade Tokyo about 35 percent of their gross domestic product (GDP), more than half among neighbors. Visitors to Tokyo can see people Nagoya being crushed into trains by profes- Osaka sional train-packers. Millions of peo- ple willingly subject themselves to the unpleasantness of such a crush. A map of Japan's economic density shows why. Hiroshima Tokyo generates a big part of Japan's wealth--to get a share of it, people Kitakyushu have to live close by (see map G0.1). Fukuoka The most striking feature of this map is density--the concentration of wealth in Tokyo and Osaka. In the United States, each year in the days before the Thanksgiving holi- day, about 35 million people try to get Source: WDR 2009 team and World Bank Development Research Group based on subnational GDP estimates for back to their families and friends. It is 2005. See also Nordhaus (2006). xx WORLD DEVELOPMENT REPORT 2009 Geography in Motion Map G0.2 Distance--why Americans must be mobile tage of economic density. Despite the Economic production per square kilometer in the United States crush among commuters and in such UNITED STATES slums as Dharavi, Mumbai's popula- tion has doubled since the 1970s. Since the 1990s, millions of Chinese work- Portland Seattle Chicago New ers have migrated to get closer to eco- Washington, DC York nomic opportunity concentrated along the coast. Just as Americans travel dur- ing Thanksgiving, more than 200 mil- Denver Boston lion people in China travel during the Chinese New Year. Regional produc- Phoenix Dallas- tion networks in East Asia are spread San Ft. Worth Francisco far wider than Airbus sites in Western Miami Europe. East Asian countries may not Los Houston trade airplane parts, but nations that Angeles once were enemies now trade parts of cars and computers with the same fre- Source: WDR 2009 team and World Bank Development Research Group based on subnational GDP estimates for 2005. See also Nordhaus (2006). quency and speed. And what is the payoff? We can which makes parts of planes and assem- a region that was divided not so long again recognize the shapes of China, bles them in France,Germany,Spain,and ago now trade with former enemies to India, and Southeast Asian countries the United Kingdom as well as in other become an ever-more-integrated Euro- on the map of the world's economic countries. Huge sections of aircraft are pean Union (EU). As this integration geography (see map G0.4). Contrast loaded onto ships and planes, as places has increased, economic divisions have these shapes with that of the mighty specialize in making different parts and decreased, making specialization and continent of Africa, which shows up as producing them in scale. Countries in scale possible (see map G0.3). a slender peninsula. What is the payoff for this pain? A The World Development Report Map G0.3 Division--what prevents progress map of economic geography, which argues that some places are doing well in Africa does not in Western Europe resizes the area of a country to reflect because they have promoted transfor- Border restrictions to flows of goods, capital, people, and ideas its GDP, shows the benefits of big cit- mations along the three dimensions of ies, mobile people, and connected economic geography: countries. The United States, Western · Higher densities, as seen in the Europe, and Japan dominate the world's growth of cities. economy (see map G0.4). · Shorter distances, as workers and Cities, migration, and trade have businesses migrate closer to density. been the main catalysts of progress in · Fewer divisions, as countries thin the developed world over the past two their economic borders and enter centuries. These stories are now being world markets to take advantage of repeated in the developing world's most scale and specialization. dynamic economies. The United States and Japan · Mumbai is not the largest city in reshaped their economic geography the world, but it is the most densely along these lines in the past. China is populated. And it keeps growing. reshaping its economic geography now. · China is not the largest economy in This Report proposes that these will be the world, but it is the fastest growing the changes that will help developing and may be among the most mobile. nations in other parts of the world, · Southeast Asia may not have formed most notably Africa. a political union like Europe, but it trades parts of goods back and forth Unbalanced growth,inclusive Source: WDR 2009 team (see chapter 3 for details). as the EU does. development Note: The width of borders is proportional to a sum- mary measure of each country's restrictions to the People risk loss of life or limb on That is what this World Development flow of goods, capital, people, and ideas with all other countries. Mumbai's packed trains to take advan- Report proposes, and the Report is Geography in Motion xxi Map G0.4 How markets view the world A country's size shows the proportion of global gross domestic product found there Source: WDR 2009 team using 2005 GDP (constant U.S. dollars). Note: The cartogram was created using the method developed by Gastner and Newman (2004). This map shows the countries that have the most wealth when GDP is compared using currency exchange rates. This indicates international purchasing power--what someone's money is worth if spent in another country. structured to bring out the message (see interest all countries--small and large, Africa is how to make a better economic figure G0.1). low income and middle income. The union that benefits both the landlocked chapters on distance, factor mobility, and the coastal countries, the poorest · Part one describes the changes along and regional development may be of and the more prosperous. the dimensions of density, distance, most interest to larger middle-income As the geographic scale increases and division--taking up each in countries. And the chapters on division, from local to national to international, turn. It summarizes the experience transport costs, and regional integration the specific policy issue changes. But of the past century or so. may be of most interest to low-income the underlying problem is the same-- · Part two analyzes the drivers of these and smaller economies. some places do well, others do not. And transformations--the market forces Four spotlights on Geography in it is difficult for anyone to accept this as of agglomeration, migration, and Motion examine the interplay between inevitable. specialization and trade. It distills market forces and government policies The Report's main message is that the findings of policy research dur- in North America, Western Europe, economic growth will be unbalanced. ing the past generation or so. East Asia, and Sub-Saharan Africa. By To try to spread out economic activ- · Part three discusses the policy impli- highlighting the interactions among the ity is to discourage it. But development cations of the experience and analy- three dimensions, they also connect the can still be inclusive, in that even people sis in the first two parts. It provides Report's different parts. who start their lives far away from eco- a common framework for reframing Seen another way, the Report exam- nomic opportunity can benefit from three policy debates--on urbaniza- ines the most important policy issues the growing concentration of wealth in tion, on lagging areas within coun- of economic geography, from local, to a few places. The way to get both the tries, and on regional integration national, to international. Locally, the benefits of uneven growth and inclu- and globalization. policy issue in areas such as Lagos state sive development is through economic The Report is structured and written in southern Nigeria is how to manage integration. in such a way that people interested in urbanization. Nationally, the policy only one of these debates can read just issue in Nigeria is how to manage the Economic integration--local, some of it. That is, it can be read verti- disparities in resources and living stan- national,and international cally. The chapters on density, agglom- dards in the north and the south. And The Report makes it clear what eco- eration, and urbanization should internationally, the policy issue in West nomic integration means. It means one xxii WORLD DEVELOPMENT REPORT 2009 Geography in Motion aph Figure G0.1 The Report can be read by part or by policy 1 DENSITY 2 DISTANCE GIM 1: 4 3 NORTH AMERICA AGGLOMERATION DIVISION AMERICA 5 FACTS MIGRATION 7 6 GIM 2:WESTERN WESTERN URBANIZATION SPECIALIZATION EEUROPE UROPE 8 TERRITORIAL DEVELOPMENT ANAL ANALYSIS YSI 9 GIM GIM S REGIONAL 3:EAST INTEGRATION ASIA POL POLICIES ICIES GIM GIM 44::SUB-SAHA SUB-SAHARAN RANAFRICA AFRI CA Source: WDR 2009 team. thing to integrate rural and urban areas, · In places urbanizing rapidly, gov- integrate areas within nations, while and slums with other parts of cities. It ernments must put in place, in reducing poverty everywhere. means another to integrate lagging addition to institutions, connective Lagging areas have one thing in and leading provinces within a nation. infrastructure so that the benefits common--they are economically dis- And it means yet another to integrate of rising economic density are more tant from places doing well. But besides isolated and well-connected countries. widely shared. A good example is this, the economic geography of differ- These notions of economic integration Chongqing, China. ent areas is not the same: are central to three debates in develop- · In places where urbanization has ment--urbanization, territorial devel- advanced, in addition to institutions · In some countries, such as China, opment, and international integration. and infrastructure, targeted inter- lagging areas are sparsely populated. ventions may be necessary to deal It does not make a lot of sense to Urbanization with slums. But these interventions spread expensive infrastructure into The arguments and evidence in World will not work unless institutions for these places--or to give firms incen- Development Report 2009 can set pri- land and basic services are reason- tives to move to them. What makes orities for policies at different stages of ably effective and transport infra- much more sense is to provide basic urbanization, essentially providing the structure is in place. A good example services everywhere, even if it costs e, elements of an urbanization strategy. is Bogotá, Colombia. more to reach these distant areas. Each territory or area within a nation Encouraging mobility of people is has a specific geography. But the prin- Territorial development the priority, and institutions that ciples are quite universal. The principles also can reshape the make land markets work better and er · In places mostly rural, governments debate on territorial or regional develop- provide security, schools, streets, and should be as neutral as possible and ment. The tools of geography can iden- sanitation should be the mainstay of should establish the institutional tify which places are poor--the lagging integration policy. foundation for possible urbaniza- areas--and where most of the poor live. · In other countries,such as Brazil,lag- other countries, such as Brazil, tion in some places. Good land poli- Often, the two are not the same, because ging areas are densely populated. But lagging areas are densely populated. cies are central, and so are policies to the poor have the most reason to move in China, poor people have moved As in China,poor people have provide basic services to everyone. A from poor places. The Report discusses in the millions from the northeast good example is Costa Rica. how governments can tailor policies to to the southeast. Everyone speaks Geography in Motion xxiii the same language, and domestic possibility is providing incentives to markets attractive to investors, face a mobility is not difficult. But many agriculture and allied activities that more difficult challenge. Good insti- poor people still live in the north- are appropriate for states that are tutions and regional infrastructure east. Encouraging mobility of people still mostly rural. can help them access these markets. from the northeast is important, but Examples include East Asia and, Regional integration so is enabling access to markets in increasingly, South Asia. Southern Finally, the principles developed in this the dynamic southeast. In such cases, Africa and South America can also Report inform the debates on how to both institutions and infrastructure integrate globally by making their make globalization work for all coun- to connect the two coastal areas are home markets bigger and more spe- tries. The same logic applied at the necessary for economic integration. cialized through regional institu- local and national levels can be used at · In a third group of countries, such as tions and infrastructure. the international level to classify world India, lagging areas are densely pop- · Integration is hardest for countries regions by the difficulty of economic ulated--almost 60 percent of India's in regions that are divided, are dis- integration in these regions. The com- poor live in these poor places--and tant from world markets, and lack mon problem is division--thick eco- people can find it difficult to migrate the economic density provided by a nomic borders. Aside from this, the task to places doing well, such as the cap- large local economy. These countries of integration varies in different parts ital area and the south. Language include those nicknamed the "bot- of the developing world: and cultural differences within tom billion"--East, Central, and West some areas can be considerable. In · Countries in regions close to world Africa; Central Asia; and the Pacific such cases, institutions and infra- markets, such as Central America, Islands. For these countries, all three structure could be complemented by North Africa, and Eastern Europe, instruments are needed--regional incentives to producers to locate in face a relatively straightforward task institutions that thin borders,regional these lagging states. But these incen- of integration. Common institutions infrastructure that connects countries, tives should be carefully designed to can help them become extensions of and such incentives as preferential avoid offsetting the unifying effects these large markets. access to world markets, perhaps con- of common institutions and con- · Countries in regions distant from ditioned on ensuring that all countries nective infrastructure. A promising world markets, but with large home strengthen regional cooperation. One thing is common to the policy debates on urbanization, area development, and globalization. In their current form, they over- emphasize geographic targeting--what to do in rural areas or in slums, what to do in lagging states or remote areas, and what to do in the most poor or landlocked countries. The Report reframes these debates in a way that better conforms to the reality of growth and development. The reality is that 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 incentives, governments have far more potent instruments for integration. They can build 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 three dimensions of density, distance, and division to tailor the use of these policy instruments to address integration challenges that range from the relatively straightforward to the most complicated. Overview Economic growth will be unbalanced, but development still can be inclusive--that is the mes- sage of this year's World Development Report. As economies grow from low to high income, production becomes more concentrated spatially. Some places--cities, coastal areas, and con- nected countries--are favored by producers. As countries develop, the most successful ones also institute policies that make living standards of people more uniform across space. The way to get both the immediate benefits of the concentration of production and the long-term benefits of a convergence in living standards is economic integration. Although the problems of economic integration defy simple solutions, the guiding principle does not have to be complex. The policy mix should be calibrated to match the difficulty of the development challenge, determined by the economic geography of places. Today, policy discus- sions about geographic disparities in development often start and end with a consideration of spatially targeted interventions. The Report reframes these debates to include all instruments for economic integration--institutions, infrastructure, and incentives. The bedrock of integration efforts should be spatially blind institutions. As the challenges posed by geography become more difficult, the response should include connective infrastructure. In places where integration is hardest, the policy response should be commensurately comprehensive: institutions that unite, infrastructure that connects, and interventions that target. Place and prosperity would earn about three times as much in the Place is the most important correlate of a United States. A Nigerian with nine years of person's welfare. In the next few decades, a education would earn eight times as much in person born in the United States will earn a the United States than in Nigeria. This "place hundred times more than a Zambian, and live premium" is large throughout the develop- three decades longer. Behind these national ing world.1 The best predictor of income in averages are numbers even more unsettling. the world today is not what or whom you Unless things change radically, a child born know, but where you work. in a village far from Zambia's capital, Lusaka, will live less than half as long as a child born Bumps, curves, and spills in New York City--and during that short These disparities in incomes and living stan- life, will earn just $0.01 for every $2 the New dards are the outcome of a striking attribute Yorker earns. The New Yorker will enjoy a of economic development--its unevenness lifetime income of about $4.5 million, the across space. Somewhat unfairly, prosper- rural Zambian less than $10,000. ity does not come to every place at the same A Bolivian man with nine years of time. This is true at all geographic scales, schooling earns an average of about $460 from local to national to global. Cities per month, in dollars that reflect purchas- quickly pull ahead of the countryside. Liv- ing power at U.S. prices. But the same person ing standards improve in some provinces 1 1 2 WORLD DEVELOPMENT REPORT 2009 while others lag. And some countries grow Less widely appreciated is the fact that to riches while others remain poor. If eco- places near prosperous provinces, coun- nomic density were charted on a map of tries, and regions have invariably benefited. the world, the topography at any resolution Prosperity produces congestion and causes would be bumpy, not smooth. economic activity to spill over, but only to Location remains important at all stages places that are well connected to these pros- of development, but it matters less for living perous parts. The detrimental effects of standards in a rich country than in a poor poverty, instability, and conflict spill over one. Estimates from more than 100 living as well. To prosperous places, proximity is standard surveys indicate that households a blessing, to poor places, a curse. in the most prosperous areas of developing These three attributes of development-- countries--such as Brazil, Bulgaria, Ghana, geographic unevenness, circular causation, Indonesia, Morocco, and Sri Lanka--have and neighborhood effects--have not always an average consumption almost 75 percent received much attention. They should, higher than that of similar households because they have radical implications for in the lagging areas of these countries. public policy. Compare this with less than 25 percent for such developed countries as Canada, · Geographic unevenness--the first attri- Japan, and the United States. In contrast, bute of development--implies that as a country grows richer, location becomes governments generally cannot simulta- more important for economic production. neously foster economic production and Ghana, Poland, and New Zealand--three spread it out smoothly. medium-size countries with land areas of · Circular causation--the second attri- about 250,000 square kilometers--have bute--provides hope for policy makers vastly different per capita gross national wishing to pursue progressive objectives. incomes of about $600, $9,000, and $27,000, Rising concentrations of economic pro- respectively. The most economically dense duction are compatible with geographic 5 percent of the country's area produces convergence in living standards. And the about 27 percent of gross domestic product market forces of agglomeration, migra- (GDP) in Ghana, 31 percent in Poland, and tion, and specialization can, if combined 39 percent in New Zealand. with progressive policies, yield both a Put another way, as countries develop, concentration of economic production location matters less for families and more and a convergence of living standards. for firms. Development seems to give a place · Neighborhood effects--the third attri- the ability to reap the economic advantages bute--come with a principle for policy of rising concentrations of production, and making: promote economic integration. to obtain the social benefits that come from Unevenness and circularity imply that it a convergence in consumption. Economic is more difficult for places left behind to development thus brings with it the condi- catch up. But spillovers point to the prom- tions of even greater prosperity, in a virtu- ise for surmounting this handicap. Eco- ous circle. nomic integration is an effective and the Another stylized fact: neighborhoods most realistic way to harness the immedi- matter. A prosperous city seldom leaves its ate benefits from concentration to achieve periphery mired in poverty. A province's the long-term benefits of convergence. prosperity is sooner or later shared with those nearby. And neighboring countries Putting this principle of economic inte- share not just political borders but eco- gration into practice requires identifying nomic destinies. North America, Western the market forces and government poli- Europe, and East Asia are now prosperous cies that best support the concentration neighborhoods. Within these regions, all of economic mass and the convergence of countries did not grow in lockstep. Within living standards across different locations. countries, some provinces did better, and It also requires recognizing that these mar- within each province, prosperity came at ket forces can be strong or weak depend- different times to cities, towns, and villages. ing on economic geography. Earlier World Overview 3 Development Reports have studied these phe- manifest in urbanization. In East Asia, for nomena. This Report advances the influence example, if current trends continue, the of geography on economic opportunity by urban population is expected to increase elevating space and place from mere under- by about 450 million people over the next currents in policy to a major focus. two decades, as countries in the regions grow, adding the equivalent of a Paris The problem--at three geographic scales every month. In South and Central Asia, Depending on the "geographic scale," the the increase is expected to be almost 350 market forces to be harnessed or supported million. And in Sub-Saharan Africa--if differ. At a smaller scale--say, an area within economies continue to grow--the urban a country (a province or state)--geography population could increase by 250 million poses different challenges than at a larger between 2005 and 2025. In other parts of geographic scale--say, a country. At an even the developing world, within-urban trans- larger geographic scale--say, a group of formations will be as important. countries that form a geographic region--the The question is whether growing con- market forces that work toward integration centrations of humanity will increase can be blocked by even greater geographic prosperity, or produce congestion and and political obstacles (see box 1). squalor. Another concern is the diver- Locally, the concentration of eco- gence in living standards between those nomic production as countries develop is who benefit most from this geographic BOX 1 Three geographic scales: local, national, and international Consider the "neighborhoods" of Lagos agglomeration economies and rural- of religious and linguistic di erences. State, Nigeria, and West Africa (see the urban migration. The sharing of oil wealth is a source of maps below). · The second geographic scale is the coun- tension. · The rst geographic scale is the area. try. With its 36 states and capital area · The third geographic scale is the region. The state of Lagos in southwestern and covering 924,000 square kilome- Nigeria's West African neighbors Nigeria has the ve districts of Badagry, ters, Nigeria is the world's 32nd larg- include Cameroon, the Central African Epe, Ikeja, Ikorodu, and Lagos, cover- est country. The distance from Lagos Republic, Côte d'Ivoire, Equatorial ing about 3,500 square kilometers. Its to the northeastern tip of Nigeria is Guinea, Ghana, Niger, and Togo. The estimated population density--with almost 1,500 kilometers. The southern region covers more than 6 million the smallest land area but among the states have seaports and oil elds. The square kilometers, divided by some of two most populous in the nation--is northern part, once a seat of ancient the world's thickest borders. about 2,600 persons per square kilome- empires, now has higher poverty. ter. Metropolitan Lagos has a density Migration between the north and the more than three times that, fueled by south is not an easy matter because Source: WDR 2009 team. Three geographic units: area, country, and region Lagos State, Nigeria, and West Africa represent the local, national, and international scales The first geographic scale The second geographic scale The third geographic scale The area around Lagos State The country of Nigeria The West African region Lagos LAGOS STATE LAGOS STATE Source: WDR 2009 team. 4 WORLD DEVELOPMENT REPORT 2009 Map 1 The biggest development challenges--at the local, national, and international geographic scales a. A billion in slums b. A billion in remote areas c. The bottom billion Population (millions) WDR regions > 250 100­250 50­100 25­50 < 25 Sources: Panel a: United Nations 2006a; panel b: WDR 2009 team, based on household survey data; panel c: Collier 2007. Overview 5 concentration--essentially urbanites in is that they also had more than half of the prosperous neighborhoods--and those left world's population; the European Union behind in villages and those living in slums, (EU), Japan, and the United States have less estimated to number about 1 billion in the than one-sixth. developing world (see map 1, panel a). The Today, the worry at the international (ineffective) policy responses so far have level is the high poverty, illiteracy, and been to try to slow down urbanization. mortality in some parts of the world, set At the national scale, economic growth against the prosperity, literacy, and longev- displays a similar unevenness, as places close ity in others. The policy responses include to large markets prosper sooner than places foreign aid and multilateral efforts to ease more distant. In China the coastal provinc- international trade and investment flows. es--mainly in the three areas known as the But barriers to the agricultural exports of Bohai Basin, the Pearl River Delta, and the developing countries remain considerable, Yangtze River Delta--accounted for more and apathy for people distant or distinct than half of the country's GDP in 2005, renders aid flows miniscule. Aid will be a with less than a fifth of its area. In Brazil small part of the solution. Even in the Euro- the south-central states of Minas Gerais, pean Union, with a combined GDP of about Rio de Janeiro, and São Paulo account for 8 trillion, annual aid through the struc- more than 52 percent of the country's GDP, tural and cohesion funds will average less with less than 15 percent of its land area. than 50 billion between 2007 and 2013. Greater Cairo produces 50 percent of the Foreign aid is less than 0.5 percent of the Arab Republic of Egypt's GDP, using just gross national income of giving countries, 0.5 percent of its land area. and not even a large fraction of the GDP Politicians generally view this economic of countries home to the "bottom billion" imbalance disapprovingly. In communist who have 12 percent of the world's popula- Russia the government labored to reduce tion, but less than 1 percent of its GDP (see the economic share of the old industrial map 1, panel c).2 area of St. Petersburg, the Center, and the A billion slum dwellers in the developing mid-Urals from 65 percent to 32 percent, world's cities, a billion people in fragile lag- forcibly shifting production to the eastern ging areas within countries, a billion at the areas. It boosted the share of the east in eco- bottom of the global hierarchy of nations-- nomic production from 4 percent in 1925 these overlapping populations pose today's to 28 percent at the end of communism, biggest development challenges. Seemingly whose demise probably was hastened by the disparate, they share a fundamental feature: spatial inefficiency that these efforts engen- at different spatial scales, they are the most dered. Because governments care so much visible manifestation of economic geogra- about domestic disparities, they jeopardize phy's importance for development. competitiveness and risk collapse. Policies Concern for these intersecting 3 billion to reduce interstate or provincial dispari- sometimes comes with the prescription that ties in production and living standards are economic growth must be made more spa- commonplace--but largely ineffective. tially balanced. The growth of cities must About 1 billion people continue to live in be controlled. Rural-urban gaps in wealth these inhospitable lagging areas (see map 1, must be reduced quickly. Lagging areas and panel b). provinces distant from domestic and world At the international scale, economic markets must be sustained through territo- growth has concentrated global produc- rial development programs that bring jobs tion in a few regions, with commensurate to the people living there. And growing differences in incomes. In 2000 about gaps between the developed and developing three-quarters of world GDP was concen- world must be addressed through interven- trated in North America, Western Europe, tions to protect enterprises in developing and Northeast Asia. This concentration is countries until they are ready to compete. not new. Three centuries ago, China and World Development Report 2009 has India accounted for about two-thirds of a different message: economic growth the world's wealth. What was different then is seldom balanced. Efforts to spread it 6 WORLD DEVELOPMENT REPORT 2009 BOX 2 The three dimensions of development: density, distance, and division This Report uses three geographic dimen- area's economic density (GDP per square Division. But the journey is not yet sions to describe the transformation of kilometer) was 35 times that of Nigeria complete. The goods must surmount economies as they develop (part one) in 1990. The capacity of the tanneries in the division caused by di erences in and the conditions to keep in mind when and around the city even makes it worth- currencies and conventions between formulating policies (part three). The while to illegally import live animals--the Nigeria and Europe. Between December words are easy metaphors, since density, most important intermediate input-- 2007 and March 2008, Nigeria's currency distance, and division summon images of from neighboring countries. But Kano is depreciated from 170 naira to 1 to human, physical, and political geography. neither large enough, nor rich enough, 180 naira, but appreciated from 246 naira But they can be measured. Consider this to consume more than a little of what is to the British pound in November 2007 illustration. produced. The goods must be exported to 235 naira in March 2008. Buyers and In 2003 Nigeria had 45 million goats and to people willing to pay enough to make sellers of leather goods have to contend kids, 28 million sheep and lambs, and 15 production worthwhile. with these uctuations. They must also million cattle. In a typical year 8 million Distance. Wealthy Europeans want deal with two sets of laws and customs. sheep, 7 million goats, and 0.5 million goods made with "Morocco leather," a The United Kingdom has 30 procedures cattle are slaughtered, mostly in ve north- lot of which comes from Kano. To get to for enforcing a contract, Nigeria 39. These ern states including Kano. More than half Europe, Kano's bulky exports must travel divisions multiply the costs of doing the hides are consumed as pomo. The rest through Lagos, which along highways business. Few cargo ships make landfall are sold to tanneries. The demand from and railways is about 1,000 kilometers in Lagos, so it costs much more to trans- tanneries exceeds local supply, so animals away. It might as well be 4,000 kilome- port goods from Lagos than from busier are imported from nearby Chad, Niger, ters. A railway goes to Lagos through places such as Shanghai. It costs less than and Cameroon. Goat and sheep skins are the cities of Kaduna and Ibadan, but it is $400 to ship a container to the United good business--in 2001 Nigeria produced narrow gauge and poorly maintained. Kingdom from China, more than $1,000 30 million to 35 million of them, exporting Most commerce is by road, obstructed by from Nigeria. almost all to Europe. roadblocks and piracy. Shipping compa- Low local density, costly internal dis- Density. Consider the market condi- nies charge more than $1,200 for a 30-ton tances, and international divisions conspire tions for a tannery that produces leather trailer from Kano to Lagos. Once the against Kano. Making matters more di cult in the city of Kano in Northern Nigeria. goods get to Lagos, there are port fees, are religious and other divisions within O cially, the population of Kano State is pilferage, and delays. It takes 26 days to Nigeria. about 9 million, large enough to provide get the goods onto a ship. The economic the skilled labor and infrastructure for distance from Kano to Lagos, measured Sources: World Bank 2007; Phillips, Taylor, its tanneries. Due to the concentration as money, is several times the Euclidean Sanni, and Akoroda, (FAO 2004); Govern- of people in and around Kano city, the (straight-line) 829 kilometers. ment of Nigeria 2003. prematurely will jeopardize progress. Two convergence. Part three proposes the prin- centuries of economic development show ciple of economic integration--between that spatial disparities in income and pro- places that producers prefer and places duction are inevitable. A generation of eco- where people live--to guide policy making. nomic research confirms this: there is no Using this principle, it reframes the debates good reason to expect economic growth to on urbanization, territorial development, spread smoothly across space. The experi- and international integration, calling for a ence of successful developers shows that change in orientation of policies away from production becomes more concentrated geographic targeting toward integration. spatially. The most successful nations also By using a well-calibrated blend of insti- institute policies that make basic living tutions, infrastructure, and interventions, standards more uniform across space. Eco- today's developers can reshape their eco- nomic production concentrates, while liv- nomic geography. When they do this well, ing standards converge. they will experience unbalanced growth Part one of the Report describes the and inclusive development. geographic transformations that are neces- sary for development. Part two analyzes the The three dimensions of development drivers of these changes and identifies the The geographic transformations for eco- markets that deliver both concentration and nomic development can be characterized in Overview 7 three dimensions--density, distance, and and workers reduce their distance from division. These three words are not just met- density. The main mechanisms are the aphors for the policy challenges just outlined. mobility of labor and the reduction of They conform closely to the more technical transport costs through infrastructure notion of "market access" (see box 2). And investments. Divisions within coun- they represent the dimensions of economic tries--differences in language, currency, geography that have to be reshaped if the and culture--tend to be small, though development challenges are to be met. large countries such as India and Nigeria Understanding the transformations may be geographically divided because along the dimensions of density, distance, of religion, ethnicity, or language. and division helps to identify the main · Division is the most important dimen- market forces and the appropriate policy sion internationally. But distance and responses at each of the three geographic density are also relevant. Economic pro- scales--local, national, and international duction is concentrated in a few world (see table 1). regions--North America, Northeast · Density is the most important dimension Asia, and Western Europe--that are locally. Distances are short, and cultural also the most integrated. Other regions, and political divisions are few and shal- by contrast, are divided. While dis- low. The policy challenge is getting den- tance matters at the international level, sity right--harnessing market forces to for access to world markets, divisions encourage concentration and promote associated with the impermeability of convergence in living standards between borders and differences in currencies villages and towns and cities. But dis- and regulations are a more serious bar- tance can be important as rapid urban- rier than distance. Having a large and ization leads to congestion, and divisions dynamic economy within the neigh- within cities can be manifest in slums borhood can help smaller countries, and ghettos. especially in regions distant from world markets. For economies in other regions · Distance to density is the most impor- such as Central Africa and Central Asia, tant dimension at the national geo- international integration is hardest. graphic scale. Distance between areas where economic activity is concentrated But the potential problem at each of and areas that lag is the main dimension. these geographic scales is the same--people The policy challenge is helping firms in one place, production in another. Places Table 1 Density is most important locally, distance nationally, and division internationally Geographic scales Local National International Unit Area Country Region Examples Guangdong (178,000 km2) China (9.6 million km2) East Asia (15.9 million km2) Rio de Janeiro State (44,000 km2) Brazil (8.5 million km2) South America (17.8 million km2) Lagos State (3,600 km2) Nigeria (933,000 km2) West Africa (6.1 million km2) Greater Cairo (86,000 km2) Egypt, Arab Rep. of (995,000 km2) North Africa (6.0 million km2) Most important Density Distance Division dimension Of rural and urban settlements Between lagging and leading areas Between countries Second-most important Distance Density Distance dimension Because of congestion Of population and poverty in lagging To major world markets areas Third-most important Division Division Density dimension Between formal settlements and slums Between areas within countries Absence of large country in the neighborhood Source: WDR 2009 team. Note: Throughout the Report, "areas" are within-country economic neighborhoods or administrative units such as states or provinces, and "regions" are groupings of countries based on geographic proximity. 8 WORLD DEVELOPMENT REPORT 2009 attract production and people at different $10,000­$11,000, about the threshold for speeds, and these differences determine crossing into high incomes. This is the geographic disparities in income. Across experience of successful developers. The provinces, nations, and the world, develop- implication is that developing countries ment comes in waves and leaves behind a should expect rising subnational dispari- bumpy economic landscape--prosperity in ties in income and production when they some places, poverty in others. still have underdeveloped infrastructure and institutions. The world is not flat · Concentration is slowest internation- Development is neither smooth nor lin- ally, and it continues longer. Production ear--at any geographic scale. Growth and wealth continue to concentrate in comes earlier to some places than to others. countries beyond per capita incomes of Geographic differences in living standards $25,000, the upper reaches of the inter- diverge before converging, faster at the local national income distribution. Neighbor- scale and slower as geography exercises its hoods of nations seem to grow or stagnate influence. These are the stylized facts, based together--nearness to prosperity helps, on the experiences of successful developers while nearness to poor nations hurts. The over the last two centuries. implication is that growth strategies for later developers are not the same as the Economic production becomes strategies that worked for those who have more concentrated already grown to high-income levels; for As countries develop, people and economic today's developing countries, economic activities become more concentrated. But integration with the rest of the world-- the speed varies, depending on the spatial neighbors and distant countries--is even scale--economic forces do not operate in more essential. a geographic vacuum. The concentration of people and production is fastest locally, Local concentration (in towns and cit- slowest internationally. ies)happensquickly. Consider first the rising concentration of people in towns and cities. · Concentration is fastest locally. Economic As countries develop, the economic density concentration at the local scale is most in some places increases as more people move conveniently measured by the rate of to live in or near towns and cities (see figure urbanization--the growth of economic 1, panel a). The urban share of the population and population density in towns and cit- rises sharply--from about 10 percent to 50 ies. A large part of this geographic trans- percent--as countries grow from low income formation has been completed when to lower-middle incomes of about $3,500. countries reach per capita incomes of (It is difficult to make international com- about $3,500, roughly the threshold for parisons because countries define "urban" crossing into upper-middle incomes. The differently.3) Between 2000 and 2005, the speed of this transformation is no differ- average urban population growth for low- ent from what was seen in today's devel- income countries was 3 percent a year, more oped countries when they transformed. than twice the rate for middle-income coun- The implication is that all nations must tries and more than three times the rate for manage a rapid growth of cities when high-income countries. Sometimes, this can they still have low incomes and nascent mean rapid growth of a single city, such as institutions. Bangkok, Thailand, producing even greater · Concentration is steadier nationally. concentration. Here, it can best be measured by area The share of urban residents in total development indicators--the accumula- household consumption rises too. Urbanites tion of production and people in leading in Malawi, Jordan, and Panama--countries areas. A large part of this transforma- with per capita GDPs of about $160, $1,600, tion generally is completed when coun- and $5,600 respectively--account for 36, 63, tries reach per capita incomes of about and 80 percent of aggregate consumption. Overview 9 These spatial transformations are Figure 1 At all three geographic scales, the patterns of concentration of economic activity are closely related to the sectoral transfor- similar mation of countries from agrarian to a. As nations start to develop, people concentrate in towns and cities industrial and then, in a postindustrial Agglomeration index economy, to services. Today's high-in- 1.0 come countries experienced a similar rush to urbanize as they industrialized 0.8 (see chapter 1). All the evidence indicates that the shift from farming to industry is helped, not hurt, by healthy agriculture, 0.6 which helps towns and cities prosper.4 People move to make their own lives bet- 0.4 ter. But when agriculture is doing well, migration makes not just them better off, but also the villages they leave and the 0.2 cities in which they settle. National concentration (in leading areas) continues for longer. What is true of 0 0 5 10 15 20 25 30 35 cities is also true of areas within countries, GDP per capita (PPP, constant 2000 US$, thousands) but at a slower speed. With development, people and production become concen- b. Nationally, production concentrates in leading areas trated in some parts of countries, called Concentration Index 10 "leading" areas. Economic density grows in France, 1801­1999 9 these parts--Marmara in Turkey, for exam- 8 ple--while incomes in places economically 7 Spain, 1850­2000 Japan, 1900­2000 distant--such as southeastern Anatolia in 6 the east--can lag far behind. This concen- 5 Canada, 1890­2006 tration is hard to quantify, but it appears to 4 Netherlands, 1850­2006 3 slow or stop at per capita incomes between 2 $10,000 and $15,000 (see figure 1, panel b). 1 Initially, the concentration increases 0 2 10 20 30 rapidly. The share of total consumption of GDP per capita (constant 2000 US$, thousands) the leading areas in countries with incomes ranging between $500 and $7,500--Tajik- c. Internationally, wealth concentrates in some regions istan, Mongolia, El Salvador, and Argen- % share of global GDP (log scale) tina--increases from 30 percent to 65 percent. Comparing GDP concentrations 20 in countries with the same land area-- Lao Western "offshoots" Western Europe (United States; Canada) PDR, Ghana, Poland, and Norway--but (EU12) 10 with incomes from $600 to $27,000 shows concentration rising as incomes increase. Northeast Asia 5 (Japan; Rep. of Korea; This is nothing new. Production in Taiwan, China) today's developed economies grew more 2 concentrated until they reached high incomes. Concentration in France's leading 1 area quadrupled between 1800 and 1960, 0 5 10 15 20 25 and French incomes grew from $1,000 to GDP per capita (1990 int'l $, thousands) $6,000. But at some point, nations continue Sources: Panel a: WDR 2009 team (see chapter 1 for details); panel b: WDR 2009 team (see chapter 2 for to grow wealthier but not more concentrat- details); panel c: WDR 2009 team (see chapter 3 for details). ed--about when they enter the ranks of high-income countries. There are no rea- sons to expect greatly different patterns today (see chapter 2). 10 WORLD DEVELOPMENT REPORT 2009 International concentration (in some ging and leading areas of a country as it world regions and leading countries) con- grows through low and lower-middle tinues for a while. A similar concentration incomes, the same range of per capita of economic mass has occurred internation- incomes needed for territorial concentra- ally. Today, a quarter of the world's GDP tion to increase. And global divergence can fit into an area the size of Cameroon, in wages and wealth appears to go on and a half into one the size of Algeria. In for much longer. East Asia saw per capita 1980 the shares of the EU15, North Amer- incomes diverge between 1950 and 1970 ica, and East Asia added up to 70 percent; as Japan pulled ahead. Then, Japan's pros- in 2000 the sum was 83 percent.5 Within perity spilled over into the neighborhood, these regions, economic activity became and incomes converged as countries in more concentrated in a few countries over the region that integrated internationally time before it became more dispersed. The prospered. Among the countries of West shares of France, Germany, and the United Asia, by contrast, there was no divergence Kingdom in the EU15 regional GDP rose to in incomes--nor was there rapid growth. about two-thirds by 1940, before falling to about half today. In East Asia, the share of Convergence in living standards, like con- Japan in the region's GDP rose to 83 percent centration of economic activity, takes place in 1975 and then fell to 62 percent by 2000. faster at the local geographic scale and slow- There is no reason to expect that, when est at the international. But this happens only they prosper, other parts of the world will not in prosperous neighborhoods. Even in such experience the same patterns--a rising con- places, some measures of living standards centration in some countries, before over- (such as per capita consumption, income, flowing to their neighbors (see chapter 3). or earnings) take a long time to converge, sometimes even with an initial divergence Living standards diverge before (see figure 2). For others, such as education converging and health indicators, it can be quicker. As incomes increase, living standards con- Locally, convergence in basic living stan- verge between places where economic mass dards sets in early. Urban-to-rural gaps in has concentrated and where it has not, but consumption levels rise until countries reach not before diverging. upper-middle-income levels (see figure 2). But they fall soon after, and become small · Essential household consumption converges even before they get to high-income levels of soonest. Rural-urban gaps in essential around $10,000 per capita. Access to water household consumption diminish quite and sanitation in urban areas is more than rapidly.Even for countries that have urban 25 percent higher in urban areas for the less shares of about 50 to 60 percent, these dif- urbanized countries. For countries with ferences can be small. Area differences in urbanization rates of about 50 percent, such poverty rates are more persistent, inter- as Algeria, Colombia, and South Africa, the national differences even more so. But as disparity in access is about 15 percent. For the world has developed, these gaps have such countries as Brazil, Chile, Gabon, and diminished at all geographic scales. Jordan, the disparity is less than 10 percent. · Access to basic public services converges This pattern is also seen within countries. next. Rural-urban gaps in basic educa- Provinces that are more prosperous and tion, health, drinking water, and sani- urbanized have smaller rural-urban gaps in tation persist until countries reach living standards. This is true even in coun- upper-middle incomes. But within-city tries at low levels of income, such as China, disparities in these services--most vis- India, and the Philippines. But within highly ible as slums--persist well past high lev- urbanized areas, gaps in basic living stan- els of urbanization and upper-middle dards such as sanitation and schools tend to incomes. persist. Despite the best efforts of govern- · Wages and incomes converge last. Indeed, ments, for example, slums mark the urban wages and incomes diverge between lag- landscape in countries well after they reach Overview 11 high-income levels. It is common for one- Figure 2 At all three geographic scales, the patterns of convergence in living standards are third of a developing city's population to live similar in slums. a. Locally, first divergence, then convergence, in rural-urban gaps Nationally, divergence in living stan- Ratio of urban to rural per capita consumption dards happens quickly, but convergence is slower. At early levels of income, provin- 3 cial or interarea disparities in basic living standards can be small. But they increase quickly as countries grow. In low-income Cambodia, for example, the gap between 2 leading and lagging areas in consumption of otherwise-similar households is almost 90 percent. In middle-income Argentina, the gap is 50 percent; but in contemporary 1 0 2 4 6 8 Canada, it is just 20 percent. In the rapidly GDP per capita (2000 US$, thousands) growing East Asian and Eastern European countries, for example, these gaps have b. Nationally, divergence, then convergence, in incomes between leading and lagging areas increased rapidly. Coefficient of variation of regional wages or income A few countries such as Chile have been 0.6 exceptions. Between 1960 and 2000, it Sweden, 1920­61 0.5 Spain, experienced geographic convergence while 1860­1975 its GDP per capita more than doubled to 0.4 about $10,500. In Colombia, the ratio of United States, 1840­1960 GDP of leading Bogotá to lagging Choco 0.3 Japan, 1955­83 fell from 10 to 3 between 1950 and 1990. 0.2 Habsburg Empire, 1756­1910 Less exceptional is convergence in poverty, basic health, nutrition, and education lev- 0.1 United Kingdom, 1871­1955 els between areas within countries. Fast- growing countries everywhere have been 0 0 2 4 6 8 10 12 14 16 able to quickly translate economic progress GDP per capita (constant int'l Geary-Khamis $, thousands) into spatial equity in these more basic liv- ing standards. c. Internationally, divergence, then convergence--but only in growing regions Internationally, divergence in incomes Coefficient of variation of GDP per capita continues a while, and convergence 2.0 is slowest. Global GDP per capita has 1.9 increased almost tenfold since 1820. Life 1.8 expectancy has doubled. Literacy rates have 1.7 increased from less than 20 to more than 1.6 80 percent. But these gains have not been shared equally. Europe and its offshoots-- 1.5 Australia, Canada, New Zealand, and the 1.4 United States--and more lately Japan and 1.3 its neighbors have seen enormous increases 1.2 in income and living standards. 1950 1960 1970 1980 1990 2000 2010 For incomes, the convergence has hap- Year pened only in the fastest-growing regions Source: Panel a: WDR 2009 team estimates from more than 120 household surveys for more than 75 countries; Panel b: WDR 2009 team (see chapter 2); Panel c: WDR 2009 team (see chapter 3). of the world. The pattern has been uneven within these countries--a few countries lead, resulting in divergence within the these regions have been falling behind neighborhood, and then growth appears Europe, the European offshoots, and to spill over into their neighbors. In other Japan. The importance of neighborhoods regions such as Western Asia, there is is shown most graphically by a compari- no divergence--cold comfort because son of the southern cone nations of Latin 12 WORLD DEVELOPMENT REPORT 2009 America--Argentina, Brazil, Chile, and and persist for longer in today's develop- Uruguay--with Italy, Portugal, and Spain ing countries. Not all parts of a country in southern Europe. Between 1950 and are suited for accessing world markets, and 2006, convergence within southern Europe coastal and economically dense places do took place at 1 percent per year, but in South better. China's GDP per capita in 2007 was America at just 0.3 percent. the same as that of Britain in 1911. Shang- In contrast to incomes, global inequal- hai, China's leading area, today has a GDP ity in access to basic living standards--life per capita the same as Britain in 1988, while expectancy and education--has been fall- lagging Guizhou is closer to Britain in 1930. ing since 1930. These improvements have China's size, the openness of coastal China picked up pace since 1960 and have been to world trade, and Shanghai's location are shared across all regions. the reasons. Moreborders.While markets are becom- The world is different today, ing more international because of better but the past provides useful lessons transport and communications, the world The general patterns of concentration and has become more politically fragmented. convergence are likely to remain the same In 1900 there were about 100 international for today's developing countries as they borders (see figure 3, panel c). Today, there were for early developers. But there are are more than 600, as nations in Asia and some differences because of reasons that Africa gained independence from Euro- are technological and political. pean colonizers, and the Soviet Union and Bigger cities. Thanks to better medicine other communist countries broke up into and transport, the world is now more pop- smaller nations. The fragmentation of the ulated and cities are much larger. Between world into more nations means smaller 1985 and 2005, the urban population in domestic markets. But at the same time, the developing countries grew by more than potential for accessing foreign markets has 8.3 million a year, almost three times the been growing. In any case, thinner borders annual increase of 3 million for today's between countries now bring greater pay- high-income countries between 1880 and offs for producers and workers. 1900, when their incomes were comparable. Do such differences in technology mean If China and India are excluded, though, that the past provides no lessons? Are cit- the annual increase is less than 4.5 million, ies in developing countries too large, and about 50 percent more than a century ago. would these countries be better off if The big difference is that the world's larg- urbanization were slowed? Should today's est cities are today much larger. London developing countries be more concerned had fewer than 7 million people in 1900; about regional disparities in production the largest city among low-income coun- and income than developed countries were tries today (Mumbai) is three times that at a comparable stage of development? Is it size. So is Mexico City, the largest city in easier today for all developing countries to middle-income countries. The average size access global markets and offset the disad- of the world's largest 100 cities has grown vantages associated with greater fragmenta- to almost 10 times their size in 1900 (see tion? This Report shows why the answer to figure 3, panel a), and almost two-thirds of all these questions is no. these cities are in developing countries. Wider markets. Because of advances in Markets shape the economic communications and transport technol- landscape ogy, the notion of markets is more global. Rising densities of human settlements, Global trade as a share of production is now migrations of workers and entrepreneurs to more than 25 percent, almost five times shorten the distance to markets, and lower more than in 1900 (see figure 3, panel b). divisions caused by differences in curren- The openness to trade and capital flows cies and conventions between countries are that makes markets more global also makes central to successful economic develop- subnational disparities in income larger ment. The spatial transformations along Overview 13 Figure 3 Later developers face a different world changing the economic landscape of today's most successful developing countries, in a. Cities are more populous Millions of people, world's largest cities ways similar in scope and speed. Growing 7.0 cities, mobile people, and vigorous trade 6.3 6.0 have been the catalysts for progress in the developed world over the last two centuries. 5.0 Now these forces are powering the develop- 4.0 ing world's most dynamic places. 3.0 2.0 The realm of "agglomeration 2.0 economies" 1.0 0.7 0.2 A trip on National Highway 321 east from 0 1820 1900 1950 2000 Chengdu in Sichuan province to Shenzhen Year in Guangdong is a journey through eco- b. Markets are more international nomic development. Migrating workers Global trade as share of global GDP (%) who travel these highways often leave their 30 families behind. But they also help their 26 25 families escape poverty and propel China through the ranks of middle-income coun- 20 tries. As they travel eastward, they leave 15 an agrarian realm in which they receive 12 few benefits from working in proximity 10 6 to others. Instead, they enter the realm of 5 "agglomeration economies," in which being 1 near other people produces huge benefits. 0 1820 1900 1950 2000 Shenzhen attracts young workers--90 Year percent of its 8 million residents are of c. But the world is more fragmented working age. It specializes in electronic Number of borders goods. But it makes them in enormous 700 quantities. In 2006 its exports exceeded 600 600 India's, making its seaport the fourth busi- 500 est in the world. Propelled by the forces of agglomeration, migration, and specializa- 400 tion, and helped by its nearness to Hong 300 Kong, China, Shenzhen has grown the fast- 200 200 est of all cities in China since 1979, when it 104 100 75 was designated a special economic zone. This story is being replayed in India. In 0 1820 1900 1950 2000 1990 Sriperumbudur was known mostly as Year the place where Prime Minister Rajiv Gan- Source: WDR 2009 team. dhi was assassinated. In 2006 his widow, Sonia Gandhi, watched as Nokia's tele- these three dimensions--density, distance, phone plant churned out its 20-millionth and division--have been most noticeable handset.6 The plant had begun produc- in Japan, North America, and Western tion just earlier that year. With neither Europe. Fast and frequent movements of Shenzhen's favored administrative status people and products have helped North nor its infrastructure, Sriperumbudur America, Western Europe, and Northeast may be on its way to becoming a national, Asia account for about three-fourths of perhaps even regional, hub for electronic global production with less than a sixth of goods. The key is the town's proximity to the world's people. Chennai, just as Shenzhen's proximity to The same market forces of agglomera- Hong Kong, China, was instrumental in tion, migration, and specialization are its growth. 14 WORLD DEVELOPMENT REPORT 2009 In 1965, when independence was thrust first three chapters of the most influential on Singapore, it was not near any prosper- economics text ever written, Adam Smith's ous or peaceful place. Instead, it lay between The Wealth of Nations. Malaysia and Indonesia, two poor countries The economies of scale emphasized by that had been ravaged by war between colo- Smith can be categorized into three types-- nizers. Three-quarters of Singapore's popu- those exclusive to firms, those shared by lation lived in tenements. By 1980 it had firms in the same industry and location, industrialized, specializing in electronics, and those more generally available to pro- much as Shenzhen is doing now. By 1986 it ducers in a larger urban area. was the world's busiest container port and · With fewer than 17,000 people, Sriper- Southeast Asia's financial hub. Along the umbudur was large enough for Hyun- way, by instituting land markets, building dai to set up a big plant there in 1999. efficient transport infrastructure, and inter- By 2006 the town had helped Hyundai vening to improve housing, it cleaned up its produce its millionth automobile. Basic slums. Prosperity spilled over into neighbor- education and health services, proximity ing Malaysia. Malaysia's manufacturing-led to a port, and basic infrastructure were prosperity in turn helped more than 2 mil- all it needed to facilitate plant-level scale lion Indonesians who streamed in to fill jobs economies. The evidence is that internal in construction and services. Singapore's scale economies are high in such heavy businessmen jet around Asia, fueling growth industries as shipbuilding, and low in in places farther than Shenzhen and Sriper- such light industries as garments. The umbudur. The "little red dot" on a map--as town has enough workers to enable reportedly derided by a neighboring pres- matching workers and jobs in big plants. ident7--has transformed itself, integrated So towns like Sriperumbudur are large its neighborhood, and overtaken Britain, its enough to facilitate internal economies. former colonizer (see map 2). Singapore, Shenzhen, and Sriperum- · Shenzhen Special Economic Region-- budur show how scale economies in pro- with an area of just 300 square kilometers duction, movements of labor and capital, but a population of almost 3 million--is and falling transport costs interact to pro- home to a bustling electronics industry. duce rapid economic growth in cities and With a ready supply of skilled and semi- countries both large and small. These are skilled young workers, the area is invest- the engine of any economy, with a role so ing in better education and research fundamental in prosperity and poverty facilities to ensure that the city supplies reduction that they are the subject of the what the industry needs. Its port ships in intermediate inputs and ships out final products. It shares expensive facilities, Map 2 Settlements of varying size facilitate different scale economies such as top-notch container ports and convention centers, and matches work- Shenzhen ers to the growing number of jobs as HONG KONG, firms rapidly expand their operations. CHINA Proximity to Hong Kong, China, pro- vides access to finance, though Shenzhen is home to a rapidly expanding financial Bangalore sector. And competition for customers Chennai Sriperumbudur among the multiple suppliers of inputs produces cost savings. The area excels in providing, in economic jargon, localiza- tion economies. · Singapore has passed through these Singapore stages and is now one of the world's top centers of commerce. By providing Source: WDR 2009 team. a stable economic environment, excel- Overview 15 lent transport links, livability, and effi- of all inputs to production--land--must cient finance, it provides services to the become mobile between uses. Access to entire Asia-Pacific region. These ser- oceans and rivers might be the reason a vices are used by a wide range of indus- place is settled, but the nimbleness of its tries, from shipping to manufacturing, land markets will largely determine how to education, and to finance, insurance, much it will grow. Governments may not be and real estate. They thrive on eco- good at picking places that will prosper. But nomic density. With fewer than 5 mil- how well they institute regulations, build lion people packed into less than 700 infrastructure, and intervene to make land square kilometers of space, Singapore use efficient will decide the pace of prosper- is the world's most densely populated ity for the entire neighborhood. country. In 2006 its exports of $300 Depending on what type of agglomera- billion approached those of the Russian tion economies they deliver, places can be Federation, which has more than 16 large or small. Function is far more impor- million square kilometers. Singapore's tant than size. But locating farther away diversity facilitates sharing, matching, from economic density generally reduces and learning, providing what econo- productivity. Doubling this distance in mists call urbanization economies. Brazil apparently reduces productivity by 15 percent and profits by 6 percent. Better In most countries, such towns and cit- infrastructure reduces economic distance. ies coexist. Brazil's Rio de Janeiro state has But in a developing country, the most nat- about 14.5 million people. Volta Redonda, ural way for workers and entrepreneurs to not too far from Rio city, originally supplied close this distance is to move closer. goods and services just to meet the needs of CSN, the largest steel plant in Latin Amer- Migrating to profit from proximity ica. Duque de Caixas, about 15 kilometers Agglomeration economies attract people from Rio, meets the needs of an industry and finance. Today, capital tends to move producing petrochemicals. And the diversi- quickly over long distances to exploit fied Rio de Janeiro metropolis, with about opportunities for profit. People also move, 6 million people, supplies financial services but they move more quickly to nearby to settlements that surround it. And with agglomerations than to those far away. other metropolises like São Paulo, Rio con- Once plants and people come to a place, nects Brazil to the rest of Latin America and others follow. the world. The pattern is so familiar that it is almost a law of urban economics. · Locally, the move toward density is quick The functions and fortunes of settle- in fast-growing economies, manifest ments are linked. Industrialized places are in a rapid rural-urban migration that different from their agrarian predecessors accompanies the shift from agriculture to not just because they are more concentrated industry. As the Republic of Korea grew but also because they are more specialized. between 1970 and 1995, the urban share The largest cities may be well suited for of population quadrupled to 82 percent, startup enterprises; the smaller ones may be with migration accounting for more than better suited for those more established. In half the increase in the 1960s and 1970s. agriculture, sowing and reaping must hap- · Nationally, workers move to reduce dis- pen in the same place. Not so for industry tance to markets in parts that are pros- and business services. Falling transport and pering. About 3 million people moved communications costs allow firms to spa- in the second half of the 1990s from tially separate sowing and reaping. Prod- the lagging Indian states of Bihar and ucts may be designed and financed in large Uttar Pradesh to leading Maharashtra cities--and produced in small towns. and prosperous Punjab (see map 5). In As firms adjust to changing market con- Vietnam, a much smaller country, more ditions, places have to perform different than 4 million people migrated inter- functions or risk decay. The most immobile nally during the same period. 16 WORLD DEVELOPMENT REPORT 2009 · Internationally, regional migration is among the top 10 sending countries. But a big part of labor mobility. Migration interregional migration is sluggish. Fewer among neighbors is considerable. Côte than 200 million of the world's 6.7 billion d'Ivoire, India, and the Islamic Republic people live outside their region of birth. of Iran have been among the top desti- And just 2 million people move from nations for their neighbors. Germany, poorer countries to the developed every Italy, and the United Kingdom still rank year, half of them to the United States. Map 3 Migrating to reduce distance to density: Despite the obstacles, Chinese workers have migrated in the millions Migration totals Migration from western region to 2,000,000 coastal region 1,000,000 Migration from central region to 500,000 coastal region HEILONGJIANG 250,000 C E N T R A L 100,000 Migration within the coastal region R E G I O N JILIN W E S T E R N R E G I O N LIAONING N E I M O N G O L BEIJING Beijing TIANJIN HEBEI XIA COASTAL G SHANXI REGION IN SHANDONG QINGHAI N GANSU HENAN SHAANXI JIANGSU W E S T E R N ANHUI R E G I O N SHANGHAI HUBEI NG SICHUAN ZHEJIANG CHONGQI COASTAL HUNAN JIANGXI REGION GUIZHOU FUJIAN YUNNAN TAIWAN GUANGXI GUANGDONG HONG KONG MACAO CHINA HAINAN Source: Huang and Luo 2008, using data from the population census of China. Overview 17 This sum is not likely to increase, even Map 4 Migrating to reduce distance to density: Brazil's young workers move in thousands to though the gains from greater migration get closer to economic density from developing to developed countries are considerable.8 International migration has been high in the past: fully 20 percent of BRAZIL Europeans emigrated to new lands in the Americas, Australia, and South Africa. Today, these movements have slowed. Just 500,000 Chinese emigrated abroad in 2005. N O R T H But internal migration has picked up in the developing world. More than 150 million 762 (1991) people moved internally in China despite 788 (2000) restrictions (see map 3). In Brazil's high- NORTHEAST growth years during the 1960s and 1970s, almost 40 million people left the coun- CENTER-WEST 45,672 (1991) 57,131 (2000) tryside for cities; even today, young work- ers migrate in large numbers (see map 4). 2,839 (1991) Brasília Vigorous internal migration is not new. 4,117 (2000) Between 1820 and 2000 per capita incomes in the United States multiplied 25-fold, SOUTHEAST and Americans earned the reputation of Population that did not migrate being among the most footloose of people. 1991 2000 In Japan internal migration peaked in the 300,000 14,697 (1991) 1960s, as it grew to become the world's 17,228 (2000) 200,000 1991 2000 second-largest economy. SOUTH 100,000 15,000 Despite aggressive area development 10,000 30,000 policies, 1.7 million people--more women 5,000 2,000 than men--have left East Germany for the West, helping to make incomes more Source: WDR 2009 team, based on census data from the Instituto Brasileiro de Geografia e Estatística. equal. Since the transition to market economies, firms and people have picked places better suited for production. More than a million people--about 12 percent of Map 5 Migrating to reduce distance to density: Migration in India has been less frenetic HIMACHALHIMACHAL MAHARASHTRA HIMACHALHIMACHAL DELHI HIMACHALHIMACHAL PUNJAB PRADESH PRADESH PRADESH PRADESH PRADESH PRADESH PUNJABPUNJAB UTTARANCHALUTTARANCHAL PUNJABPUNJAB UTTARANCHAL UTTARANCHAL UTTARANCHALUTTARANCHAL 1,712,627PUNJAB PUNJAB UTTARANCHAL HARYANADELHIDELHI HAHARYANRYANA HAHARYANRYANA HARYANA SIKKIMSIKKIM SIKKIMSIKKIM HARYANA HAHARYANRYANA SIKKIMSIKKIM 131,895 DELHIDELHI DELHIDELHI RAJASTHANRAJASTHAN UTUTTARTAR UTTAR RAJASTHAN RAJASTHAN UTTAR UTUTTARTAR RAJASTHAN RAJASTHAN UTUTTARTAR UTTAR PRADESHPRADESH PRADESH PRADESH PRADESHPRADESH BIHARBIHAR BIHARBIHAR BIHARBIHAR JHARKHANDJHARKHAND JHARKHAND JHARKHAND JHARKHANDJHARKHAND GUJARGUJARAT GUJARAT WESTWEST MADHMADHYA PRADES MADHYA PRADESH YA PRADESH MADHYA PRADESH MADHMADHYA PRADES YA PRADESH WESTWEST MADHMADHYA PRADES MADHYA PRADESH YA PRADESH WESTWEST BENGALBENGAL BENGAL BENGALBENGAL BENGAL BENGALBENGAL BENGAL GUJARAT GUJARGUJARAT GUJARGUJARAT GUJARAT CHHATTISGARH TTISGARH CHHATTTISGARH TISGARH ORISSAORISSA ORISSAORISSA CHHATTISGARH TTISGARH ORISSAORISSA CHHA CHHA CHHA MAHARASHTRA MAHARASHTRA MAHARASHTRA MAHARASHTRA MAHARASHTRA 12,505,916 ANDHRAANDHRA ANDHRA ANDHRA ANDHRAANDHRA PRADESHPRADESH PRADESH PRADESH PRADESHPRADESH GOA KARNKARNATAKATAKA KARNATAKA GOA KARNATAKA KARNKARNATAKATAKA GOA KARNKARNATAKATAKA KARNATAKA INDIA 12,505,916 Number of within-state migrants Migration totals 1,000,000 500,000 100,000 50,000 Source: WDR 2009 team, based on census data from the Census of India. 18 WORLD DEVELOPMENT REPORT 2009 residents--have left Siberia and the Russian should facilitate labor mobility. For North and Far East for the western parts of decades since independence, India treated Russia. its 40 million emigrants as "not required West Africa has sustained regional labor Indians." Encouraged by a change in atti- mobility through institutional coopera- tude since the 1990s, expatriate Indians are tion. But independent Africa is generally pulling distant places like Bangalore and less integrated. Africans--especially the Hyderabad closer to world markets, just as most skilled--have been leaving the conti- the overseas Chinese did for Shanghai and nent, seeking and getting higher rewards in Guangzhou more than a decade earlier. the North. Other parts of the world show Falling costs of transport and communica- how to deal with this brain drain. Educated tions have helped greatly. workers will be pulled toward places where other skilled people agglomerate. This is Specializing and trading as transport beneficial for both places. But when people costs fall are pushed out by the lack of security or Transport and communication costs have basic services, migration is beneficial for indeed fallen rapidly over the last century, the migrant but not always for the nation. especially in the last 50 years. Since the Pull migration is better than push, but both 1970s, railroad freight costs are down by are hard to stop or slow. Policy makers are half. Road transport costs, despite higher realizing that the challenge is not how to energy and wage costs, are down by about keep people from moving, but how to keep 40 percent. For worldwide air freight, the them from moving for the wrong reasons. price has fallen to about 6 percent of its 1955 China illustrates the benefits. Except for level. The price for tramp shipping services a brief period during the Cultural Revolu- is half that in 1960. A three-minute phone tion, China has treated its diaspora well, call from New York to London was almost according them both rights and respect.9 $300 in 1931. Today, the same call can be Internally, its policies have gone back and made for just a few cents. forth, but now they are shifting from trying With falling domestic transport costs, to discourage people from moving to deliv- economic production should have become ering basic services to people wherever they more evenly spread within countries. With live. The policies are paying dividends. As lower costs of transporting and commu- Chinese migrants are moving to the coast nicating internationally, countries should by the million, many of the 57 million have traded more with distant partners. overseas Chinese are bringing finance and What happened was the opposite. Falling expertise back to some of the same places. transport costs have coincided with greater Internal and international migrants are economic concentration within countries. coming together in a way that is not acci- And while countries now trade more with dental. The willingness of the Chinese to everyone--exports as a share of world pro- move--leaving the country for other parts duction quadrupled to 25 percent over the of the world to escape war and squalor in the last three decades--trade with neighbors first part of the twentieth century and then became even more important. bringing finance and know-how to coastal Why did this happen? The answer lies in China during the last quarter--promises the growing importance of scale economies to bring to southeast China a "reversal of in production and transport (see chapter fortune" rivaling the U.S. Northeast (see 6). As transport costs have fallen, they have "Geography in Motion: Overcoming Dis- allowed greater specialization and radically tance in North America"). altered the location of firms and the nature Countries do not prosper without of trade. With high transport costs, firms mobile people. Indeed, the ability of people had to be near consumers. But as transport to move seems to be a good gauge of their costs fall, they can avail of internal, local, economic potential, and the willingness to and urban economies of scale, and trans- migrate appears to be a measure of their port the product to consumers. Internation- desire for advancement. Governments ally, the same thing. With high transport Overview 19 costs, England imported only what it could Figure 4 Intraindustry trade is high in North America, Western Europe, Oceania, and East Asia not grow or produce at reasonable cost-- spices from India and beef from Argentina Southern Africa in exchange for British textiles and china. Western Africa 1962 As transport costs fell, it imported more 1975 Central Africa 1990 spices and beef. But it also traded more with 2006 Northern Africa France and Germany--Scotch whisky for French wine, English ale for German beer. Central Asia, Caucasus & Turkey Trade to fulfill basic needs was joined and Eastern Africa soon overtaken by trade to satisfy a variety Western Asia of wants. South Asia Falling costs of transportation and com- munication have made the world smaller. Central America & Caribbean But they have also made economic activity South America more geographically concentrated. Eastern Europe & Russian Federation · Locally, with falling costs of commut- Northeast Asia ing and a greater potential for exploit- Southeast Asia & Pacific ing scale economies, towns and cities can Western Europe grow bigger and denser. Australia & New Zealand · Nationally, as leading and lagging areas within countries are connected through North America better modes of transport, production 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 is more concentrated in the more eco- Grubel-Lloyd Index, 3-digit, intraregional trade nomically dense areas to take advantage Source: Brülhart 2008 for this Report. of agglomeration economies. Note: The Grubel-Lloyd Index is the fraction of total trade that is accounted for by intraindustry trade. · Internationally, countries that have lowered the costs of transport more world, explaining why the friction of bor- have benefited most from greater trade. ders on trade has fallen. Aided by a deep- Greater specialization has made these ening integration, the intraregional share countries more competitive still, con- of trade in the EU has risen above 60 per- centrating trade and wealth in a few cent (see "Geography in Motion: Overcom- parts of the world. ing Division in Western Europe"). In East Asia, the fastest-growing region, the share of Scale economies are evident in the trans- regional trade is now more than 55 percent port sector, too. More trade means lower (see "Geography in Motion: Distance and costs of transportation, which in turn Division in East Asia"). means more trade. This is especially true Development in a world of greater spe- for intraindustry trade, which has been the cialization and concentration is even more most rapidly growing part of international challenging. Developing countries have trade during the last half-century. Since higher transport costs and small markets, 1960 the share of intraindustry trade in the which do not support specialization. But world's total has doubled from 27 percent several countries--mainly in East Asia-- to 54 percent. Within-region intraindustry have shown that these markets are acces- trade is low in most regions, and high in a sible for low-income countries. The answer few. It is close to zero for Central Africa, lies in the fastest-growing component of Central Asia, East Africa, Northern Africa, intraindustry trade: trade in "intermediate South Asia, and Southern Africa. It is high- inputs" of production (see box 3). est for Australia, East Asia, New Zealand, In agriculture, industry, and services, North America, and Western Europe (see the potential for fragmenting production figure 4). is almost without limit. Thailand may not Regional cooperation has advanced be able to make a television set better than much faster and further in these parts of the Japan, but it could make parts of televisions 20 WORLD DEVELOPMENT REPORT 2009 BOX 3 Intraindustry trade and intermediate inputs More than half of world trade today is nal and intermediate goods, with both est increase is in food and live animals. intraindustry trade, with industries clas- having increased considerably over the Consumers like variety for farm produce, si ed in 177 (3-digit) categories, up from last 50 years. This rise in intraindustry and that means pro t in trade between about a quarter in 1962. So countries trade is not just for manufacturing. Intra- two countries that raise similar food and are becoming more similar in their eco- industry trade in machines and transport animals (see gure at left). nomic structures. This trade consists of equipment is the highest, but the larg- But the largest rise is for intermediate inputs--the produced means of produc- Intraindustry trade has risen for primary, intermediate, and final goods tion. Marginal intraindustry trade--a reliable measure of change--is highest Grubel-Lloyd Index, 3-digit in intermediate inputs. This is not just for 0.6 manufacturing. Agriculture needs inputs, Intermediate goods too. And falling communications costs 0.5 have resulted in greater fragmentation of services into "components," supplied to nal consumers from di erent parts of 0.4 Final goods the world. Trade in intermediate goods is more sensitive to transport costs than is trade 0.3 Primary goods in nal goods. Consider the following illustration: if intermediate inputs are 0.2 two-thirds of the value added for a good, a 5-percent increase in transport costs can mean the equivalent of a 50-percent 0.1 tax. Little wonder that intermediate goods trade has increased fastest in parts 0 of the world that have reduced trade and 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 transport costs the most. Year Source: Brülhart 2008, for this Report. Source: WDR 2009 team. equally well and much cheaper. Anchored transport costs have occupied the interest by China and Japan, countries in East Asia of researchers (see box 4). have developed production networks that Their insights should change what to trade intermediate goods back and forth. expect from the markets. They should also By specializing in a small part of the pro- inform what governments can do to pro- duction chain, they have broken into this mote the geographic transformations nec- most lucrative and fastest-growing compo- essary for development. nent of trade in manufactures. Countries in other regions can also Putting development in place benefit from the growing trade in inter- Prosperity will not come to every place at mediate goods. The key for most is mak- once, but no place should remain mired in ing a concerted effort to lower the costs of poverty. With good policies, the concen- transport. This means more concentra- tration of economic activity and the con- tion within developing countries, but--by vergence of living standards can happen allowing them to specialize at earlier stages together. The challenge for governments is of development and exploit economies of to allow--even encourage--"unbalanced" scale--it will help them converge to the economic growth, and yet ensure inclusive incomes and living standards in the devel- development. They can do this through oped world. Over the last two decades, economic integration--by bringing lag- such interactions between scale econo- ging and leading places closer in economic mies, mobility of capital and labor, and terms. Overview 21 BOX 4 New insights from a generation of analysis Researchers have been taking a fresh thick input markets, but not for "urban- Falling transport costs increase trade look at industrial organization, eco- ization" economies--especially those more with neighboring, not distant, nomic growth, international trade, and involving knowledge spillovers--gener- countries. With a decline in transport costs, economic geography, having incorpo- ated mainly by large cities (see chapter 4). countries should trade more with countries rated the e ects of scale economies in The implication: policy makers should that are farther away. But trade has become production. The results can be surpris- focus on the functions of cities. more localized than globalized. Countries ing for those schooled in conventional Human capital moves to where it is trade more with countries that are similar, economic analysis. Here are some of the abundant, not scant. Conventional eco- because increasingly the basis of trade is new insights: nomic analysis implies that people should the exploitation of economies of scale, not Plants have to be big to exploit econ- move to where their skills are scant. But the di erences in natural endowments. omies of scale, but places do not have the opposite seems to happen: educated The reason: falling transport costs make to be big to generate them. Increasing migrants seek places where many others specialization possible (see chapter 6). returns to scale arise because of xed have similar skills. Among the 100 largest The implication: falling transport costs costs of production (internal to a rm) metropolitan areas in the United States, change the composition of international and proximity to workers, customers, the 25 cities with the highest share of trade and make it even more sensitive to and people with new ideas (external to a college graduates in 1990 had, by 2000, such costs. Policies to reduce trade and rm, even an industry). The size of settle- attracted graduates at twice the rate of the transport costs should be a big part of ments matters less than their function. other 75. growth strategies for late developers. The reason: with reasonable transport The reason: educated workers gain Recognizing scale economies and their costs, towns can be large enough to from proximity to others (see chapter 5). interaction with the mobility of people and facilitate internal scale economies. Medi- The implication: policies should not products implies changing long-held views um-size cities are often large enough for ght the market force that pulls skilled about what is needed for economic growth. "localization" economies that come from people together. Source: WDR 2009 team. This integration can best be done by · Turkey is trying to change neighbor- unleashing the market forces of agglom- hoods too, in a different way. The eration, migration, and specialization, not country of 70 million has been looking by fighting or opposing them. How well toward integration with the EU. Because markets and governments work together of higher agglomeration economies and determines the speed and sustainability of lower transport costs, areas near Istanbul geographic transformations. Look at what and Izmir may be better suited for inte- is happening in Bogotá, Turkey, and West grating with Europe. The more distant Africa: areas of eastern and southeastern Anato- lia and the Black Sea have 40 percent of · Bogotá has almost 7 million citizens, but the land but less than 20 percent of the migration from rural Colombia contin- national product, with a GDP per capita ues. A third of its population growth is about half that of the western areas. The due to rural migrants, who mostly settle disparities persist despite government in poor, crowded neighborhoods as the efforts to spread economic mass toward city grows denser.Since 2000 a new public the east. Meanwhile, public investments transportation system, the TransMilenio, in social services help lagging areas, has eased congestion, now carrying a while fiscal incentives for firms to locate million passengers a month. For the poor in those areas seem ineffective.10 neighborhoods especially, it has reduced · The Economic Community of West Afri- the distance to economic opportunities. can States (ECOWAS) has a protocol that But many people still live in slums, and allows free movement of its 250 million crime and violence are getting worse. people between member states. This A municipal initiative has addressed has helped the neighborhood maintain these social divisions since 2003, helping regional labor mobility at preindepen- almost a million people integrate into the dence levels, even as it fell in East and city and change their neighborhoods. Southern Africa. But trade is another 22 WORLD DEVELOPMENT REPORT 2009 story. In the most dynamic parts of the trade similar goods and services, moti- world, the exchange of similar goods and vated more by the benefits of special- services--intraindustry trade--has been ization and scale than by differences in rising rapidly. But in West Africa, inter- natural endowments. Trade can only national borders are thickened by red tape partially offset the immobility of land and illicit checkpoints, which divide the and labor, but it will help convergence region and thwart the efforts of ECOWAS when developing countries can tap into members to specialize and trade. the most rapidly growing component: trade in intermediate goods. As the lens of economic geography is widened, different movements, stresses, Private motives are the main shapers and strains come into view. of the economic landscape, but it can be reshaped by collective action, most potently · Locally, in places like Bogotá, land must by governments. Seen through the lens of accommodate more and more people. economic geography, land use, labor mobil- If land markets work well, land will be ity, and intermediate goods trade come into mobile between uses and allocated pro- focus (see table 2). Governments should pay ductively. The cities that do this best special attention to land, labor, and product will grow, and even more people will be markets. When they do not work well, the attracted to their economic density. forces of agglomeration, migration, and · People and products move much faster specialization weaken, and the economy in and around Bogotá than they do in stagnates. When they do, land, labor, and Turkey. But even in Turkey, the western input markets bring the economic efficiency areas will become more prosperous and that comes with geographic concentration, dense, if at a slower pace. Spatial dis- and the equity associated with converging parities in incomes and poverty rates living standards. between the west and the east will likely rise and then diminish as people move A rule of thumb for economic to take advantage of economic density. If integration labor markets in Turkey are fluid, peo- The concern of policy makers is that pro- ple will reduce their economic distance duction will concentrate in some places, to these agglomerations. people in others. Cities will have economic · Internationally, these movements are density, and the countryside most of the likely to be fewer and even slower. If poor. Leading areas will have the economic regional and global markets were inte- mass, while the poor are massed in lagging grated, countries in West Africa would areas. Some countries will have much of the specialize in a few tasks and become world's wealth, others most of the world's competitive in world markets. As divi- poor. Even if this were temporary, it seems sions diminish, neighboring countries unfair. But the disparities may be long last- ing, destabilizing parts of a country, entire Table 2 Agglomeration, migration, and specialization are the most important forces-- nations, and even some world regions. and land, labor, and intermediate inputs the most sensitive factor markets Governments have many reasons to Geographic scales worry about disparities in welfare in and Local National International among countries. They also have many pol- Economic Agglomeration Migration Specialization icy instruments for promoting economic force Speeded by migration, Influenced by Aided by agglomeration integration to reduce those disparities. capital mobility, and agglomeration and and factor mobility trade specialization · Institutions--shorthand in the Report Key factor of Land Labor Intermediate inputs for policies that are spatially blind in production Immobile Mobile within countries Mobile within and their design and should be universal in between countries their coverage. Some of the main exam- Source: WDR 2009 team. ples are regulations affecting land, labor, Note: Throughout the Report, "areas" are within-country economic neighborhoods or administrative units such as states or provinces, and regions are groups of countries based on geographic proximity. and international trade and such social Overview 23 services as education, health, and water the least developed countries can end up and sanitation financed through tax and dominating policy discussions. transfer mechanisms. This Report calls for a rebalancing of · Infrastructure--shorthand for policies these debates to include all the elements and investments that are spatially connec- of a successful approach to spatial inte- tive. Examples include roads, railways, gration--institutions, infrastructure, and airports, harbors, and communication incentives. Using the findings in part one systems that facilitate the movement of and the analysis of market forces in part goods, services, people, and ideas locally, two, part three reframes these debates, nationally, and internationally. calling for a shift from spatial targeting to · Interventions--shorthand for the spa- spatial integration. tially targeted programs that often dom- The world is complicated, and the prob- inate the policy discussion. Examples lems of economic integration defy simple include slum clearance programs, fis- solutions. But the principles need not be cal incentives for manufacturing firms complex. The bedrock of integration poli- offered by state governments, and pref- cies should be spatially blind institutions. erential trade access for poor countries Where the integration challenge spans more in developed country markets. than one geographic dimension, institutions must be augmented by public investments Today, policy debates often begin and in spatially connective infrastructure. Spa- end with discussions of spatially targeted tially targeted interventions are not always incentives. The debate on how to pro- necessary. But where the problem is low mote healthy urbanization is polarized economic density, long distances, and high between those who emphasize villages, divisions, the response must be comprehen- where a majority of the world's poor still sive, involving spatially blind, connective, live, and those who believe the way out of and targeted policies. poverty lies in cities, where much of the For each spatial dimension, an instru- world's wealth is generated. As urban pov- ment of integration (see table 3). The rule erty increases, the focus is shifting from of thumb: "an I for a D." villages to slums. Motivated by within- country geographic disparities in living · For a one-dimensional problem, the standards, the debate on territorial devel- mainstay of the policy response should opment is similarly fixated on economic be (spatially blind) institutions. growth in lagging areas. At the interna- · For a two-dimensional challenge, both tional level, preferential market access for institutions and (spatially connective) infrastructure are needed. Table 3 "An I for a D?" A rule of thumb for calibrating the policy response Policy priorities for economic integration Institutions Infrastructure Interventions Place type--local (L), national (N), and international (I) Spatially Spatially Spatially Complexity of challenge geographic scales blind connective targeted One-dimensional problem L. Areas of incipient urbanization N. Nations with sparse lagging areas · I. Regions close to world markets Two-dimensional L. Areas of intermediate urbanization challenge N. Nations with dense lagging areas · · I. Regions distant from world markets Three-dimensional L. Areas of advanced urbanization that have within-city divisions predicament N. Nations with dense lagging areas and domestic divisions · · · I. Regions distant from markets with small economies Source: WDR 2009 team. Note: Throughout the Report, areas are within-country economic neighborhoods or administrative units such as states or provinces, and regions are groupings of countries based on geographic proximity. 24 WORLD DEVELOPMENT REPORT 2009 · For a three-dimensional predicament, behind a misplaced density of populations all three instruments are needed--in- in lagging areas, so that in some countries stitutions, infrastructure, and (spatially (such as Brazil) lagging areas have higher targeted) interventions. poverty rates and high population densi- ties. Internationally, developing regions The primary dimension at the local are all deeply divided, but some also may geographic scale is density; nationally, it be distant from world markets. Even if is distance; internationally, division. At regional institutions take hold and make each of these geographic scales, policies South Asia a more integrated region, some designed without explicit consideration to countries (such as Nepal) may need con- space should be seen as the primary instru- certed policy action to improve the infra- ment. In some places, these can be a large structure to reach growing regional and part of integration policies. The task of international markets. For places that integration is relatively straightforward in face two-dimensioned integration chal- areas of incipient urbanization (as in lag- lenges, investments in infrastructure that ging states in many low-income countries), connects lagging to leading places and in countries with mobile labor and capital aid market access should supplement the (such as Chile), or in regions that are close institutions that bring people together. to world markets (such as North Africa). The integration challenge is greatest where In such places, the integration challenge adverse density, distance, and division com- can be seen as one dimensional. Explicitly bine to pose a "three-dimensional challenge." spatial policies are not generally necessary. In highly urbanized areas (such as Bogotá), Universal or spatially blind institutions-- the fear is that economic density and popu- made available to everyone regardless of lation density may not coincide. Within-city location--form both the bedrock and the divisionsmaypreventtheintegrationofslums mainstay of an effective integration policy. and spawn problems of crime and grime. In As the task becomes more complicated, some countries (such as India), ethnic, reli- these institutions must be assisted by gious, or linguistic divisions discourage the infrastructure. Locally, rapid urbanization poor in densely populated lagging areas from can congest the area, increasing economic seeking their fortunes elsewhere. And in the distance and choking off agglomeration most fragmented and remote regions (such as economies. In places such as Mumbai, Central Africa or Central Asia), a clustering whose population has doubled since the of small and poor nations can lead to spill- 1970s, rising congestion has to be met by overs of the wrong kind--disease, conflict, investments in transport infrastructure, or corruption. so that the benefits of density are shared Slums in large cities, densely populated more widely. Nationally, changing eco- poor areas in divided nations, and the "bot- nomic and political fortunes can leave tom billion" countries--approximating the three billions discussed at the beginning-- Figure 5 In charted waters: the pace of urbanization today has precedents are the most difficult challenges for inte- Change in urban shares since 1800 gration. The policy responses should not be timid. But they should also be deliberate. Developing economies (median), 1985­2005 High-income economies (mean), 1880­1900 Efficient and inclusive urbanization Developing economies (mean), 1985­2005 No country has grown to middle income United States, 1800­1900 without industrializing and urbanizing. Denmark, 1800­1900 None has grown to high income without United Kingdom, 1830­50 vibrant cities. The rush to cities in develop- Germany, 1830­50 ing countries seems chaotic, but it is nec- Canada, 1880­1900 essary. It seems unprecedented, but it has 0 5 10 15 20 25 happened before (see figure 5). It had to Percentage point difference in urban shares have, because the move to density that is Source: WDR 2009 team calculations based on data from various sources (see figure 1.13). manifest in urbanization is closely related Overview 25 to the transformation of an economy from establish the institutional foundation agrarian to industrial to postindustrial. of possible urbanization in some places. Governments can facilitate the spatial Good land policies are central, and so transformations that lie behind these sec- are policies to provide basic services toral changes. Depending on the stage of to everyone. For example, the univer- urbanization, sequencing and priority- salization of land rights in Denmark setting require paying attention to different at the turn of the eighteenth century aspects of the geographic transformation. contributed greatly to the nation's take- What does not change is that a foundation off into industrialization a few decades of institutions must be universal and come later. Indeed, policies to strengthen rural first, investments in connective infrastruc- property rights are seen as instrumental ture should be both timed and located well for higher agricultural productivity in and come second, and spatially targeted sixteenth-century England, which freed interventions should be used least and last. workers to migrate to towns to work The approach requires the discipline of in manufacturing and services. A close following the integration principle set out complement to the institutions for bet- earlier. The payoff is a spatial transforma- ter land markets is the universal provi- tion that is both efficient and inclusive (see sion of basic social services--security, chapter 7). education, health services, and sanita- The principles outlined in the Report tion. In 1960, the Republic of Korea had help to prioritize policies for different stages a per capita income level that Benin has of urbanization, providing the elements today. Seventy-five percent of its people of an urbanization strategy. Map 6 shows lived in rural areas, more than a third three areas in Colombia, each with a spe- of Korean adults had no schooling, and cific geography. But the principles are quite fewer than 5 percent of children had universal. been immunized against preventable diseases such as measles. By 2000, more · Incipient urbanization. In places that than 80 percent had urbanized, almost are mostly rural, governments should everyone was literate and immunized, be as neutral as possible and should and the Republic of Korea's income had Map 6 As urbanization advances, policies must evolve a. Incipient urbanization b. Intermediate urbanization c. Advanced urbanization in Cauca, Colombia in Santander, Colombia in Colombia's Capital Area VALLE DEL CAUCA BOLÍVAR CUNDINA MARCA CAUCA Bucaramanga ANTIOQUIA Bogotá Popayán SANTANDER HULA TOLIMA META COLOMBIA Source: WDR 2009 team, using data from Schneider, Friedl, and Potere 2008. 26 WORLD DEVELOPMENT REPORT 2009 of rising economic density are more widely shared. Industrialization involves BOX 5 Concentration without congestion in western changing land use patterns as activities China: Chongqing and Chengdu concentrate, and requires moving goods An experiment in China might change Better institutions. The emphasis and services around quickly. Land use the future of urbanization policy in is on coordination across government regulations can affect location decisions, the developing world. Policy makers levels to manage land use and con- and they continue to be the institutional should take notice. version. In the countryside, the plan priority. Spatially blind social services China is taking inland the urbaniza- concentrates rural land by transfer- should continue as part of rural-urban tion strategy that was successful in ring use rights to rms and farmers. integration, so that people are pulled to the leading coastal areas in the 1980s In towns and cities, the creation of and 1990s. The "area approach" is industrial zones is a key part of the cities by agglomeration economies, not being implemented in two places-- wider framework. Large and medium pushed out by the lack of schools, health Chongqing and Chengdu, both cities are developing high value- services, and public security in rural located in the near west. At about 40 added manufacturing, while smaller areas. But even if these services are pro- percent, they have the same urbaniza- cities and towns are specializing in vided, transport costs can rise quickly tion ratio as the average for China. The labor-intensive industries, pulling in because of growing congestion, affecting aim is to increase that to 70 percent by labor from nearby villages, and facili- the location choices of entrepreneurs. 2020, promoting both concentration tating localization economies. and rural-urban convergence. More infrastructure. Massive trunk Connective infrastructure is needed to Chongqing has a population of infrastructure is planned. Chongqing keep such areas integrated. State and cen- about 40 million, with a portfolio of will spend billions on infrastructure, tral governments that work well together a capital city, six large cities, 25 small from the central government and can provide the trunk infrastructure and mid-size cities, 95 central town- through increased private invest- necessary to ensure that prosperity is ships, and 400 townships. Chongqing ment from Hong Kong, China, and widely shared. Making the administra- has been accorded the status of from Singapore. In Chengdu, about tive jurisdiction wider can help in coor- a special municipality, as Beijing, 117 billion yuan will be invested in Shanghai, and Tianjin have had for 71 infrastructure projects, including dinating infrastructure investments. A some years. Like them, it will enjoy rural-urban transport networks, and good example is Chongqing in western greater nancial autonomy. Chengdu water and sanitation projects in both China (see box 5). is smaller, a sprawling metropolitan rural and urban areas. Another 16.5 · Advancedurbanization.Inhighlyurban- area with 11 million people. Along billion yuan will be invested in 34 ized areas, besides institutions and infra- with the 2,000-year-old capital city of social projects to improve the living structure, targeted interventions may be Sichuan province, it has eight medi- standards of lagging rural residents. um-size cities, 30 central townships, If markets favor the two places as necessary to deal with the problem of 60 townships, and 600 villages. much as the government has, they slums. Services and learning require peo- The urbanization strategy involves will improve the lives of millions in ple to be in proximity to livable surround- "three concentrations" of land, the Chinese hinterland. The integra- ings. This is the stage in which slums can industry, and farmers. The idea is to tion already has had a local impact. compromise a city's ability to deliver the reap the bene ts of scale economies, In Chongqing, rural incomes in 2007 economies that come from proximity. promote the mobility of goods and increased faster than those of urban Slum-improvement programs may not workers, and improve the well-being residents. In Chengdu, farmer con- of new migrants to cities. Consistent centrations are believed to have led be a priority at earlier stages of urbaniza- with the policy priorities outlined for to a productivity increase of 80 per- tion, but at this stage they become nec- areas with intermediate urban shares cent, as industry has been absorbing essary. The lesson from assessments of of about 40­50 percent, the emphasis about 100,000 farmers a year. slum-improvement initiatives is that tar- in both places is on universal institu- geted interventions will not be enough tions and connective infrastructure, by themselves. These interventions will not spatially targeted interventions. Source: WDR 2009 team. not work unless institutions related to land and basic services are reasonably effective, and transport infrastructure is reached that of modern-day Portugal. in place. A three-dimensional challenge Another good example is Costa Rica. must be met by a three-pronged policy · Intermediate urbanization. In places response, requiring coordinated policies where urbanization has picked up at the central, state, and city levels of gov- speed, in addition to these institutions, ernment. Singapore's success shows the governments must put in place connec- advantages of such coordination in a city- tive infrastructure so that the benefits state. More recent examples are Shanghai Overview 27 and Guangzhou in China. An even more Figure 6 Quicker geographic convergence in basic living standards in Malaysia recent (and perhaps more generally appli- % difference between min. and max. poverty rates among Malaysian states cable) example is Bogotá in Colombia. 70 The experience of successful urban- 60 1976 izers indicates that the basis of successful rural-urban transformations is a set of spa- 50 tially blind policies--"institutions" in the 1970 40 shorthand of this Report. Investments in 1984 infrastructure that connects places form 30 1990 the second tier. Geographically targeted 1995 interventions should be used only when the 20 2002 challenge is especially difficult, but should 10 always be used together with an effort to improve institutions and infrastructure. 0 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 GDP per capita (2000 US$) Area (territorial) development policies that integrate nations Source: Malaysia Economic Planning Unit 2008. Some parts of a country are better suited in the slower-growing states, implying that for agriculture, others for industry, and tax and transfer mechanisms worked well. still others for services. And as industry Such impatience with spatial inequality and services flourish, the spatial distribu- in living standards is paying off in other tion of economic activities must change.11 countries such as China, Egypt, Indonesia, No country has grown to riches without Mexico, Thailand, and Vietnam. changing the geographic distribution of its But not all countries have experienced people and production. geographic convergence in the Millennium A rising concentration of people and Development Indicators, such as child mor- production in some parts of a country has tality, maternal health, basic education, safe marked economic growth over the last water, and sanitation. What should they do? two centuries. To fight this concentration The answer lies in integrating lagging and is to fight growth itself, and policy makers leading areas, using policies that are tailored must show patience in dealing with these to the level of difficulty of integration. While imbalances. But aided by government poli- economic motives are important, social and cies, successful development also has been political conditions influence the speed of marked by falling disparities in living stan- these spatial changes. The location choices dards between places favored by markets that people make reflect the strengths and and those less fortunate. Policies can speed inclinations of societies and political struc- up the convergence in basic living stan- tures. Poverty maps provide a snapshot of dards, so that people in the least-fortunate where the poor are concentrated (high pov- places do not have to wait for basic public erty mass--that is, the "poor people"), and amenities until their nations reach high which places are the poorest (high poverty income levels. The experience of success- rate--that is, the "poor places"). These maps ful developers also justifies impatience in can tell us a lot about the social and politi- equalizing basic living standards. cal conditions in a country: the movement of Consider Malaysia. Economic growth poor people may best reflect the constraints to and government policies have reduced mobility, because they have the most reason poverty and improved living standards, to move and the fewest resources to do so. speeding progress toward meeting the Mil- Using information on where poor people lennium Development Goals. But in the are located and which places are poor, the early years of growth (between 1970 and policy response can be calibrated to coun- 1976), poverty rates between different states try conditions. diverged briefly, to later converge as they declined for all states (see figure 6). Health · Countrieswithsparselypopulatedlagging indicators (infant mortality) declined more areas. In China the highest poverty rates 28 WORLD DEVELOPMENT REPORT 2009 Map 7 Three types of countries, differing challenges for area development a. China: Poverty rates are high in the west, but most poor people are in the east Proportion of poor (%) < 17.5 17.6­35.9 Poverty density 36.0­51.6 Each dot represents 51.7­70.3 70.4­81.1 50,000 poor persons b. Brazil: Poverty rates are high in the north and northeast, but most poor people live along the coast Proportion of poor (%) < 12 12­25 Poverty density 25­35 Each dot represents 35­45 >45 5,000 poor persons c. India: Poverty rates are high in the central states, and many poor people live there Proportion of poor (%) 6.4­9.7 9.8­16.7 16.8­24.8 Poverty density 24.9­35.4 Each dot represents 35.5­46.6 no data 50,000 poor persons Source: WDR 2009 team (see chapter 8 for details). Overview 29 are in the western provinces, but the poor ging states, home to more than 60 percent are concentrated in the southeast and cen- of the nation's poor (see map 7, panel c). tral areas (see map 7, panel a). Economic People live there for a reason: it is a fer- density and population density overlap. tile plain and was the cradle of Indian The country has few divisions--linguistic civilization. But their location is less for- and other barriers are not high--and peo- tunate now, as the world has changed. ple,including the poor,can move to reduce Labor mobility is limited because of lin- their distance to density. Spatially blind guistic and class divisions. Mobility has institutions that ensure well-functioning not been helped by policies that sought to land markets, enforce property rights, and revive growth in these lagging provinces deliver basic social services such as school- through subsidized finance and preferen- ing and health care can be the mainstay of tial industrial licensing. The debate is now an economic integration strategy to reduce shifting toward economic integration-- the economic distance between lagging policies more consistent with mobility of and leading areas. Chile, Egypt, Honduras, labor such as interregional infrastructure Indonesia, Russia, Uganda, and Vietnam and better health and education services. are other examples of countries where the These policies and the interstate migra- area development challenge is unidimen- tion they encourage will, if given time, sional--the main problem is distance. reduce the divisions that have made the ·Undivided countries with densely popu- distances long between leading areas lated lagging areas. In Brazil the poverty and densely populated lagging areas. rates are highest in the north and north- In the meantime, these areas may need east: eight of the ten poorest states are in a helping hand--from geographically the northeast, the other two are in the targeted incentives that encourage local north (see map 7, panel b). But the eco- production. Another country with a nomic mass and the concentration of three-dimensional integration agenda of poverty are highest in the urban agglom- distance, densely populated poor areas, erations near the coast, from the poor and domestic divisions may be Nigeria. northeast to the thriving southeast. Eco- In such places, the policy response has to nomic and population densities coincide be a blend of spatially blind, connective, only partially. The poverty-related symp- and targeted policies. toms are those of a country where within- Governments should not be faulted country divisions such as ethnolinguistic for being impatient with markets, and differences and political fragmentation for trying to help lagging areas. But tar- are low, but where population densities geted interventions should be designed to are--for historical and policy-related work with the institutional reforms and reasons--in the "wrong places." Bangla- the investments in infrastructure. Expe- desh, Colombia, Ghana, and Turkey have rience suggests that incentives should not similar conditions. In such places the be provided for activities that depend on pull of agglomeration economies in lead- agglomeration economies or international ing areas and the mobility of labor may market access. Incentives for agriculture not be strong enough to induce concen- are prime candidates in these largely rural tration and convergence. The problems and agrarian areas. Relying mainly on tar- of "long distance and wrong density" geted incentives for industry--as India must be met by a two-pronged policy did for decades--will not help the lagging of economic integration: spatially blind states improve living standards to levels in institutions should be augmented by spa- the leading states. tially connective infrastructure, such as interregional highways and railroads and Regional integration to increase access improved telecommunications. to global markets ·Divided countries with densely popu- The merits of global versus regional trade lated lagging areas. In India more than agreements have been debated for years. 400 million people live in the central lag- The debate is now largely concluded. Where 30 WORLD DEVELOPMENT REPORT 2009 Figure 7 Northeast, Southeast, and South Asia have been catching up to developed nations if the scale of production is big, and that Average annual growth rates of GDP per capita, 1960­2006 requires reaching the big markets of the Northeast Asia Northern Hemisphere. Other high-income countries What do late developers have to do to accelerate development? The common con- Southeast Asia & Pacific dition is division--that is, thick borders. South Asia What differs is their distance from large OECD countries world markets and whether or not there is Northern Africa a large country in their neighborhood (see Central Asia, Caucasus & Turkey map 8, panel b). Central America & Caribbean Eastern Europe & Russian Federation · Countries in regions near large world Western Asia markets. For countries near large mar- South America kets, regional and global integration does Southern Africa not require geographic differentiation. Eastern Africa Spatially blind measures such as improv- Western Africa ing economic policies and the invest- Central Africa ment climate will attract capital and ­1 0 1 2 3 4 5 6 technology from the more sophisticated Percent markets nearby. Their underused talent Source: WDR 2009 team. and cheaper labor are powerful draws. Whether they lag or lead within the regional or bilateral pacts do not discourage region is hardly relevant; the presence of trade with countries in other regions, and a sun nearby makes them all small plan- where they are accompanied by measures ets. Mexican exports to the United States to facilitate the flows of goods, people, and are about 1.7 percent of the U.S. econ- finance--such as infrastructure and com- omy. Mexico should build even stron- pensatory mechanisms--they can help. ger links with the United States. But for Otherwise, they are not worth the trouble. other countries in Central America, the This Report does not reopen that payoffs to infrastructure connections to debate. Instead, it takes up the question Mexico are small--the market in North of how developing countries can best gain America dwarfs all of Central America's. access to markets within their neighbor- And market access likely depends most hoods and across the world. Geography on economic stability. Spatially blind matters greatly in deciding what is needed, institutions should be able to integrate what is unnecessary, and what will fail. But Central America with world markets. with the right mix of policy actions, even The same is true for Eastern Europe and countries in parts of the world that have North Africa. Countries in these regions been left far behind can overcome their have better-than-average market access, geographic disadvantage. The way to tell if though depending on their economic the actions are paying dividends is whether policies and regulations, this access is market access improves noticeably. not uniform even within these regions Some regions of the world have done (see map 8, panel c). better than others (see figure 7). Countries · Countries in regions distant from in these regions now have thinner eco- large world markets that have a large nomic borders (see map 8, panel a). They economy. To integrate regions more can afford to have thin borders, because distant from large world markets but their neighbors are prospering too. For with a sizable economy--East Asia, them, regional markets are world markets. Latin America, Southern Africa, and Others, like the East Asians, have allowed South Asia--such spatially blind mea- production relationships to grow strong sures are just as necessary, but they may and cut paths even through thick borders. not be sufficient. For lagging countries But specializing can increase efficiency only in these regions, such as Mongolia, Overview 31 Map 8 Market access distinguishes world regions a. Borders are thicker in developing regions b. The size and access to markets differs greatly by region Real market access relative to the United States, 2003 < 0.040 0.040­0.090 0.091­0.240 0.241­0.910 > 0.910 No data c. The three D's suggest a simple taxonomy of the world's neighborhoods Regions with High-income countries Countries close to world markets Large countries far from world markets Small countries far from world markets Sources: Panel a: WDR 2009 team (see chapter 3 for details); panel b: Mayer 2008 (see chapter 9 for details); panel c: WDR 2009 team (see chapter 9 for details). 32 WORLD DEVELOPMENT REPORT 2009 Nepal, Paraguay, and Zimbabwe, some can hardly be blamed for worrying of the paths to world markets may go most about their own poor, and not through their larger neighbors. Brazil, their less fortunate neighbors such as China, and India are attractive to inves- Burkina Faso or Burundi. Indeed, see- tors because of their potential market ing the benefits of regional cooperation, size, and these "home market effects" they have made repeated efforts to fos- can generate the impetus for special- ter integration in their neighborhoods. ization and help their enterprises com- The ECOWAS even includes a clause pete in world markets. A qualification: that allows workers to cross borders, a for market access, the relevant measure stage of integration rivaled only (and of distance is economic, not Euclidean. only recently) by the EU. It also has With a combination of bilateral accords, tried to share regional infrastructure. inspired transport policies, and aggres- Other such regions are Central Africa, sive specialization in primary products, Central Asia, and the Pacific Islands. Chile reduced distance to North Amer- Countries in such regions face a three- ica and built global rather than regional dimensional challenge (see "Geogra- links. But such cases are exceptions. For phy in Motion: Density, Distance, and the smaller countries in these regions, Division in Sub-Saharan Africa"). A both institutional reforms and regional combination of efforts to improve insti- connectivity will be necessary for eco- tutional cooperation and regional infra- nomic integration. structure investments is needed--but it · Countries in regions distant from world is not enough. Targeted incentives also markets without large economies. The will be necessary, through preferential most difficult challenges are for the access to developed country markets, countries in parts of the world divided perhaps made conditional on regional by thick borders, distant from world collaboration to improve institutions markets, and without a large country and infrastructure. that can serve as a regional conduit to world markets, as Brazil and India Everyone should support the efforts of might. For these regions, economic these "bottom billion" countries to inte- geography poses a three-dimensional grate their economies, within and across challenge. Côte d'Ivoire or Tanzania borders. A billion lives depend on it. We are familiar with the sectoral transformations needed for economic growth--the changes in work and organization as agrarian economies become industrialized and service oriented. This Report discusses the spatial transformations that also must happen for coun- tries to develop. Higher densities, shorter distances, and lower divisions will remain essential for economic success in the foreseeable future. They should be encouraged. With them will come unbalanced growth. When accompanied by policies for integration calibrated to the economic geography of nations, these changes also will bring inclusive development--sooner, not much later. Navigating This Report I n 1971 Simon Kuznets, a Russian émigré may even be one of the main lessons of the who had built his career in the United twentieth century. After Kuznets left Russia States, was awarded the Nobel Prize in in 1922, Soviet planners implemented one Economics "for his empirically founded approach to economic geography, and the interpretation of economic growth, which United States implemented another. The has led to new and deepened insight into the Soviet strategy forced people to move to economic and social structure and process the north and east and to spread out eco- of development."1 In his prize lecture, Kuz- nomic production. Meanwhile, Americans nets summarized the structural changes that moved voluntarily toward the south and the accompany economic growth, emphasizing west, but production became more concen- "the shift away from agriculture to nonag- trated. Within five years of Kuznets' death ricultural pursuits and, recently, away from in 1985, the Soviet Union would collapse. industry to services."2 These are the sectoral At the time, Russia's per capita income was changes in production needed for nations to a quarter that of the United States. Spatial prosper. Nations do not develop by merely inefficiency was not the only reason why doing more of the same thing. They must do the Soviet Union fell. But it could not have different things, and do them better. helped. Over the years, this has been confirmed As Russia has moved from plan to mar- so often that it now seems almost obvious. ket, spatial efficiency increased. Between Less obvious but no less important are the 1989 and 2004, almost all new firms chose spatial transformations needed for these locations with the best access to Moscow, structural shifts. Some places are suited St. Petersburg, and international markets.3 for farming, others for industry, yet others Over the past three decades, researchers for services. As economies become indus- have been documenting the changes in trialized and more people are employed economic geography needed to stay spa- in services, their shapes must change, too. tially efficient as technology advances and These changes, involving social adjustment production structures change. They have as much as the economic, can take time. studied the effects of larger populations, The economic world is not frictionless. The globalizing markets, and international "what" and "how" of economic production borders on the location of people and pro- cannot be decided without deciding the duction. They are starting to assess how "where." governments can help or hurt these trans- For policy makers, especially, it is formations. This Report draws on this work important to understand these changes and and its implications for public policy. to appreciate the market forces that shape Government policies are important. them. This understanding can be the differ- With development, people and production ence between prosperity and stagnation. It become more concentrated--in towns and 33 34 WORLD DEVELOPMENT REPORT 2009 cities, and in areas of countries closer to of this chapter summarizes the Report's domestic and international markets. While scope, clarifies its terms, and outlines its economic activity concentrates in some structure. parts of a nation or the globe, many people may be spread out over the countryside or Scope in places distant from prosperity, perhaps Governments intervene (usually incorrectly) opening sizable geographic disparities in to spread the benefits of economic growth living standards. This Report discusses why more evenly across space. Even when the this happens, and assesses what has been imperatives are political, they have economic most effective in altering the economic consequences. And even if the objectives are geography of developing countries. Eco- economic, they have social and environmen- nomic activity will concentrate in any case. tal effects. Policy makers thus face sharp But managed one way, as the United States tradeoffs and must compromise. The eco- did, it can foster growth and integration. nomic costs of mistakes can be large and last- Managed another way, it can result in dis- ing: recognizing the importance of economic integration and despair, and even conflict. geography means realizing that once produc- The Report covers a broad and seemingly ers and people make decisions on where to disparate set of phenomena that span the locate, they can be difficult to reverse. spectrum from local to national to inter- Governments can do better by promoting national scales, from human to physical to the market forces that deliver both the con- political geography, and from national and centration of economic production and the global institutions to targeted interventions. convergence of living standards, and aug- To keep the inquiry disciplined requires ment them with policies to ensure afford- emphasizing some aspects of spatial trans- able basic services everywhere. They can do formations and leaving others out. The rest this by helping people and entrepreneurs take advantage of economic opportunities, wherever they arise. The market forces that BOX 0.1 What this Report is not about help most are agglomeration, migration, and specialization. Their economic benefits are To keep the Report focused, several are found in a much greater degree in a the subject of this Report. Their social and important aspects of the spatial crowded city than in a country village, where one's individual concerns are the environmental implications are not consid- transformations do not get the atten- concern of everyone.a ered in detail (see box 0.1). The unintended tion they would in a fuller study. The Migration also can have vastly dif- main aspects not considered--ex- social and environmental effects of market ferent e ects across societies, both in cept when emphasizing or qualifying forces are important policy matters. But they the places people leave and to those the most important messages--are deserve more space than can be covered in a places they go. It almost always brings the social and environmental e ects economic rewards, but as the anti- report that shows how economic geography of a changing economic geography. immigrant sentiments in many coun- is reshaped during development. Agglomeration--the growth of tries show, it also means more risk. The Report describes the geographic cities--can have social and environ- Specialization of production made transformations needed for development. mental e ects that are bene cial and possible by falling transport costs can some that are detrimental. Cities help It analyzes these changes using the insights come at an environmental price. Cod to break down societal stereotypes from economic history and recent research. is caught o Norway, transported by and increase cohesion. Most progres- It then revisits the policy debates on urban- plane to China to be cleaned, and sive movements throughout history then own back to Norway to be sold. ization, regional development, and inter- have had urban origins. But so have Such specialization based on natural national integration. This is the 31st World the most violent. The propensity of endowments ( sh in Northern Europe, Development Report, and the issues it covers people to commit crimes is believed people in China) helps both Norwe- have been visited by earlier Reports. But here to be greater in cities. And while cit- gian consumers and Chinese workers, ies allow individualism and creativity the facts, analysis, and policies related to spa- but the cod now has a longer carbon and break down social barriers, they tial transformations are the major focus, and trail. The environmental e ects of also break societal ties: the Report is structured accordingly. urbanization and transport are con- The cities have always been the cradles sidered in this Report, but only when of liberty, just as they are today the they qualify the Report's messages. Terms centres of radicalism. Every man of the world knows that isolation and solitude a. Weber 1899, p. 432. To formulate simple messages that are useful to policy makers requires an uncomplicated Navigating This Report 35 terminology. The Report uses some terms density of about 3,000 persons per square that may not be familiar to readers, intro- kilometer. The population density in the duces others, and uses yet others as short- city is about 13,000 persons per square hand. This section clarifies the terms that kilometer. the rest of the Report uses consistently. · Country. The national scale encom- passes the 23 provinces, five autono- Spatial scales--area, country, and region mous regions, and four municipalities Throughout the Report, the analysis is pro- (Shanghai is one of them) that make vided at three geographic scales--local, up China, covering about 9.6 million national, and international. The policy con- square kilometers. The distance between cerns that correspond to these spatial scales the western province of Xinjiang and the are, respectively, the speed and sustainability dynamic coastal areas in the east is more of the rural-urban transformation, the ter- than 4,000 kilometers. Restrictions on ritorial disparities in production and welfare internal migration can make the eco- within countries, and the same disparities nomic distance seem much longer. across countries and world regions. The units · Region. The international scale con- thatcorrespondtothesespatialscalesarearea, sists of China and its East Asian neigh- country, and region. These terms are used bors including Japan, Mongolia, and the consistentlythroughouttheReport.An"area" Republic of Korea. The region is divided is the same as a "territory," the target of ter- by borders, some thick, some thin. ritorial development policies. In Anglophone countries, it is the same as a "region" within a This Report uses the notion of "natu- country, as in the debates on "regional devel- ral" neighborhoods, defined by elements opment." Area is used here to avoid confusion of human, physical, and political geogra- with another spatial scale, the international, phy. The World Bank commonly classifies because "region" also describes a group of all low- and middle-income countries into countries, such as South Asia, which includes six regions, and groups all high-income India and its neighbors. countries together, regardless of their loca- To fix the terms, consider the three geo- tion. This Report classifies the world into graphic scales of the Shanghai metropoli- 16 regions that include both developed and tan area, the country of China, and the East developing countries, using geographic Asia region (see map 0.1): proximity as the most important crite- · Area. The local scale is the municipality rion (see box 0.2). It is also more detailed. of Shanghai--which includes the city of Sub-Saharan Africa, for example, has four Shanghai and neighboring cities, towns, regions--West, Central, East, and Southern. and villages in an area of about 7,000 East Asia and the Pacific has three--North- square kilometers, with a population east, Southeast, and the Pacific Islands. The Map 0.1 Three geographic scales--area, country, and region Shanghai, China, and East Asia exemplify the local, national, and international scales The first geographical scale The second geographical scale The third geographical scale The area around Shanghai Province The country of China The East Asian region Shanghai SHANGHAI PROVINCE SHANGHAI PROVINCE Source: WDR 2009 team. 36 WORLD DEVELOPMENT REPORT 2009 BOX 0.2 This Report's regions are more detailed than the World Bank's This Report is about geography and eco- sovereign states, the Report uses an aggre- the context, the analysis in this Report nomic development, focusing more on spa- gation of countries that is more detailed ignores the income of countries within tial variability of conditions and outcomes than the six standard World Bank regions, a region--say, where regional growth than economic analysis usually does. Where which can hide signi cant variation. spillovers from industrial to developing appropriate, it uses countries or areas Adapting the United Nations geo- countries are of interest--or treats the within countries as the units of analysis. But graphic regions but remaining consistent Organisation of Economic Co-operation where the emphasis is on regional integra- with World Bank regions yields the 16 and Development (OECD) and other high- tion and interactions between neighboring regions displayed here. Depending on income economies separately. Regions used in this Report EASTERN EUROPE & RUSSIAN FEDERATION WESTERN NORTH EUROPE AMERICA CENTRAL ASIA, CAUCASUS & TURKEY NORTHEAST ASIA WESTERN NORTH AFRICA ASIA SOUTH CENTRAL AMERICA ASIA & CARIBBEAN WESTERN AFRICA SOUTHEAST ASIA EASTERN CENTRAL & PACIFIC AFRICA AFRICA SOUTH AMERICA SOUTHERN AUSTRALIA & AFRICA NEW ZEALAND Source: WDR 2009 team. term "region" is used throughout the Report interpretation. Density generally signifies to refer to these 16 groups of countries. the intensity of economic activity on a unit While the choice of area or region can of land, say, a square kilometer. Data limi- be arbitrary, these spatial scales conform tations can force compromise: since pro- well to the levels of policy making. This duction and population densities are closely Report aims to inform policy making at related, and production data are less easily these three levels--subnational, national, available, population density is sometimes and international. used as a proxy for economic density. It can get a bit confusing. London is probably the Spatial dimensions--density, distance, city with the highest economic density in and division the world, but Mumbai, with 30,000 people To describe the geographic transforma- per square kilometer, is the most densely tions that accompany development, the populated. Distance signifies the costs of Report introduces the use of three spatial getting to places with economic density. dimensions--density, distance, and divi- While density and distance relate closely sion. These dimensions help the reader see to human and physical geography, division development in real space--in three dimen- refers more to sociopolitical geography. sions, in other words. The terms are easy Religion, ethnicity, and language are among metaphors, but they also have a technical the main attributes that lead to divisions Navigating This Report 37 between places. While divisions are great- density--such as the population per square est across nations, they can be considerable kilometer (as in chapters 1 and 7) or the within countries as well. places where more of a nation's poor people These dimensions are measurable. But live (as in chapters 2 and 8), it is qualified unlike height, length, and breadth, for accordingly. example, the geographic dimensions are Distance can be measured with some not orthogonal. Better analogs for the three precision, but where infrastructure is sparse, dimensions are a person's height, weight, straight-line distance is different from road and age, which are related. Likewise, as dis- or rail distance. Many other factors, such as tances increase, it is likely that divisions also the availability and affordability of trans- get stronger. Density, distance, and division port services, determine actual accessibil- are best illustrated by market access, an ity. Where such information is available, indicator of economic opportunity for a it is used. Chapter 1, for example, reports a location that tells the size of the potential uniform measure of urbanization based on markets in its vicinity, and the ease of reach- places that both have minimum levels of ing them. Market access across geographic population density and are within an hour's scales determines where economic activity travel time to sizable settlements. In com- can thrive and thus where firms will locate puting this "agglomeration index," the qual- and populations will grow. ity of transport infrastructure is taken into Using this concept of market access, the account. Division is associated with interna- three dimensions are defined as follows: tional borders, because they usually impede the ease of exchange or travel. But not all bor- · Density indicates the size of economic ders imply divisions. Those in the European output or total purchasing power per Union (EU), for instance, have increasingly unit of surface area--say, a square kilo- ceased to reflect divisions between countries. meter. It is highest in large cities where And not all divisions imply international bor- economic activity is concentrated and ders. Where religious, ethnic, and linguistic much lower in rural neighborhoods. differences are manifest spatially, there can · Distance measures the ease of reaching be divisions within countries. markets. It determines access to oppor- There is a correspondence between the tunity. Areas far from economically geographic scales and dimensions. Locally, dense centers in a country are more within an area, the most important dimen- likely to lag. sion is density, because generally distances · Division arises from barriers to eco- are short and divisions few. Nationally, the nomic interactions created by differences most important dimension is distance to in currencies, customs, and languages, density; divisions within countries tend which restrict market access. It is most to be fewer, though they can be serious in relevant in an international context. some countries. Internationally, across a regional or global spatial scale, distances The concept of distance is also relevant and divisions are usually more serious. internationally. The difference between Using these three dimensions, the Report distance and division is that distance mod- summarizes the geographic transformations ulates access to economic opportunity in a needed for development (part one). It shows more continuous way--a distance decay. how market forces drive these transforma- Division, by contrast, presents discrete tions (part two). And it assesses how govern- barriers to access and economic integra- ments can augment these forces to sustain tion. It can be seen as increasing economic growth and reduce poverty (part three). distance or travel time for a unit of physical (or Euclidian) distance. These definitions are not scientifically Instruments for integration-- exact. But the terms are used consistently institutions, infrastructure, and in the Report. When "density" is used, it interventions means economic density: production per Through good policies, governments can area of land. When any other measure of promote economic integration between 38 WORLD DEVELOPMENT REPORT 2009 places where economic production is education and health, and electricity, concentrated and places that are lagging. water, and sanitation. Systems for col- Some of these policy instruments are spa- lecting taxes and financing the spending tially explicit, like a slum-upgrading pro- associated with these services are also gram in a city, a Brazilian state's fiscal best designed without specific places in incentives to a U.S. automobile company, mind. or the EU's structural and cohesion funds. · Infrastructure is the summary term for Others are intended to be universal in their all spatially connective investments and coverage, including compulsory and free the associated rules and regulations. It basic education for all children, such labor includes roads and railways, airports market regulations as minimum wage laws, and air transport systems, telecommu- and the enforcement of property rights. nications, and the Internet. Between these spatially targeted programs · Interventions is shorthand for all spa- and "spatially blind" policies are invest- tially focused incentives. These include ments and regulations that connect places, regulations and investments that favor such as roads, airports, and communica- some places, such as export processing tions systems. zones. They also include place-based pro- In their current form, the debates on grams--such as slum-upgrading schemes how governments can foster rural-urban like Rio de Janeiro's Favela Bairro, or transformation, help lagging areas reduce Superintendency for the Development of poverty, and--in the poorest nations in the the Northeast (SUDENE), Brazil's devel- world--improve access to world markets all opment agency for the lagging Northeast, emphasize geographic targeting. The debate or the Everything But Arms initiative of on how to promote healthy urbanization is the EU, which gives the least developed polarized between an emphasis on villages, countries preferential trade access to where a majority of the world's poor still European markets. live, and a belief that the way out of poverty lies in cities; if urban poverty increases, the Because these definitions do not con- focus shifts from villages to slums. Moti- form strictly to common usage, additional vated by within-country spatial disparities clarification is necessary: in living standards, the debate on territorial · First, spatial blindness does not mean development tends to be similarly fixated spatial neutrality. A progressive tax sys- on promoting economic growth in lagging tem, for example, may not be neutral in areas. At the international level, preferential its effects or outcomes. Cities may end market access for the least developed coun- up contributing more in taxes than the tries can end up dominating policy discus- countryside, and richer states may con- sions. Part three of the Report reframes tribute more than those that are poorer. these debates, calling for a shift from spatial But the guiding principle is that tax rates targeting to integration. differ not by place alone, but by the attri- The policy instruments for economic butes of firms and families that happen integration can be classified in three cat- to be located there. egories, based on how explicitly place is · Second, in the common use of the term, considered in their scope and design: infrastructure includes nonconnective · Institutions is shorthand for all the pol- investments such as water supply and icy instruments that are spatially blind. energy. In this Report, infrastructure is These are the amenities that governments reserved for the spatially connective com- should provide to everyone, regardless ponents. Nonconnective public utilities of place. The word "institutions" con- are included in institutions, as for such notes universality, and includes mecha- basic services as sanitation. nisms for financing and delivering such · Third, each of these categories includes basic amenities as the administration of all three tools of government policy-- justice, public security, the regulation of taxes, transfers and public expenditures, land, labor, and capital markets, primary and regulations. Navigating This Report 39 · Finally,governmentinitiativescaninclude more than one instrument. Slum devel- BOX 0.3 This Report's message is not anti-equity opment can include steps to make urban land markets work better by formalizing Policies for spatially balanced growth The Gini coe cient for the spatial property rights, improving streets, and are often justi ed by equity. The EU inequality of GDP is 0.53 for the United States and 0.41 for the EU. For offering monetary incentives for some of describes its territorial policy as gov- erned by the principle of solidarity population, the coe cients are 0.54 the slum-dwellers to relocate. because it "aims to bene t citizens and 0.32, respectively. For subna- and regions that are economically tional areas in the EU and states in the Structure and socially deprived relative to United States, the numbers change, The main finding of this Report--at all EU averages."a The policy seems to but the conclusion is the same.b Spatial disparities in living stan- three spatial scales--is that economic equate social and spatial equity-- equality across individuals, and the dards. EU-15 countries have greater development is not smooth, linear, or neat. equality of living standards across spatial inequality in per capita income The processes of economic growth leave states and countries. This Report, by and unemployment rates, two com- behind a bumpy landscape, with economic contrast, argues in favor of the ben- mon indicators of individual living mass concentrated in some places. Liv- e ts from geographic concentration standards in high-income countries. ing standards in such places--especially of economic production. But it shows GDP per capita, for example, exhib- rising prosperity, good access to educa- that in the earlier stages of develop- ited greater variation across EU areas than it did across U.S. states in 2005. tion and health facilities, and safe shelter, ment, increased concentration is associated with spatial divergence in Although production is more concen- water, and sanitation, some of the most living standards such as income. So is trated geographically in the United urgent among the Millennium Develop- this Report's message anti-equity? States, people are also more likely to ment Goals--improve faster than where No. It is important to distinguish live where production is, so GDP per there is less economic activity, widening between three types of disparities: capita varies less. The same is true of the spatial disparities in welfare. But where spatial disparities in economic pro- unemployment rates. In the United there is sustained economic growth, the duction, spatial disparities in living States, the state with the highest unemployment in 2007 (Michigan) convergence in living standards begins to standards, and social inequality. Spatial disparities in economic had an unemployment rate of 7.2 supplant divergence. Nations become both activity. In both the United States percent, 2.8 times the lowest unem- spatially efficient and equitable (see box and the EU-15 countries, gross ployment state (Hawaii). But in the EU 0.3). The challenge of development is to domestic product (GDP) and popula- in 2006, the ratio was 8.1. There is less institute policies that allow--even encour- tion have lumpy spatial distributions. spatial inequality in living standards age--"unbalanced" economic growth and In the United States, three states in the United States. yet ensure geographically balanced devel- (California, New York, and Texas) Social inequality. While spatial inequality in living standards is greater opment outcomes. generated 21 percent of national GDP in 2005. The same three states have in the EU than in the United States, the opposite is true for social inequality The facts 19.8 percent of the U.S. population, but only 12.8 percent of the country's between individuals. During the past Part one of the Report presents the facts land. Meanwhile, 10 EU subnational few decades, the Gini coe cient for about the spatial transformations--the areas were responsible for 20.5 per- the United States has been about 0.40, changes in economic density, distance, cent of the EU's GDP in 2005. These compared with 0.33, 0.28, and 0.23 for and division. Chapter 1 shows that devel- areas have 16.9 percent of the EU-15's the United Kingdom, Germany, and Austria, respectively.c opment is accompanied by the rising den- population, but only 8 percent of its land. So, in both cases, economic sity of human settlements: no country has Contributed by Mark Roberts. activity and population are con- reached high income without this rise in a. http://europa.eu/pol/reg/overview_ centrated. But spatial inequality of en.htm. density. Chapter 2 expands the scale and production and population is higher b. Puga 2002. shows that development is also accompa- in the United States than in the EU. c. Burkey 2006. nied by the greater concentration of eco- nomic activity in areas of countries closer to economic density. Chapter 3 incorpo- The long experience of countries shows rates international divisions that slow, but that income differences between leading do not prevent, the concentration of eco- places and following places first diverge nomic activities in some countries. At the and then converge, but only in the more local, national, and international scales the dynamic areas, countries, and regions. At pattern is similar: rapidly rising concentra- each of the three spatial scales, it pays to tions at the early stage and then a slowing be in dynamic neighborhoods. Economic down. growth leads to congestion in cities--and to 40 WORLD DEVELOPMENT REPORT 2009 the growth of towns and cities that are well scale associated with places, not plants--in connected to fast-growing agglomerations. producing goods, services, and ideas. Places This pattern is repeated at the national and of different sizes provide varying agglom- international levels. Expanding economic eration benefits, and congestion associated activity spills over to areas and countries with spatial concentration leads to a portfo- that are--in economic terms--near places lio of places that facilitate economic growth, doing well. with different parts in the lead depending on the stage of development. The insights Chapter 5 explains the interaction The second part of the Report is the "engine between scale economies and factor mobil- room." It exploits the main insights from a ity, focusing on the migration of workers. quarter century of work spanning several Chapter 6 explains the nonlinear rela- subdisciplines in economics, such as indus- tionship between transport costs and the trial organization, urban economics, inter- geographic concentrations of production, national trade, and economic geography. focusing on intraindustry trade, which is Distilled to its essence, the engine works especially sensitive to transport costs. These through a three-way interaction between chapters summarize the new insights pro- scale economies, the mobility of workers vided by the three-way interaction between and entrepreneurs, and the costs of trans- scale economies, factor mobility, and trans- porting and communicating between places port costs--and their implications for (see figure 0.1). development policy (see box 0.4). Firms are generally more productive when they locate in large places and when The policy framework they operate at a relatively large size. If it Circular causation, unevenness, and spill- is relatively easy to transport produce, the overs make for a world in which poli- scale can be even higher, since the poten- cies can promote economic growth and tial market is bigger. Workers move to these improve social welfare beyond what mar- places, bringing with them both a supply of kets yield, because well-executed policies labor and a demand for goods and services. can set these transformations in motion or As people become more mobile and as speed them up. transport and communications costs fall, These features of economic develop- these economies of scale create a circular ment also make policy making a diffi- and cumulative causation, where economic cult enterprise. Part three of the Report activities become even more concentrated reframes three important policy debates, spatially. Rising concentration inevitably using a principle derived from its first two leads to congestion, which slows the pro- parts: for developing countries to realize cess and eventually reverses it. Declines the benefits of both spatial concentration in transport costs first make concentra- of production and convergence in con- tion possible, and then, when they fall low sumption, development is best facilitated enough, they make it unnecessary. by economic integration. Using the three Part two discusses these interactions in dimensions--density, distance, and divi- some detail, summarizing more than a cen- sion--described in part one, and the (mal) tury of experience and the novel insights functioning of pivotal markets at each spa- that come from a generation of research tial scale--land, labor, and intermediate recognizing how factor mobility and fall- inputs--analyzed in part two, the chapters ing transport costs feed economies of scale in part three provide a simple framework (see box 0.2). They should change what we and illustrate its workings through real- can expect from the markets, and what gov- world policy experience. At each of the ernments can and should do to facilitate the geographic scales, the response rule is the concentration of production and promote same--an instrument per dimension. Here the convergence in living standards. is a somewhat oversimplified summary, Chapter 4 provides evidence of agglom- using examples from only the local scale eration economies--increasing returns to (chapter 7): Navigating This Report 41 BOX 0.4 Fresh insights from economic geography: concentration, convergence, and integration Over the past two decades, new analysis transport costs, but the relationship is not pulled rapidly through the development has changed the way we think about the linear. When these costs are high, rms process. In the neoclassical world, being location of production, trade, and develop- avoid shipping their output long distances behind can be an advantage--places lag- ment. The analysis builds on two elements. by spreading out their production. Firm ging farther can catch up faster. But with First, large markets are disproportionately location is then mostly determined by agglomeration economies, the farther attractive for rms producing with scale local access to immobile demand, such as behind an area, country, or region, the economies. Firms with a larger home from farmers and miners. For intermediate tougher it is to catch up. What should lag- market have more sales that, with scale values of trade costs, it becomes feasible ging places do? economies, imply lower unit costs and to supply markets from a distance, and Integration is the answer. Because more pro ts, which encourage existing places that get an advantage in market size both high and low trade costs can rms to expand and attract new rms. Sec- build on it and take o relative to other encourage production to spread out, ond, large markets are big partly because places. When trade costs fall to low levels, lagging areas, countries, or regions could many rms and consumers locate there. it matters little whether one sells and buys in principle turn to either import substi- Market access and mobility creates a circu- locally. Firm location is then determined tution or export-oriented industrializa- lar and cumulative causation. A large mar- mostly by the local cost of immobile fea- tion. But import substitution becomes ket attracts rms and workers--and the tures, including the cost of land and hous- less feasible as a development strategy demand for intermediate inputs by rms ing, but also by the ability to have face-to- over time. Why? Because it limits for- and the demand for nal goods by workers face interactions or to nd a good match in eign access to local immobile demand, make the market even larger, attracting a specialized labor market. So once trade whereas export-oriented industrialization more rms and workers, and so on. costs decline su ciently, some activities reduces the cost of purchasing foreign This is both good and bad news for will spread out in response to cost di er- intermediates for processing and export. places with poor initial conditions. It is ences, and others will remain concentrated. The falling share of agriculture and the good because it means that rm location Convergence is the objective. The tendency of manufacturing and services is not as constrained by nature as theories forces of market access and mobility to agglomerate have reduced the share of based on comparative advantage would have implications for the way we think demand in lagging places. And the frag- have us believe. Places with poor endow- about convergence. The view of develop- mentation of production has made access ments can sustain concentration of activity. ment as smooth and linear gives way to a to intermediate inputs more important. It is bad news because the circle of market lumpier nonlinear process. As a country Both make development strategies based access and mobility produces persistence. grows, new producers locate close to on fencing o local immobile demand Once a place gets far ahead, it is di cult for existing production, widening the pro- hopeless. The observation that some lagging areas to catch up. While agglom- duction di erences between lagging and developed countries or provinces indus- eration raises the cost of labor, rms do leading places. When wage gaps become trialized while being closed to trade is of not move to low-wage areas, because this wide, industry starts to spread to places little help to lagging areas, countries, or would mean forgoing the bene ts of prox- that have low wages. But this does not regions today. The ones left behind are so imity to suppliers and customers. lead to steady development of all places. small relative to the world economy that Concentration is the rule. The strength Instead, development takes place in isolation is no longer a feasible option. of the agglomeration forces created by waves, where some areas or countries are market access and mobility depends on drawn in sequence out of poverty and are Contributed by Diego Puga. ·For one-dimensional problems, a cali- are not only to facilitate the increase in brated response would be spatially density, but also to alleviate the problem blind policies. In areas experiencing of distance caused by growing conges- incipient urbanization, for example, the tion. The response includes improve- policy objective should be to facilitate ments in institutions to facilitate rising rising density, and policy makers should density as just outlined--and invest- pay special attention to institutions to ments in infrastructure to address the improve the functioning of (rural and growing problem of economic distance. urban) land markets. · For three-dimensional problems, the ·For two-dimensional problems, the response should include spatially blind, response should include both spatially connective, and targeted policies. In blind and connective policies. For exam- highly urbanized areas of a country, ple, in areas of a country undergoing for example, the problems of density rapid urbanization, the policy problems and distance are compounded by divi- 42 WORLD DEVELOPMENT REPORT 2009 sions within urban areas, most notice- economic concentration, chapter 8 pays ably between formally settled parts of a special attention to labor mobility, for metropolis and slums, where land mar- which the potential for market malfunc- kets use informal conventions. An effec- tioning is greatest. tive policy response includes institutions, · At the international spatial scale, the infrastructure, and interventions. policy objective should be to promote convergence in living standards in a At the national level, a similarly gradu- world in which divisions hamper the ated policy response can help to integrate movements of labor and capital. Dis- lagging and leading areas (chapter 8), and cussing how developing countries can at the international level, it can help to inte- gain access to world markets, chapter grate poor countries with world markets 9 emphasizes specialization and intra- (chapter 9). industry trade, in addition to exploiting At all three geographic scales, policy comparative advantage based on natural debates have one thing in common: cur- endowments. It pays attention to trade rently, they begin and end with discus- in intermediate goods, which is especially sions of spatially targeted interventions. sensitive to transport costs. This Report calls for a rebalancing of these debates to include all the elements of a suc- The Report draws on both experience cessful approach to spatial integration--in- and analysis to discipline the inquiry in a stitutions, infrastructure, and incentives. policy area as broad and difficult as devel- This Report takes a long-term per- opment itself, and it should be useful for a spective, chronicling spatial disparities in wide readership. But the Report is struc- today's developed economies when they tured to be friendly to readers interested were at incomes comparable to those of only in specific aspects of this inquiry: today's low- and middle-income countries. The Report has descriptive, analytical, It also systematically documents the rela- · and prescriptive parts and progresses tionship between spatial disparities and gradually from the positive to normative. development for a large set of countries. In Each part is a section of an integrated its conclusions, it makes a sharper distinc- inquiry, but each can be read separately. tion between spatial disparities in economic Policy makers pressed for time can read production and those in welfare. And it just the overview and the three policy recommends using agglomeration rents in chapters in part three. Students interested leading areas to push up social welfare in in the world's spatial transformation can lagging areas--and not, except in special read just the three chapters of part one, circumstances, to push economic produc- which provides a three-dimensional tour tion out to those places. of economic development. · At the local spatial scale, the policy objec- · The Report progressively widens the spa- tive should be to improve the quality of tial scale for addressing the policy ques- urbanization to maximize its growth tions posed by economic geography, from effects. Chapter 7 discusses how the pri- local to national to international, with orities of policy makers should change the specialized reader in mind. Readers as urbanization advances. It pays special interested in just the policy debate on attention to land use, where the potential urbanization in developing countries can for market malfunctioning is greatest. read just the three density cluster chap- · At the national spatial scale, the policy ters--1, 4, and 7. Those who are mostly objective should be to improve the mar- interested in the policy discussion on ket access of workers and entrepreneurs, territorial development and geographic especially in a world in which dimin- disparities within countries can read ished distance has changed the notion chapters 2, 5, and 8--the distance clus- of markets from local to global. Discuss- ter. Readers interested in regional inte- ing how policy makers can reconcile the gration can read just chapters 3, 6, and 9 political objective of national unity with in the division cluster. Navigating This Report 43 Figure 0.1 A navigational aid for the reader 1 DENSITY 2 DISTANCE GIM 1: 4 3 NORTHAMERICA AGGLOMERATION DIVISION 5 FACTS MIGRATION 7 6 GIM 2:WESTERN URBANIZATION SPECIALIZATION EUROPE 8 TERRITORIAL ANALYSIS DEVELOPMENT 9 GIM REGIONAL 3: LOCAL EAST INTEGRATION ASIA POLICIES TIONAL NA GIM 4: SUB-SAHARAN TIONAL AFRICA INTERNA Source: WDR 2009 team. · Chapters 1 through 9 slice the problem lenges posed by geography for develop- of economic development into digestible ment--and some clues to how geography bites, each serving a pedagogical func- was reshaped--can read these notes on tion. The arguments in the Report are different parts of the world. punctuated with four notes on "Geogra- phy in Motion," which connect the dif- Figure 0.1 shows how the Report can be ferent components by spotlighting the read horizontally (facts, analysis, and poli- experiences of North America, West- cies, respectively) or vertically, according to ern Europe, East Asia, and Sub-Saharan the policy interest of the reader. Africa. Readers interested in the chal- Geography in motion Overcoming Division in Western Europe Overcoming istance North America When Europeans began to colonize beyond their shores, the prospects for economic growth in North America seemed remote. Dur- ing the Seven Years' War (1756­63), as the French and British battled over Canada, Voltaire wondered why they should fight over "a few acres of snow." They should have been more interested in the economic potential of the Caribbean, where climate and soil were good for growing sugarcane, and they were. Manhattan was famously traded away by the Dutch in exchange for land around Suriname. But over time, it has been the few acres of snow and the rocky landscape of Plymouth (Massachusetts) that gave birth to the "reversal of fortune" between frigid northeastern America and the warmer south.1 T o understand how this reversal southwest, ending up in Missouri in were paramount. The Constitution happened,onehastounderstand 2000. By this time, America's popula- and the Northwest Ordinance (1787) how North Americans managed tion had settled mostly on its two coasts. provided the procedural mechanisms the growing density, the vast distances Americans are as physically distant as for transforming unsettled areas into in the continent, and the sharp divi- they have ever been. states. Public land was disposed of sions between slaves and their own- How did America overcome these through sales to private individuals ers, between natives and colonialists, vast physical distances? Initially, and outright grants. Eminent domain between French and English--in short, institutional mechanisms to allo- was used to put land to its best use, how North America's economic geog- cate land and secure property rights especially when required for railroads. raphy has been reshaped. Size and American economic Map G1.1 The U.S. geographic center of population gravity moved 1,371 kilometers between 1790 and 2000 ascendancy Size is the most obvious feature of the United States' economic geography.2 In 1800 5.3 million individuals lived on the 865,000 squares miles of land given to the fledgling nation under the Treaty of Versailles (1783). By 1900 a little more than 2 million square miles had been added through outright pur- 1790 chase, spoils of war, or treaty. Today 1900 1850 1950 the United States has more than 300 million people and a territory of 3.5 2000 million square miles. Since 1790 the population density of the country has multiplied nearly 18 times. The challenges of distributing pop- ulation and production over such a vast space are enormous. Both people and productive land have moved west and south. In 1800 the population was UNITED STATES centered in Maryland, on the eastern seaboard (see map G1.1). By 1900 the center had moved to Indiana. Over the twentieth century, the center veered Source: Geography Division, U.S. Census Bureau. Geography in Motion 45 The first transcontinental railroad was Convergence in living standards the dominant pattern of movement completed in 1864. Indigenous popu- The American Civil War had long- was from poorer to richer states. Prob- lations were removed forcibly, where lasting economic effects that divided the ably the most important example is the necessary, by the U.S. Army. States and country. Per capita incomes fell sharply migration of African Americans from local governments encouraged Ameri- in the South after the Civil War, both the rural South to the urban North cans to move by offering land, build- absolutely and relative to the rest of the (and West), beginning in earnest dur- ing canals, and supplying schools, country. In 1900 per capita income in ing World War I and becoming a tidal roads, and other public goods. These Alabama was still half of the national wave during and just after World War local governments competed with each average. In 1938 Franklin Roosevelt II. States such as Mississippi and Loui- other to attract people and firms, offer- famously remarked that the South was siana now rank lowest in disposable ing tax and other incentives. the nation's "number one economic income, but it is easy to imagine that People and firms were also encour- problem."America had its lagging areas. they would have been much worse off aged to move by the commerce clause But the twentieth century experience without this migration. of the U.S. Constitution, which explic- was one of steady convergence of living Convergence has been aided by itly prohibits state governments from standards. reductions in transport costs. Many of engaging in restraint of trade across In the United States, a clear negative the most important inventions in trans- state boundaries. The institutional relationship exists between the level of port and communications happened in structure thus permitted the free move- per capita income in a state in 1900 and the United States. In the twentieth cen- ment of people (except slaves), capital, the income growth in that state over tury, the network expanded with the and goods, with attendant property the next century. That is, poorer states diffusion of the airplane, the automo- rights so that movement could occur grew faster than richer states between bile, and electronic communications. without economic loss. 1900 and 2000, a phenomenon known Today, 16 of the 30 busiest airports in In this policy environment, the as"beta-convergence."The main expla- the world are in the United States, and "transport revolution"of the nineteenth nation for this phenomenon is migra- there are more than 75 automobiles for century and growing density permit- tion of people. In the twentieth century, every 100 Americans. ted a fundamental change in American economic structures. The combination Map G1.2 America's large cities are in the Northeast and on the two coasts of rail, canals, and steamboats vastly reduced the costs of medium- and long- haul transport compared with wagon transport alone.3 The country became Seattle more urban and dense, while regional economic structures diverged. New Boston Minneapolis England, which had been 80 percent Detroit agricultural in 1800 despite its poor soils New York Chicago and climate,started to develop manufac- Philadelphia Washington, D.C. tures, while the Midwest specialized in San Francisco food. By the beginning of the twentieth Los Angeles century, the United States had become Riverside the largest manufacturer in the world. Phoenix Atlanta Dallas The growing density and the migra- San Diego tion of people and firms were driven largely by market forces. Most settle- Tampa Houston ment was cautious. Railroads were built when (and where) investors thought Miami they could make a profit and moved incrementally across the country. Occasionally settlement did "leapfrog," jumping over large expanses of land to Population, 2007 (millions) get someplace else, as in California after 18 12 the discovery of gold in 1849. But that 6 4 simply accelerated the pace of realloca- 2.5 tion of labor in America. Source: Population of Metropolitan Statistical Areas; U.S. Census Bureau. 46 WORLD DEVELOPMENT REPORT 2009 The Report at a glance The invention and diffusion of the ies, in the Northeast and on the coasts, across states; over a decade, more than automobile led to the enlargement of producing what is known as "sigma- a quarter of the population changes cities through a pronounced "flatten- convergence," a reduction in the income its state of residence. By overcoming ing" of urban density as one moves inequality across states (see map G1.2). distance and division, and by permit- from the center city to the suburbs. This By one measure, the dispersion across ting population and production to helped magnify agglomeration econo- Density, Distance and Division states in per capita income had fallen to be uneven across space through free mies, but it also produced social divi- one-third its 1880 level by 2000. mobility, per capita incomes in the sions. The U.S. system of local public United States today are both high and finance, relying on local property taxes Rising density,falling remarkably similar across the different to fund services, is poorly designed to disparities,persisting divisions states. effect income redistribution. Rich and The long-run economic performance A remaining challenge for the United middle-class households can avoid sub- of the United States is exemplary. Per States is the removal of divisions. The sidizing others by moving to new sub- capita income growth has averaged North American Free Trade Agree- urbs. Race also plays a role--the central 1.8 percent per year for the last 180 ment (NAFTA) is a step in this direc- city is predominantly "black" whereas years, leading to a cumulative 26-fold tion. But it is a modest step. Consider the suburbs are "white." improvement in living standards. Canadian-U.S. market integration. One For better or for worse, growth in Alongside this growth, income inequal- study found that trade among Cana- automobiles benefited from the Federal ity across states has fallen. America has dian provinces was much larger than Highway Act of 1956, which authorized realized economies of scale--first at between Canada and the United States, building of the Eisenhower Interstate the plant level, then at the local level controlling for distance and the eco- System of highways.In a famous speech, as towns specialized in manufacturing, nomic size (gross domestic products) President Eisenhower recounted how and later at the metropolis level in the of the trading partners, in this case, as a young officer he participated in major urban agglomerations in places states and provinces.4 Given California's the first transcontinental motor convoy like Los Angeles and New York. size, for example, its trade with Ontario from Washington, D.C., to San Fran- The United States today is composed should have been 10 times Ontario's cisco in 1919. The trip took 62 days, of a highly effective set of national mar- trade with British Columbia, Califor- encountering every type of delay imag- kets in goods and factors of produc- nia's closest Canadian neighbor. In fact, inable along the way. Today, courtesy tion. Place still matters in determining Ontario's trade with British Columbia of the system, a driver can cover the income, but it matters in the short was three times its trade with Califor- 2,819-mile journey in two days. Recent run, not the long, and the short run nia. Even one of the thinnest borders in research shows that the 47,000-mile is much shorter than it was a century the world has a large negative influence network of highways has integrated ago. Major local shocks like Hurricane on trade. formerly isolated rural areas into the Katrina have far less impact on local Along its northern boundary, the national economy and fostered metro- growth prospects than before. After the United States and Canada share 3,987 politan growth. Mariel boatlift brought 125,000 Cuban miles, the longest unguarded interna- What have these connections done to refugees to Miami in the early 1980s, tional border in the world.The situation the distribution of population and eco- regional wages did not experience a is markedly different along the south- nomic activity? Paradoxically,as the cen- perceptible impact. ern border with Mexico. The border is ter of gravity moved toward the interior The result is a seeming paradox: guarded--not closely enough for many of North America, the interior--except wages in America (corrected for human U.S. citizens--to keep potential illegal for its metropolises--has hollowed out. capital) are similar in different loca- immigrants from entering. There are Missouri has just 5.5 million people, tions, while economic activity is highly even proposals to build a fence stretch- more than half of them in the greater St. unequal across space. Europe is lauded ing across the 1,933 mile border. Such Louis area. Spreading out the transport for having lower social inequality, but barriers are an obstacle to convergence infrastructure has not spread people out, North America is more spatially equal. between countries in the North Ameri- but it has allowed growth from agglom- And it has a more spatially efficient can continent. eration economies to occur in more cit- distribution of economic production. ies across the country. The distribution The reason: a mobile labor force. Every of population in 2000 is clustered in cit- year about 8 million Americans move Contributed by Robert A. Margo. Part One Seeing Development in 3-D As the world's economy grows, people and production are concentrating, pulled as if by gravity to prosperous places--growing cities, leading areas, and connected countries. As it did decades ago in today's high-income countries, the drive to density in low- and middle- income countries can increase the sense of deprivation as the economic distance between prosperous areas and those left behind widens. And although rapid advances in transport and communication increasingly bind together geographically distant communities around the world and open new opportunities for exchange, political divisions that obstruct the ow of people, capital, and goods remain. Part one of this Report de nes the spatial dimensions--density, distance, and division--and describes their evolution with economic development. Chapters 1, 2, and 3 show how the economic geography at the local, national, and international scales is changing, and how the scope and pace of these changes compare with transformations in the economic geography of North America, Europe, and Japan when they were at similar stages of development. This broad sweep of stylized facts informs the analysis in part two and the policy discussions in part three of the Report. CHAPTER 1 Density M ostly off the world's radar, on Despite its industriousness, Bamako is a dusty plain in West Africa, one of the sleepier cities in West Africa. is a city of 1.6 million people. Many of the manufactured staples come Bisected by the River Niger, its two halves-- 1,184 kilometers by road from one of the with about 800,000 people each--are linked region's metropolises, Abidjan, which has by only two bridges. The pressure of move- more than twice Bamako's population. ment is so strong that every morning one of Abidjan seems small beside Lagos, where these bridges is dedicated to incoming traf- activity is so concentrated that its residents fic: minibuses, bicycles, motorbikes, pedes- speak of living in a pressure-cooker. Some trians, and occasionally private cars. In the families rent rooms to sleep for six hours evenings, to leave the center means joining and then turn them over to another fam- an exodus of people toward the minibus ily that takes their place. Shopping does depots. Green vans loaded with passengers not necessarily require travel: goods are file out to residential neighborhoods as far brought on foot and cart to drivers stuck in as 20 kilometers away. This is Bamako, Mali. Lagos's interminable traffic jams. To some, It contracts into its center every morning like the authors of Lagos's 1980 master plan and breathes out again in the evening. written when the city had just 2.5 million With each breath Bamako grows bigger. residents, the continuing growth of the city It happens to be one of the fastest-growing is "undisciplined."2 What can possibly be so cities in the world. Natural demographic attractive about living in Lagos that, despite growth is supplemented by migration from its congestion and crime, it continues to the countryside and other Malian cities. Its draw migrants? population in 2008 is 50 percent larger than The short answer: economic density. 10 years ago, making it the same size as Lagos is not the most economically dense Budapest, Dubai, or Warsaw. It has 10 times city in the world, nor even the most densely more inhabitants than the next biggest populated. Those distinctions belong to Malian city and accommodates 70 percent Central London and Mumbai, respec- of the country's industrial establishments.1 tively. Even so, Nigeria's economic future New neighborhoods--quartiers--formerly and Lagos's growth are as inextricably villages, become consolidated with the rest tied as Britain's economy is with London's of the city, toward the south, east, and west. growth. No country has developed with- Some of Bamako's people are now moving out the growth of its cities. As countries out into surrounding neighborhoods in become richer, economic activity becomes search of cheaper land and some tranquil- more densely packed into towns, cities, ity, but they remain within reach of the city and metropolises. This geographic trans- because it provides their livelihoods. formation of economies seems so natural 48 Density 49 that--at an impersonal aggregate level--it nomic density continues to increase in is taken for granted. But moving to eco- a postindustrial economy because ser- nomic density is a pathway out of poverty vices are even more densely packed than both for those who travel on it and, ulti- industry. mately, for those left behind. Jane Jacobs, · Rural-urban and within-urban dispar- the noted urbanist, did not have Bamako ities in welfare narrow with develop- and Lagos in mind when she wrote, "A met- ment. In the early stages of development, ropolitan economy, if it's working well, is geographic disparities in welfare are constantly transforming many poor people large. With development, these gaps into middle-class people, many illiterates may increase initially. Rural-urban gaps into skilled people, many greenhorns into in income, poverty, and living standards competent citizens. Cities don't lure the begin to converge as economies grow, middle class. They create it."3 She might faster for access to social services, and as well have written: as Lagos and Bamako faster in areas of more vibrant growth. grow, they will fill in West Africa's missing Within-city gaps in welfare and hous- middle. ing--most obvious in informal settle- This chapter introduces density, the first ments or slums--persist for much of the geographic dimensions of develop- longer, and narrow only at later stages of ment, defined as the economic mass or out- development. put generated on a unit of land. Surveying · Neither the pace of urbanization nor the evolution of density with development, its association with economic growth the chapter presents stylized facts about is unprecedented. Today's developing how density in a country rises with urban- countries are sailing in waters charted by ization, rapidly at first, and then more developed nations, which experienced a slowly. These changes are associated ini- similar rush to towns and cities. The tially with a divergence of living standards speed is similar, and the routes are the between places with economic density and same. What is different today is the size those without, later with a convergence. of the ship: the absolute numbers of peo- Living standards thus eventually converge ple being added every year to the urban between areas of different density, such as populations of today's developing coun- urban and rural. Even within cities, densely tries are much larger than for even the populated slums amid formal settlements, most recent industrializers such as the the differences slowly disappear with devel- Republic of Korea and Taiwan, China. opment. But this convergence does not hap- Later chapters of this report investigate pen by itself. It requires the institutions to the policy implications of these similari- manage land markets, investments in infra- ties and differences. structure, and well-timed and executed interventions. Defining density The main findings: Density refers to the economic mass per unit · The concentration of economic activ- of land area, or the geographic compactness ity rises with development. The world's of economic activity. It is shorthand for the densest areas or settlements are in devel- level of output produced--and thus the oped countries. But the path to these lev- income generated--per unit of land area. It els, "urbanization" in this Report, is not can, for example, be measured as the value linear. The share of a country's popula- added or gross domestic product (GDP) tion settled in towns and cities rises rap- generated per square kilometer of land. idly during its transformation from an Given that high density requires the geo- agrarian to an industrial economy, which graphic concentration of labor and capital, generally coincides with its development it is highly correlated with both employment from low to middle income. The pace of and population density. Density is the defin- urbanization slows after that, but eco- ing characteristic of urban settlements. 50 WORLD DEVELOPMENT REPORT 2009 The economic world is not flat This density contrasts markedly with The geographic distribution of economic ion the agricultural areas of Belgium. In the activity, at any resolution, is uneven. No Flemish Flanders (Vlaams Gewest) area, matter the geographic scale examined, be ed, 6,323 square kilometers of land are used for it the country or a subnational area such as agriculture. Its area is almost 40 times that a province or district, there is a hierarchy of Brussels, but its employment is just 13 ju of density. At the top is the primary city, percent of Brussels and its GDP a mere 4.5 and at the bottom are agricultural lands or at percent, translating into employment and rural areas. Between them is a continuum GDP densities of only seven workers and wo of settlements of varying density. 330,000 per square kilometer. The ratio of The geographic unevenness of economic output density between Brussels and Flan- mass, or bumpiness, tends to increase ders is 1,000 to 1. In between metropolitan with a country's land area. But even the Brussels and rural Flanders is a range of set- economic geography of small countries is aph tlements, each with a different density (see bumpy. The Belgian city of Brussels has map 1.1). The cities of Antwerp, Brugge, a land area of 161 square kilometers, of Gent, and Leuven have an average output which 159 square kilometers are used for of 22 million and employment density of nonagricultural purposes. On this small 342 workers per square kilometer.5 area, a GDP of 55 billion is generated by In both developed and developing lop lop about 350,000 workers--that is, the aver- wo countries, then, the economic landscape is age square kilometer of land has more than bumpy. But the topography does not corre- top aph 2,000 workers annually producing almost spond to a simple urban-rural dichotomy. 350 million of services and goods. Brus- go A continuum of density gives rise to a port- sels not only has high densities of GDP and folio of places. At the head is a country's io employment; it also has the highest popu- leading, primary, or largest city. Below the lation density of any European (EU27) of rop primary city is a spectrum of settlements-- area classified as NUTS1 (Nomenclature secondary cities, small urban centers, of Territorial Units for Statistics)--more towns, and villages (see figure 1.1). In some es see than 6,000 people per square kilometer, countries, such as France and Mexico, the 18 times the average for Belgium.4 For the size difference between the top two cities is sake of comparison, the population den- phenomenal.l. With a population of 10 mil- sity of London and Madrid is about 5,000 lion, Paris dwarfs second-ranked Marseilles is dwarfs second-ranked Marsei le people per square kilometer. with just 1.5 million. And with a population Map 1.1 The landscape of economic mass is bumpy, even in a small country like Belgium Brussels BELGIUM Antwerp FLANDERS Gent WALLONIA Leuven Brugge Source: WDR 2009 team and World Bank Development Research Group, based on subnational GDP estimates for 2005. See also Nordhaus 2006. Density 51 of 22 million, Mexico City is more than four Figure 1.1 From dichotomy to continuum: a portfolio of places times as populous as Guadalajara, Mexico's The simplified area economy and a more realistic representation second city. Conversely, in India and the United States, the size difference between Urban the two biggest cities is relatively small. With Metropolis populations of more than 22 million people, Rural Urban Rural Towns Large city Mumbai and New Delhi stand shoulder to Secondary cities Villages shoulder. New York has a population of 22 million, Los Angeles 18 million.6, 7 An evolving portfolio of places Source: WDR 2009 team. Although the growth of cities appears chaotic, the underlying patterns have a primacy" notwithstanding, the "portfolio of remarkable order (see figure 1.2). A coun- places" is an enduring feature of economic try's urban hierarchy is characterized by development. two robust regularities: Settlements of different sizes complement · The"rank-size rule"--the rank of a city in one another. Metropolises, secondary cit- the hierarchy and its population are lin- ies, market towns, and villages are all linked early related. through their complementary functions (see box 1.2). The primary city is often but not · Gibrat's law--a city's rate of population always the national administrative center and growth tends to be independent of its theseatofpoliticalpower:Cambodia'sPhnom size. Penh, Cameroon's Yaounde, and Colombia's According to a special case of the rank- Bogotá. A country's leading city also tends to size rule, known as Zipf's law, the popula- beitsmostdiversified,bothintheprovisionof tion of any city is equal to the population of goods and services and in cultural and other the largest city, divided by the rank of the amenities. For the cultural amenities, think of city in question within the country's urban Broadway in New York City, the Opera House hierarchy (see box 1.1).8 As early as 1682, in Sydney, and the Louvre in Paris. But think Alexandre Le Maître observed a systematic also of Trinidad and Tobago's Port of Spain, pattern in the size of cities in France.9 For famous for the annual carnival that attracts all classes of country, the relative size dis- large numbers of visitors. tribution has remained stable over time, Just as a primary city forms the core of even as incomes and populations grew a country's metropolitan area with other (see figure 1.2). Concerns about "urban adjacent cities, other large urban centers or Figure 1.2 Almost a law: relative size distributions of settlements remain stable over time Low-income countries Middle-income countries High-income countries Log of rank Log of rank Log of rank 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 1 1 1 1950 1980 2005 1950 1980 2005 1950 1980 2005 0 0 0 2 4 6 8 10 2 4 6 8 10 2 4 6 8 10 Log of population Log of population Log of population Source: United Nations 2006c. Note: Each data point represents an agglomeration area of population size of 750,000 or more. 52 WORLD DEVELOPMENT REPORT 2009 BOX 1.1 Two laws and a rule: the empirical regularities of a country's city-size distribution The rank-size rule, discovered in 1913, can U.S. city sizes is more even--and that the path can have important long-term be expressed as the rank r associated with rule fails to hold at the extremes of the U.S. repercussions for the welfare of a city's a city of size S is proportional to S to some city-size distribution, a common nding inhabitants. On whether the power in the negative power. The special case in which for many countries.b Moreover, the rank- rank-size rule equals ­1, so that Zipf's law the estimated power equals ­1 is known as size rule also holds for countries as diverse holds, many researchers seem to agree Zipf's law, named after a linguist, George as Kazakhstan and Morocco, providing that, in general, it does not. Zipf. Evidence on the pervasiveness of the further evidence of its universality (see the The robust message from the rank-size rank-size rule comes not only from large gure below). rule is that, for a given country or area, a cities belonging to countries of di erent Whether the rank-size rule is really a wide range of city sizes coexists. Even the income classes, but also from the experi- rule with underlying theoretical structure most developed countries have a portfolio ence of individual countries. The remark- is still under debate. It can be shown to of settlements of di erent sizes, ranging able westward and southward expansion follow from Gibrat's law, which implies from the small to the large, as opposed to of the U.S. urban hierarchy notwithstand- that cities grow in parallel.c This is consis- a single megacity or a collection of cities, ing, the rule provides a good description tent with the absence of any systematic all of similar size. Agglomeration is a bal- of the size distribution of U.S. cities for growth di erences between cities. But ancing act between centripetal and cen- every decade between 1790 and 1950.a this does not imply that policy is inca- trifugal forces. The balancing point di ers Indeed, even today, the rank-size rule con- pable of in uencing a city's size and depending on the sector, the economic tinues to describe well the size distribution economic performance. Cities can and activities, and the type of industries. of U.S. cities (see gure below). This is so do move up and down their national Contributed by Mark Roberts. despite evidence that the shape of the rule urban hierarchies as a result of good a. Madden 1956, cited in Kim and Margo 2004. has changed over time, becoming slightly and bad policy choices. And even transi- b. Gabaix and Ioannides 2004, p. 14. atter so that the overall distribution of tory departures from a parallel growth c. Gabaix and Ioannides 2004, pp. 16­17. The rank-size rule, for nations as diverse as the United States, Morocco, and Kazakhstan United States 2000 Morocco 1993 Kazakhstan 1993 Log of rank Log of rank Log of rank 6 3.0 4.0 4 3.0 2.0 2.0 2 1.0 1.0 0 0.0 0.0 13 15 17 11.5 12.5 13.5 14.5 15.5 11.5 12.5 13.5 14.5 Log of population Log of population Log of population Sources: The graph for the United States is from Rose (2005); the graphs for Kazakhstan and Morocco are based on data for cities and urban agglomerations from Brak- man, Garretson, and Marrewijk (2001). secondary cities act as regional foci for both private medical colleges, is a seat of learning the economy and society. For example, they in southern India. are the local centers for the financial sector, These large regional cities are connected which serve the areas around them. Düs- to smaller cities or major towns. The Ruhr seldorf, Hamburg, Hanover, and Munich area of Germany, the Randstadt area of the are all home to regional stock exchanges, as Netherlands, and the Padang-Medan hub in well as local concentrations of venture capi- Indonesia's Sumatra represent alliances of cit- tal firms.10 Dallas and Atlanta emerged as ies. Smaller cities within these areas consti- regional centers of commerce and finance tute more specialized urban centers, typically in the lower South of the United States, focusing on manufacturing and the produc- and both host regional offices of the Fed- tion of traditional and standardized items. eral Reserve Bank.11 Large urban centers Symbiosis is the ruling order: just as the larger and secondary cities also act as local politi- cities help to serve the smaller cities, so the cal centers, and provide advanced public reverse is true. For instance, the larger cities health, education, and cultural facilities. depend on the smaller ones for the daily pro- Hyderabad, the state capital of Andhra vision of workers through commuting.12 Pradesh, with numerous universities, lead- Just as there are mutually beneficial links ing institutes for technical education, and between larger and smaller cities, the same is Density 53 BOX 1.2 The Republic of Korea's portfolio of places Illustrating a well-developed portfolio manufacturing, especially standardized At the bottom of the hierarchy, of places are seven settlements in the manufacturing, than cities farther up the Jeongeup and Sunchang, both in the Republic of Korea's urban hierarchy: hierarchy. Although both cities serve as Jeonbuk province, are close to the inter- Seoul, Pusan, Daegu, Ansan, Gumi, Jeon- manufacturing centers, they di er in their face between rural and urban. So while geup, and Sunchang. specializations. Gumi is heavily specialized Jeongeup has a relatively large popula- Seoul is at the pinnacle of the hierarchy. in the radio, television, and communica- tion (129,050), one in four of its inhabit- Located 50 kilometers from the Republic tion equipment industry, which by itself ants is a farmer. Likewise, Sunchang is a of Korea's border with the Democratic accounts for more than 50 percent of local rural town: half of the 32,012 residents are Republic of Korea in the Han River basin, manufacturing employment. Ansan is farmers. To the extent that they exhibit it is the country's capital and home to specialized in such high-tech industries as any specialization in manufacturing, it a quarter of its population (that is, 9.76 electrical machinery and computers and is either in traditional resource-related million people). It serves as the nation's o ce machinery. It also has agglomera- industries, as in Jeongeup, or in the man- political center and cultural heart. Also tions in several heavy industries: almost ufacture of food and beverage products, typical is its specialization in business 14,000 workers, or 14.7 percent of the local as in Sunchang. services, nance, insurance, real estate, manufacturing workforce, are employed in and wholesaling and retailing. Overall, the fabricated metal products industry. Contributed by Park Sam Ock. services account for 60 percent of the local economy. Seoul is also highly specialized Seoul heads the hierarchary of settlements in the Republic of Korea in publishing and printing and in fashion design and high-end apparel, with the two industries employing more than half the city's 465,000 manufacturing workforce. Next in the urban hierarchy are Pusan and Daegu. With a population of 3.7 Seoul million, Pusan is the Republic of Korea's REPUBLIC OF KOREA second largest city. In the southeastern Ansan corner of the Korean Peninsula, its sea- port, one of the world's largest, handles more than 6.5 million container ships a year. Daegu is a metropolitan area of 2.5 million, dominated by textile and cloth- Gumi ing manufacturing and automotive parts manufacturing and assembly. Since 1970, Daegu the Gyeongbu Expressway has connected Jeongeup Pusan to Seoul through Daegu. About 20 Sunchang ights operate daily between Seoul and Pusan Daegu, and since 2001, the two cities have been linked by a high-speed train. Population, 2007 Much farther down the hierarchy, Ansan (thousands) and Gumi are secondary cities, with popu- > 4,000 1,000­4,000 lations of around 679,000 and 375,000, 500­1,000 150­500 respectively. In Gyunngi province, Ansan < 150 belongs to the Seoul National Capital Area, as part of Seoul's suburban area. Gumi is in Gyungbok province, in the southeast. As tends to be the case with secondary cities, Ansan and Gumi are more specialized in Sources: WDR 2009 team, using data from the National Statistical Office of the Republic of Korea. true for smaller cities and towns, and towns scale in postsecondary education and health and rural areas. Towns are the connective tis- care services. Symbiosis is again the rule. sue between rural and urban areas. They act Towns draw sustenance from the agricultural as market centers for agricultural and rural activity of rural areas, but their prosperity output, as stimulators of rural nonfarm activ- also spills over to villages by providing non- ity, as places for seasonal job opportunities for farm employment opportunities. Farmers in farmers, and as facilitators of economies of Vietnam migrate seasonally to work in urban 54 WORLD DEVELOPMENT REPORT 2009 construction, returning to invest the money interchangeably, agglomeration, density, earned in their farms.13 Farmers in Makueni, or geographic concentration of economic Kenya, use nonfarm income to invest in ter- activity--across countries. racing, planting trees, clearing bush, building The index identifies an area of 1 square houses, and educating their children. Farm- kilometer as urban, agglomerated, or dense ers in the semiarid Diourbel region of Senegal if it satisfies the following three conditions: have responded to growing urban demand for · Its population density exceeds a thresh- meat by diversifying away from groundnut production into animal husbandry.14 old (150 persons per square kilometer). · It has access to a sizable settlement within some reasonable travel time (60 minutes Measuring density by road). Measures of gross product at a refined spa- · The settlement it has access to is large tial scale, such as a district or a city, are in that it meets a population threshold difficult to come by. Even for developed (more than 50,000 inhabitants). countries, output estimates tend to be available only for rather broadly defined Box 1.3 summarizes the rationale and subnational areas (first level and adminis- methodology underpinning the index. trative units, such as provinces or states). At One advantage of the agglomeration this level, important variations in economic index is that it incorporates both density density are likely to average out. Fortunately and the local distance to density. Based on though, as illustrated earlier for Belgium, the criteria of population density and acces- output and population density are closely sibility to a sizable market, the index also correlated. Reliable population estimates comes closer to providing an economic defi- are more easily available, even for villages nition of an area that can both benefit from or townships, because in most countries, a and contribute to agglomeration economies. population census is taken every decade. Although economic density is both a cause The strong correlation between popula- and a consequence of agglomeration econo- tion density and economic mass is consistent mies, accessibility to this economic mass with urban areas being a conglomeration of from the outer parts of the city facilitates the consumers and producers, of buyers and sell- exploitation of such benefits to proximity. ers, and of firms and workers. For a typical This is especially true in the service sector metropolitan area, the gradient of popula- in which face-to-face interactions are often tion density for distance from the city center necessary. By reducing the need to allocate is similar to the corresponding gradient for valuable land area to residential uses in and employment density.15 As implied above, the near urban centers, transport infrastructure extent to which a country's population lives facilitates economic density. in urban areas bears a strong relationship to Going to work by car or by high-speed how "bumpy" its economic geography is. public transportation is a luxury that devel- Density goes from smoothly spread out to oped country commuters do not always quite uneven as a country develops. Urban- share with their counterparts in developing ization is thus synonymous with a tendency countries. For any given geographic dis- toward greater agglomeration within a coun- tance, therefore, accessibility to a city tends try. A country's urban share is a good proxy to be lower in developing countries because for the proportion of its population living in of the need to rely on alternative, more time- areas of high density and, therefore, for the intensive modes of transportation, such as "bumpiness" in its economic geography. walking, cycling, or inefficient public trans- This Report proposes the use of an portation operating on poor-quality roads. agglomeration index computed using geo- In Mumbai, India, 44 percent of people walk graphic information systems as a measure to work,16 and in Hefei City, China, more of density. Measures of urbanization are than 70 percent either walk or cycle.17 nonuniform across countries, which makes Such variations in accessibility deter- comparability and aggregation a challenge. mine both the shape and form of a city. The index allows for a more consistent com- When most people walk to work, a city is parison of the level of urbanization--or, more likely to be monocentric and densely Density 55 BOX 1.3 Computing the agglomeration index The United Nations maintains the World adjusted for purchasing power di er- settlement center is calculated based Urbanization Prospects database, a trea- ences between countries--is that it on the maximum travel time to the sure trove of information. It provides allows international comparisons and center. urban shares and population data for calculations that aggregate poverty for · Create population density grids. These 229 countries stretching back to 1950. regions and the world. The agglomera- are created at a 1-kilometer spatial But these data are based on country tion index allows the same comparisons resolution using two global grid-based de nitions, which can be quite di erent. and aggregation. population data sources, GRUMP and This Report proposes a new measure of The methodology underlying the cal- LandScan.b agglomeration, based on a uniform de - culation of the agglomeration index can · Identifytheareas. Identify the grid cells nition of what constitutes an "urban" or be summarized as follows: that satisfy thresholds for all three criteria. agglomerated area, using the technique · Specify thresholds. To be classi ed as · Aggregate grid cell populations. The outlined in Chomitz and others (2007) and "urban" using the agglomeration index, result is analogous to urban popula- elaborated in Uchida and Nelson (2008). an area must satisfy three criteria based tion. The proportion of this number to This should not be read as implying on (1) minimum population size used that country's total population is the that World Urbanization Prospects data to de ne a sizable settlement, (2) mini- agglomeration index, a summary mea- are awed. A better interpretation is to mum population density, and (3) maxi- sure of the proportion of the popula- see the challenge of measuring urbaniza- mum travel time, by road, to the sizable tion living in areas of high density. tion as analogous to the measurement settlement. of poverty. Each country has its own In calculating the index, this Report uses poverty line and criteria to track changes · Locate the centers of sizable settlements. a base case set of thresholds of 50,000 for in national poverty rates. But these mea- This mapping is done for cities that minimum population size of a settlement, sures do not allow reliable comparisons meet the minimum population size 150 people per square kilometer for pop- of poverty between countries, and they criterion using data from the Global ulation density, and 60 minutes for travel cannot be used to aggregate poverty Rural-Urban Mapping Project (GRUMP) time to the nearest large city. for groups of countries. The merit of human settlements database.a The density and travel time thresh- a uniform poverty measure--such as · Determine the sizable settlement's bor- olds are those employed in Chomitz, those living below US$1 or US$2 a day, der. The border surrounding a sizable Buys, and Thomas (2005). The density threshold is the same as the one used by the Organisation for Economic Co- The internationally comparable agglomeration index can yield different urban shares than those operation and Development (OECD). The from country-specific definitions threshold of 50,000 for a sizable settle- Urban share (%) ment is reasonable for developing and 100 developed countries. Many developing Country definition 90 nations have more than 10 percent of their total population in urban centers 80 Agglomeration Index of between 50,000 and 200,000. Some 70 examples include Chile in 2002, Brazil 60 in 2000, and Malaysia in 2000, all with 50 around 17 percent of their national 40 population living in urban centers of 30 50,000­200,000 inhabitants. Of India's 20 urban population in 2001, 20 percent 10 lived in settlements of this size. According to the World Urbanization 0 of Prospects database, the worldwide urban Brazil rkey Angola Lanka India China Uganda Vietnam Rep. Tunisia ation Tu share in 2000 was 47 percent. Using the Argentina Sri Bangladesh Feder Arab base case criteria, this ratio is 52 percent, ian but using 100,000 as the minimal settle- Egypt, Russ ment size, it is 44 percent, according to Sources: Chomitz, Buys, and Thomas 2005; Nelson 2008; Satterthwaite 2007; United Nations 2006c. the agglomeration index. But country a. The GRUMP human settlements database was developed by the Center for International Earth Science level estimates can be further apart (see Information Network (CIESIN) at Columbia University (http://sedac.ciesin. columbia.edu/gpw/index.jsp). b. LandScan was developed by Oak Ridge National Laboratory (http://www.ornl.gov/sci/landscan/). gure at left). populated at its core. In Mumbai, half of all agglomeration in industrial districts, work- workers commute less than 2 kilometers, ers in nineteenth-century Britain had to live implying that they live close to their places of nearby. The centers of industrial towns were work. Similarly, to obtain the advantages of densely populated, and overcrowded housing 56 WORLD DEVELOPMENT REPORT 2009 was common. Not until the electric tram was redefined as 15,000 (Nigeria and Syria, introduced did this change. for example, have cutoffs of 20,000), that In determining accessibility, and thus the share would drop to 67 percent. shape and form of cities, features of physical · Mauritius. In 2000 about a quarter of geography can also be important. Manhattan Mauritius's population lived in settle- Island in New York City is difficult to get to, ments with between 5,000 and 20,000 simply because of geography, so it has sky- inhabitants. Some of these settlements scrapers and a classic monocentric structure, are district capitals, but none of them with half its employment within a three-mile are classified as urban. If they were, the radius of Wall Street. By contrast, in Los urban share would have been more than Angeles, one has to widen the area to a radius two-thirds rather than less than half. of 11 miles from the center to find as large a share of employment.18 The implication: At a regional level, according to World economic density in New York City is $1.44 Urbanization Prospects data, South Asia billion of gross product per square kilometer, poses the paradox of being the least urban- in Los Angeles it is $0.49 billion.19 ized region (27 percent urban) in the world In the United Kingdom, Stevenage, Basil- while also the most densely populated. Using don, and Crawley are commuter towns that the agglomeration index, South Asia's urban serve London. About 11 percent of Lon- share in 2000 was 42 percent, making it more don's GDP is generated by commuters from urbanized than both Sub-Saharan Africa suburban areas.20 Similarly, in the United and East Asia and the Pacific (figure 1.3). States, a daily tide of workers commute into The World Urbanization Prospects also pose Washington, D.C., from the neighboring a puzzle for Latin America and the Carib- states of Maryland and Virginia. In 2005 the bean. The urban share in this region in 2000 net contribution of commuters from these was greater than that in Eastern Europe and two states to Washington, D.C.'s output Central Asia and almost on par with the was $36.4 billion. Maryland's Montgomery OECD's. The OECD has an average GDP per County--within easy commutable distance capita more than six times that of the aver- of the district--alone contributed $6.4 bil- age Latin American country. More reason- lion to Washington's gross product.21 ably, the agglomeration index indicates that The biggest advantage of the agglomera- Latin America and the Caribbean's urban tion index is its comparability across coun- share in 2000 was similar to that of Eastern tries. Here the index has an advantage over Europe and Central Asia, and 15 percentage the United Nations' World Urbanization points lower than that of the OECD. Prospects database, which contains the "de Despite these drawbacks, the World facto population living in areas classified Urbanization Prospects data are the only avail- as urban according to the criteria used by able information for comparisons over time. each area or country."22 The heterogeneity The agglomeration index is available only for across countries can makes cross-country 2000, because time-series data on road net- comparisons misleading. A few examples: works, necessary to estimate travel time, are not readily available. So, the agglomeration · India. With the criterion for an urban index and World Urbanization Prospects data- area used by Zambia or Saudi Arabia, base should be considered as complementary defined as settlements with populations data sources for examining urbanization of 5,000 or more, the share of India's and density, and this Report uses both the population in urban areas in 1991 would agglomeration index and the World Urbaniza- be 39 percent instead of the official figure tion Prospects data.23 Calculating comparable of 26 percent. This is because 113 mil- urban share measures for at least some coun- lion inhabitants of 13,376 villages would tries in the past is possible; going forward, it be reclassified as urban. should be a priority for all countries. · Mexico. Based on Mexico's official cri- terion of settlements of 2,500 or more Economic concentration-- as urban, the country's urban share in the richer, the denser 2000 was 74.4 percent. But if the settle- In the early stages of development, when an ment population threshold were to be economy is primarily agrarian, people live Density 57 spread out on farmland. Even the largest Figure 1.3 The agglomeration index helps to compare urbanization across regions towns and cities are small. Urban settlements Urban share (%) are likely to be small port cities and market 100 towns, serving the rural needs and trading 90 surpluses of agriculture. Industrialization 80 brings with it a rapid process of urbaniza- 70 tion--new cities are born, and existing cities Agglomeration Index 60 expand. As people crowd into these cities at 50 a faster rate than their boundaries expand, United Nations population and economic density increase. 40 Quite early in a country's development, this 30 leads to a hierarchy of places. 20 So, two transitions characterize eco- 10 nomic development. The first involves 0 Sub-Saharan South East Asia Middle East Latin Europe & Other OECD the movement from a primarily agrarian Africa Asia & Pacific & North America & Central high-income countries economy to a much more manufacturing- Africa Caribbean Asia economies oriented economy. The second transition, Sources: Chomitz, Buys, and Thomas 2005; Nelson 2008; Satterthwaite 2007; United Nations 2006c. taking place at a much higher level of devel- opment, involves the transformation to a for disproportionate shares of their national service-oriented economy. The first phase GDP. In 2005, Mexico City contributed 30 of urbanization, which occurs at a faster percent of Mexico's GDP despite occupying rate, coincides with the transition from only 0.1 percent of its land. Luanda contrib- a rural to an urban economy. The second uted a similar share of Angola's GDP, while phase of urbanization, at a slower rate and a occupying 0.2 percent of its land. Like- much higher level of development, is linked wise, the largest cities in Hungary, Kenya, to a within-urban evolution. In most coun- Morocco, Nigeria, and Saudi Arabia-- tries, these transformations happen at the Budapest, Nairobi, Casablanca, Lagos, and same time but in different areas. Riyadh--contributed about 20 percent of To measure concentration, we have to their country's total GDP while taking up define an area. The policy debate often less than 1 percent of land.25 involves a discussion of urban primacy, Density, defined as GDP in purchasing such as whether developing country cities power parities per square kilometer, rises are too big or too small. More academic with the level of development, and the dens- discussions use a purer geographic notion est places in the world are in the richest coun- of space. This chapter uses both spatial tries. Dublin, London, Paris, Singapore, and units--primary cities and the densest grid Vienna ranked at the top, in 2005, with more cell of 1° longitude by 1° latitude of a coun- than $200 million in gross product per square try--to measure concentration. kilometer. Likewise, Tokyo-Kanagawa, New York­New Jersey, Oslo­Akershus-Vestfold, Historically, rapidly rising and Vienna-Mödling were the densest grid concentration, then a leveling off cells of 1° longitude by 1° latitude, generating By one definition, a city is a geographic area more than $30 million of gross product per characterized by a concentration of eco- square kilometer (figure 1.4). nomic actors.24 Globally, the top 30 cities, A century of data on aggregate urban ranked by GDP, generated around 16 per- shares, and two centuries of population cent of the world's output in 2005, while the estimates for primary cities, suggest that top 100 generated almost 25 percent. The urbanization is initially rapid before slowing. urban agglomerations of Tokyo and New Developing countries--especially those in York have estimated GDPs (in purchasing Africa and Asia--are at phases during which power parity) broadly similar to those of urban shares increase sharply. People in Canada and Spain, respectively, whereas Western Europe and North America, which London has a higher estimated GDP than went through the same phase a century ago, either Sweden or Switzerland. Similarly, pri- have understandably forgotten. Emerging mary cities in developing countries account economies such as the Republic of Korea that 58 WORLD DEVELOPMENT REPORT 2009 Figure 1.4 The richer a country, the more concentrated its economic mass a. Primary city b. Area of 1° longitude by 1° latitude Gross product (US$ millions) per km2 Gross product (US$ millions) per km2 300 London Singapore 90 250 Seoul Madrid Dublin 70 200 Vienna Tokyo-Kanagawa Paris 150 50 New York­New Jersey Ontario Oslo­Akershus-Vestfold 100 30 Vienna-Mödling 50 10 0 0 5 10 15 20 25 30 ­10 GDP per capita (constant US$, thousands) 0 10 20 30 40 50 GDP per capita (constant PPP US$, thousands) Sources: WDR team estimates based on World Bank (2007j), and databases from www.citymayor.com and www.gecon.yale.edu. Figure 1.5 Developing countries have a pace of urbanization similar to that of early developed rapidly provide the best case stud- developers ies for understanding the pace and pattern of a. At magnified scale: GDP per capita < $10,000 geographic concentration. Their experience Urban share (%) traces the initially rapid and the more grad- 100 ual growth of today's wealthiest nations. 90 At the aggregate level, using the popula- 80 tion shares in urban areas, the urbanization 70 pattern of developing countries in Asia, 60 Africa, Middle East, and Latin America 50 over the last 50 years closely tracks the first 40 part of the historic path earlier traversed by 30 OECD countries between 1900 and 2000 20 (figure 1.5). The urbanization in Asia mir- 10 rors the rapid phase of urbanization that 0 0 1 2 3 4 5 6 7 8 9 10 OECD countries experienced in the nine- GDP per capita (1990 int'l Geary-Khamis $, thousands) teenth century. Likewise, the geographic transformations in Latin America and the b. Full range of GDP per capita Urban share (%) Caribbean, in Eastern Europe and Central 100 Asia, and in the Middle East and North 90 Africa are qualitatively similar to those 80 experienced by the OECD in the first phase 70 of urbanization. Quantitatively, the urban 60 shares for Latin America and the Carib- 50 bean and for Eastern Europe and Central 40 Asia regions are higher than those for the OECD at comparable incomes. 30 OECD Middle East & North Africa This may, however, be an artifact of the 20 East Asia & Pacific Latin America & Caribbean South Asia Eastern Europe & Central Asia data. Data from the World Urbanization 10 Sub-Saharan Africa Prospects database systematically overstate-- 0 0 5 10 15 20 25 purely as a definitional matter--the urban GDP per capita (constant int'l Geary-Khamis $, thousands) shares of Latin America and the Caribbean, Eastern Europe and Central Asia, and Sub- Sources: Maddison 2006; United Nations 1969; United Nations 1949; United Nations 1952; Historical Database of the Global Environment; United Nations 2006c. Saharan Africa. The safest conclusion may be that the pattern of urbanization--the Density 59 BOX 1.4 Africa's urbanization reflects industrialization Between 1970 and 1995, the urban popula- rate population estimates, a population of at in total GDP--a doubling of their tions in Sub-Saharan Africa were growing least 1 million in 1995, and data on sectoral economies--also witnessed the fastest at 5.2 percent a year while their GDP per value added for 1970 and 1995. growth in urban population--a four- capita was shrinking at 0.66 percent a year. This whittles the sample down to just 10 fold increase. The leaders in the sample Since the work by Fay and Opal (2000), countries: Benin, Botswana, Central Afri- were Benin and Zimbabwe. many have argued that urbanization does can Republic, Ghana, Mauritania, Niger, · The pace of urbanization was positively not necessarily accompany development, Rwanda, Senegal, Zambia, and Zimbabwe. correlated with growth in industries with Sub-Saharan Africa in mind (Com- Of these 10 countries, ve experienced and services, activities predominant in mission for Africa 2005). But Satterthwaite con ict at least once, and the other ve urban areas. (2007) questions the validity of the urban were peaceful throughout the period. The population numbers in most studies. Since results do not appear to di er systemati- These patterns do not support the claim many were based on projections, some cally between these two sets of countries. of African urbanization without growth. may have been grossly overestimated. The main ndings follow: In contrast, countries with higher GDP The problem is the lack of regular popula- growth experienced faster urbanization, tion censuses. For Chad and Eritrea the pop- · Except for Botswana, the countries and rapid urbanization came hand-in- ulation projections spanning 1950 through experienced on average a doubling hand with higher growth in industries 2030 were based on one population census. of population, but only 60 percent and services. A counterfactual of an Africa Those for the Democratic Republic of Congo cumulative growth in GDP. Population without urbanization is one with even were derived from two observations, the growth outpaced increases in gross slower economic growth, greater GDP per most recent for 1984. It is thus reasonable value added, and GDP per capita fell. capita losses, and increases in poverty. to consider only countries with at least · Urban population growth and total two censuses during the period examined GDP growth are positively correlated. Sources: Fay and Opal 2000; Satterthwaite (1970­95), a census post-2000 for more accu- Countries with the fastest growth 2007; United Nations 2006c. relationship between economic growth and At a disaggregated level, the primary urbanization--is not unprecedented. Even city's population share of a country dis- in Sub-Saharan Africa, faster urbanization plays a similar, nonlinear pattern of initially between 1970 and 1995, albeit with negative rapidly rising concentration, followed by a GDP per capita growth, was associated with subsequent leveling (figure 1.6). This inten- higher total GDP growth. Urbanization also sification of economic mass within a coun- came hand-in-hand with rapid growth in try's largest cities is seen for a wide range industries and services (see box 1.4). of incomes, from Budapest, Cairo, Kuala Figure 1.6 Density intensifies rapidly in the early phase of urbanization before leveling off % city population to % city population to national population national population Santiago, 1800­2000 35 35 Athens, 1800­2000 30 30 Vienna, 1800­2000 Lisbon, 1800­2000 25 25 Dublin, 1800­2000 Seoul, 1800­2000 20 20 Sydney, 1800­2000 Budapest, 1850­2000 Toronto, 1800­2000 15 15 Cairo, 1800­2000 Zurich, 1800­2000 10 São Paolo, 1850­2000 10 Brussels, 1800­2000 Kuala Lumpur, 1900­2000 5 5 Warsaw, 1850­2000 0 0 0 5 10 15 0 5 10 15 20 25 GDP per capita (constant int'l $, thousands) GDP per capita (constant int'l $, thousands) Sources: WDR 2009 team estimates, based on the Staff City Population Database, Human Settlements Group, International Institute for Environment and Development (IIED). Data from 1950 to the present, primarily from United Nations (2006c); data before 1950, primarily from Chandler and Fox (1974), Chandler (1987), and Showers (1979). Latin America drew on a review of 194 published censuses. 60 WORLD DEVELOPMENT REPORT 2009 Lumpur, and Warsaw to Athens, Lisbon, urban share and development holds until Santiago, and Seoul. These evolutions have a GDP per capita of around $10,000. This also been observed in Brussels, Dublin, Syd- incipient urbanization is associated with a ney, Toronto, Vienna, and Zurich over the rapid shift in the number of people moving two centuries since 1800. from rural to urban areas. Subsequently, the pace of urbanization slows and density Again today, rapidly rising levels off as the urban share surpasses 60 concentration, then a leveling off percent, and the level of GDP per capita A similarly shaped pattern reappears in con- surpasses $10,000. With only a handful of temporary comparisons between a country's exceptions, countries with GDPs per capita level of development and the concentration of above $25,000 have an agglomeration index density. During 2000­05, the average urban above 70 percent. population growth for low-income countries Administratively defined areas. Tak- was 3 percent a year--faster than upper- ing individual cities as the geographic middle-income countries at 1.3 percent and unit, a positive concave relationship exists high-income countries at 0.9 percent. The between a country's level of development relationship is robust. It holds for a variety and its primacy--the share of urban popu- of concentration measures, ranging from the lation living in the country's primary city, a agglomeration index, to population, gross widely used concentration measure. Similar product, and household consumption den- to the relationship between agglomerations sity. It is robust to geographic scale: an area and the level of development, primacy also of 1 square kilometer, a city, a grid cell of 1° rises rapidly before stabilizing during the longitude by 1° latitude, and an aggregated latter stages of urbanization (see figure 1.8, urban sector. panel a). Population and output density are Local 1-square kilometer areas. Esti- highly correlated, but population density mated agglomeration indexes produce a understates the geographic concentration pattern similar to the historical time series: of economic mass. Agglomeration econo- rapidly rising density for countries during mies, the benefits that firms and workers the early phase of urbanization (figure 1.7). enjoy as a result of proximity, make it likely This strong positive relationship between that output density will increase more than proportionately with employment or popu- lation density. Figure 1.7 Shares of population living in urban agglomerations rise with the level of 1° longitude by 1° latitude. Using the development terrestrial grid cells to estimate concentra- Agglomeration index tion as the share of the densest cell's gross 1.0 Egypt, Arab Rep. of Japan product in the country's GDP, concentra- tion of economic mass rises rapidly among countries with a GDP per capita of less than 0.8 Korea, Rep. of United States $15,000, and then stabilizes and tapers off among higher-income countries (see figure 0.6 1.8, panel b). Brazil India Urban areas of countries. Concentra- South Africa tion measured by consumption, rather 0.4 Norway than by population or GDP, suggests the China same concave relationship with the level of 0.2 development. For instance, the urban shares of household consumption in Malawi and Ethiopia Cameroon at GDPs per capita of $150 and 0 0 5 10 15 20 25 30 35 40 $700, respectively, are 36 percent and 48 GDP per capita (PPP, constant 2000 US$, thousands) percent. At about 63 percent, the shares are Sources: Calculated by WDR 2009 team using Nelson (2008) and World Bank (2006g). higher for Jordan and the Arab Republic of Note: The size of each circle indicates the population size of that country. PPP = purchasing power parity. The Egypt with GDP per capita of around $1,600, agglomeration index uses the following criteria: density of 150 persons per kilometer or more, access time of 60 minutes or less to a sizable settlement, defined as one that has a population of more than 50,000. and rise to 80 percent in Panama and Poland Density 61 Figure 1.8 Geographic concentration of population, gross product, and household consumption rises sharply with development, then levels off Cross-country evidence, late 1990s and 2000s a. Population b. Economic mass c. Consumption Spatial unit: city Spatial unit: grid cell of 1° longitude by 1° latitude Spatial unit: aggregated urban areas Gross product in densest area Urban share (%) of % urban population in largest city as % of country's total GDP household consumption 50 50 100 40 40 80 30 30 60 20 20 40 10 10 20 0 0 0 0 10 20 30 40 0 10 20 30 40 0 1 2 3 4 5 6 7 GDP per capita (constant US$, thousands) GDP per capita (constant US$, thousands) GDP per capita (constant US$, thousands) Sources: WDR 2009 team estimates, based on World Bank (2007j), Nordhaus (2006), and more than 120 household surveys for more than 75 countries. with GDPs per capita of $3,500 and $5,000, will approximate a 50/50 urban-rural split. respectively (see figure 1.8, panel c).26 During more advanced urbanization--now a within-urban transformation in a postin- A portfolio of bigger and denser places dustrial area--the distribution of popula- It follows from these stylized facts of geo- tion can be approximated as 75 percent graphic transformation that high-income urban and 25 percent rural. countries have a portfolio of places with a This generalization corresponds well to higher proportion of large settlements and the experience of the United States. In 1690, a lower proportion of small settlements when the average GDP per capita was a mere than do middle-income countries. And the $500 (1990 international dollars),27 the pri- middle-income countries have a signifi- mary city in colonial British America was cantly higher proportion of medium-size Boston. With a population of 7,000, how- settlements than do low-income countries. ever, Boston was by modern-day standards In low-income countries, about three- little bigger than a small town. In the urban quarters of the population live in small hierarchy, only three other cities had popu- settlements of less than 20,000 people, lations greater than 2,500, two of them New and only 10 percent live in urban agglom- York and Philadelphia. The early phase of erations of more than 1 million people. In American industrialization brought with it high-income countries, the opposite is true. an increase in the urban share from 7 per- Less than a quarter of the population live in cent in 1820 to 20 percent in 1860, as GDPs small settlements of less than 20,000 peo- per capita rose from $1,257 to $2,170 (1990 ple, and about half of the population live in international dollars). During this time, the settlements of more than 1 million people population of the primary city, now New (see table 1.1). York, expanded from 123,706 to 805,651. Its At an incipient stage of urbanization, rapid growth allowed the urban hierarchy the portfolio of places in a small country to expand and stretch out. or part of a larger country, such as a prov- ince or even a large district, can be approxi- Table 1.1 The size of urban settlements grows with development mated as 75 percent rural and 25 percent Low-income Middle-income High-income urban, all settlements of relatively low den- Population size countries (%) countries (%) countries(%) sity. As urbanization accelerates--still pre- Small settlements: less than 20,000 73 55 22 dominantly a rural-urban transformation Medium settlements: 20,000 to 1 million 16 25 26 driven by industrialization--and the area or province grows toward a GDP per capita Large settlements: more than 1 million 11 20 52 of $10,000, its distribution of settlements Source: World Bank 2007j. 62 WORLD DEVELOPMENT REPORT 2009 The number of cities with a population and public health facilities in urban areas. greater than 1 million increased from just Along with diverging wages, this promotes one, New York, in 1820 to nine in 1860. All divergence in more basic measures of wel- these cities were in the Northeast, where fare between urban and rural areas.30 But industrialization began. As the geographic rural-urban disparities begin to narrow as transformation wore on, and the United the urbanization process slows, and gov- States completed its transition to a mature ernments become more capable. The exo- industrial economy, population density in a dus of people and workers from rural areas consistent sample of U.S. cities with popu- to towns and cities reduces surplus labor lations greater than 25,000 increased from from the land in agriculture--and reduces 7,230 persons per square mile to 8,876 per competition between workers in rural labor square mile. The average land area of a city markets. And labor-saving technological increased from about 19 square miles to 40 progress releases labor for migration to square miles.28 Cities became more packed urban areas and improves productivity. In and more sprawling at the same time. time, investments and fiscal redistributions give rural residents better local access to Convergence--rural-urban and basic amenities, such as a clean daily source within cities of running water, sanitation, and electricity, A"bumpy"economicgeographydistributing as well as schooling and health care. Indeed, production and people unevenly across the with development and the passage of time, space in a country is a natural feature of the a country's economic geography approxi- working of a market economy. This bumpi- mates a "natural" balance that equalizes ness tends to become more pronounced as a welfare between urban and rural residents. country develops. The question often asked In this situation, people choose to live where is: what does this do to the geographic distri- they expect to be best off in material and bution of poverty, consumption, and other nonmaterial well-being. The Islamic Repub- living standards? The answer can determine lic of Iran illustrates this rural-urban con- the political and social sustainability of the vergence (see box 1.5). process of concentration. Evidence from today's industrial coun- tries suggests that development has largely Rural-urban disparities in well-being-- eliminated rural-urban disparities. High first wide, then narrow urban shares and concentrated economic Rural-urban disparities in productivity, density go hand in hand with small differ- wages, and well-being can be expected to be ences in rural-urban well-being on a range large and increasing in the earlier stages of of indicators. The 15 countries that joined development. With the rapidly increasing the European Union (EU) before 2004, all concentration of economic mass in a coun- with GDPs per capita in excess of $13,000 try's towns and cities in the earlier stages of (1990 international dollars), consider the development, significant disparities in pro- unemployment rate an important policy ductivity, wages, and basic welfare occur target.31 But rural-urban unemployment between urban and rural areas. The agglom- differences should not be a concern. The eration of capital, consumers, and workers unemployment rates are 10.1 percent for quickly brings production advantages, and urban areas, and 9.9 percent for rural areas. transport costs restrict the benefits to the This is also evident for youth: 19.4 percent locality. These larger local markets enable in urban areas compared with 18.7 per- firms to spread the fixed costs of production cent in rural areas. The rates of labor force across a wider number of consumers, pro- participation in urban and rural areas are ducing cost and productivity advantages.29 68.3 and 69.4 percent, respectively.32 For This means higher wages in towns and cities, England, the high degree of rural-urban and greater availability of a more diversified equality in well-being is reflected in similar range of goods and services. disposable incomes: indeed, at £522, weekly The concentration of mass also helps to disposable income in villages is 10 percent ensure a better supply of basic infrastructure higher than the £476 in cities.33 Density 63 BOX 1.5 Urbanization and narrowing rural-urban disparities in the Islamic Republic of Iran Rural-urban disparities have narrowed · First, the share of the urban population the lagging provinces. Between 1976 in the Islamic Republic of Iran. In 1976, has increased from 49 to 67 percent and 1996, the female literacy rate rose on the eve of the Iranian revolution, the between 1979 and 2005. This is a con- from 17 to 62 percent, while for urban mean per capita household income in tinuation of a longer-term trend: the women it rose from 56 to 82 percent. rural areas was 44 percent of that in urban urban population had grown by 5.4 During 1994­2000, infant mortality areas. By 2005, it had increased to 63 percent per year (and in Tehran by 6 and under-5 mortality fell fastest in the percent. percent) between 1966 and 1976. poorest provinces. The Shah's government favored cities · Second, the rural-urban gap in house- · Finally, overall poverty has fallen. The over the countryside. Price controls for hold incomes has narrowed. Between national poverty rate was at 8.1 percent essential foods depressed agricultural 1976 and 1984, agricultural value added in 2005, with relatively modest di er- incomes. High tari s, import bans, and grew by 31 percent, twice the rate of ences in rural and urban poverty of 10 licensing for industrial goods propped the nonoil economy. One reason for this and 7.1 percent, respectively. But pov- up prices of manufactured goods and growth was that farmgate prices rose 55 erty rates still vary a lot between prov- depressed farmers' purchasing power. percent. Another reason was that more inces, ranging from 1.4 to 23.3 percent. An inward-looking development strategy was spent on projects to increase the The political commitment to spatial oriented toward nal domestic demand productivity of small and medium-size equity has produced mixed outcomes ampli ed internal migration to Tehran farms. Growth could also be attributed during the last 30 years: overall poverty and a few other large cities. For every to the fact that agricultural production in declines and a convergence in rural- indicator of development, the center per- the Islamic Republic of Iran is dominated urban standards of living, but persistent formed far better than the periphery. In by the private sector, whereas large di erences in interprovincial living stan- 1973, the poverty rate was 23 percent in industrial enterprises and service provid- dards. the central region and 42 percent for the ers were nationalized after the revolu- country. This spatial inequality matched tion, which hindered their e ciency. the nation's ethnic map, fueling tensions. What has happened since the commit- · Third, rural and urban human devel- Based on a contribution by Anton Dobro- ment in 1979 to address spatial disparities? opment indicators improved, even in nogov, Alexander Kremer, and others. For 21 of the 30 OECD countries, the three times higher. But for OECD countries higher the GDP per capita in 2003,34 the with average GDPs per capita above $10,000, lower the ratio of GDP per capita in predom- the ratio is between one and two (except for inantly urban areas to that in rural areas Norway). Given the well-developed fiscal (see figure 1.9).35 For the Czech Republic, redistribution mechanisms in OECD coun- Hungary, Poland, the Slovak Republic, and tries, and differences in age-demographic Turkey, with an average GDP per capita profiles between urban and rural areas, below $10,000 (1990 international dollars), these disparities in GDP per capita will GDP per capita in urban areas is two to overstate rural-urban differences in, say, Figure 1.9 Rural-urban disparities in GDP per capita tend to be smaller in richer OECD countries Ratio of urban to rural GDP per capita Ratio of urban to rural GDP per capita 3.50 3.50 3.00 3.00 2.50 2.50 2.00 2.00 1.50 1.50 1.00 1.00 0.50 0.50 0.00 0.00 5 10 15 20 25 30 40 50 60 70 80 90 100 GDP per capita (constant 1990 int'l $, thousands) Agglomeration Index, 2000 (%) Source: WDR 2009 team, based on data from OECD (2007), pp. 1­256. 64 WORLD DEVELOPMENT REPORT 2009 Table 1.2 Rural-urban disparities in earnings, wealth, and consumption characterize development over the last two centuries Rural-urban Country (year) disparity (%) Description and country sample Sweden (1805) 221.0 Wealth per male adult in urban and rural areas. Finland (1805) 146.0 Wealth per male adult in urban and rural areas. England (1830s) 73.2 Urban wages are wages per laborer in the building trades, and rural wages are for agricultural laborers. France (1882) 29.0 Urban wages are for unskilled wages in the regional capital city (department chef lieu), and rural wages are France (1911) 51.0 based on average farm wages . United States (1925) 28.0 Urban earnings are manufacturing earnings, and rural earnings are agricultural earnings. United States (1935) 75.0 Developing countries 51.2 Urban wages are for unskilled general laborers, and rural wages are agricultural wages, including payments (nineteenth century) in kind. The countries included are Argentina 1872; Australia 1887; Denmark 1872; France 1892, 1801; Hungary 1865; Japan 1887; and the United States 1820­29, 1890. Developing countries 41.4 Urban wages are based on wages for unskilled construction workers, and rural wages are agricultural cash (twentieth century) wages. There are 19 countries (1960­70) underlying this average: Argentina, Cameroon, Chile, Costa Rica, Côte d'Ivoire, Guatemala, Kenya, Pakistan, Malawi, Malaysia, Mexico, Morocco, Panama, Sri Lanka, Tanzania, Trinidad and Tobago, Tunisia, Uruguay, and R. B. de Venezuela. Developing countries 42.0 Based on per capita household consumption, after controlling for household characteristics. There are 72 (twenty-first century) countries (2000­05) underlying this average disparity: Armenia, Angola, Bangladesh, Belize, Benin, Bhutan, Bolivia, Brazil, Burkina Faso, Burundi, Bulgaria, Cambodia, Cameroon, Chad, Chile, Colombia, Dem. Rep. of Congo, Costa Rica, Côte d'Ivoire, Croatia, Djibouti, Ecuador, Arab Rep. of Egypt, El Salvador, Ethiopia, The Gambia, Georgia, Ghana, Guatemala, Guinea, Guyana, Honduras, Hungary, India, Indonesia, Jamaica, Jordan, Kyrgyz Republic, Madagascar, Malawi, Maldives, Mali, Mauritania, Mexico, Moldova, Mongolia, Morocco, Mozambique, Nepal, Nicaragua, Nigeria, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Romania, Russian Federation, Rwanda, Senegal, South Africa, Sri Lanka, Swaziland, Tajikistan, Tanzania, Thailand, Timor-Leste, Uganda, Ukraine, Vietnam, and Zambia. Sources: Sweden and Finland 1805: Soltow 1989, table 1, p. 48; England 1830s: Williamson 1987, table 3, p. 652; France 1882, 1911: Sicsic 1992, table 2, p. 685; United States 1925, 1935: Alston and Hatton 1991, table 3, p. 93; Developing countries (nineteenth century): Clark 1957, table II pp. 526­31; Developing countries (twentieth century): Squire 1981, table 30, p. 102; Developing countries (twenty-first century): WDR 2009 team estimates based on individual country's household survey for 72 countries; the data set is described in detail in Montenegro and Hirn (2008). Note: Rural-urban disparity (in nominal terms) is computed as the difference in wages, earnings, wealth, or consumption between urban and rural areas relative to the rural averages. average levels of personal disposable income disparities in productivity and income. and consumption. The agglomeration index For a sample of developing countries in the produces the same qualitative pattern. 1960s--among them Malaysia, Mexico, Rural-urban disparities in these countries and Trinidad and Tobago, which have since were wide throughout the nineteenth and reached upper-middle-income or high-in- early twentieth centuries. Wealth per male come status--urban wages exceeded rural adult in nineteenth century Sweden was more wages by more than 40 percent. Similar gaps than 200 percent higher in urban areas than can be observed in per capita consumption in rural areas, and 150 percent higher in Fin- between urban and rural areas for a recent land (see table 1.2). Meanwhile, for rapidly sample of 72 developing countries. urbanizing England, urban wages were more The rural-urban discrepancy between than 70 percent higher than rural wages in economic mass and population distributions the 1830s. France and the United States saw diminishes with urbanization. Another way big increases in the urban wage premium to examine consumption disparities between from 1882 to 1911 and from 1925 to 1935. urban and rural areas is to look at the popu- Indeed, in the United States, the premium lation share of a country's urban areas and increased almost threefold in a decade.36 For compare it with the share of consumption developing countries in the nineteenth cen- in these areas. If this ratio is greater than tury, including Australia, Denmark, France, one, consumption per capita is, on average, Japan, and the United States, urban nominal higher in urban areas than in rural areas, wages were 50 percent higher. while the converse is true if the ratio is less Today's developing countries are still than one. in the first phase of urbanization and, Rural-urban disparities in consump- not surprisingly, have large rural-urban tion fall with density in today's developing Density 65 Figure 1.10 Rural-urban gaps in per capita points. For countries where urbanization is consumption become smaller with urbanization advanced and the urban share is approach- Ratio of urban consumption share ing its natural maximum, almost no differ- to urban population share ence exists between urban and rural areas 4.0 in access to basic services. Equalization of 3.5 access to basic services can be expected to 3.0 promote a corresponding convergence in 2.5 nonmaterial indicators of welfare and liv- 2.0 ing standards (see table 1.3). 1.5 Narrowing rural-urban disparities is 1.0 important, but the progress in absolute 0.5 measures of basic welfare in the rural areas 0 of the world's poorest countries is even more 0 20 40 60 80 100 Urban population share (%) important.Risingrural-urbandisparitiesare consistent with an absolute improvement in Source: WDR 2009 team estimates from more than 120 house- hold surveys for more than 75 countries. basic welfare in both rural and urban areas. The overall evidence is encouraging. Over countries (see figure 1.10).37 In Malawi and the past decade, most low- and middle-in- Sri Lanka the ratio is around two: urban come countries have experienced absolute areas account for about 10 percent of the improvements on a range of basic welfare population but 20 percent of consumption. indicators, including infant and under-5 For countries with higher levels of urbaniza- mortality rates, malnutrition, immuniza- tion, the spatial distribution of population tion, and school participation in rural and more closely resembles that of production. urban areas. Of 32 low-income countries, Madagascar and Tanzania have urban popu- three-quarters reduced infant and under-5 lation shares of around 20 to 25 percent and mortality rates and the incidence of severe urban consumption shares of about 30 to stunting and severe underweight, especially 35 percent. By the time a country enters an in rural areas.40 And since 1990, school advanced stage of urbanization, population attendance rose in four-fifths of these is more or less proportionately distributed countries, especially in rural areas.41 Both with economic mass, so that the ratio is close to one. In Chile 85 percent of the popula- Table 1.3 Rural-urban disparity in basic services narrows with development tion reside in urban areas, and these urban Disparity in Disparity in access residents account for 92 percent of national Urban population access to clean to sanitation consumption. In Brazil 80 percent of people share (mean GDP water (percentage (percentage Examples of countries in live in urban settlements, and these 80 per- per capita) points) points) the sample cent are responsible for 85 percent of con- 75% or higher 8 8 United States, Norway, (mean GDP per Switzerland, Spain, sumption. As development progresses and capita: $21,602) Germany, Canada, Mexico, the concentration of economic activity in Chile, Brazil, Argentina, areas of high density increases, rural-urban Gabon, R. B. de Venezuela, Djibouti, Lebanon, Jordan, disparities narrow. A downward sloping line United Kingdom at all levels of urbanization is a good omen: 50%­70% 15 20 Estonia, Panama, Turkey, most developing countries may have passed (mean GDP per Hungary, Ecuador, the peak in their rural-urban disparities.38 capita: $9,672) Colombia, Malaysia, Syria, What is true for private consumption is Azerbaijan, South Africa, Rep. of Congo, Algeria, true for basic amenities. Among low-income Tunisia, Bolivia countries with urban population shares of 25% or lower 24 26 India, Rep. of Yemen, less than 25 percent, access to water and (mean GDP per Madagascar, Chad, sanitation in towns and cities is around capita: $2,585) Tajikistan, Bangladesh, 25 percentage points higher than in rural Tanzania, Kenya, Nepal, areas.39 But for more urbanized countries, Cambodia, Malawi, Uganda, Sri Lanka, Bhutan such as Algeria, Colombia, and South Africa, Source: World Bank 2007j. the disparity in access is 15 to 20 percentage Note: Disparity refers to the percentage point difference between urban and rural areas. 66 WORLD DEVELOPMENT REPORT 2009 Figure 1.11 Even at the subnational level, rural-urban disparities fall as density increases Philippines, 2000 China, 1999 and 2006 India, 1983 and 1994 Ratio of urban to Ratio of urban disposable income Disparity in life expectancy rural incomes to rural net income urban-rural ratio (by state) 4.0 6 1.25 3.5 5 1.20 3.0 4 2.5 1.15 2.0 3 1983 1.5 2006 1.10 2 1.0 1999 1994 1 1.05 0.5 0.0 0 0 0 20 40 60 80 100 0 20 40 60 80 100 0 0.1 0.2 0.3 0.4 0.5 Urban share (%) Urban population share (%) State-specific urban share (%) Sources: Balisacan, Hill, and Piza forthcoming; Yao forthcoming; Cali 2008. urban and rural areas in these nations have and deprivation. Disparities within cities achieved progress toward the Millennium can be large. In Nairobi poverty is high in Development Goals. the inner city but much lower in the rest of Rural-urban convergence takes place the city and the suburbs (see figure 1.12). In sooner in more urbanized subnational Mombasa, Kenya's second-most-populous areas. In both China and the Philippines, city, marked geographic divisions in the urbanized provinces exhibit lower internal poverty rate are evident (see map 1.2). South urban-rural disparities in incomes (see fig- African cities also show internal disparities ure 1.11). In China the entire relationship in the poverty rate. Cape Town has a low has shifted upward over the past decade poverty rate in the coastal areas, but a higher so that, in general, rural-urban disparities poverty rate in the interior of the city. Simi- have increased over time, consistent with larly, both Johannesburg-Pretoria-Tshwane China's early stage of development, which and Durban have visible divisions. But the is marked by rapid urbanization. In India geography of poverty in Durban is different rural-urban gaps in life expectancy were from that in Cape Town and Johannesburg: smaller in the more urbanized states in the poverty rate is, in general, higher outside both 1983 and 1994. But the entire relation- the city boundaries than inside. ship has shifted downward over time. The most obvious sign of divisions within cities is slums. Slums have chronically over- Slums--divergence and convergence crowded dwellings of poor quality in under- within cities served areas. The reason for the lack of basic In poor countries, higher average living public services and infrastructure is the standards in cities do not rule out poverty inability or unwillingness of many urban Figure 1.12 Slums grow with the pace of urbanization, and fall with its level Annual growth of slum population (%) Percentage of slums 20 120 15 100 10 80 5 60 0 40 ­5 20 ­10 0 ­2 0 2 4 6 8 10 ­20 0 20 40 60 80 100 120 Annual growth of urban population (%) Urban share of a country (%) Source: Kilroy 2008. Density 67 Map 1.2 Local divisions--spatial disparities within urban settlements can be large Poverty rates in African cities KENYA SOUTH AFRICA Nairobi Johannesburg and Pretoria Poverty rate: Poverty rate: Mombasa Proportion of Proportion of poor (%) poor (%) 0­11 17­42 11­25 42­48 25­40 48­58 40­57 Durban 58­63 57­92 63­84 Cape Town No data No data Source: The Poverty Mapping Project, Columbia University, using data from Alderman and others (2002); Statistics South Africa; the Central Bureau of Statistics, Kenya; and the Ministry of Planning and National Development, Kenya. governments, utilities, and service provid- Slums are part of rapid urbanization, and ers to operate in slums, generally because of it is not uncommon for a fifth to a third of the informality and illegality of such settle- a city's population in a contemporary devel- ments.42 So living standards, especially oping country to reside in slums (see figure health, security, and sanitation, are lower in 1.12).44 Goiâna, the capital of the Brazilian slums than in formal settlements close by. state of Goiàs, a medium-size city of 40,000 Mumbai's Dharavi, believed to be Asia's big- in 1950, is today a city of more than 1 mil- gest slum, has "maybe a million residents . . . lion, with much of the population increase crammed into a square mile of low rise wood, accommodated in slums.45 Since 1950, concrete and rusted iron . . . a family of 12 liv- Delhi's population has risen more than ing in a 90-square-foot room." In Shiva Shakti tenfold, from 1.4 million to 15.6 million,46 Nagar, again in Mumbai, each community accompanied by an increase in the number tap is shared by roughly 100 people.43 of slum clusters from 200 to 1,160. The growth of slums in major cities "A dirtier or more wretched place he is characteristic of rapid urbanization. had never seen. The street was narrow and Because rapid population growth cannot muddy, and the air was impregnated with be satisfactorily accommodated, slums and filthy odors. . . . Covered ways and yards, shantytowns grow bigger and more visible. which here and there diverged from the This contributes to wide and increasing main street, disclosed little knots of houses, geographic divisions in well-being within where drunken men and women were posi- urban areas. Development--both economic tively wallowing in filth." A contemporary and institutional--and better infrastruc- description of a developing country slum ture, combined with focused interventions, such as Nairobi's Kibera or Huruma, Abi- eventually bring about a convergence in liv- djan's Washington, Delhi's Majboor Nagar or ing standards in urban areas. Kanchan Puri, Buenos Aires's San Fernando, 68 WORLD DEVELOPMENT REPORT 2009 in multistory tenements arranged along nar- row, unlit foot passages. This "housing was BOX 1.6 Slums, then and now hopelessly inadequate in all respects--in The term "slum," probably originating reached out beyond the working quantity, in quality and environmental from an old English or German word class, nally motivating strong politi- amenities, if needs as basic as clean water meaning a poorly drained or muddy cal action. But rather than attempting and safe sewage disposal can be described as place, was applied to housing in the to stop more workers from coming, amenities."47 Apart from the obvious mis- early Industrial Revolution in the or clearing out these areas of disease United Kingdom before the railways and poverty, the government in the ery, slums were prone to deadly outbreaks of were in place, when canals trans- 1870s passed legislation for strict measles and scarlet fever and high rates of ported heavy goods along the length building regulations, prescribing the mortality attributable to diarrheal diseases, and breadth of the country. During dimensions of streets and houses, and typhus, and respiratory diseases.48 Britain's rapid industrialization, most making it mandatory that all dwell- Yesterday's slums are today's world-class factories were built beside canals, the ings be connected to newly built cities. Britain is not the only industrial coun- main channel for transporting coal sewerage systems. Major municipal try to suffer from slums and wide intracity for their steam engines and other investments in water works, sewage inputs of production. facilities, and public health dramati- divisions in welfare during the earlier phases Poor workers, migrating to cities cally reduced mortality in Britain's of development and rapid urbanization (see for factory jobs, could ill a ord to cities between 1874 and 1907. box 1.7). The stylized pattern of divergence walk long distances to and from their Despite atrocious and lthy con- followed by convergence is a hallmark of places of work. Before electric trams, ditions, millions of migrants keep other modern-day developed countries as other forms of transport were expen- leaving rural areas for the teeming well. Slums for these cities are now much a sive. So workers settled close to fac- economic opportunity o ered in the thing of the past. Aided by improving land tories. Cheap housing grew around cities of poor and middle-income these factories in low-lying, poorly countries. Even though health hazards markets, investments in infrastructure, and drained areas. Housing was over- and mortality rates are far worse in the targeted incentives, within-city welfare dis- crowded. Sanitation was inadequate shanties around many cities in Africa, parities tend to narrow, but only in the more and in most cases nonexistent. And people there are trading, working, and advanced stages of urbanization. Indeed, for air quality was poor, with soot and sending large sums of money home. "world" cities such as London, New York, other pollutants. Sickness was com- The challenge facing policy makers Paris, Singapore, and Tokyo, slums can, with monplace. Diarrhea, typhus, respira- today is similar to that faced by the the benefit of hindsight, be viewed as part of tory diseases, measles, and scarlet Victorians in London: how to nurture fever cut the life expectancy of those these agglomerations with functional their "growing pains." Britain cleaned up its born in cities by 12 years compared land markets, better transport, and Dark Satanic Mills over a century, and if it with those born in rural areas. public health infrastructure to capture had started the cleanup sooner, the working The growing public health hazards the bene ts of economic growth. class would have suffered from slower wage in Britain's urban slums exacted a Sources: Satterthwaite and others 2007; growth and lower consumption.49 terrible health toll that eventually Crafts 2008; The Economist 2007a. The emergence and growth of slums in the early and intermediate stages of a coun- try's development can be explained by the or Rio de Janeiro's Rocinha? No, this is an interaction of functioning labor markets excerpt from Charles Dickens's Parish Boy's with dysfunctional land markets. In the Progress, published in 1838, describing the rapid phase of urbanization, the labor mar- rapidly expanding city of London in the ket signals higher labor demand in urban nineteenth century (see box 1.6). areas, the higher demand that arises from London was by no means the only city growth in industries and services. Labor or urban area in nineteenth century Britain responds by moving to towns and cities. with large slum settlements. Chronically As a reflection of this, slum dwellers in overcrowded and inadequately serviced developing countries are often productively housing was a common feature of British engaged, taking advantage of the economic cities and industrial towns of the time. In opportunities the city offers. Mumbai's Edinburgh rapid population growth and a Dharavi has 15,000 "hutment" factories, first wave of suburbanization by the then- and "the clothes, pots, toys and recycled rising middle classes meant that by the materials its residents produce earn the fac- 1860s, the core of the city had a large slum tories millions of dollars a year." Many slum area with population densities as high as 600 residents started businesses after the state persons per acre. Residents in this area lived government provided them with limited Density 69 BOX 1.7 Many of today's world-class cities were littered with slums "In Antwerp and in most Belgian towns the "Here the background embraces the tal soldier turned milkman, Vergniaud. basic problem in matters of working class pauper burial-ground, the station of the There the Colonel lives in a single room housing was . . . no individual sanitation or Liverpool and Leeds railway, and, in the with a dirt oor and a straw bed." individual water supply. . . . The three heavy rear of this, the Workhouse, the "Poor-Law "Between 1815 and 1851 France's popula- cholera epidemics of the 19th century had Bastille" of Manchester, which, . . . looks tion grew from 29 to 36 million . . . it was terri c e ects in these slums . . . " threateningly upon the working-people's the cities that absorbed the thousands of quarter below. . . . Passing along a rough "The rst encampments of Baltimore's migrants unable to nd work in the country- bank, among stakes and washing-lines, poor were at the water's edge. Time and side. . . . But there were simply not enough one penetrates into this chaos of small again, outbreaks of yellow fever, malaria, jobs. Unemployment and overcrowding cre- one-storied, one-roomed huts, in most of cholera, typhoid fever swept the town. ated appalling living conditions. Only one in which there is no arti cial oor; kitchen, These epidemics seemed peculiarly asso- ve houses had running water. In 1832 chol- living and sleeping-room all in one. In ciated with the low-lying encampments era wiped out some 20,000 Parisians." such a hole, scarcely ve feet long by six of the poor. The yellow fever epidemic of broad, I found two beds--and such bed- "Like so many other European cities, 1797, for example, was said to have begun steads and beds!--which, with a staircase Paris su ered from chronic post-war in the stagnant waters of the Fells Point and chimney-place, exactly lled the housing shortages. Of the 17 slum areas cove and to have spread . . . to the huts room." designed for clearance, most were still and hovels on the banks of the Jones Falls intact in the 1950s." and thence on to the shacks and shanties "Melbourne's most infamous slum, at the foot of Federal Hill." Little Bourke Street, . . . by the 1880s . . . was "One of the worst outrages of indus- crowded, bustling and growing. . . . The trialism in China against humanity is the "By the 1890s, Polish immigrants had lane is completely lled up with all kinds of herding of these workers in noisome supplanted the Irish and Germans, creat- lth comprising garbage tips, putrid liquid, slums in the factory districts, . . . so foul ing a ghetto of a new dimension. Single straw rags, and other rubbish. A most dis- and revolting . . . in Shanghai. . . . There dwellings housed from six to eight families, agreeable odor arose from this o ensive are no sanitary provisions of any kind, and one [family] to a room. . . . Fells Point was mass . . . the loathsome mass . . . exposed the passages between the rows of houses described by a health o cial as an Augean and allowed to rot and spread its contami- are practically open latrines. Overcrowd- stable . . . a mass of nuisance . . . Open nating in uences." ing exists to a distressing extent. The drains, great lots lled with high weeds, many children who are reared in these ashes and garbage accumulated in the "About 200 years ago, Lower Manhat- lthy quarters are covered with running alleyways, cellars lled with black water, tan was adorned by a pretty ve-acre sores from dirt and bodily neglect." houses that are total strangers to the lake known as the Collect. . . . By the mid- touch of whitewash or scrubbing brush, 1700s, however, the Collect was already "In the 15 years between 1930 and the human bodies that have been strangers rimmed with slaughterhouses and tan- end of the war, the population of Singa- for months to soap and water . . . that's neries. The e usions from these bloody pore doubled to a million people. The Pigtown." businesses were poured directly into the population explosion had generated a lake and more industries, more trash, housing shortage of epidemic propor- "The slums of Dublin were among the quickly followed. By 1800 the Collect was tions. Small shophouses gave shelter to worst in Europe, rivaled only by Glas- a reeking cesspool. By 1813 it had been as many as 100 people. The average living gow. Tall town houses, originally built as entirely lled in and by 1825 something space was 9 feet by 9 feet, about the size elegant homes for the rich in the eigh- entirely new stood on the site--America's of a prison cell." teenth century, fell into the Tomae hands rst real slum, the Five Points." of avaricious and pitiless landlords who "All of the ghettos of the 1920s within lled them to bursting point with the "Although this is a hugely expensive the city of Tokyo were products of Tokyo's desperate and impoverished urban poor. area in Paris to live today, in Victor Hugo's urban development and Japan's modern Conditions were often unspeakably vile, day it was a slum area, close to the Bastille economic growth. . . . The sheer size of these with massive over-crowding and utterly Prison." ghettos was astonishing. . . . Poverty pockets inadequate sanitation." re-emerged in all parts of the metropolis of "[T]he lawyer Derville ventures into the Tokyo after the Second World War, even in "Katajanokka's transformation in its slums of Saint Marceau, the poorest sec- the midst of the old city of Tokyo." entirety from a low-income housing area tion at the outskirts of Paris. Taking his to an enclave for the city's civil service coach through the lthy rutted lanes, he Sources: Belgium: Lis; Baltimore: Garrett elite and bourgeoisie represented an arrives at a broken-down building, made 2002; Dublin: Kearns 2006; Helsinki: Mäki- nen; Manchester: Engels 1987; Melbourne: urban growth pattern that emerged for entirely of second-hand materials and Mountford; Manhattan: Baker 2001; Paris: the rst time in the history of Helsinki. poorly built, where Colonel Chabert is Sanderson, Villon 2000, The Economist; A former slum had become a prestigious lodged with the cows, goats, rabbits and Shanghai: Schwenning 1927; Singapore: residential area for the privileged classes." impoverished family of a former regimen- Baker 1999; Tokyo: Koji 1969. 70 WORLD DEVELOPMENT REPORT 2009 rights over their dwellings in 1976 and began European countries lived in urban settle- to supply water and power to parts of the ments of 5,000 inhabitants or more.52 In this settlement. Because Dharavi is sandwiched respect, at least, little had changed from the between the city's two main railway lines previous five centuries. So the takeoff into and is surrounded by six stations, it also acts urbanization over the next century broke as Mumbai's transportation hub.50 In short, dramatically from the past. slums arise in many developing countries as low-income households take advantage of The pace and pattern of urbanization spatially concentrated employment oppor- is similar tunities and as businesses take advantage of It started in Great Britain. In 1800 Britain's their location in a land-constrained envi- urban share stood at 19.2 percent, about ronment. Consistent with today's industrial twice the European average. But in the first countries, the correct response is not to two decades of the century, the number of slow, stop, or reverse urbanization. It is to people living in urban areas doubled. By tackle dysfunctional land markets. 1820 the urban share was 40 percent. By the The interplay of such market forces and close of the century, seven of every 10 Brit- responses from rational market actors can ons were living in urban settlements. Britain also be seen in many Sub-Saharan African was joined in its headlong rush into urban- countries. But inefficient land markets, ization by other early European industrial- often thanks to misguided urban plan- izers. By the second half of the nineteenth ning and zoning, produce only a limited century, urbanization spread beyond the and unresponsive supply of affordable, legal Old World to the United States and Canada. land sites for building housing to keep pace By World War I, four of every 10 Americans with the demand.51 were living in urban settlements with popu- lations of 5,000 or greater; just 60 years ear- What's different for today's lier, the ratio was one in 20. developers? So if anything is different for today's At the beginning of the nineteenth century, developers, it is certainly not the pace of one person in every 10 in today's developed urbanization. Indeed, the average pace of Figure 1.13 Urbanization's speed has precedents Percentage point difference in urban population, 1985­2005 (except where specified) 35 30 Canada, 1880­1900 25 United Kingdom, 1830­1850 20 Germany, 1880­1900 Denmark and United States, respectively, 1880­1900 15 Switzerland, Mean of high-income 1880­1900 countries, 1880­1900 Mean of developing 10 countries, 1985­2005 Median of developing countries,1985­2005 5 0 All countries Sources: WDR 2009 team calculations based on data from the United Nations (2006c); historical data for Canada, the United King- dom, and industrial countries' averages are from Bairoch and Goertz (1986) and Dumke (1994). Density 71 urbanization for developing countries over Between 1985 and 2005, China added 1985­2005 is remarkably similar to the 225 million people to its towns and cities, average for European and North Ameri- almost the entire population of the United can countries53 between 1880 and 1900 (see States. Yet China for the same time period, figure 1.13).54 For the early developers the ranked only fifteenth in its absolute increase average absolute increase in the urban share in urban share. In India the number of peo- over the 20 years was 7.7 percentage points, ple in towns and cities rose by 137.8 million, and for current developers the respec- adding a Germany and an Italy to its urban tive median and mean absolute increases areas in just two decades. were 7.1 and 8.0 percentage points. The Today's developing countries had an pace of urbanization among most of the average increase in their urban popula- early developers in the last two decades of tion of 8.3 million over 1985­2005, almost the nineteenth century ranked in the top three times the increase for many of today's quartile of the contemporary distribution high-income European and North Ameri- of urbanization speeds. can countries between 1880 and 1900. But when China and India are excluded from The volume of urbanization is greater the group, the average urban population for today's developers increase in recent decades has only been What then is different? One difference is the 4.4 million, about 50 percent more than unprecedented absolute increases in urban the average for the early developers during populations in many developing countries 1880­1900 (see figure 1.14).57 in recent decades. Today's developing coun- Correspondingly, megacities in devel- tries simply have larger populations than oping countries are unprecedented in their the industrializing countries of the nine- size. Through the nineteenth century the teenth and early twentieth centuries. The world's largest city was London. But its urban population today, estimated at 3.3 1900 population of 6.6 million was only billion, is far greater than the world's total a third that of modern-day Mumbai or population as recently as 1960. It took more New Delhi, the largest cities in low-income than 10,000 years for the urban population countries. The London of 1900 and, indeed, to reach 1 billion in 1960, 25 years to add even the London of today are also smaller the second billion, and only 18 to add the than modern-day Shanghai (10 million), third.55 According to the UN projection, it the largest city in lower-middle-income will take just 15 years to add the fourth.56 In countries, and several others (Cairo, East Asia alone, 500 million people will join Jakarta, and Manila) among the more suc- today's 750 million urbanites over the next cessful developers. With more than 22 mil- 25 years, essentially adding another Paris or lion people, Mexico City, the largest city in Kuala Lumpur every month. upper-middle-income countries, is three Figure 1.14 The population increment in urban areas of today's developing countries is much larger Change in urban population (thousands), 1985­2005 Change in urban population (thousands), 1985­2005 30,000 140,000 United States, 1880­1900 25,000 120,000 100,000 20,000 80,000 United States, 1880­1900 15,000 60,000 Average for developing countries (excluding Average for developing countries, 1985­2005 10,000 China and India), 1985­2005 40,000 Average for developed countries, 1880­1900 Average for developed countries, 1880­1900 5,000 20,000 0 0 All countries including China and India All countries excluding China and India Sources: WDR team calculations based on data for 1985­2005 from the United Nations (2006c) plus historical data from Bairoch and Goertz (1986). 72 WORLD DEVELOPMENT REPORT 2009 times the size of London at the start of the workers in London earned an urban real twentieth century. wage premium of 67 percent, a large part of this premium was compensation for the evi- Urbanites today enjoy both higher dent health hazards of city living.64 private earnings and better public In Germany during the second half of the services nineteenth century, infant mortality rates Cities now do better than rural areas in both in rural areas were about 150 per 1,000 live income and nonincome indicators of well- births. But expanding Berlin had the high- being. In 2000 the infant mortality rate in est infant mortality in the Kaiserreich era, rural Malawi was 117 per 1,000 live births, hovering around 300 per 1,000 live births in in urban Malawi it was 83. Urban Benin the 1860s, and peaking at 410 per 1,000 live did much better than rural Benin in low- births in the 1870s. The rural-urban gap in ering under-5 mortality rates and reducing physical well-being remained for decades diarrhea and acute respiratory infections.58 during the nineteenth century.65 Urban Ugandan women were less likely to As the U.S. economy industrialized and suffer from anemia or malnutrition. Supe- urbanized, people living in high-density rior health indicators are repeated in urban areas at the turn of the twentieth century areas throughout the developing world-- were exposed to infectious and parasitic from Chad and Cameroon in Sub-Saharan diseases. In 1880 urban mortality for adults Africa, to Nepal in South Asia, Kazakhstan was 50 percent higher than rural mortality, in Central Asia, and Nicaragua in Latin and two decades later, the urban mortality America, and to Morocco and Egypt in rate was still 18 percent higher. The rural- North Africa and Middle East.59 urban mortality difference was even greater But the opposite was true for the devel- for infants and young children. For infants, opers of the nineteenth and early twentieth excess urban mortality was 63 percent in centuries. Migrants to cities could expect 1890 and 49 percent in 1900, and for young better material standards of living, offset by children ages one to four, the respective fig- poorer health and shorter lives for them and ures were 107 percent and 97 percent. In 1900 their children. In 1881­91 life expectancy at male life expectancy was 10 years shorter in birth was 51 years in English and Welsh vil- urban areas than in rural areas.66 lages, but only 44 years in London and 39 That the cities and towns of modern- years in large towns.60 In 1850s Britain the day developing countries do better than infant mortality rate in cities with popula- villages on indicators of health, while the tions greater than 100,000 was, at 196 per opposite was true for the developed coun- 1,000 live births, far higher than the 138 per tries at similar incomes in the nineteenth 1,000 live births in rural communities.61 century, reflects advances in public health Even as late as 1937, George Orwell saw it and medicine, and improvements in sewers fit to characterize industrial towns and cit- and water systems. It also reflects the pub- ies as places where "one always feels that the lic benefits that today's cities in developing smoke and filth must go on for ever and that countries confer. So the advantages of high no part of the earth's surface can ever escape density are not limited to income genera- them."62 It is perhaps no surprise, then, that tion and wealth creation--they also include the absence of respiratory diseases attribut- social services. able to poor air quality in the cities would With these differences in private and have resulted in life expectancies 4.7 years public sources of well-being, it should longer in the England and Wales of 1861­70. hardly be a surprise that cities and towns in In the absence of cholera, diarrhea, dysen- the developing world are growing rapidly. tery, and typhus, life expectancy might The surprise is that this move to density is have been 1.7 years longer, and the absence not faster. And the policy implication? Any of measles and scarlet fever, common in strategy for a less desperate and more delib- the cities, would have added 2.3 years to erate urbanization must include efforts to life expectancy.63 Thus in the 1830s, while improve public services in rural areas. Distance CHAPTER 2 D eng Xiaoping, generally seen as the standards can happen in parallel. Develop- architect of China's resurgence as ment in the United States was accompanied an economic superpower, insisted by a rapidly rising concentration of manu- onopennesstoworldmarkets.Healsoinsisted facturing activity in a relatively small area on concerted development of the country's of the northeast and eastern part of the coastal areas, like Shanghai and Guangzhou, Midwest at the turn of the twentieth cen- as launching grounds for connecting to these tury.3 Throughout this process, U.S. states markets. When asked about the growing witnessed a slow, if sometimes halting, wealth disparities between the coast and the convergence of per capita incomes.4 Today, interior, he reportedly countered, "If all of roughly half of the U.S. population is in China is to become prosperous, some [areas] only five states,5 but long-term unemploy- must get rich before others." ment disparities among states have been This chapter shows that all successful fairly small since World War II. developers support Deng's insight. But his The convergence of living standards in wisdom may have eluded leaders in the the United States has been assisted by the developing world, even the few lauded as willingness of workers to "pull up their visionaries, as later chapters in the Report roots" and relocate.6 But basic welfare indi- will show. For decades, "spatially balanced cators have converged even in countries growth" has been a mantra of policy mak- where such a willingness has been less evi- ers in many developing countries. It was an dent, because development has been accom- obsession of planners in the former Soviet panied by the spread of public services. Union (see box 2.5). And it has been the Take France and Germany. Even though objective of governments of various politi- Paris generates 28 percent of France's gross cal hues in the Arab Republic of Egypt, domestic product (GDP)7 using only 2 per- Brazil, India, Indonesia, Mexico, Nigeria, cent of its land, infant mortality rates in the the Russian Federation, South Africa, and country show little spatial variation. The other great developing nations. There has lagging area of Lorraine had the highest rate, even been a strong commitment to spatially 4.5 deaths per 1,000 live births in 2005, but balanced development in the economic this is not much higher than the national history of many developed countries. The average of 3.8.8 In Germany the lead- United Kingdom pursued it between the ing area of Hamburg--with an economic late 1920s and 1980s,1 and Canada did so density of 114 million of GDP per square between the late 1950s and late 1980s.2 But kilometer--enjoyed a GDP per capita more in these cases, even with the popularity than twice that of the northeastern lagging of these policies, Deng's insight remained area of Mecklenburg-Vorpommern and an valid. economic density more than one hundred Indeed, the concentration of economic times higher. Despite the phenomenal dif- activity and the convergence of living ferences in economic density between these 73 74 WORLD DEVELOPMENT REPORT 2009 areas, there is no difference in basic welfare. country industrializes, it concentrates The numbers of physicians and hospital its limited initial human and physical beds per 1,000 habitants in both Hamburg capital in leading areas, those with high and Mecklenburg-Vorpommern closely growth potential. Areas distant from track the national averages.9 the new density lag. Spatial disparities This chapter presents stylized facts about in productivity and income can persist economic concentration in parts of a country, for generations, even with mobile labor usually called "leading areas," and the con- and capital. History points to persistent vergence in living standards between house- spatial divergence in living standards in holds in these areas and those in distant or today's developed countries in their ear- disconnected parts, called "lagging areas," in lier stages of development, followed by the same country. It introduces the concept of slow convergence many years after they economic distance, which is related to but not attained high income.10 the same as physical distance. When supple- · Technological progress and globaliza- mented with the economic density discussed tion have increased market potential in chapter 1, distance helps characterize the in the leading areas of developing coun- spatial transformations that accompany tries, intensifying concentration and development and that may be necessary for amplifying spatial disparities. Although rapid economic growth. the basic forces shaping the internal eco- The main findings: nomic geography of developing countries · As countries develop and integrate inter- are the same as those that earlier shaped nally, location matters more for eco- the economic landscapes of today's devel- nomic activity but less for social welfare. oped countries, the magnitudes have Greater economic mass (which accumu- changed. Larger international markets, lates where firms carry out production) better transportation, and improved and higher living standards (reflected in communication technologies mean that household consumption, poverty, and leading areas in open developing coun- access to basic services) are not spatially tries have greater market potential than synonymous. During the early phases of industrial countries did in their early development, infrastructure and social development. So the forces for spatial services tend to be confined to areas of divergence between leading and lagging economic mass. But as countries develop areas are now stronger. and integrate internally, the distinc- tion between leading and lagging areas Defining distance becomes sharper for economic mass and Density, discussed in chapter 1, is also rele- more blurred for living standards. vant at the country level. Denser concentra- · The spatial concentration of economic tions of economic activity increase choice activity first rises and then levels off. and opportunity. They ensure greater mar- As an economy changes from agrar- ket potential for the exchange of goods, ian to industrial, the spatial distribu- services, information, and factors of pro- tion of people and economic production duction. This chapter examines the dispari- becomes more compact. Within a coun- ties in economic mass and welfare between try, agglomeration and city-periphery areas within countries, linking these dis- integration give rise to metropolitan parities to the distance from economic den- areas and leading areas of dense eco- sity. So while chapter 1 discussed changes nomic mass. This process eventually at the local scale--where the most relevant levels off, and the spatial distribution of spatial dimension is density--this chapter economic activity stabilizes. addresses the spatial transformations at the · Spatial disparities in living standards country scale, where both density and dis- follow an inverted-U path, widening tance are relevant. Chapter 3 will propose in the early stages of economic devel- that although density and distance also opment, and remaining high for a long matter for world regions, the most impor- period before slowly converging. As a tant dimension at the international scale is Distance 75 division--political barriers to the flows of well connected to markets in dense settle- goods, entrepreneurship, people, and infor- ments. But people in many parts of India mation between nations. have difficulty getting to markets because of the travel time, determined by the type As the crow flies? Distance as an and quality of roads and other transport economic, not Euclidean, concept infrastructure (see map 2.1). Distance refers to the ease or difficulty for For labor mobility, distance also captures goods, services, labor, capital, information, the "psychic costs" of separation from famil- and ideas to traverse space. It measures how iar territory. Between 1985 and 1995, the easily capital flows, labor moves, goods are share of migrants in a Chinese province orig- transported, and services are delivered inating from another province fell as distance between two locations. Distance, in this between the provinces increased. And addi- sense, is an economic concept, not just a tional costs exist for migration between non- physical one. Although economic distance neighboring provinces.11 So, as with trade, is generally related to Euclidean (straight- economic distance for migration is related to, line) distances between two locations and but not synonymous with, physical distance. the physical features of the geography sepa- In this Report, the destination of interest is a rating them, the relationship is not always location with the greatest economic density straightforward. One reason is that distance or highest market potential. Distance is thus for the exchange of goods is different from a metaphor for access to markets. that for the migration of people. Manmade barriers, including policies, For trade in goods and services, distance can also increase distance. Roadblocks and captures time and monetary costs. The local barricades--improvised "toll sta- placement and quality of transport infra- tions" for local police and others to extract structure and the availability of transport payments--are common for journeys by can dramatically affect the economic dis- road in many Sub-Saharan countries.12 tance between any two areas, even though And where local political autonomy is the Euclidean distance between them high, there may be territorial fragmenta- could be identical. Two villages may have tion as policies of protection are pursued the same straight-line distance to a city, at the local level. Map 2.2 shows the time but one could be near a national highway, to human settlements, assuming few or no the other on an unpaved rural road. Based manmade barriers. Distances can be long, on straight-line distance, most of India is even in high-income countries. Map 2.1 Access to markets is not a straight line a. Based on Euclidean distance b. Based on economic distance c. Roads and settlements Source: WDR 2009 team. Note: The lighter color represents greater access to places with economic mass. 76 WORLD DEVELOPMENT REPORT 2009 Map 2.2 Distances can be long even in the developed world Travel time to sizable settlements, by subnational administrative area Travel time in hours and days to the nearest city of 50,000 or more people 0­1 1­2 2­3 3­4 4­6 6­8 8­12 12­18 18­24 24­30 30­36 36­2d 2d­3d 3d­4d 4d­5d No data Contributed by Andrew Nelson; see Uchida and Nelson (2008) for this Report. Locations close to markets have as the spread of disease. The main determi- a natural advantage nant of the strength of these interactions is Provincial governments in 1980 in China distance. Waldo Tobler's First Law of Geog- heightened their administrative powers raphy states that "everything is related to under decentralization reforms. They used everything else, but near things are more these powers to protect local firms--raising related than distant things."15 Areas closer tariffs and imposing bans on shipments from to economic density have easier access to other provinces. Imports between provinces beneficial interactions and exchanges. fell from 50 percent of GDP to 38 percent In Indonesia better road connections between 1992 and 1997, while local absorp- shorten travel time and the distance to eco- tion of goods within provinces rose from 68 nomic centers, creating larger agglomer- percent to 72 percent. The magnitudes are ated areas. Because of good roads and easier similar to those for goods crossing the U.S.- access to markets, villages 60 kilometers Canada border and international borders in from the district center generate as much the European Union (EU).13 China's hukou manufacturing activity as the district cen- system of permanent household registra- ter itself, and the well-connected periphery tion--linking place of residence with access becomes part of the agglomerated area. But to consumer goods, employment oppor- in poorly connected peripheries, the density tunities, and social protection--similarly of economic activity falls off rapidly beyond reduced internal migration.14 25 kilometers from the center (figure 2.1). Distance to density affects spatial Spillovers from proximity to density show movements in goods, services, informa- up in both developed and developing coun- tion, knowledge, and people. Commuting, tries. In European manufacturing, an area's migration, telecommunication, informa- total factor productivity growth is positively tion flows, and shipments of goods connect and significantly related to the density of originating and receiving areas. Most spa- manufacturing production in neighboring tial interactions, such as learning and trade, areas. And faster demand growth in neigh- are beneficial. But some are harmful, such boring areas stimulates, through spillovers, Distance 77 Figure 2.1 Manufacturing activity in Indonesia flourishes in areas with shorter economic distance to density Faster travel speed, better market access Slower travel speed, poorer market access Density Density 0.06 0.06 All households Manufacturing Others 0.04 0.04 0.02 0.02 0.00 0.00 0 20 40 60 80 100 0 20 40 60 80 100 Distance to district center (km) Distance to district center (km) Source: Yamauchi and others, forthcoming. faster total factor productivity growth.16 there. Responding to these incentives, firms In Canada, North York and Waterloo are, and workers enlarge the market opportuni- thanks to proximity and local research ties available in the dense area. The result is universities, becoming an extended part of a circular and cumulative process of dense the Toronto information and communica- areas continually gaining workers and firms tion technology (ICT) hub. Firms closer to from less dense areas. In this process, migra- Toronto do better than those farther away.17 tion balances the distribution of population The phenomenon is repeated in emerg- against the spatial disparity in economic ing economies. When a network of high- density. Reducing distance-related costs or ways surrounding Jakarta was built in the spatial frictions increases movements of 1980s, many firms moved out of the center people, firms, and ideas--as well as those to save on land and congestion costs. But of goods and services--and thus brings less they stayed near the metropolitan region developed areas into the national system of to have access to the large market.18 Similar production. With trade, the mobility of peo- but less pronounced is the pattern in other ple is probably the most potent mechanism Indonesian agglomerations, where growth for integrating areas of low economic density has been strongest in peripheral areas sur- with markets of high density. But for inter- rounding megacities.19 In Brazil indus- nal migration to bring about a convergence tries moved out of greater São Paulo to the in living standards, large population move- lower-wage populated periphery. Following ments may be necessary over generations. the transport corridors, these industries Every year, approximately 40 million moved through São Paulo state and into people in the United States change resi- the neighboring state of Minas Gerais. In dences, and 8 million people change states.21 the Republic of Korea the early decentral- The reason for this mobility is that economic ization of manufacturing from Seoul was to production is concentrated in a few parts of peripheral locations within an hour's drive. the country, and accessing this economic Only in the 1990s did industries decentral- density generally means moving closer to it. ize to towns and rural areas.20 People moving to economically dense areas contribute to production and boost The natural way to reduce distance is their incomes. But they also increase com- for people to migrate petition among workers in dense areas, A leading area of dense economic activity, reducing it in less dense areas, and contrib- through its market opportunities, creates uting to the convergence of living standards incentives for firms and workers to move between low- and high-productivity areas. 78 WORLD DEVELOPMENT REPORT 2009 Among today's industrial countries, the criteria that correspond to fairly self- quickest convergence occurred between 1870 contained labor markets and zones of eco- and 1913, largely driven by the largest flows of nomic activity. But data on such functionally people from Europe to emerging markets in defined economic areas are hard to come Asia and the Americas. For Ireland between by.24 So subnational areas are more com- 1851 and 1908, mass outmigration contrib- monly defined by administrative or political uted at least a third to the catch-up in Irish boundaries. Such definitions can bias econo- real wages with those in the United States metric analysis (see box 2.1), but they have and Britain--by reducing competition in the advantage of corresponding to the areas the domestic labor market. The virtual ces- for defining and implementing subnational sation of catch-up or convergence among the policy. This chapter examines administra- industrial countries between the two world tively or politically defined areas based on wars was attributed largely to more restric- different data sources, ranging from national tive immigration policies.22,23 accounts and household surveys to terrestrial grid cells of 1° longitude by 1° latitude. Density in leading areas, distance for In this Report, leading areas have a high lagging areas economic density, and lagging areas have a Subnational areas, when compared, should long distance-to-density. An area is more ideally be defined according to economic likely to be lagging the farther it is from BOX 2.1 Defining an area: impossible or NUTS? Subnational policy analysis relies on data within-area di erences in employ- The gure below shows the density of for areas that range from small primary ment or poverty can be as large as economic activity for Germany's 16 prov- sampling units to districts, and to states between-area di erences. Any change inces (länder) and 439 districts (kreise). or provinces. Typically, these areas are in the boundaries between areas The highly aggregated data indicate that de ned administratively or politically, could change the results. The potential 30 percent of GDP is produced on 10 per- re ecting historical characteristics more implications are succinctly summa- cent of the country's area, and the more than current patterns. For instance, the rized by the title of a classic paper on disaggregated data show that almost 60 existing administrative structure of the this topic, "A Million or So Correlation percent of GDP is produced on the same EU's member states generally consists Coe cients."a 10 percent. Aggregate information can be of two levels, such as länder and kreise · Second, analytical ndings depend on useful, but be mindful of these biases. in Germany, regions and départements in the aggregation or spatial scale, the Source: WDR 2009 team. France, comunidades autónomas and pro- ecological fallacy of inferring charac- a. Openshaw and Taylor 1979. vincias in Spain, and regioni and provincie teristics of individuals from aggregate b. Using state level data for the United in Italy. The Nomenclature of Territorial data. The classic study by Robinson States, the study showed that the propor- Units for Statistics (NUTS) provides a single (1950) illustrates this problem.b A broader tion of foreign-born people is positively cor- uniform classi cation of territorial units related with the proportion literate in Eng- aggregation will yield smaller di erences lish, suggesting that native-born Americans for producing regional statistics for the between units of analysis--and lower were more likely to be illiterate. Analyzing EU. The rst two administrative levels variances. So, results can di er signi - the same relationship using individual data in most member states correspond to cantly depending on the size of the units. showed a negative correlation. NUTS 2 and NUTS 3. NUTS 1, a larger unit representing the major socioeconomic Different spatial scales yield different results because of an aggregation bias regions, often does not correspond to Provinces (la¨ nder), Germany Districts (kreise), Germany existing administrative units within mem- ber states. Cumulative GDP (%) Cumulative GDP (%) 100 100 Which spatial scale to use, or how best to de ne a subnational area, depends on 80 80 the issue and the information available. 60 60 But the choice can dramatically a ect the 40 40 conclusions drawn from studying social 20 20 and economic conditions across di erent 0 0 parts of a country--for two reasons. 0 50 100 0 50 100 · First, areas are not de ned keeping in Cumulative area (%) Cumulative area (%) mind the policy issues. For instance, Source: Estimates based on Nordhaus 2006. Distance 79 leading areas because greater distance-to- such as access to sanitation and electricity, density implies a lack of integration into the are not met. In developed countries, lagging economy of leading areas. It also implies areas are locations with poorer job pros- poorer access to the "thick" markets of capi- pects than leading areas, but no differences tal, labor, goods, services, and ideas, and the in basic welfare. So distance and market spillovers of knowledge and information they access, in this Report, capture a wide range provide. A lagging area is usually a remote of criteria that different countries use to part of the country with one or more of the define a lagging area (see box 2.2). following features: high poverty, low pro- It follows that distance-to-density is the ductivity and income, high unemployment, cause of low income per capita, labor pro- and stagnant growth, which are typically the ductivity, and real wages--and of the high criteria governments use to define lagging rates of poverty and unemployment. In the areas. United Kingdom, economic density in the In developing countries, lagging areas leading London and southeast areas pro- tend to be remote places where basic needs, duces a wage premium of 18 percent, which BOX 2.2 How developed and developing countries define lagging areas: a quick survey In this Report, a lagging area is de ned around 71 percent of funds under the Mexico is noteworthy not only because as a place distant from density. How does convergence objective. But, even in EU of the sophistication of the measure used this de nition compare with how policy regional policy, funding is available on to identify lagging areas, but also because makers in developing and developed more favorable (and complicated) terms of the sophisticated manner of de ning countries have, today and historically, for those areas whose GDP per capita areas. Rather than using crude administra- de ned lagging areas? is not only less than 75 percent of the tive boundaries to de ne areas, geograph- Usually, the criteria national govern- EU average, but which are in a country ical information system (GIS) techniques ments use to classify an area as "lagging," whose GDP per capita is less than 90 are used to consider an area's geographi- "disadvantaged," or "backward" are linked percent of the EU average. These areas cal proximity, ethnic and cultural identity, to explicit strategies or policies for spatial are considered to be "more lagging."c and geoeconomic characteristics. or regional development. The criteria · Precise and complicated. Between 1982 So the criteria that di erent countries might be vague or precise. They might and 1987 Canada's Department of use to identify lagging areas depend on relate to a single indicator of economic per- Regional Industrial Expansion used a the level of development and on domes- formance or to a weighted average of sev- development index to classify areas tic political considerations. High levels of eral. And they might re ect the de nition for allocations under its Industrial and poverty and marginalization de ne lag- of lagging areas at di erent spatial scales. Regional Development Program. The ging areas in developing countries, and a high rate of unemployment often de nes · Vague. UK regional policy in the 1980s index assigned a 50 percent weight to them in developed countries. classi ed a lagging area as being either an area's unemployment, a 40 percent India's 10th Five-Year Plan (2002­07) a "development area" or an "intermedi- weight to its personal income, and a 10 identi es the northeastern region as ate area." But the law was vague in the percent weight to the scal capacity of "backward" and "disadvantaged" and criteria it set to designate such areas. the province to identify 15 percent of thus deserving special policy attention. "In exercising his powers under the the "least developed."d EU regional policy, under its convergence preceding provisions of this section [in · Sophisticatedly de ned and measured. objective, makes special provisions for the designation of development and To identify areas considered as lag- "the outermost regions," deemed to intermediate areas] the Secretary of ging, Mexico's microregional strategy require additional assistance. State shall have regard to all the circum- uses a "marginalization index" based This Report's de nition of lagging stances actual and expected, including on indicators of access to such basic areas--as distant from density--captures the state of employment and unemploy- services as electricity and drinking this wide range of criteria. ment, population changes, migration water, and indicators of the quality of and objectives of regional policies."a dwelling conditions and the proportion · Precise and simple. EU regional or "cohe- of the local working population that Contributed by Mark Roberts. sion" policy for the period 2007­13 is poorly paid.e It is mainly targeted a. Industrial Development Act 1982, chapter de nes lagging areas as those qualify- at remote rural communities in the 52, part I, para. (3); bold emphasis added. ing for assistance under the "conver- south, because the "remoteness of b, c. http://europa.eu/pol/reg/index_ en.htm, "Activities of the European Union-- gence objective," equated with NUTS2 rural communities often translates into Regional Policy," 2008. areas with a GDP per capita of less conditions of poverty and a substantial d. Atkinson and Powers 1987. than 75 percent of the EU average.b lack of access to a wide range of basic e. Villarreal 2005; OECD 2003, p. 6. These areas are budgeted to receive public services."f f. OECD 2003. 80 WORLD DEVELOPMENT REPORT 2009 distant areas in the north and southwest of have lower wages, and improving an area's England and in Scotland and Wales do not growth prospects largely depends on reduc- enjoy.25 In Indonesia the potential profit- ing distance.28 In Brazil's leading area, eco- ability of firms in textiles and other sectors nomic density implies a wage premium of is negatively related to distance-to-density: 13 percent, comparable to that in European more distance, less profit. This is true for countries.29,30 In Mexico the southern rural distance-to-density within the country and areas--distant from the economic density for distance to an international port and in Mexico City and the United States--have thus to the density in international mar- the lowest wages and highest poverty. kets.26 Again, lagging areas unable to attract Lagging areas in many countries are investment and employment are those with home to ethnic minorities. Tribal, racial, a high distance-to-density. and religious differences in access to As in today's rich countries, distance-to- resources show up as spatial disparities. In density affects incomes in emerging mar- a vicious cycle, disparities between areas ket countries. In China good market access that coincide with different ethnic groups produces higher individual wages, even can deepen political divisions and fuel after controlling for individual, sector-, and tensions, contributing to greater diver- province-specific attributes, living cost dif- gence in living standards. They can even ferences, and human capital externalities.27 fuel civil conflict that is difficult to extin- In Brazil lagging areas economically distant guish, causing "development in reverse" from São Paulo and other large markets (see box 2.3).31 BOX 2.3 Dangerous disparities: when divisions aggravate distance The academic literature argues that inter- Sikkim, and Tripura make up the lagging Economics Research at the United Nations nal labor migration is the strongest force northeast. Except for the Assamese, University in Helsinki (UNU-WIDER) conjec- for convergence in economic and other the population is predominantly tribal, tured that "Spatial inequality is a dimen- measures of household welfare across speaks Tibeto-Burman and Austro-Asiatic sion of inequality overall, but it has added areas of a country. But di erences in lan- languages, and has a strong genetic simi- signi cance when spatial and regional guage, religion, ethnicity, and race are larity with the people of East Asia. Hin- divisions align with political and ethnic probably one of the strongest barriers to duism is the dominant religion, but the tensions to undermine social and political internal migration, a troubling dilemma for proliferation of Christianity has set the stability."a These somewhat abstract words policy makers. The ethnic, linguistic, and area apart from the rest of India. By con- chillingly foreshadowed the violence in religious barriers that may keep house- ventional measures of economic welfare Kenya in early 2008, which left 1,500 peo- holds from taking advantage of many and development, northeastern states ple dead and another 250,000 displaced. opportunities to arbitrage geographic rank among the lowest in India. Violence began over the disputed outcome di erences for employment and earnings Disparities in Africa. A study of 11 of a presidential election in late December can be the same barriers that cage poor Sub-Saharan countries found that ethnic- 2007, quickly exposing deep ethnic cleav- people in lagging areas, perpetuate their ity was on its own a strong predictor of ages that demarcate Kenya's economic and poverty, and sharpen spatial disparities. di erences in child mortality, but when political geography. Communal ghting Disparities in East Asia. In Thailand combined with geography, it continued was most pronounced around the town 17 percent of people in the northeast to predict the probability of survival of El Doret in the Rift Valley, and on the are poor, compared with 0.5 percent in among children. For instance, in Côte outskirts of Kisumu in the Western district Bangkok. About half of Thailand's ethnic d'Ivoire, mortality among two year olds of the country. The Rift Valley and Western minority groups live in the Northeast. In fell much faster from 1970 to 1994 for the districts are among Kenya's economically Indonesia poverty and welfare indicators Baoule than for other ethnic groups. Chil- lagging areas and are the traditional home are persistently worse in West Kaliman- dren of Ashanti women in Ghana were places of the minority Kalenjin, Luo, Kisi, tan--home to such ethnic minorities as about 20 percent less likely to die than and Luhya tribes, who along with other the Dayak, Bugis, and Sambas--than in other children. In Uganda, Baganda chil- ethnic minorities in these areas harbor Java, home to Indonesia's ethnic majority. dren under ve were a third less likely to resentments related to economic depriva- Disparities in South Asia. In India die than children of other ethnic groups. tion and neglect. the states of Arunachal Pradesh, Assam, A 2005 study on spatial inequalities Source: Brockerho and Hewett 2000. Manipur, Meghalaya, Mizoram, Nagaland, by the World Institute for Development a. Kanbur and Venables 2005. Distance 81 Lagging areas have higher poverty rates, Economic concentration in leading leading areas have more poor people areas The rate of poverty (the poverty head- As economies develop, economic activity gen- count) is related to distance, and the mass erally becomes more concentrated, not less. of poverty is related to density. Lagging In about a quarter of the world's nations-- areas tend to have a higher proportion of such as Botswana, Brazil, Norway, Russia, and poor residents, and the leading areas tend Thailand--morethanhalfofnationalincome to contain a higher share of the country's is generated on less than 5 percent of the land poor people, because of the dense popu- area. In half of all nations--such as Argen- lation in leading areas. Vietnam's lagging tina, Saudi Arabia, Slovenia, and Zambia--a inland areas have the highest poverty rate, third or more of national income is generated but its prosperous leading areas contain on less than 5 percent of land. Only one coun- the mass of poor people (see map 2.3). try in 10 has a dispersed economic mass, with And in Honduras the country's poverty less than a tenth of national income generated mass is concentrated in its two leading on 5 percent of its land. Among the few coun- areas of Tegucigalpa and San Pedro Sula, tries with this high spatial dispersion: Bangla- while distant eastern areas generally have desh, the Democratic Republic of Korea, the a high poverty rate (map 2.4). Netherlands, and Poland.32 Map 2.3 Vietnam's poverty rate is higher in lagging inland areas, but its poverty mass is greater in leading coastal areas Hanoi Hanoi Poverty rate: Poverty density proportion of poor (%) 2.5­68.6 3­18 68.6­145.8 18­36 145.8­245.9 36­41 245.9­410.6 41­48 410.6­2757.3 48­94 Thanh Pho Thanh Pho Ho Chi Minh Ho Chi Minh VIETNAM Source: The Poverty Mapping Project. Columbia University, using data from Minot, Baulch, and Epprecht 2003. 82 WORLD DEVELOPMENT REPORT 2009 Map 2.4 The poverty rate is high in distant eastern Honduras, but the poor are concentrated in the two largest metropolitan areas HONDURAS San Pedro Sula Poverty rate: Poverty density Tegucigalpa proportion of poor (%) Tegucigalpa 2.50­35.00 42­57 35.00­59.19 57­72 59.19­96.63 72­76 96.63­318.09 76­84 318.09­342.72 84­97 No data No data Source: The Poverty Mapping Project. Columbia University, using data from Robles 2003. This section presents the historical expe- not as dramatic, but both countries expe- rience of selected industrialized countries. rienced the same pattern of rapidly rising Spanning more than a century, this section concentrations at low levels of development, shows how these countries experienced followed by a leveling off as GDP per capita rapidly rising spatial concentrations, fol- rose past $10,000 (see figure 2.2).35 lowed by a leveling off. It then turns to a Patterns are similar in today's developing large sample of developed and developing countries. As Thailand industrialized and countries to document how the concentra- grew rapidly, the concentration in the leading tion of economic mass rises with a coun- Bangkok metropolitan area increased from try's development. 1.8 in 1975 to 3.1 in 2004, while GDP per cap- ita increased fourfold. In Brazil too, the con- Rapidly rising concentration in the early centration in the leading São Paulo area edged stages of development, then a leveling upward from 7.3 in 1960 to 8.4 in 2004, as the It is difficult to come by data that track the country's GDP per capita almost tripled. evolution of spatial concentrations of eco- For Japan during its post­World War II nomic activity.33 The information available industrialization, the concentration in its reveals that economic development, in its leading area of greater Tokyo increased from a early stages, is accompanied by a rapidly rising highof7.1in1955toabout8in1970asitsGDP spatial concentration in a country. Not only per capita more than doubled. This increasing does the volume of economic activity grow, spatial concentration eventually levels off, as but its generation becomes more compressed the spatial distribution of economic activity into a smaller land area. Leading areas benefit in a country stabilizes. After 1970, the con- most from this compression and growth. centration in greater Tokyo stabilized. Economic concentration in the Ile de In the United States as GDP per capita France--the leading area of France, with rapidly increased from $1,806 in 1850 to about 2 percent of the country's land--in- $4,091 in 1900,36 concentration came in creased rapidly from a value of around two the manufacturing belt of Green Bay­St. times the hypothetical share in 1801 to three Louis­Baltimore­Portland ME, which times in 1851 and to six times by 1910.34 It accounted for three-quarters of U.S. manu- continued to rise, but less rapidly, to nine facturing employment. Over the next 60 times that share in 1960. French GDP per years, the belt's share of manufacturing capita grew from less than $1,000 in 1801 employment remained stable at two-thirds to $7,000 in 1960. From 1960 on, however, to three-quarters.37 Despite structural its economic concentration stabilized, even changes in the U.S. economy and shifting though its GDP per capita tripled. In Can- patterns of economic concentration, that ada and the Netherlands the increases were concentration remained stable after 1960. Distance 83 Figure 2.2 Rising density of economic mass accompanies development over decades, even centuries a. From low-income to middle-income b. From low-income to high-income Concentration Concentration Index 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 0 2 4 6 8 10 2 10 20 30 40 GDP per capita (constant 2000 US$, thousands) GDP per capita (constant 2000 US$, thousands) Indonesia, 1989­2005 Spain, 1850­1960 France, 1801­1999 Canada, 1890­2006 Thailand, 1975­2004 Brazil, 1960­2004 Spain, 1850­2000 Japan, 1900­2000 France, 1801­1963 Netherlands, 1850­1960 Netherlands, 1850­2006 Philippines, 1980­2005 Chile, 1976­2004 Sources: WDR team estimates based on national accounts--statistical yearbooks of various years in respective countries. 1890 data for Canada come from Green (1969). Data on France are based on population numbers from Catin and Van Huffel (2003); Barro and Sala-I-Martin (2004). Data on Japan, the Netherlands, and Spain came from the Staff City Population Database, Human Settlements Group, International Institute for Environment and Development (IIED). Another corroborative piece of evidence of administrative areas, which may be of dif- rising concentration comes from the falling ferent geographic sizes. But controlling for share of land area occupied by 80 percent of these factors, a comparison of 24 develop- the U.S. population in the densest counties ing countries--ranging from Mozambique from 25 percent of the U.S. land areas in with a GDP per capita of $211 to Greece 1900 to 17 percent in 2000.38 with more than $12,000--reveals the same As countries grow beyond $10,000 GDP pattern as the historical experiences of per capita, concentration tends to stabilize, Canada and France. The share of national with the details differing. The concentra- GDP produced in the leading administra- tion in the leading area is greater in Canada, tive area tends to increase with the level of France, and Japan than it is in the Nether- development (see figure 2.3, panel a). lands and the United States. For develop- Statistical areas. Statistical areas, broad ing countries too, Brazil, Indonesia, and census regions, can differ from administra- the Philippines seem to be on paths toward tive areas. The United States has nine sta- greater spatial concentration than either tistical areas but 50 states; Canada has five Chile or Thailand. statistical areas but 10 provinces and three territories. A country's statistical office gen- International comparisons of erally uses these areas to stratify its sam- concentration today support pling frame for household surveys, with the historical trends areas corresponding to the geographic par- The relationship between a country's devel- titions of a country such as east and west.39 opment and its spatial concentration holds Despite the difference in aggregation, the for countries at different levels of develop- data for statistical areas suggest the same ment. It holds for countries based on admin- relationship between concentration, mea- istrative areas (Canadian provinces, Japanese sured by consumption rather than GDP, prefectures, Russian oblasts, and U.S. states), and development (see figure 2.3, panel b). statistical areas (the nine census regions of Land areas. Terrestrial grid cells of 1° the United States, the three regions in Ecua- longitude by 1° latitude, each correspond- dor), and land areas (terrestrial grid cells of ing to a land area of 100 square kilometers 1° longitude by 1° latitude). And it holds for can provide purer geographic resolution.40 different measures of concentration. Spatial concentration within a country can Administrative areas. Different then be measured as the share of national countries have different numbers of GDP generated on the densest 5 percent of 84 WORLD DEVELOPMENT REPORT 2009 Figure 2.3 Measures based on national accounts, household surveys, and geoscaled economic data confirm the historical pattern of a rising concentration of economic mass with the level of development a. Administrative area b. Statistical area c. Land area Province, state, prefecture Broad census regions 1° longitude × 1° latitude Highest provincial share of GDP Highest regional share of total household consumption % GDP confined in 5% of land 1.0 1.0 1.0 0.9 0.9 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0 ­2 3 8 13 0 1 2 3 4 5 6 7 8 0.0 0 5 10 15 20 25 30 35 GDP per capita (2000 US$, thousands) GDP per capita (2000 US$, thousands) GDP per capita (2000 US$, thousands) Source: Panel a: National accounts at national statistical office Web sites or Yearbooks; panel b: World Bank staff estimates of more than 120 household surveys in 75 countries (data set is described in detail in Montenegro and Hirn 2008); panel c: World Bank staff estimates from http://gecon.edu.yale. its land.41 The stylized pattern of rising con- middle-income country) and New Zealand centration of GDP with development using (a high-income country). Poland and New historical data is the same as that using con- Zealand have lower spatial Gini coefficients temporary data. The relationship between than richer Norway and the United States. development and economic concentration is The pattern also holds for small and large positive and roughly linear when comparing countries. developing countries with a GDP per capita of less than $10,000. But this relationship starts Divergence, then convergence-- to level off when higher-income countries are between leading and lagging areas included in the sample (figure 2.3, panel c). When production is primarily agrarian, The rising concentration of production economic activity tends to be evenly distrib- with economic development is not an artifact uted across space. Productivity differences of the number of subnational areas across are also moderate, varying naturally with countries or of the different sizes of land area soil quality and climate. But as an economy in the countries (see table 2.1). Consider Tan- develops and production expands in manu- zania, Italy, France, and Sweden, with similar facturing and services, some areas become numbers of administrative areas (21 or 22). more attractive to firms and workers. Some Tanzania's leading area of Dar-es-Salaam are endowed with natural or "first nature" generates 15 percent of national GDP, Italy's geographic advantages.43 For example, a leading area of Lombardia, 21 percent. France strategic coastal location makes an area a and Sweden, each with a higher GDP per cap- natural choice for a port (as with New York ita than Italy, also have higher concentrations and Philadelphia in the United States). For in their leading areas. others areas not so blessed by nature, their For a set of countries partitioned into economic pull might be linked to a "second five statistical areas--ranging from Argen- nature" historical accident. An example is tina to Tajikistan--the concentration of Boston, saved from economic decline by an consumption in the leading area increases influx of immigrant labor fleeing the Irish with development. Among medium-size potato famine. For Irish immigrants it was countries with about 300,000 square kilo- cheaper to travel from Liverpool to Boston meters of land area, Ghana and Lao People's than to New York. Democratic Republic (both low-income Economic development brings with it countries) have markedly lower spatial greater market integration, which facilitates GDP concentrations measured by spatial the mobility of people and capital and allows Gini coefficients42 than Poland (a lower- for greater trade, forces benefiting the leading Distance 85 Table 2.1 Administrative, statistical, and geographic area measures all point to rising spatial concentrations of economic activity with development Administrative areas Country GDP per capita Number of administrative areas Share of GDP in the leading area (%) Tanzania 324 21 15 Italy 19,480 21 21 France 22,548 22 29 Sweden 31,197 22 29 Share of household consumption Statistical areas Country GDP per capita Number of statistical areas in the leading area (%) Tajikistan 204 5 30.2 Mongolia 406 5 34.6 El Salvador 1,993 5 43.9 Brazil 3,597 5 51.6 Argentina 7,488 5 64.7 Land areas Country GDP per capita Land area (km2) Spatial Gini coefficient Ghana 211 227,540 0.48 Lao PDR 231 230,800 0.48 Poland 3,099 311,888 0.52 New Zealand 11,552 267,990 0.55 Norway 27,301 304,280 0.64 Sources: Administrative area information for Tanzania is from http://www.nbs.go.tz/nationalaccount/index.htm; information for France, Italy, and Sweden are from the Annex in Growing Regions, Growing Europe. Statistical area information is from more than 120 household surveys fielded during the 2000s for more than 80 countries (data set described in detail in Montenegro and Hirn 2008). Land area information is from http://gecon.edu.yale, which is based on 1990 information. Note: GDP per capita estimates are in 2000 U.S. dollars for the particular year of the household survey. areas. And by attracting people and firms, Across areas of the United Kingdom, the leading areas fuel agglomeration economies, coefficient of variation of GDP per capita becoming centers for innovation and growth increased by almost 40 percent between 1871 and driving the national economy. But the and 1911.45 During this period, Britain went process does not go on forever. Agglomera- from a modern-day Namibia to a Jordan or tion economies start to be offset by conges- the former Yugoslavia.46 After World War II, tion and pollution, the diseconomies of GDP per capita across areas of the United agglomeration. So the spatial concentration Kingdom displayed a slow convergence, in leading areas starts to level off. continuing until the late 1970s, when spatial What, then, of the income and welfare inequalities stabilized.47 disparities that accompany this pattern of In the United States, the dispersion of per first rising and then stable economic con- capita income across states increased between centration? Is there a tendency for lagging 1840 and 1880, coinciding with the rise of the areas to catch up with leading ones as eco- manufacturingbeltintheNorth,andtheCivil nomic development progresses? What is the War and its aftermath. The end of the Civil role of government policies in facilitating War marked the beginning of integration this convergence? between states in the North and the South, and spatial dispersion in per capita income For today's developed countries, spatial began to narrow. Because the southern states inequalities in income and welfare rose remainedmoredependentonagriculture,lag- early, followed by slow convergence ging areas of the United States suffered a set- In today's developed countries, per capita back in the 1920s because of a sharp drop in incomes initially diverged between sub- the relative prices of agricultural goods. Once national areas, and convergence began to set this shock dissipated, the slow convergence in as GDPs per capita approached $10,000, between lagging and leading areas resumed following an inverted-U relationship (see with few interruptions until the 1990s, when figures 2.4 and 2.5 and table 2.2).44 disparities among states stabilized.48 86 WORLD DEVELOPMENT REPORT 2009 Figure 2.4 Spatial inequality rose and remained high before slowly declining as economies Figure 2.5 Subnational disparities in income and approached $10,000 in GDP per capita wages persisted for more than 70 years in Canada and France Coefficient of variation of area wages or income 0.6 Area inequality Index 2.5 Sweden, 1920­61 0.5 Spain, Canada 1860­1975 2.0 0.4 United States, 1840­1960 1.5 0.3 1.0 Japan, 1955­83 0.2 Habsburg Empire, 1756­1910 0.5 France 0.1 United Kingdom, 1871­1955 0 1855 1880 1905 1930 1955 0 Year 0 2 4 6 8 10 12 14 16 GDP per capita (constant int'l Geary-Khamis $, thousands) Sources: Canada: Green 1969; France: Williamson 1965. Note: Canada data are based on provincial per capita gross Sources: United States: Williamson 1965; Habsburg Empire: Good 1986; Sweden: Williamson 1965; Spain: value added; France data are based on department agricul- Martinez-Galarraga 2007; Japan: Mutlu 1991. tural wages. Table 2.2 Spatial inequality varied through different phases of development Phase of economic development Country Spatial disparity measure Early Middle Advanced United States 1774 1790 1840 1860 Relative deviation regional GDP per capita from U.S. average 30 31 56 66 Italy 1861 1911 1936 1951 Index of regional percent agriculture labor force 6.55 9.41 12.7 14.2 Canada 1901 1911 1941 1951 Index of regional percent agriculture labor force 7.14 9.88 12.6 10.2 England 1767 1795 1867­70 1898­1914 Maximum-minimum in county agriculture wages 3s 11d 8s 2d 11s 0d 7s 4d Austria 1869 1890 1910 Maximum-minimum regional percent agriculture labor force 0.32 0.35 0.40 Spain 1860 1914 1955 1975 Maximum-minimum ratio regional GDP per capita 1.76 2.33 2.22 1.74 Australasia 1860 1880 1900 Coefficient of variation regional GDP per capita 0.30 0.35 0.10 Sources: United States: Good 1986; Italy: Williamson 1965; Canada: Williamson 1965; England: Hunt 1986; Austria: Good 1986; Spain: Martinez-Galarraga 2007; Australasia (Australia, New Zealand, and Tasmania): Cashin (1995). Note: For Spain, the maximum is the top five and the minimum is the bottom five. For England, the currency is in shillings (s) and pence (d). Canada and France also exhibit the over to 1929 and starting to fall by 1956.49 In same inverted-U-shaped pattern of ris- Italy, Germany, and Spain, the convergence ing spatial disparities in the early stages in per capita income gradually set in many of development--spanning two genera- years after these economies reached high tions--followed by slow convergence (see income--after World War II--followed by figure 2.5). In France the spatial dispersion stable income disparities (see figure 2.6). of wages across départements increased Government policies can facilitate this between 1855 and 1900, when convergence convergence. In Japan, for example, invest- set in. In Canada the spatial dispersion of ments in social services in lagging areas average gross value added between areas were increased as concentration of eco- increased between 1890 and 1910, carrying nomic production accelerated. By making Distance 87 BOX 2.4 Correcting geographic disparities in postwar Japan In 1970, Prime Minister Eisaku Sato and instrumental in mobilizing nancial welfare in less developed areas. These the Cabinet initiated the New Economic resources. The general account budget policies were e ective in corralling large and Social Development Plan and the of the central government provided investments toward achieving universal New Integrated Spatial Development Plan earmarked budget transfers to local gov- attainment of basic living standards. Per (Shin-Zenso). The objective was to address ernments in addition to nonearmarked capita income converged between lead- disparities in living standards, as a result transfers. Among the earmarked budget ing and other areas during the 1970s (see of accelerated growth in industrial areas transfers, a substantial amount was allo- the gure on the right, below). Labor around Tokyo, Nagoya, and Osaka along cated for investments in basic services migration from rural to large urban areas the Paci c Coast during the early postwar (for example, rural roads) and social insti- was pronounced throughout the 1950s years. An excerpt in the Shin-Zenso sum- tutions under cost-sharing arrangements and 1960s, but it tapered o after the marized the government's vision: with the local government. mid-1970s. The Fiscal Investment and Loan Pro- Among many problems concerning spatial Sources: Cabinet Council 1972; Hayashi 2003; disparities, disparities in living standards are gram pooled public funds from such Kamada, Okuno, and Futagami 1998; Minis- more serious than those in per capita income. sources as postal savings and public try of Finance 2008; Nakajima 1982; Okuma From this standpoint, the construction of the pension insurance premiums and then 1980; Overseas Economic Cooperation Fund basic services and social institutions must be channeled them for investments in hous- accelerated in rural towns, and new policies 1995; Policy Research Institute for Land must be adopted to improve the living condi- ing and social institutions to improve 2001; Sakamaki 2006. tions of their surrounding areas above a certain Rising investments in social services facilitate convergence in incomes minimum level. Per capita spending Relative per capita income These plans continued to provide pub- Yen (thousands) Index (average = 100) lic investment in basic services and social 120 160 institutions (for example, public utilities, 150 medical facilities, and school buildings) 100 140 Tokyo & Osaka to industrialized areas. But additional Tokyo & Osaka investments were made in the less devel- 80 130 Pacific Ocean Belt oped areas, to achieve at least a minimal 120 60 level of living standards for all places. The 110 Pacific Ocean Belt result was a rapid catch-up in investment 40 Less developed 100 areas in basic services and social institutions in 90 20 less developed areas relative to the more 80 Less developed areas industrialized areas (see the gure imme- 0 70 diately to the right). 1966 1968 1970 1972 1974 1976 1978 1980 1955 1960 1965 1970 1975 1980 Both the general account budget of Year Year the central government and the Fiscal Contributed by Keijiro Otsuka and Megumi Investment and Loan Program were Muto. the labor force more mobile, this led to Figure 2.6 Spatial disparities have narrowed slowly falling geographic disparities in incomes in Europe since World War II (box 2.4). Coefficient of variation 0.45 For developing countries, spatial Italy 0.40 disparities in living standards between Spain 0.35 subnational areas first rise and then fall 0.30 with development 0.25 Germany Comparing a large number of countries at 0.20 different levels of development reveals that 0.15 France spatial disparities in per capita product 0.10 United Kingdom and welfare diminish with level of devel- 0.05 opment (see figure 2.7). This is consistent 1950 1955 1960 1965 1970 1975 1980 1985 with most developing countries being clus- Year Sources: de la Fuente 2000; Barro, Sala-I-Martin, Blanchard, tered on the upward-sloping section of the and Hall 1991. inverted-U-shaped relationship between development and spatial inequality-- and with the developed countries on the 88 WORLD DEVELOPMENT REPORT 2009 Figure 2.7 Contemporary comparisons of countries indicate that disparity in welfare among subnational areas fall with economic development a. Statistical area b. Land area Broad census regions 1° longitude × 1° latitude Max.-min. ratio of per capita household consumption Max.-min. ratio of GDP per capita 2.5 8 7 6 2.0 5 4 3 1.5 2 1 1.0 0 0 5 10 0 5 10 15 20 25 30 GDP per capita (2000 US$, thousands) GDP per capita (2000 US$, thousands) Source: Panel a: World Bank staff estimates of more than 120 household surveys fielded during 2000s in more than 80 countries; panel b: World Bank staff estimates from http://gecon.edu.yale, which is information in 1990. downward-sloping part of the relationship. to Argentina with more than $7,500. The The conclusion is based on two sources of second source is based on the geophysi- information. The first source comes from cally scaled economic data of terrestrial more than 120 household surveys cover- grid-cells of 1° longitude by 1° latitude for ing more than 80 developing countries, 90 countries that span the full spectrum of from the Democratic Republic of Congo development, from Ethiopia with a GDP with a GDP per capita of less than $100, per capita of less than $200, to Japan with a GDP of more than $30,000.50 The household survey data offer an Table 2.3 Household survey and subnational gross product data corroborate the pattern of declining spatial disparities in welfare with development added advantage because individual house- hold consumption is a better measure of Number of Leading-lagging area disparity Statistical GDP per statistical in household consumption welfare than income. Similar households in area Country capita areas (minimum-maximum ratio) different areas of a developing country can Cambodia 234 5 1.89 have an average gap in household consump- tion of 70 percent simply as a result of loca- Bangladesh 286 5 1.73 tion.51 In Nicaragua, a six-person household Colombia 1,989 5 1.54 headed by a primary-educated 40-year-old Thailand 2,109 5 1.52 male in the lagging area of Matagalpa- Argentina 7,489 5 1.48 Jinotega consumes half of what an equiva- Canada 23,392 5 1.22 lent household consumes in the leading area of Managua. In Canada and the United Leading-lagging area disparity Land GDP per Land area in per capita gross product States a household in the lowest GDP per area Country capita (km2) (minimum-maximum ratio) capita area consumes 20 percent less than Philippines 920 300,000 5.43 an equivalent household in the highest. In Poland 3,099 311,888 4.63 Japan the area of residence means even less for the gap in consumption. New Zealand 11,552 267,990 3.35 As countries become more developed, Norway 27,301 304,280 1.78 the disparities in welfare purely attributable Japan 33,280 364,600 0.35 to location diminish.52 This pattern holds Sources: Estimates of consumption disparity are from more than 120 household surveys fielded during after controlling for the land area of a coun- the 2000s for more than 80 countries. Estimates of disparity in gross product are from, which comes from try and its number of administrative areas. information gathered in 1990. Note: GDP per capita estimates are based on constant 2000 U.S. dollars for the particular years of the surveys. Among countries partitioned into five areas, Distance 89 Bangladesh and Cambodia, both with GDP Figure 2.8 Economic growth in East Asia and Eastern Europe is faster than the world's growth per capita less than $300,53 had spatial gaps Growth rate (%) in consumption between their leading and 15 lagging areas of 89 percent and 73 percent, East Asia respectively. For Colombia and Thailand 10 (with GDPs per capita of approximately $2,000) the equivalent gaps are about 50 World percent. For Canada (with a GDP per capita 5 of $20,000) the gap is less than 25 percent. Latin America Among the medium-size countries, spatial disparities in welfare follow the same pat- 0 tern, falling across the spectrum from devel- oping to industrialized countries. The same ­5 is true for larger and smaller countries (see Eastern Europe & Central Asia table 2.3). ­100 Fast-growing countries see spatial 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 disparities in income widen Year Source: World Bank 2005e. East Asian growth has outstripped both the world economy and the growth of other developing regions. As they moved from Figure 2.9 Disparities in per capita gross product have been rising between leading and plan to market, Eastern European and lagging areas in Southeast Asia Central Asian countries have also grown faster than the world (see figure 2.8). As in Coefficient of variation 1.2 the early stages of development in today's 1.1 industrialized countries, development in East Asia, Central Asia, and Eastern Europe 1.0 Vietnam has brought widening gaps. In Southeast 0.9 Asia the disparities in incomes per capita 0.8 Thailand between leading and lagging areas has 0.7 grown wider (see figure 2.9). In China too, 0.6 the spatial dispersion in GDP per capita 0.5 Indonesia increased over the last decade (see figure 0.4 2.10). All this is consistent with the findings 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 of the UNU-WIDER research program. Year In Eastern Europe and Central Asia, Source: Hamaguchi forthcoming. too, disparities among subnational areas in labor productivity and income wid- ened. In Russia income per capita in the Figure 2.10 Steady rise in inequality of per capita provincial gross product in China since 1990 lagging subnational area in 1985 was half the national average, and that in the lead- Coefficient of variation 0.70 ing area, twice the national average. Since then, income per capita in the lagging area 0.60 Including has fallen to a quarter of the national aver- municipalities age, while that in the leading area increased 0.50 to five times the national average.54 This divergence occurred during a reshaping 0.40 Excluding of Russia's economic geography as state municipalities industries in remote areas collapsed, and 0.30 economic activity started to respond to spa- 0.20 tial variations in market potential (see box 1956 1964 1972 1980 1988 1996 2.5). Similarly, the Czech Republic, Hun- Year gary, Poland, and the Slovak Republic have Source: Demurger and others 2002. 90 WORLD DEVELOPMENT REPORT 2009 BOX 2.5 Spatial inefficiency and the downfall of the Soviet Union The Earth hosts many vast and harsh east of the Belaya. Industrial Siberia grew found itself more resource abundant, spaces, but few governments have put in absolute terms, but its share did not but also less populated. The market as much energy into the development of exceed one- fth under the Soviet price revaluation of resources and assets such places as Russia did under the Soviet system that favored nal goods at the shrank the economic mass of distant government. expense of raw materials, transportation, zones and poles, but deteriorating infra- The e ort to develop Russia's eastern and energy (see the table below). structure did not reduce, and in some areas was substantially increased under The Soviet social infrastructure over- cases, increased economic distance. Stalin's rule. A forced industrialization lapped with industrial development. Industry-tied public services also col- attempted to shift production to the east Health centers, schools, recreational, lapsed in the 1990s, as rms were priva- and create new economic bases in the cultural, sports, and communal-housing tized or transferred to their sotscultbyt country's geographic heart. Equalization facilities--called sotscultbyt--generally to municipal authorities. For some time of economic (especially industrial) mass belonged to enterprises. This overlap under Yeltsin, the revenues of federal across Russia was seen as the way to was especially evident in large com- and regional/local budgets were o - make development uniform across space. panies in remote areas, such as the cially equal (50:50). In the 2000s, though, "Balanced industrial growth" remained transpolar city of Noril'sk. This tradition the rules were changed in favor of the a slogan for a long time. In the 1930s the was combined, somewhat paradoxi- Federation (60:40 when the external new areas received more than 50 per- cally, with a vigorous redistribution of debt payments were made, reduced cent of the central investment, nanced funds between sectoral and regional later to 55:45). But expenditures stayed mainly by expropriating wealth from departments. Pro ts were seized and at 50:50 because of growing transfers. agriculture. The new areas absorbed only then given back--not necessarily to the Today, center-region nancial rela- capital at rst. Visible e ects appeared same place--in capital goods and assets. tions are again based on the principle of during World War II, although the most The share of enterprises under the all- redistribution, though less so than in the productive zones were close to the front, Union jurisdiction reached 70 percent Soviet Union. But industry is now more like the Ural-Volga, where 58 percent of in the reigns of Stalin and Brezhnev. The fuel and material based. After decades factories evacuated from the west of the central government (Sovmin) controlled of equalization plans, the economy sees USSR were placed. less than 20 percent of industrial pro ts widening disparities in regional per capita An accounting of this centralized, direc- obtained on Russian soil. product. tive e ort to spread out economic mass Industrial deconcentration, together The gures on the next page show this is depressing. Alexei Mints, the Soviet with price system distortions and an for 1990 and 2005, using old Soviet net geographer, dismissed as propaganda the expensive arms race, would bring the material and new gross regional product claims that directed investment boosted Soviet system down. In the late 1980s (GRP) methods and prices. The two lead- backward areas and created cities "from both the elite and the masses in almost ers, Tyumen oblast in Western Siberia zero" under the ve-year plans. The real- every area or republic claimed that it bore and Moscow in the center, remained the ity was more prosaic: the "opening up" of the burdensome duty of a land that "fed same. But the gap between leading and eastern raw material elds coincided with the others." The slogan of regional khoz- lagging areas skyrocketed from 5 to 43. the growth of manufacturing in the west. raschet (self-repayment and economic With redistribution, the leading-lagging The shift eastward, Mints wrote, occurred accounting) soon grew into political sepa- gap in each area's average personal mostly in the European part.a In reality, ratism and contributed to the demise of income in 2005 was 11. Only 20 of 88 Russia's demographic and economic the Soviet Union. regions exceed the Russian average in per geocenter had moved only as far east After the Soviet Union collapsed, the capita GRP, and only 22 in income. Most as the river Belaya in Bashkiria by 1990; Russian Federation became more inte- poor areas reduced the gap in living stan- eight of Russia's 11 time zones lay to the grated with the world market. Russia dards with the help of transfers. Spatial shifts in the Russian Federation, 1900­2000 Indicator/region 1900 1925 1950 1975 2000 1900 1925 1950 1975 2000 Number of workers, millions Production, billion rubles, in 2000 prices Absolute figures 1.9 2.2 10.8 21.4 13.3 22 37 579 4,705 4,759 By type of regiona Percent Percent (in current prices) Old industrialb 64 61 42 40 33 50 65 68 42 32 New European 30 33 39 41 47 33 31 27 38 40 Eastern (Asiatic) 6 6 19 19 20 17 4 5 20 28 a. Author's calculations based on various statistical and literary sources. b. Includes St. Petersburg and suburbs, the center (including Nizhniy Novgorod) and the mid-Urals. Distance 91 BOX 2.5 Spatial inefficiency and the downfall of the Soviet Union--continued Differences in regional product widened Current prices, percent of Russian average Net material product, 1990 Gross regional product, 2005 11 macroregions, 73 regions 11 macroregions, 79 regions Index 550 500 450 400 350 Index 300 250 250 200 200 150 150 100 100 50 50 0 0 lga North East East Centre yatka Vo Urals Volga Urals Siberia SiberiaFar North Centre yatka Siberia SiberiaFar Caucasus Caucasus Kaliningrad Northwest Volgo-VC.Chernozem West East Kaliningrad Northwest Volgo-VC.Chernozem West East North North Note: Vertical lines show range of values within an area, and diamonds represent the area mean. Welfare in remote areas has become across space based on a wider sharing of largest land area, spatial policy choices less dependent on economic mass in con- oil and gas pro ts, or a forced diversi ca- and their e ciency could mean the dif- temporary Russia. The trend is not seen tion of regional economies based on mili- ference between economic progress and as satisfactory by some Russian observ- tary-industrial activities and research and stagnation. ers and policy makers, but what should development initiatives. While the debate be done about it is not clear. The policy continues, Russia's experience under the debate ranges between two polar visions: Soviet government o ers policy lessons. Contributed by Andrei Treyvish. reinforcing the redistributive system Particularly for a country with the world's a. Mints 1974, pp. 20­54. all witnessed increased spatial disparities Figure 2.11 Income disparities between areas widened as Eastern European nations moved across subnational areas since the begin- from plan to market ning of transition (see figure 2.11). Coefficient of variation The East Asian and Eastern European 0.050 countries appear to be on the rising part 0.040 of the inverted-U curve. Economic activity Czech Republic is still concentrating in a small number of 0.030 favored leading areas, with agglomeration Hungary Poland economies increasing their productivity, 0.020 wages, and income per capita. The lagging areas, insufficiently integrated into the 0.010 Slovak Republic national economy, have not yet captured spillovers from the leading areas. 0.000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 The dynamics of geographic divergence Year in East Asia, Eastern Europe, and Central Source: Ezcurra and Pascual 2007. Asia have generally been a "race to the top." All subnational areas experienced gains in average wages and household incomes, though the biggest gains have gone to the 92 WORLD DEVELOPMENT REPORT 2009 leading areas.55 Among the poorest prov- As incomes diverge, health and inces in China, the southwest region had education converge GDP per capita growth of 7.7 percent over Many developing countries have had subna- 1979­98, the central region 7.8 percent, and tional Millennium Development Indicators the northwest region 8.4 percent.56 East across areas converge, so even though dis- Asian countries saw phenomenal declines in parities in income and material well-being poverty from more than 450 million poor widened, basic welfare has become more living on less than $1 a day in 1990 to about equal. In Indonesia the coefficient of varia- 120 million in 2007.57 For Eastern Europe tion across provinces for average years of and Central Asia, the divergence between schooling fell from 0.43 in 1971 to 0.15 in 1998 and 2003 was associated with a fall of 2000, and that for the poverty rate fell from 40 million in the region's poor living on less 0.42 to 0.35.63 In Thailand infant mortality than $2 a day, mainly because the mass of rates narrowed from a minimum-maximum poverty is in leading areas.58 gap of 6 percentage points between the lead- ing and lagging areas in 1980 to 0.7 percent- Some relatively closed or middle- age points in 2000,64 around a national income countries had incomes converge mean of six deaths per 1,000 live births. In upper-middle-income Brazil, the dis- In Vietnam the gap in malnutrition rates persion of state per capita income around between leading and lagging areas fell from the national mean fell from a coefficient of 20 percentage points in 1998 to 15 percent- variation of 0.65 in 1970 to 0.49 in 1995.59 age points in 2004, accompanying an overall Chile witnessed spatial convergence in improvement for all areas.65 In China terri- GDP per capita across subnational areas torial disparities in the human development between 1960 and 2001, when its GDP per index declined between 1995 and 2003. The capita more than doubled from $4,270 to disparity between the best-performing $10,538.60 Upper-middle-income South province (Beijing) and the worst-perform- Africa also had per capita incomes con- ing province (Tibet) declined from 0.26 in verge between its towns and cities from 1995 to 0.19 in 2003 for life expectancy, and 1990 to 2000.61 For Colombia, a relatively from 0.50 to 0.32 for the human develop- closed economy, the ratio of GDP per cap- ment index. The gap for literacy rates also ita in the leading departamento of Santafé declined between 1990 and 2003, from 58 to de Bogotá to the lagging departamento of 51 percentage points.66 The convergence of Choco fell from 10 to 6 during 1950­60 basic welfare in rapidly growing East Asian and to 3.1 in 1990.62 countries is epitomized by Malaysia (see fig- ure 2.12). Figure 2.12 In Malaysia, geographic convergence in basic welfare accompanied economic growth Diverging before converging poverty rate, 1970­2002 Converging to universal access to sanitation, 1987­2001 Households below the poverty line 80 Kedah Johor Sabah 1987 2001 Perak 70 Kelantan Kelantan Sarawak 60 Sarawak Pahang Melaka Perak 50 Pulau Pinang Perlis Terengganu Terengganu 40 Kuala Lumpur Selangor Negeri Sembilan 30 Pulau Pinang Perlis Melaka Pahang 20 N Sembilan Selangor Johar Kedah 10 Sabah Malaysia 0 Malaysia 1960 1970 1980 1990 2000 2010 40 60 80 100 Year Rural population with sanitary latrines (%) Source: Malaysia Economic Planning Unit 2008. Distance 93 For Mexican states, rates of adult literacy the benefits of development as a slow sub- and infant mortality converged from 1940 national convergence in living standards to 2002, as did life expectancy and enroll- sets in. This basic thesis holds true today. ment rates from 1990 to 2002.67 In Egypt But there are some important differences the gap in female primary school enroll- for modern-day developing countries: ment rates between the best- and worst- performing governorates narrowed from · Given the phenomenal size of today's 41 percentage points in 1995 to 25 in 2004, global market, development relies more as did the literacy rate and the gender gap in on pursuing an outward-oriented strat- literacy between 1986 and 2001.68 egy in which leading areas compete and Not all countries have experienced spa- trade globally. tial convergence in the Millennium Devel- · The rapid transformation of internal opment Indicators. Countries in South Asia economic geography--and the spatial and Africa still have wide internal dispari- disparities in today's developing coun- ties. In India and Sri Lanka the dispari- tries--will likely be greater than in ties across states remained large between industrial countries during their early 1981 and 1991,69,70 though there have been stages of development. absolute improvements both nationwide · Because redistributive mechanisms take and in the country's lagging areas. In Sri time to build and mature, labor mobility Lanka poverty was reduced in all provinces and market connectivity are more potent between 1991 and 2007, with the fastest mechanisms to integrate lagging areas reduction in its leading western province.71 into national economies. Globalization In Kenya provincial gaps in primary and technological progress in transpor- and secondary school enrollment rates tation and communication potentially remained large between 1999 and 2004, but provide a wider range of means to bridge more important, all areas made progress, the economic distance between leading including the lagging Northeast.72 and lagging areas. Global markets are more important. What's different for today's Because of greater integration today, global developers? markets are more important than domes- In The Wealth of Nations, published in tic markets than at any time in history. The 1776, Adam Smith wrote, "It is upon the market potential of leading areas is higher in sea coast, and along the banks of navigable today's developing countries than it was in rivers, that industry of every kind naturally today's developed countries during the nine- begins to sub-divide and improve itself, and teenth and early twentieth centuries, thanks it is frequently not till a long time after that to the rapid growth of trade since the end of those improvements extend themselves to the inland parts of the country."73 What Smith wrote in 1776 could apply equally to Figure 2.13 Today's developing countries face a more integrated world the spatial processes in China's modern eco- nomic development. What, if anything, is World exports as a % of global GDP different for today's developing countries? 30 In some fundamental respects, very little. Smith's key point was that a coun- 20 try's economic development, in its early stages, tends to be led by subnational areas that provide the greatest potential access 10 to markets and thus to density. But sub- national areas distant from density, inland 0 areas in Smith's example, tend to be left 1820 1870 1900 1960 1975 2004 behind. Only later in the development pro- Year cess do these lagging areas share more of Source: Chase-Dunn, Kawano, and Brewer 2000. 94 WORLD DEVELOPMENT REPORT 2009 World War II. Indeed, the growth of trade the United States also became important, has been about twice that of world income and border areas such as Ciudad Juarez, in recent decades.74 Trade as a proportion Mexicali-Calexico, Nogales, and Tijuana of world GDP is now more than 25 times had large increases in market potential and its level in 1820 (see figure 2.13). So devel- growth, whereas Mexico City had some opment under protectionist policies might depopulation and dispersion of its manu- have been a viable (if not optimal) strategy facturing activity.76 in the nineteenth and early twentieth cen- In China, during Mao's era of self- turies.75 But a protectionist strategy is much sufficiency, heavy industries were promoted less likely to be viable today, especially in in interior provinces, which received 71 the light of recent failures of such policies in percent of state investment between 1966 Latin America and Sub-Saharan Africa. and 1970. Many companies in Shanghai When a country is relatively closed, an and other coastal cities were relocated to area's market potential is determined mainly the interior and mountainous provinces of by its distance to density within the country. Guizhou, Hubei, and Sichuan.77 But since But once it is open, distance or access to inter- China has become more open to foreign national markets also becomes important, trade and investment, coastal areas flour- and border and coastal areas tend to gain ished as gateways to overseas markets, but in their shares of economic activity. Struc- many interior areas floundered. Export- tural shifts in patterns of trade can alter the oriented industries (garments, electron- topography of market potential in a country: ics, leather) are concentrated in coastal previously leading areas, perhaps favored by provinces, while domestic market-oriented policy, lose out and decline as their distance industries (metals, nonferrous smelting) to new leading areas increases. This is illus- are dispersed (see map 2.5).78 trated by Britain, China, and Mexico. The costs of transport and telecommu- Openness matters for distance. Before nications matter more. Sea coasts and navi- Mexico liberalized trade in 1985, the dis- gable rivers are natural locations for leading tance to Mexico City was the primary deter- areas because, in Smith's day, shipping was minant of an area's market potential. But the most cost-effective way of transport- with liberalization, distance to density in ing goods to domestic and international Map 2.5 Exporting industries concentrate in coastal areas to minimize distance to the global market a. International market-oriented industries b. Domestic market-oriented industries Electronics and Petroleum refining telecommunications and coking equipment Nonmetal mineral Instruments and meters products Garments and other Ferrous metal smelting fiber products and pressing Leather and fur products Nonferrous metal smelting and pressing Source: He forthcoming. Distance 95 markets. But technological progress has led Guizhou has a level ($1,653) close to the to large reductions in the cost of transport- British average in 1830.82 ing goods and in telecommunications (see Although comparisons between China chapter 6). New (non-water-based) modes and Britain need to be made with caution of transport and the information technol- because of the different geographic scales of ogy revolution have reshaped the landscape the two countries, the basic point remains. of economic density. When today's rich countries were develop- Access to knowledge is easier. So today's ing during the nineteenth and early twen- developing countries can take advantage of tieth centuries, the growth of their leading world markets of unprecedented size and areas was constrained to the rate of growth can access these markets with greater ease. of their domestic markets and the world At the same time, greater flows of foreign technological frontier. These constraints direct investment, expanding twice as fast limited the extent to which spatial dispari- as world trade, increase access to knowledge ties could increase in their early stages of at the world's technological frontier.79 For development. In sharp contrast, for today's the most successful developing countries developing countries, these constraints no (mainly in East Asia) of recent decades, the longer exist. Although the absence of these result has been national growth--driven constraints helps developing countries, the by leading areas--far faster than that of potential disparities that can arise between today's developed countries in the early leading and lagging areas in the early stages stages of their development. of development are much larger. With such rapid growth in leading Although the spatial inequality between areas, the geographic disparities in today's leading and lagging areas in today's devel- developing countries are far larger. Take oping countries will follow the same China, for example, whose GDP per capita inverted-U shaped path, the features of is roughly equivalent to that of Britain in this path will differ. The ascent is likely to 1911. London then had a GDP per capita be steeper in the initial stages of develop- around 1.7 times the national average, ment. Set against this faster rise in dispari- whereas East Anglia had a GDP per capita ties, however, is the opportunity for faster two-thirds that average.80 In China today, convergence between lagging and leading the comparable figures are 3.3 for the lead- areas as development progresses--because ing area of Shanghai and one-third for the modern information and communications lagging area of Guizhou.81 Shanghai has a technologies offer a wider range of methods GDP per capita ($16,044), roughly equiva- to bridge the economic distance between lent to the British average in 1988, while leading and lagging areas. CHAPTER 3 Division D ensityanddistance,thedimensions 600 land borders between nations (see fig- of economic geography examined ure 3.1).4 And their number may continue in the two previous chapters, mat- to increase if federated states split apart, ter for the development of countries and if minorities within nations achieve self- regions. Over the past two centuries, global determination, and if some of the remain- gross domestic product (GDP) has grown ing 70 dependencies seek independence.5 about 2.3 percent a year, an almost 50-fold This chapter shows how divisions affect increase in constant dollars.1 But growth has economic development, how geography not been uniform. Half of global GDP today and cultural history contribute to persis- is produced on just 1.5 percent of the world's tent divisions, and how countries impose land, which would fit comfortably into Alge- barriers to productive interaction with ria. This dense economic mass is home to their neighbors and the rest of the world. about a sixth of the world's people.2 Economies benefit from gradually lowering High density reflects the self-reinforcing barriers, and rich countries tend to have the benefits of proximity between economic lowest barriers to trade and factor mobil- agents across spatial scales--local, regional, ity. Countries that have integrated region- and international. Distance also matters for ally benefit from growth spillovers, larger countries and world regions. For the past home markets, and scale economies in pro- 50 years, by far the largest share of global duction and some types of public services. economic activity has been concentrated Some countries within a region may ini- in North America, Western Europe, and tially prosper more than others, but living Northeast Asia (see map 3.1). Being near standards eventually converge in regions these largest markets for products and sup- that have integrated. And in a world with plies opens great opportunities. Indeed, the economic activity and purchasing power correlation between access to markets and concentrated in a few regions, countries that economic growth is strong. have integrated globally benefit from access But it is the persistence of divisions to those markets and sources of investment. between nation-states that sets the processes This chapter makes the case for countries to of economic geography apart for countries promote such integration. and regions. The latest wave of globaliza- The main findings: tion, which began after World War II, has been associated with a borderless world. In · Divisions between countries make for 1990 Kenichi Ohmae famously pronounced thicker borders in the developing world. that "borders have effectively disappeared."3 Borders restrict the flow of goods, capi- For some world regions and some transac- tal, people, and ideas everywhere. But tions across borders, this reflects reality. But larger countries with big markets may borders, rather than disappear, have tripled get by with more restrictive borders. 96 in the past 50 years. There are now about Small countries have to worry more. Division 97 Some types of divisions, like being land- Map 3.1 Global GDP is concentrated in a few world regions, 2006 locked, are beyond the control of individ- ual countries. Others are self-imposed. And as countries develop, they gradually lower almost all types of barriers. · Economic mass is concentrated in North America, Western Europe, and North- GDP, US$ east Asia. And only East Asia has signifi- (billions) cantly increased its share of global GDP 12,000 6,000 in recent decades. This global concen- 3,000 1,500 tration matters greatly for the develop- 500 ment prospects of today's lagging world regions, and increasing their access to these large world markets must be a pri- ority for global development policy. Source: World Bank 2007j. · Within world regions, economic devel- opment tends to be accompanied by an Figure 3.1 The number of borders between nations initial divergence in living standards tripled in the past 50 years between countries, followed by conver- Number of borders gence. Basic health and education indi- 700 cators show improvements in almost all 600 world regions, but there is some diver- 500 gence in incomes between the richest and 400 poorest countries. The increasing inequal- 300 ity between countries within a region 200 reverses as lagging countries benefit from 100 0 growth spillovers from leading countries. 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 · Overcoming divisions between coun- Year tries regionally and globally is essential Source: Stinnett and others 2002. for sustained progress. This points to the importance of facilitating access to those borders are integrated in a functional global markets and promoting regional economic community (the Czech Republic integration in all its many forms (see and the Slovak Republic) or divided by con- chapters 6 and 9). flict, reducing the scope for further integra- tion (Eritrea and Ethiopia). Defining division Viewed through an economic lens, some borders are much wider than others (see Borders and divisions are not synonyms. map 3.2). The width or thickness of each National borders enclose people with shared country's borders is proportional to restric- characteristics, providing a sense of place tions that each country imposes on the flow and belonging that contributes to social wel- of goods, capital, people, and ideas with all fare. They also generate manageable units other countries.6 The wider the border, the for governing society. And well defined and more the country limits trade, travel, and the settled, they provide security and stability, flow of factors of production. yielding considerable economic benefits. Divisions, by contrast, arise when borders · Economic borders are narrow in North are poorly managed. They range from mod- America, Western Europe, Japan, Austra- erate restrictions on the flow of goods, capi- lia, and New Zealand; are wide in Asia, tal, people, and ideas to more severe divisions Africa, and Eastern Europe; and are in triggered by territorial disputes, civil wars, between in Latin America. Countries and conflicts between countries. Borders are with wide borders include emerging not a problem in themselves. But the conse- economies in East Asia and countries in quences for economic development are quite Sub-Saharan Africa, which for decades different when the countries separated by have had low growth. 98 WORLD DEVELOPMENT REPORT 2009 Map 3.2 Some borders are much wider than others Source: WDR 2009 team. Note: The width of borders is proportional to a summary measure of each country's restrictions to the flow of goods, capital, people, and ideas with all other countries. Gray areas = insufficient data. · Borders of the same width appear nar- opens its borders to benefit from interactions rower around larger countries. This with other countries, promoting further reflects the reality that large countries development. But there are exceptions. Some can often get away with more restrictive upper-middle-income countries maintain policies. Small countries depend more high restrictions--all of them oil exporters: on openness to overcome small markets Equatorial Guinea, Gabon, Libya, and Saudi and production scales. Arabia (upper right of figure 3.2). And some · Some countries with narrow borders are poorer countries have greatly reduced bor- surrounded by countries with restric- der restrictions, among them the landlocked tive policies, making it more difficult for countries of Armenia, Uganda, and Zambia, them to benefit from openness than for as well as the coastal countries of The Gam- countries in more open neighborhoods. bia, Georgia, Haiti, Kenya, Madagascar, and · This is true more for countries that are Nicaragua (lower left). open but landlocked, such as Armenia, How countries maintain divisions Uganda, and Zambia, than for those that are open and coastal, such as Chile Countries choose how permeable their or Georgia. Some coastal countries, by borders are, affecting the flows of goods, contrast, have such high restrictions that capital, people, and ideas. And the effects of they might as well be landlocked. division change as countries become more open to some flows and restrict others. Comparing border widths with eco- Goods and services. Borders reduce trade. nomic status confirms that wealthier coun- A study in the mid-1990s found that trade tries typically have lower border restrictions between Canadian provinces is, on aver- (see figure 3.2).7 As a country develops, it age, more than 20 times greater than trade strengthens the institutions that manage its between those provinces and equally distant borders and regulate the flow of goods and places in the United States. That implies a factors of production. It also becomes more "border-width" equivalent to increasing the integrated into the global economy and trade distance by 10,500 miles.8 More recent Division 99 Figure 3.2 Rich countries tend to have lower border (OECD) (see figure 3.3). Quotas, subsidies, restrictions antidumping duties, licensing, and idiosyn- GDP per capita (US$) cratic or confusing regulations affect trade as well.13 Using tariff and nontariff barriers, 25,000 poor countries restrict trade more than rich countries. They also face higher barriers to SAU GNQ LBY their exports. Nontariff barriers, on aver- 5,000 GAB age, represent more than two-thirds of total trade barriers, with higher proportions in ARM rich countries than in poor. 1,000 GEO NIC Capital. Restrictions on capital flows in HTI KEN 200514 are lower in industrial than in devel- ZMB GMB 250 oping countries (see figure 3.4) and are great- UGA MDG est in Africa, Central Asia, and South Asia. Recent empirical work--much prompted by Less More the financial crises of the 1990s--provides Border restrictions qualified evidence that financial globaliza- Source: WDR 2009 team (see note 6). tion benefits developing countries and that Note: GDP per capita is for 2005 in 2000 U.S. dollars from a series used in later sections of this chapter and based on greater financial openness does not by itself World Bank (2007j) and Maddison (2006). ARM = Armenia; contribute to more severe economic crises.15 GNQ = Equatorial Guinea; GAB = Gabon; GMB = The Gambia; GEO = Georgia; HTI = Haiti; KEN = Kenya; LBY = Libya; By reducing the cost of capital in receiving MDG = Madagascar; NIC = Nicaragua; SAU = Saudia Arabia; countries, freeing capital account transac- UGA = Uganda; ZMB = Zambia. tions increases the availability of resources estimates suggest that international borders for productive investment. It can also pro- reduce trade between industrial countries by mote portfolio diversification, thus mitigat- a still significant 20­50 percent.9 The reduc- ing risk, and encourage sound monetary tions are even larger for developing countries, management. From 1955 to 2004, freeing which tend to have higher trade barriers. capital accounts had a positive association Countries that encourage exports and are with growth in both developed and emerg- open to imports of goods and services grow ing economies.16 Liberalizing equity markets faster and reduce poverty more than coun- tries that do not encourage exports. When Figure 3.3 Tariffs are highest in Africa, South Asia, and Western Asia exports are concentrated in labor-intensive Average tariff, 2005 manufacturing, trade increases the wages for Eastern Africa unskilled workers, benefiting poor people. Northern Africa It also encourages macroeconomic stability, again benefiting the poor, who are more likely Central Africa to be hurt by inflation. And through innova- South Asia tion and factor accumulation, it enhances Western Asia productivity and thus growth.10 There may Western Africa be some empirical uncertainty about the Southeast Asia & Pacific strength of trade's relationship with growth.11 South America But essentially all rich and emerging econo- Central America & Caribbean mies have a strong trade orientation. A country's openness to trade is often Southern Africa measured by a country's sum of exports Other high-income countries and imports as a share of GDP. But a more Central Asia, Caucasus & Turkey direct measure is the average tariff rate, Northeast Asia which fell globally from close to 30 per- Eastern Europe & Russian Federation cent in the early 1980s to about 10 percent OECD countries in 2005.12 Tariffs are highest in Africa, 0 5 10 15 20 South Asia, and Western Asia and lowest in Percent member countries of the Organisation for Source: World Bank 2006f. Economic Co-operation and Development Note: The figure reflects the unweighted mean of country average tariffs. 100 WORLD DEVELOPMENT REPORT 2009 Figure 3.4 Capital restrictions are highest in Africa, South Asia, and Central Asia States or other middle-income countries.19 Migrants move for higher wages, greater Central Africa education opportunities, or a better quality Western Africa life (see chapter 5). Sending countries receive South Asia remittances, shed surplus agricultural labor, Southern Africa and benefit from return migration by those Northern Africa who have acquired skills or capital abroad. Receiving countries, many with aging popu- Central Asia, Caucasus & Turkey lations or chronic labor shortages, increase Eastern Africa their labor pool by admitting unskilled Southeast Asia & Pacific workers and their productivity by attracting Northeast Asia highly qualified migrants. Eastern Europe & Russian Federation The economic benefits from more Western Asia migration could be great.20 The pool of potential migrants is likely to remain Central America & Caribbean large given prevailing wage differentials South America between poor and rich countries, three to Other high-income countries four times those triggering the mass migra- OECD countries tion of Europeans to North America in the 0 20 40 60 80 100 late-nineteenth century.21 Yet, despite the Capital restriction Index potential benefits and the ready supply of Source: Chinn and Ito 2006. migrants, most countries restrict in-migra- added 1 percentage point to annual GDP tion, largely because of perceived negative growth.17 But short-term debt flows, which effects on domestic labor markets. include portfolio bond flows and com- Comparable information on migration mercial bank loans, can be highly volatile. restrictions is not available. But countries In countries where the financial sector is also regulate admission of short-term underdeveloped, governments and financial visitors. Each country faces a tradeoff in institutions may increase their exposure to allowing people from some nations to visit short-term debt and thus their vulnerability for business or pleasure, while deterring to sudden outflows. residents of other nations for economic, The indirect benefits of global integration political, or security reasons. This pro- and free capital flows may be greater than duces a complex system of "unequal access the direct effect of capital accumulation to foreign spaces"22 that reflects similar and portfolio diversification. Open markets restrictions for people seeking to migrate. can enforce monetary discipline, macro- Residents of richer countries face fewer visa economic stability, and financial develop- requirements than those from poorer coun- ment. They can also strengthen institutions tries (see figure 3.5). But poorer countries and governance structures. And they can also restrict entry by visitors from other increase integration with the global econo- nations. Exit can be regulated as well. Many my.18 Where markets and governance are countries make it difficult for their citizens well developed, financial globalization con- to leave.23 Passport costs across countries tributes to GDP and productivity growth are as high as 125 percent of per capita gross and reduces financial vulnerability. Where national income (GNI), and higher costs they are not, the impacts on growth are are associated with lower migration rates. ambiguous, and the risk of a financial crisis Ideas. Basic labor-intensive manufac- is high. turing is a stepping stone for countries to People. Migration flows have increased improve their economic fortunes. But to with globalization, but much less than trade maintain growth that outpaces population or capital flows. Global estimates suggest that and reduces poverty, an economy needs to 11 million people move annually for longer- move from low-margin activities to the devel- term employment or to settle in another opment and production of new or improved country. About 3.5 million of them are low- products, a process associated with moving skilled workers, many migrating to the Gulf from low-income to middle-income status. Division 101 Endogenous growth theory stresses that new Figure 3.5 Residents of richer countries face fewer visa requirements ideas support this transition, generating eco- Hard to get around: % of countries for which a visa is needed nomic rents that enable the accumulation of 100 privateandpubliccapital.China--forthepast two decades a producer of low-margin, stan- dardized manufactured goods--now exports more than $300 billion worth of information 80 and communication technology (ICT) goods a year. So far, most of these exports have been assembled from imported components, with the largest rents captured by foreign firms 60 that develop innovative technologies and control marketing and sales. Of the retail proceeds from an iPod® music player assem- bled in China, more than half goes to Apple's 40 profits and the retail and distribution costs.24 Assembly and testing account for only about 2 percent of the final sale value. Freedom of access to all types of infor- 20 mation is necessary for an atmosphere that induces innovation and productivity. Ideas and knowledge spread through the research and development (R&D) investments by 0 firms and governments and through the 0 20 40 60 80 100 global stock of existing knowledge acces- Hard to get in: % of countries needing a visa to enter sible through publications, patents, and so Source: Neumayer 2006. on.25 Governments do not restrict the flow Note: Circles are proportional to GDP per capita; visas available at the border are not included. of purely technical information, although no control. These include being landlocked, poorer countries have limited access to being in a remote location (especially if such information because of cost or lan- combined with small size), and having a guage barriers. high degree of ethnic or cultural heteroge- The link between the free flow of ideas neity within and across borders. and economic development is somewhat Landlocked. There are 43 landlocked ambiguous and not well researched. A free countries in the world. Being landlocked press generally reduces corruption and reduces growth by at least half a percentage increases public accountability.26 An indica- point.28 Boxes 3.1 and 3.2 illustrate further tor of press freedom reported annually since the costs of being landlocked. Small surprise 2002 by Reporters without Borders covers then, that many landlocked countries are freedom and security in reporting, govern- among the world's poorest. But being land- ment control of media, restrictions on Inter- lockedinitselfisnotacauseofpoverty--look net providers, and censorship of content.27 at Botswana, Luxembourg, and Switzerland. Western industrial countries generally have The problem is being landlocked with poor a high degree of freedom. Many low-income neighbors or being landlocked far from countries have high restrictions on the media markets.29 Often the two go together. Africa and Internet traffic. Significant restrictions has the most landlocked countries (15), and persist in parts of Africa, East Asia, the Mid- Eastern Europe and Central Asia the high- dle East, and the former Soviet Union. est proportion--about half (see map 3.3). Bhutan, Lao People's Democratic Republic, Some divisions are beyond the control and Nepal in Asia, and Bolivia and Paraguay of individual countries in South America are other poor landlocked Countries for the most part are free to countries. determine their openness to the outside Country size. A large land area is world. But geography and history produce often associated with abundant natural divisions over which countries have little or resources (see box 3.3). A large population 102 WORLD DEVELOPMENT REPORT 2009 BOX 3.1 A country's neighborhood matters: regional integration and growth spillovers Spillovers of growth from across borders average growth spillover between 1970 resource-poor countries of Central Africa are among the main bene ts of regional and 2000 was 15.3 to 17.0 percent. This would be left further behind. integration.a In a more integrated economic contributed to a slow, but steady, conver- If Switzerland had been subject to the space, the long-run growth prospects of gence in living standards, with the gap in same low spillovers experienced by the countries become interlinked as markets prosperity between the poorest and rich- Central African Republic between 1970 of neighboring countries become more est OECD countries closing at an average and 2000, its GDP per capita in 2000 accessible. Growth in neighboring countries rate of 1.59 to 1.85 percent a year. Along would have been 9.3 percent lower, with enhances domestic growth, which bene ts with this, the e ectiveness of growth- a cumulative GDP loss of $334 billion neighbors. This spatial multiplier enhances promoting domestic policies has been (2000 constant U.S. dollars), or 162 per- the rewards to good policy and contributes supplemented by 18.1 to 20 percent. cent of Swiss GDP (see the gure below). to convergence in living standards. In Sub-Saharan Africa the average Putting Switzerland in Africa would have cost growth spillover has been far weaker, Quantifying the benefits of growth it $334 billion signaling the relative lack of regional inte- spillovers gration despite a plethora of RTAs. The GDP per capita (constant US$, thousands) From 1970 to 2000, membership in a growth spillover is estimated at only 2.9 to 29 common regional trade agreement (RTA) 3.9 percent, implying a spatial multiplier of 28 Switzerland, actual among neighbors was associated with a only 1.01 to 1.04. This nding of virtually no growth spillover of 13.6 to 15.3 percent, 27 growth spillovers holds when neighbors so every percentage point increase in 26 are de ned by contiguity rather than RTA the average growth rate of RTA partners membership. A typical Sub-Saharan coun- 25 brought a "growth bonus" of 0.14 percent try's growth rate was basically indepen- 24 to supplement domestic growth. Associ- dent of the growth rates of its neighbors. ated with this is a spatial multiplier of 1.14 23 to 1.18, with regional integration increas- Implications for landlocked and 22 ing the e ectiveness of growth-promot- resource-poor countries in Sub- Simulation of Switzerland 21 in Africa ing domestic policies by 14 to 18 percent. Saharan Africa 20 In Europe and East Asia, where regional Under current conditions, if the Sub- 1970 1975 1980 1985 1990 1995 2000 integration has been strongest, the Saharan countries whose natural endow- Year bene ts over the past few decades have ments are most favorable sustained Source: Roberts and Deichmann 2008. been even larger. For these countries the a growth takeo , the landlocked and a. Collier and O'Connel forthcoming. provides a ready market and large labor force. Conversely, small countries lack the scale, BOX 3.2 Bolivia and Chile's border--from wide to narrow? capacity, and stock of production factors Bolivia illustrates the economic Bolivia has South America's to achieve high economic growth by them- dependence of a landlocked country second-largest natural gas reserves. selves. But as with being landlocked, size on its neighbors and how economic So economic integration could be an by itself is not a determining factor. What integration could help overcome incentive for resolving regional dis- determines economic prosperity is a coun- these divisions. After a war with Chile putes. Chile would gain from energy try's economic integration with the rest of in the late-nineteenth century, Bolivia imports from Bolivia; Bolivia would lost its access to the Paci c, and Peru, bene t from better access to ports, the world.30 Luxembourg ranks 167th in Bolivia's ally, also lost territory to which would make it easier to export. population but has the world's highest GDP Chile. Peru would likely be involved in any per capita. Fully integrated in the European Chile and Bolivia have not had agreement because it provides an Union (EU), its highly specialized financial diplomatic relations since 1978, but alternative, though less economic, sector operates globally. Small countries they are now talking. A motive for route to the coast for Bolivia and should thus favor economic integration, Chile is natural gas. Since 1995 it because any corridor through Chile because they will gain most from freer has relied almost exclusively on gas would likely pass through former from Argentina, but supplies have Peruvian territory in Chile. trade and openness. been limited by high demand in Sources: The Economist 2007b, Mal- In world regions that are more highly Argentina. inowski 2007. integrated, parts of a country therefore have less incentive to remain within a nation dom- inated by another cultural or ethnic group. Devolution in the United Kingdom and sepa- ratist movements in Spain confirm this. Sim- ilarly, the "re-balkanization" of Southeastern Division 103 Map 3.3 Forty-three countries do not have direct access to the coast Source: WDR 2009 team. Europe with the disintegration of the former contrast, have more diversified economies Yugoslavia was in part facilitated by the pros- and, being closer to rich markets, benefit pect of EU accession for the newly indepen- more from tourism and trade. dent countries. Noneconomic considerations Mauritius shows that good policy can can dominate, however. Eritrea and Timor- overcome small size and remote location. It Leste have seceded from their larger neigh- now has the second highest GDP per capita in bors (Ethiopia and Indonesia) without the Africa despite being more than 900 kilome- benefit of integration with a larger economic ters from the nearest mainland. Its location association. among the Middle East, South Africa, and Sea-locked countries. Being landlocked India allows it to capture offshoring activi- can generate an island effect, preventing a country from benefiting from neighbor- ing suppliers and markets. Small islands in remote locations suffer similar isolation; BOX 3.3 The benefits of size they are essentially "sea-locked." They face Five bene ts of being a large country: · More e ective redistributive schemes hightransportcostsforexportsandimports, to reduce gaps in after-tax incomes higher costs for energy and intermediate · Smaller per capita cost of providing between rich and poor regions. inputs, and typically higher wage costs and many public goods, such as a judi- cial system or embassies. · Better ability to provide security, rents. The problems are acute for the small as the per capita cost of defense island nations of the Pacific.31 Trade prefer- · Larger home market, which can declines. increase productivity and thus ences to support them until they become bene t economic growth. A possible disadvantage is the competitive in world markets have gener- · Stronger bu er to regional economic greater heterogeneity of preferences ated large and unsustainable inefficiencies shocks--if a region that specializes and thus the larger coordination in production. And large per capita aid in, say, agriculture su ers a recession, costs in large democracies. Diversity flows have had only limited impact on their the impacts can be reduced through also makes it harder to overcome col- lective action problems. competitiveness. Closely linking up with transfers from other regions, and wealthier "patron" countries and increasing workers can seek employment else- labor mobility may be the only strategies.32 where in the country. Source: Alesina and Spolaore 2003. Small island states in the Caribbean, by 104 WORLD DEVELOPMENT REPORT 2009 ties in manufacturing and banking, as well as is statistically significant only in countries a thriving stopover tourism industry. where one group is in the majority but the Ethnic and cultural divisions. Ethno- minority groups are still powerful--for linguistic heterogeneity imposes a coor- example, Burundi and Iraq.34 In most cases dination cost on countries, because it ethnic or cultural differences are unlikely often reflects differences in attitudes or to be the cause of conflict. But ethnic dif- interests that need to be reconciled by ferences are exploited to achieve other national governments. Consider the dif- objectives, such as gaining political power ferences in opinion about joining the EU or control over resources. Ethnicity also among the French- and German-speaking interacts in complex ways with other facets parts of Switzerland. This heterogene- of society. Autocracy, for example, reduces ity also has implications for labor mobil- growth in ethnically diverse countries more ity. For instance, the Euro zone may be a than in ethnically homogenous ones. less resilient common currency area than Linguistic diversity varies greatly the United States, because its higher cul- between world regions. The Ethnologue tural heterogeneity hinders adjustments to database includes information on almost shocks through internal migration. Ethnic 7,000 languages, including their location. heterogeneity is often associated with civil The heterogeneity of language groups is conflict and with high costs for economic very high in Africa and generally increases growth. with proximity to the Equator (see map 3.4 Empirical evidence for the impact of cul- and figure 3.6). Although empirical cross- tural diversity is mixed (see also box 3.4). country studies suggest that linguistic frac- Ethnic fragmentation is negatively associ- tionalization hurts economic performance, ated with the quality of government and a regional trading language has tradition- with economic growth.33 The relationship ally helped overcome the divisions: Hindi between ethnic heterogeneity and conflict and Urdu in a large part of South Asia, Map 3.4 Language diversity is very high in Africa Figure 3.6 Globally, language diversity is highest near the equator Latitude 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 ­5 ­10 ­15 ­20 ­25 ­30 ­35 ­40 ­45 ­50 ­55 ­60 ­65 ­70 ­75 ­80 ­85 ­90 0 50 100 150 200 250 Source: World Language Mapping System, Ethnologue 2004. Languages per 1 million km2 of land area Source: World Language Mapping System, Ethnologue 2004. Division 105 Indonesian and Filipino in Southeast Asia, Arabic and Persian in the Middle East, Swa- BOX 3.4 Artificial states? hili in Eastern Africa, and Hausa in West- ern Africa. English, French, and Spanish Gathered in Berlin in 1884­85, the nial origin or location in Africa. Arti - have done the same, but in many countries colonial powers determined Africa's cial borders are not associated with a higher probability of war, re ecting they are used predominantly by an edu- borders with little concern for social or economic divisions. Many borders similar results on ethnic diversity and cated minority. in the Middle East were similarly con ict found by Paul Collier.c drawn at the end of World War I.a So, avoiding economic and political Economic costs of conflict Alesina, Easterly, and Matuszeski problems associated with ethnic diver- and territorial disputes identify "arti cial states" with a sity would require cultural homogene- Impermeable borders tend to reduce eco- measure of how straight a country's ity within countries. In Africa this would nomic growth. But full political unification border is and whether these borders imply a far larger number of countries. Yet the already small size of many Afri- between countries would not necessar- partition ethnic groups into two or ily improve economic performance.35 A more countries.b Northern Africa, can countries is perhaps a more severe Northeast Asia, and South Africa have problem--it prevents countries from full merger of two countries has a positive the most arti cial (straight) borders, reaching sustainable economic scale. country size effect but an overall slightly while South Asia and Western Africa As argued in this Report, the appropri- negative impact on growth due to reduced are the most partitioned. Eastern and ate response to small size and ethnic trade with the rest of the world. Only in Central Africa are among the top four diversity is closer integration and more a few instances would both partners ben- regions in both categories. permeable boundaries. efit from full political and economic inte- Empirical analysis suggests that Source: WDR 2009 team. arti cial borders hurt economic and gration. But integration of neighboring a. MacMillan 2003. social outcomes. But this link is less b. Alesina, Easterly, and Matuszeski 2006. markets without political integration, on signi cant after controlling for colo- c. Collier 2004. average, would increase growth across countries significantly. Borders further reduce economic ben- efits where divisions are aggravated by percentage point. It causes neighbors to conflict within or between countries. Even increase their military spending by 2 per- when conflict does not involve military cent. Other costs include refugee flows action, the cost can be significant. Territo- and disruption of preferred trade routes. rial disputes impose high international eco- The civil war in the Democratic Republic nomic transaction costs because of insecure of Congo closed river access to the sea for property rights and jurisdictional and pol- timber exports from the Central African icy uncertainty. Economic models suggest Republic. that the territorial dispute between Argen- tina and Chile reduced trade between the Economic concentration two countries by $33 billion between 1950 Economic output is spatially concentrated-- and 1995.36 The competing claims between by any measure and across geographic Japan and Russia over the Kurile Islands scales. Looking at grid cells, a quarter of the lowered trade by $535 billion between 1952 world's GDP is produced on just 0.3 percent and 1995. And those between Indonesia of the land area (about the size of Camer- and Malaysia cost $11.5 billion between oon), half on 1.5 percent, and nine-tenths 1980 and 1995. Similar disputes exist over on 16 percent.39 China, Japan, and the maritime boundaries, only about one-third United States produced about half of global of which are settled by treaty.37 GDP in 2006, and the 15 largest economies When disputes turn to military confron- produced about 80 percent. tation, the costs are considerably higher-- Early in the Industrial Revolution, at the not only in loss of life, but also in economic beginning of the nineteenth century, GDP terms. The cost of a "typical" civil war is per capita in today's industrialized coun- about $64 billion, and an average annual tries was about twice that of today's devel- worldwide cost of about $100 billion far oping and emerging countries (see table exceeds global aid flows.38 A civil war in a 3.1). But total GDP in China and India, neighboring country is estimated to reduce which had far larger populations, was more a country's annual growth by about half a than twice that in today's G7 countries. By 106 WORLD DEVELOPMENT REPORT 2009 Table 3.1 The concentration of GDP and population growth shifted between 1820 and 1998 Average annual Avergage annual Share of world GDP GDP growth rate population Excess growth (%) Share of world population (%) (%) growth rate (%) rate (GDP per 1820 1950 1998 1820 1950 1998 1820­1998 capita growth) G7 22.7 50.9 45.5 13.4 18.1 11.6 2.6 0.9 1.7 China and India 49.0 8.7 16.5 56.7 35.9 37.5 1.6 0.7 0.8 Rest of Asia 7.3 6.8 13.0 8.6 15.5 19.8 2.5 1.4 1.1 Latin America 2.0 7.9 8.7 2.0 6.6 8.6 3.0 1.8 1.2 Africa 4.5 3.6 3.1 7.1 9.0 12.9 2.0 1.3 0.7 Eastern Europe and the 8.8 13.0 5.3 8.8 10.6 7.0 1.9 0.8 1.1 former Soviet Union Source: Maddison 2006. Note: The rest of Western Europe, Australia, and New Zealand are not included. Figure 3.7 Concentration increases at the global How did this concentration come about? level, then a leveling off Shares of world GDP at different levels of GDP per The concentration of economic mass in capita, 1820­1998 today's western industrialized countries and Japan has its roots in eighteenth-century % share of global GDP (log scale) economic and technological innovation. Europe'seconomicgrowthacceleratedgreatly 20 Western Western Europe "offshoots" during the Industrial Revolution, with mod- (EU12) (United States; ern manufacturing starting in Great Britain 10 Canada) in the mid-eighteenth century and gradually Northeast Asia 5 spreading across the continent. At the begin- (Japan; Rep. of Korea; Taiwan, China) ning of this process, Western Europe had less than 20 percent of global GDP.41 By the end of 2 the nineteenth century, it had more than 30 percent, three-quarters of it in the four larg- 1 0 5 10 15 20 25 30 est economies--France, Germany, Italy, and GDP per capita (1990 int'l $, thousands) the United Kingdom (see also figure 3.7). This growth occurred against a backdrop Source: Maddison 2006. of frequent conflict between neighboring countries, constant changes of alliances, the middle of the twentieth century, the G7 and mergers and disintegrations of coun- countries accounted for more than half of tries. At the beginning of the nineteenth global output (about 60 percent if the other century, Germany included about 300 indi- western industrial countries are included). vidual states. It had 1,800 customs borders, North America and Japan grew the fast- with Prussia alone having 67 local tariff est at 3.5 and 2.8 percent a year between zones.42 Only in the 1870s did Germany 1820 and 1998.40 The four largest Euro- fully integrate domestically. Even with a pean economies grew at an annual average patchwork of economic regions in Europe, of about 2 percent, not very different from trade flows had always been large, thanks to growth rates in Africa, Eastern Europe, and local or regional agreements. These expand- the smaller Asian developing countries. But ing trade links inspired the work of David while GDP growth exceeded population Ricardo, who in 1817 famously described growth by 1.7 points in the G7, it did so by the exchange of textiles and port wine only 0.8 points in China and India and by between Great Britain and Portugal in his 0.7 points in Africa. Over the 180 years to theory of comparative advantage. Ricardo's the end of the twentieth century, these dif- work motivated further trade liberalization ferent growth rates moved the concentra- by governments, most of all Britain's. tion of economic production more toward Formal economic integration did not the northern industrialized countries. begin until the middle of the twentieth Division 107 century. Motivated by political as much as Japan started to industrialize fairly late. economic objectives, six European coun- In 1820 its GDP per capita was half that in tries, accounting for about a quarter of North America and Western Europe, a ratio world GDP, joined in a treaty liberalizing that did not change until the twentieth cen- trade in coal and steel. Annual GDP growth tury. GDP growth between 1820 and 1870 accelerated in subsequent years to around was 0.4 percent a year. Industrialization 4.5 percent, up from only around 1 percent began to accelerate after the Meiji Restora- in the 35 years after World War I. Although tion in the 1860s. The fastest growth rates the relative shares of European countries in were in the second half of the twentieth cen- world GDP dropped somewhat, the com- tury. Between 1950 and 1973, as the coun- bined EU economy maintains a share of 25 try opened to the world economy, Japan's percent, largely through enlargement to its economy grew at a rate of almost 9 percent current 27 member countries. a year. By the late 1980s, its GDP per capita Europe's economic progress was exported was higher than Western Europe's. to English-speaking "offshoots" in Australia, New Zealand, and North America. Between How did the rest of the world do? 1820 and the late-twentieth century, their The share of the largest industrial economies economies grew by about 3.6 percent, almost in world GDP has fallen slightly, from 51 per- twice the population growth of 1.9 percent, cent in 1950 to 46 percent in 1998.43 Among driven by massive migration mostly from emerging economies, Eastern Europe and Europe and Asia. Their share of global GDP Russia reduced their share from almost 5 increased from 2 percent to 25 percent during percent to 2.4 percent in the late 1980s and that time, the lion's share by the United States early 1990s. The smaller shares of industrial (22 percent). Cultural proximity and close countries and Eastern Europe are largely due trade ties meant that innovations crossed the to increases in Asia (see figure 3.8). South- Atlantic quickly in both directions. east Asia and the Pacific doubled its share Figure 3.8 Only Asia's share in world GDP has risen noticeably since 1980 Shares of world GDP of developing and emerging economies, 2000 constant dollars East Asia & Pacific Europe & Central Asia Latin America & Caribbean % of world GDP % of world GDP % of world GDP Northern Asia Central Asia, Caucasus & Turkey Central America & Caribbean 6 Southeast Asia 6 Eastern Europe & Russia 6 South America 5 & Pacific 5 5 4 4 4 3 3 3 2 2 2 1 1 1 0 0 0 1960 1970 1980 1990 2000 1960 1970 1980 1990 2000 1960 1970 1980 1990 2000 Year Year Year Middle East & North Africa South Asia Sub-Saharan Africa % of world GDP % of world GDP % of world GDP 6 6 6 Northeast Africa South Asia Eastern Africa 5 5 5 Western Asia Central Africa 4 4 4 Southern Africa Western Africa 3 3 3 2 2 2 1 1 1 0 0 0 1960 1970 1980 1990 2000 1960 1970 1980 1990 2000 1960 1970 1980 1990 2000 Year Year Year Sources: World Bank 2007j; Maddison 2006. 108 WORLD DEVELOPMENT REPORT 2009 to about 1.8 percent, and South Asia's share (see box 3.5). Trade decreases with distance of global GDP rose from 1.4 to 2.4 percent. and increases with GDP, so any country will The largest increase has occurred in North- trade more with nearby countries and with east Asia since the mid-1980s, essentially in countries that have a larger GDP. Despite China, where the share of global GDP rose reductions in transport and communication from less than 1 percent to about 5.5 percent. costs, the trade-reducing impact of distance Shares in the remaining World Development increased until about a half century ago, Report 2009 regions remained essentially remaining "puzzlingly" high since then (see, unchanged despite considerably higher pop- for example, for Brazil in figure 3.9).45 ulation growth.44 This empirical evidence may be at odds with the rapidly increasing long-distance Why does this matter? The importance trade between, say, China and the United of market access States or between Japan and Europe. But The distribution of economic production this increase in trade may not be so much globally matters greatly for the development due to trade cost reductions. It is largely prospects of countries because of the interac- driven by the other factor in the grav- tion of density and distance at a global scale. ity trade relationship: economic output.46 This is demonstrated by the close empiri- China's GDP has increased, providing the cal relationship between trade as a driver economic mass to export goods to inter- of growth and two variables that define the national markets and to import consumer well-known gravity model of trade: (1) the goods, capital equipment, and intermediate distance between trading partners, and (2) inputs. Increasing trade, in a self-reinforc- their economic size as measured by GDP ing process, generates scale economies in BOX 3.5 Market access and per capita incomes Quantifying market access (sometimes the returns to market potential are increas- and distance from markets. For any given called "market potential") is not just of ing--the same amount of market poten- level, the size of the economy determines theoretical interest. Empirical studies have tial buys more per capita income--at least how well a country can take advantage of shown that market and supplier access for some countries. market access. Rich countries like Australia have a signi cant impact on growth and There continues to be a large variance of and New Zealand can compensate for a income. For instance, halving a country's GDP per capita at any given market poten- remote location by o ering a fairly large distance from its trading partners is associ- tial. Haiti's market potential is higher than market and supply capacity. ated with a 25 percent increase in per capita New Zealand's. Its proximity to the United income--more than the combined e ect of States raises its market potential, re ecting a. Redding and Venables 2004. a coastal location and open trade policies.a the interaction between economic size b. See Mayer 2008. Trade bene ts a country by raising factor incomes (wages) through expenditures by Market potential for countries has become more unequal trading partners for goods produced in that 1970 2003 country. The level of expenditures is in large GDP per capita relative to U.S. GDP per capita GDP per capita relative to U.S. GDP per capita part determined by the size of the trading partner's economy (density) and by physical 1.00 1.00 market access, largely determined by prox- imity to trading partners (distance) and the e ect of borders (division).b 0.10 0.10 Between 1970 and 2003, the distribution of per capita income spread out, re ecting greater global inequality among coun- tries--the poorest countries now have 0.01 0.01 smaller incomes relative to the United States (see the gures at the right). The dis- tribution also moves to the right, implying 0.01 0.1 1 10 100 0.01 0.1 1 10 100 that market potential is increasing almost Market potential relative to Market potential relative to everywhere as a result of global GDP U.S. market potential U.S. market potential growth. And its slope is getting steeper, so Source: Mayer 2008 for this Report. Division 109 Figure 3.9 The effect of distance between Brazil and its trading partners has remained considerable 1980 2005 Trade as a share of partner's GDP (%) Trade as a share of partner's GDP (%) 10 10 1.0 1.0 0.1 0.1 2.5 5 10 2.5 5 10 Distance (km, thousands) Distance (km, thousands) Source: IMF 2007. the trade infrastructure and services, such of economic output. As these distributions as efficient ports and frequent container change, so too do the prospects of national shipping links (see chapter 6). Larger econ- economies. These, in turn, influence devel- omies and richer countries can thus over- opment outcomes at the regional and coun- come the friction of long trade distances try levels, reflected in levels and changes in with higher economic density. income, health, and human capital. This human capital, most often considered an input contributing to human development, Divergence, then convergence is also a development outcome that raises the The changing geographic distribution of quality of life for individuals. world economic output reflects the concen- Three broad trends: tration of economic mass initially in West- ern Europe and later in North America. · A general increase in income and basic More recently, some deconcentration has living standards globally, but with some occurred as first Japan and then other econ- big exceptions. omies in the East Asia region have grown. · Considerable divergence of incomes China and India are reclaiming their posi- between the richest and the poorest tion among the countries and regions with countries, but some global convergence the highest shares of global GDP. Country in health and education. access to input and output markets influence · Some convergence within the faster the geographic distribution of absolute levels growing regions. Table 3.2 GDP per capita increased tenfold, 1500­1998 1990 international dollars 1500 1820 1870 1913 1950 1973 1998 1998:1500 Western Europe 774 1,232 1,974 3,473 4,594 11,534 17,921 23.2 Western offshoots 400 1,201 2,431 5,257 9,288 16,172 26,146 65.4 Japan 500 669 737 1,387 1,926 11,439 20,413 40.8 Asia (excluding Japan) 572 575 543 640 635 1,231 2,936 5.1 Latin America 416 665 698 1,511 2,554 4,531 5,795 13.9 Eastern Europe and the former Soviet Union 483 667 917 1,501 2,601 5,729 4,354 9.0 Africa 400 418 444 585 852 1,365 1,368 3.4 World 565 667 867 1,510 2,114 4,104 5,709 10.1 Interregional spreads 2:1 3:1 5:1 9:1 15:1 13:1 19:1 Source: Maddison 2006. 110 WORLD DEVELOPMENT REPORT 2009 General improvements 26.5 years in 1820 to 32.8 years in 1910 to Today's generation, by almost any global about 68 years in 2005.47 In the last 35 years summary measure of income and welfare, alone, average global life expectancy grew is better off than any previous generation by about 10 years. And a much larger share in human history. GDP per capita in 1990 of the world's population now has access to international dollars increased tenfold from basic education. In 1870 the mean years of $565 to $5,700 over the last 500 years, while schooling was 1.1 years, and the adult lit- population grew from 400 million to more eracy rate 25.5 percent.48 By 1929, schooling than 6 billion (table 3.2). Since 1820 output had increased to 2.5 years, and by 2000, to growth has been about 2.2 percent a year, 6.7 years, and literacy to 43.8 percent and bringing with it a considerable rise in living then to 78.3 percent (see figure 3.10). standards. Life expectancy at birth rose from Considerable income divergence between the richest and poorest countries, but Figure 3.10 Education outcomes have improved improvements in health and education Global average, 1870­2000 Over the past 500 years, per capita output Years of schooling Literacy rate (%) increased 40-fold in Japan and 65-fold in 8 90 Australia, Canada, New Zealand, and the 7 80 United States (see table 3.2).49 In Africa 70 6 it increased only threefold, and in Asia 60 5 Literacy rate (not including Japan), fivefold. Spreads 50 between the poorest and the richest regions 4 40 increased from a factor of 2 in 1500 and 5 in 3 Years of schooling 30 1870 to almost 20 by the end of the twenti- 2 20 eth century. During the past two centuries, 1 10 the Gini coefficient of inequality increased by 30 percent. Per capita income inequality 0 0 1870 1890 1910 1929 1950 1960 1970 1980 1990 2000 among world citizens increased by 60 per- Year cent, as measured by the Theil index, largely Source: Morrisson and Murtin 2005. because of income divergence between Figure 3.11 East and South Asia have been the only regions catching up countries rather than within countries.50 Average annual growth rate of GDP per capita, 1960­2006 The main story is one of an enormous increase in per capita incomes in Europe Northeast Asia and its offshoots. More recently this has Other high-income countries happened in East Asia, with Japan, whose Southeast Asia & Pacific GDP per capita has increased tenfold since South Asia 1950, and was followed by the Republic of Korea; Taiwan, China; China; and countries OECD countries in South Asia. GDP per capita in China, Northern Africa though still low in absolute terms, grew at Central Asia, Caucasus & Turkey 8.4 percent a year between 1990 and 2005. At Central America & Caribbean the low end of the income distribution, total Eastern Europe & Russian Federation GDP in the Central Africa region increased Western Asia threefold between 1960 and 2006, compared with Northeast Asia's 30-fold increase (see South America figure 3.11). With population growth out- Southern Africa pacing economic growth, per capita incomes Eastern Africa in Central Africa fell by 8 percent in constant Western Africa prices. Incomes in the poorest countries in Central Africa the world--mostly landlocked and many in ­1 0 1 2 3 4 5 6 Africa, home to the "bottom billion" of the Percent world's population--declined by 5 percent Source: World Bank 2007j. during the 1990s.51 Division 111 Between 1960 and the late 1980s, almost Figure 3.12 Life expectancy decreased significantly in many African countries every country in the world showed contin- Countries with largest increase/decrease in life expectancy, 1970­2005 ual increases in life expectancy at birth.52 In Belarus South Asia it increased from 42 years to 60, Zimbabwe and in Northern Africa from 47 years to 65. Botswana The exception was in Sub-Saharan Africa. South Africa Until the late 1980s, life expectancy increased Namibia slowly in Western, Central, and Eastern Kenya Africa and slightly faster in Southern Africa, Saudi Arabia where it rose from 46 years to about 60. Since Libya then, however, the HIV/AIDS epidemic has Egypt, Arab Rep. of Vietnam caused a large increase in mortality, bringing Oman life expectancy in Southern Africa below its Zambia level in 1960. In Central and Eastern Africa, Lesotho life expectancy is down less dramatically, Indonesia and Western Africa contained the epidemic Swaziland and saw only a slight decline in the rate of Bangladesh improvement. Nine of the 10 countries Nepal showing the worst trends are in Sub-Saharan Central African Republic Africa, and most of these are in Southern or Yemen, Republic of Southeastern Africa (see figure 3.12). Gambia, The Similar to life expectancy, global inequal- 40 50 60 70 ity in access to education fell sharply from Life expectancy (years) a Gini coefficient for years of schooling of Source: World Bank 2007j. 0.79 in 1870 to 0.39 in 2000.53 The high Gini coefficient in the nineteenth century was considerably after 1930, when primary educa- largely due to near-universal primary edu- tion was expanded in many developing coun- cation in Western Europe and its offshoots. tries.54 Between 1960 and 2000, the years of Other world regions started expanding edu- schooling among the working-age population cation much later, and inequality dropped increased across all world regions and income Figure 3.13 Education has become more equal since the 1980s Years of schooling for 15­46-year-olds (population-weighted averages) 14 All countries High-income 12 countries Middle- and lower- income countries 10 Middle East & North Africa Sub-Saharan 8 Africa Latin America & Caribbean 6 East Asia & Pacific South Asia 4 Europe & Central Asia 2 0 1960 1970 1980 1990 2000 2010 Year Source: Cohen and Soto 2007. 112 WORLD DEVELOPMENT REPORT 2009 groups (see figure 3.13).55 The ratio of highest economies should converge over time. Will to lowest population-weighted average educa- poor countries eventually catch up with the tion dropped from 9.7 years to 3.1.56 These rich? The question received considerable improvements have been fairly uniform attention among growth economists in the across regions, so the difference between the late 1980s and 1990s.57 They produced tools highestandlowestregionhasremainedessen- and techniques to analyze convergence, tially constant. Because poorer countries start relating growth to initial income, with the from a far lower level, however, their percent- expectation that lower initial status is asso- age improvements are much higher, suggest- ciated with higher growth rates. But there ing eventual convergence. has been little, if any, convergence between countries globally over the past five decades Some income convergence within (see figure 3.14). There is even some indica- faster-growing regions tion of divergence, though the trend is weak. Neighboring countries can provide mutually Within world regions, the evidence is much beneficial economic linkages, spillovers, and more differentiated. complementarities that allow whole groups Regionalintegrationandtemporaldynam- of countries to increase their incomes. If this ics make the study of convergence important. increases growth rates in poorer countries, First, economic fortunes are shaped by what neighboringcountriesdo,andsuccessfuleco- Figure 3.14 Slight global divergence in per capita nomic integration--overcoming divisions-- incomes, 1950­2006 can pull weaker countries toward incomes Countries with populations greater than 1 million that they cannot achieve in isolation. Higher Average annual growth rate of GDP per capita (%) convergence would be expected in regions 6 that have integrated. Second, in fast-growing 5 regions, there initially is divergence as the 4 leading regional economies pull away, but later there is convergence as poor countries 3 benefit from growth spillovers and begin to 2 catch up over time. 1 In East Asia, the fastest-growing world 0 region in recent years, convergence fol- ­1 lowed initial divergence. From 1950 to 1970, incomes diverged sharply as first Japan; and ­2 later Hong Kong, China; and then Singapore ­3 100 1,000 10,000 grew at very high rates (see figures 3.15 and GDP per capita, initial (constant 2000 US$) 3.16a). In the 1970s other countries joined Source: World Bank 2007j, Maddison 2006. the fast-growth club, notably the Republic of Figure 3.15 Divergence, then convergence in East Asia, 1950­2006 Countries with populations greater than 1 million, coefficient of variation and GDP per capita growth Coefficient of variation of GDP per capita GDP per capita (constant 2000 US$, thousands) 2.0 45 Japan 1.9 40 Hong Kong, China Singapore 35 1.8 Taiwan, China 30 Rep. of Korea 1.7 25 Malaysia 1.6 Thailand 20 China 1.5 15 Philippines Indonesia 1.4 10 Papua New Guinea 1.3 5 Vietnam 1.2 Mongolia 0 Lao PDR 1950 1960 1970 1980 1990 2000 2010 1950 1958 1966 1974 1982 1990 1998 2006 Cambodia Year Year Source: World Bank 2007j, Maddison 2006. Division 113 Figure 3.16 The East Asian growth experience had levels last seen in 1960. This convergence has two distinct phases much to do with market policies in China Countries with populations greater than 1 million, in 1950­70 versus 1976­92 and Vietnam as well as with a special blend of regional economic integration against a a. 1950­70 backdrop of globalization. Average annual growth rate of GDP per capita (%) There are few signs of convergence where 9 Japan growth has been sluggish and regional inte- 8 gration limited, as in Western Asia and East- 7 ern Europe (see figure 3.17). Western Asia 6 Taiwan, China includes resource-rich countries, with low 5 Korea, Rep. of Hong Kong, China and high populations, as well as resource- 4 Thailand Mongolia Papua New Guinea Singapore poor countries, such as Jordan. Low levels 3 China Indonesia Philippines of intraregional trade indicate low levels of 2 Cambodia Malaysia integration. Eastern Europe shows low varia- 1 Lao PDR Vietnam tion in per capita income until about 1990.58 0 100 1,000 After the disintegration of the Soviet Union GDP per capita, initial (constant 2000 US$) and the fall of the Berlin Wall, per capita b. 1976­92 incomes dropped drastically in some coun- Average annual growth rate of GDP per capita (%) tries and moderately in others. This diver- 8 China gence was reinforced as the western-most 7 Taiwan, China Hong Kong, countries reoriented their economic linkages Korea, Rep. of 6 Thailand China toward Western Europe, eventually joining 5 Indonesia Singapore the EU. Belarus and initially Ukraine, by 4 Malaysia contrast, maintained close links to the Rus- Cambodia Japan 3 sian Federation, which only recently began 2 Vietnam benefiting from natural resource­driven Lao PDR 1 Mongolia economic growth. Papua New Guinea 0 Philippines The southernmost economies in the ­1 Latin America and Caribbean region expe- 100 1,000 10,000 GDP per capita, initial (constant 2000 US$) rienced relatively low growth and limited convergence (see box 3.6). At the northern c. 1976­92 end of the region, in 1994, Mexico entered Average annual growth rate of GDP per capita (%) the first major regional free trade pact that 8 China includes both industrial and developing 7 Taiwan, China Hong Kong, Korea, Rep. of countries. The North American Free Trade 6 Thailand China Agreement (NAFTA) eliminated tariffs on 5 Indonesia Singapore most products traded between the United 4 Malaysia Cambodia Japan States, Canada, and Mexico. The evidence 3 since then illustrates three points about for- 2 Vietnam Lao PDR mal regional integration processes:59 1 Mongolia Papua New Guinea 0 Philippines · Formal integration followed many years ­1 of preparation, gradual informal inte- 100 1,000 10,000 gration, and domestic policy changes. GDP per capita, initial (constant 2000 US$) Mexico unilaterally reduced trade barri- Source: World Bank 2007j; Maddison 2006. ers and implemented regulatory changes Korea and Taiwan, China. Between 1976 and long before the agreement took effect. 1992, what looked like moderate divergence · The agreement led to large increases in (see figure 3.16b) actually represented two trade and foreign direct investment (FDI) groups of countries on separate but closely flows. Economic analysis suggests that linked convergence paths (see figure 3.16c). without NAFTA, Mexico's global exports Overall, this led to a strong regional conver- would have been about 50 percent lower gence as the variation among country GDPs and its FDI 40 percent lower. This likely per capita--while still large--dropped to contributed to significant poverty reduc- 114 WORLD DEVELOPMENT REPORT 2009 Figure 3.17 Western Asia and Eastern Europe have had little integration--and little convergence Western Asia Western Asia Average annual growth rate of GDP per capita (%), 1950­2006 Coefficient of variation 6 1.15 5 Oman 1.10 4 West Bank 3 & Gaza Saudi Arabia Israel Iran, Islamic Rep. of 1.05 Bahrain 2 Syrian Jordan Yemen, 1 Arab Rep. 1.00 Republic of 0 Lebanon 0.95 Djibouti ­1 ­2 0.90 100 1,000 10,000 1950 1960 1970 1980 1990 2000 2010 GDP per capita, initial (constant 2000 US$) Year Eastern Europe Eastern Europe Average annual growth rate of GDP per capita (%), 1950­2006 Coefficient of variation 4.5 0.65 Bosnia & Herzegovina 4.0 3.5 Hungary Latvia 0.63 Estonia 3.0 Bulgaria Albania Poland 2.5 Slovak Rep. Czech Rep. Serbia & Montenegro Romania 0.61 2.0 Belarus Lithuania Croatia 1.5 Macedonia FYR Russian Federation 0.59 1.0 Ukraine Moldova 0.5 0 0.57 100 1,000 10,000 1950 1960 1970 1980 1990 2000 2010 GDP per capita, initial (constant 2000 US$) Year Source: World Bank 2007j; Maddison 2006. Figure 3.18 Mexico and other LAC countries have not been catching up with the United States tion and income growth. GDP per capita GDP per capita in the largest LAC economies relative to U.S. levels in 2002 may have been as much as 4 per- Ratio of country GDP per capita to U.S. GDP per capita cent lower without NAFTA. 0.45 · Despite these positive impacts on the 0.40 Mexican economy, the agreement has not produced rapid convergence in incomes 0.35 (see figure 3.18). Mexico has avoided 0.30 major economic crises, suggesting greater Venezuela, R.B. de stability that can have significant welfare 0.25 Argentina effects.60 But its performance relative to Mexico 0.20 the U.S. economy has not differed much from that of several other Latin Ameri- 0.15 Chile can economies. Costa Rica 0.10 Brazil The large differences in economic output Colombia 0.05 will likely remain significant for some time. In fact, steady-state convergence estimates 0.00 suggest that Mexican incomes will reach 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Year only about half of U.S. incomes. Among the main reasons are significant differences Source: World Bank 2007j; Maddison 2006. Note: LAC = Latin America and the Caribbean. in the quality of domestic institutions, in the innovation dynamics of firms, and in the skills of the labor force. These will all Division 115 BOX 3.6 Neighborhoods matter: Southern Cone versus Southern Europe Half a century ago the countries in the four countries' GDP per capita grew by an Europe at around 1 percent a year than in southern cone of South America-- average 1.7 percent a year. South America at 0.3 percent. Italy, Por- Argentina, Brazil, Chile, and Uruguay-- Economic dynamics in Southern tugal, and Spain bene ted from regional had per capita incomes similar to or Europe unfolded di erently. Italy was one growth spillovers, proximity to large mar- higher than the three Southern European of the founding members of the Euro- kets, and cohesion policies within a single countries with which they had strong cul- pean Community, and Portugal and Spain integrated Western European market. In tural bonds--Italy, Portugal, and Spain. joined in 1986 after emerging from a long the Southern Cone, regional integration The two groups have since followed dif- period under authoritarian regimes. From was slow, and integration with wealthy ferent growth trajectories. For most of lower levels, they grew at more than 3 markets in the Western Hemisphere was this period, the Southern Cone countries, percent a year, far outpacing Latin Amer- neglected for long periods. except Chile, followed similar protection- ica. While incomes converged in both Source: WDR 2009 team. ist policies. Between 1950 and 2006 the regions, they did so faster in Western a. Lucas Jr. 2007; The economic fortunes of Latin America and "Latin Europe" have diverged Average annual growth rate of GDP per capita (%), 1950­2006 GDP per capita (constant 2000 US$) 3.5 25,000 Portugal Spain 3.0 Italy 20,000 Italy 2.5 Chile Spain Brazil 15,000 2.0 Portugal 10,000 Argentina 1.5 Uruguay Argentina Chile 5,000 1.0 Uruguay Brazil 0.5 0 1,000 10,000 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 GDP per capita, initial (constant 2000 US$) Year Source: World Bank 2007j; Maddison 2006. Convergence in South America has been moderate; in Europe strong Average annual growth rate of GDP per capita (%), 1950­2006 Average annual growth rate of GDP per capita (%), 1950­2006 2.5 4.0 Brazil Chile Ireland Greece 2.0 Colombia 3.5 Spain Portugal Austria Ecuador Suriname Germany 1.5 3.0 Italy Norway Finland Peru Netherlands Guyana France 1.0 Paraguay Uruguay 2.5 Sweden Argentina Slovenia Belgium United Kingdom 0.5 Venezuela, R.B. de 2.0 Denmark Switzerland 0 1.5 1,000 1,000 10,000 GDP per capita, initial (constant 2000 US$) GDP per capita, initial (constant 2000 US$) Source: World Bank 2007j; Maddison 2006. benefit from closer integration with Mex- new countries or regions only occasionally ico's northern neighbors, but the process breaking into the ranks of the rich. First, will take considerable time. physical geography has helped some coun- tries become rich initially but continues Geography, globalization, to hold back others. Second, the forces of and development economic geography--starting from an Four main aspects explain the persis- initial advantage, such as technical inno- tent regional concentration of economic vation during the Industrial Revolution-- wealth over the past few centuries, with facilitated agglomeration economies and 116 WORLD DEVELOPMENT REPORT 2009 reinforced the concentration of economic differences and some of the variation in activity. Third, regional spillovers increased economic outcomes. But most of these economic activity in other countries within constraints can be overcome with enough a region, further increasing the scale and resources. They are thus a proximate rather scope of economic production. Fourth, than an ultimate cause of underdevelop- entirely new regions of economic concen- ment. High levels of malaria, for instance, tration emerged--as a response to conges- may be as much a symptom of persistent tion and a shift in established regions from poverty as a cause (see box 3.7). They are manufacturing to services, "freeing up" a grave concern for development interven- manufacturing opportunities elsewhere. tions but insufficient to explain global What does this imply for the prospects in patterns of economic wealth or to predict today's lagging world regions? future growth potential by themselves. Second-nature geography. An alterna- How much does geography matter tive but complementary explanation for today? global development patterns shows how First-nature geography. Physical endow- small initial differences between countries ments influence the development prospects and regions (for instance, natural endow- of countries. For instance, agricultural ments) can, over time, generate large dis- intensification in areas of good agroecolog- parities. A central question in economic ical endowments generates surpluses that development is how much growth is due can be shifted to more productive uses. But to differences in human and physical these assets are not distributed uniformly. capital accumulation, and how much to As Landes (1998) puts it: "Nature like life the efficiency of using these factors.63 Evi- is unfair, unequal in its favors." Research- dence from a growing number of studies ers have found a strong correlation confirms that levels of capital accumula- between economic output and geographic tion alone are insufficient to explain cross- characteristics. A simple regression of out- country differences in growth and income. put density (GDP per square kilometer) Instead, total factor productivity (TFP)-- on geographic variables--mean annual how efficiently factors of production are temperature, mean annual precipitation, combined--tends to better explain dif- mean elevation, terrain "roughness," soil ferences in growth and income between categories, and distance from coastline-- countries.64 captures 91 percent of the variability in TFP is, however, a vague concept that the density of economic production.61 A subsumes several aspects of economic pro- similar analysis explains 20 percent of the duction. Most generally, it relates to better difference in per capita output between technology for combining inputs to gener- tropical Africa and industrial regions, and ate products or services. This leads to cost 12 percent of the difference between tropi- reductions and thus increased competitive- cal Africa and other tropical regions. Cli- ness. Complementarities, spillovers, and mate also interacts with other factors, such economies of scale also explain differences as disease. Vector-borne diseases strike in TFP. Geographically, these externalities disproportionately in tropical countries, imply benefits for producers to locate close reducing productivity. Malaria is esti- to each other. Combined with scale econo- mated to cause approximately 1 million mies that favor larger production units, deaths and more than 200 million clinical the concentration of economic activities events among Africans each year.62 Other increases across geographic scales. Euro- purely geographic factors--such as being pean economic growth during the modern landlocked, which shaves half a percentage era was initiated by the industrial revolu- point off annual GDP growth, or a remote tion, which generated major technological location--were discussed earlier. advances. Improved technology and popu- Does this mean that geography dic- lation growth reinforced scale economies tates the destiny of countries? No. Physi- leading to concentrated centers of industri- cal geography helps explain initial growth alization. These centers attracted workers Division 117 BOX 3.7 The influence of first-nature geography: is it possible to eradicate malaria? The species of Plasmodia that cause cate malaria? The question has never been ter of epidemiological feasibility. Political human malaria most likely reached their satisfactorily answered at the global scale.d instability and geographic accessibility maximum global extent in 1900. Since But it is possible to start addressing are obvious examples, but these are oper- that time the a ected area has been pro- the problem. In the map below, risk is ational and not technical obstacles. gressively reduced by a regionally variable classi ed as stable if more than 0.1 case is What can be achieved with the 1.37 mixture of improving human conditions recorded per 1,000 population each year, billion people su ering stable risk? Ini- and deliberate control. The map below unstable if below this gure, and zero if tial evidence suggests that a substantial shows the di erence between the widest no cases have been recorded within the fraction of those a ected will be living in hypothesized extent of the distribution three most recent years of records. When areas of very low prevalence.g A detailed of all types of human malaria around overlaid on a population map for 2007,e investigation with mathematical models 1900a and the contemporary limits of Plas- 2.37 billion people were found to live in could estimate the impact from the exist- modium falciparum,b the most clinically areas with any risk of P. falciparum trans- ing toolkit of interventions. When this esti- severe and epidemiologically important mission. Globally, almost 1 billion people mate combined with a detailed analysis form of human malaria, in 2007. The for- lived under unstable, or extremely low, of the data on the e ciency of historical merly malarious areas are concentrated in malaria risk. Conditions of low risk are interventions, considerable insight could the temperature latitude extremes of the typical in the Americas and in South and follow. These approaches will help deter- parasite's ancestral distribution, in both East Asia but are also common in Africa. mine whether malaria is eradicable and, if the Northern and Southern Hemispheres. For 1 billion people at risk of unstable so, under what time frame and with what Researchers have documented the malaria transmission, malaria elimination resources. strong inverse correlation between the is epidemiologically feasible. Epidemio- Contributed by Simon Hay, David L. Smith, economic prosperity of nations and their logical feasibility was determined by and Robert W. Snow. contemporary malaria burden.c Richer reference to historical experience during a. Hay and others 2004; Lysenko and countries have less malaria, poorer coun- the global malaria eradication program Semashko 1968. tries more. This work also documents the and by inferring, through modeling, that b. Guerra and others 2008. many mechanisms, from individual to transmission could be interrupted by tak- c. Sachs and Malaney 2002. d. Roberts and Enserink 2007. macroeconomic, for malaria to contrib- ing insecticide-treated bednets to scale.f e. Balk, Deichmannand others 2006. ute to poverty. What if the constraint of There are many reasons in many regions f. Hay, Smith, and Snow, forthcoming. malaria were lifted? Is it possible to eradi- why elimination may not be a simple mat- g. Guerra 2008. Currently prosperous parts of the world were formerly malarious Stable Unstable Formerly malarious Never malarious Source: Malaria Atlas Project (MAP), Kenyan Medical Research Institute, and University of Oxford. 118 WORLD DEVELOPMENT REPORT 2009 and new firms, instigating a virtuous, self- ago, Japan would have seemed an unlikely reinforcing process that led to even greater source of inexpensive electronics and con- concentration. sumer goods for the U.S. market given the Development is contagious, tending to distance between the two countries. But spread across regions. Although growth the emergence of containerized shipping centers may start within specific areas in a allowed Japanese producers to be competi- country--the industrial belt in the north- tive in North American markets and later west of England or the mill towns in New in the European markets.67 The Republic England--dynamic centers tend to spread of Korea and Taiwan, China, followed in out. At the international level, growth Japan's footsteps. Manufacturing invest- spreads to neighboring states, giving rise to ments spread from there to South Asia, par- regional growth centers. With enough open- ticularly Malaysia and Thailand, and then, ness and interaction between countries, the after economic liberalization, to China. mechanisms for spreading growth are tech- nological spillovers and increasing special- What do we learn from this? ization, breaking up production processes. Size matters a lot. To generate scale This makes it more likely that some of the economies, a certain population and an eco- demand for intermediate products will be nomic mass need to be in place. In Europe satisfied from neighboring countries. This during the Industrial Revolution, a relatively can greatly expand trade, which produces large and concentrated population provided scale economies and steep increases in eco- both the labor that produced manufac- nomic productivity. The larger labor and tures and the market that consumed them. capital pools and the greater market size North America, when it shifted from natu- that emerge due to gradual improvement of ral resources to industry, had a large popula- transport links can lead to the rapid takeoff tion along its eastern seaboard, which grew of a regional economy.65 quickly with immigration from Europe and New regions of growth and wealth can elsewhere. East Asia has a vast population, emerge. This happens when growth in a core with first Japan and later China serving as regionhasreachedapointatwhichcongestion engines of manufacturing growth in the and rising wages encourage entrepreneurs to region. Each region benefited from a large seek new locations for production in nearby home market, but much of the production regions. This happened in Western Europe, was soon destined for export both within the when firms relocated manufacturing capac- region and to the rest of the world. ity to Central and Eastern European coun- Few countries have lifted their eco- tries, and in North America, when Mexico nomic fortunes based only on exports attractedinvestmentinmanufacturingcapac- of primary commodities. Botswana, a ity for the U.S. and Canadian markets. This sparsely populated country with large min- contagion model of region building would eral wealth and good policies, is one excep- suggest that all economic activity remains tion. Well-managed mineral resources can within an expanding contiguous zone--but help generate capital that can be invested in it does not. other sectors, but few countries have done Under some conditions, economic this successfully. Agriculture--important growth may leap to an entirely new region.66 for subsistence, for rural income genera- The location of this new center of global tion, and for specific regions in a coun- manufacturing depends on many factors, try--cannot by itself lift poor countries including market size, trade and transaction to middle- or high-income status. Rural costs, initial human and physical capital activities are either too small in scale to endowments, and competition from other provide sufficient surplus for export--or, potential growth regions. This leapfrogging in cases in which agricultural production model matches the emergence of East Asia has sufficient scale, it often benefits only as a global hub initially for labor-intensive a few large landowners or agribusinesses. production and later for technologically The verdict on services is still out. But it is more advanced production. Half a century unlikely that poor countries have enough Division 119 skilled white-collar workers to generate broad-based growth spillovers. India has BOX 3.8 Integration takes a long time, and its benefits do a large export-oriented service sector, but not come overnight it employs only about 560,000 of its more than 1 billion inhabitants, most in jobs In Europe, after the di usion of mod- Formal, de jure, integration thus fol- in constant-return customer support and ern industrial technology and the lowed de facto integration, providing back-office tasks.68 expansion of trade links in the early a framework and structure for deep- Manufacturing remains important. nineteenth century, it took more than ening already close relations. This 100 years before formal integration gradual process allowed institutions Each successful world region has, at some processes began in the 1950s. Even to develop and gave labor, nancial, point, made significant and broad-based then, the e orts were limited to agree- and product markets time to prepare gains with basic labor-intensive manufactur- ments on narrowly focused economic for possibly harsh adjustments, par- ing. This process initially led to a diversifica- issues between six countries. Gradually ticularly for recently joining countries tion of production as countries grew richer they expanded into additional areas with much smaller economies. Bul- and consumers demanded more varieties. of cooperation such as customs and garia and Romania, which joined in As economies in these regions expanded, nuclear energy. It took 16 years before 2007, added 8.6 percent to the EU's these agreements were consolidated land area and 6.3 percent to its popu- production and employment in individual in the European Community in 1967. lation but only 1 percent to its GDP.a countries started to specialize in what they Membership expanded slowly, with So the convergence of social and were best at, giving rise to interlinked net- three countries joining each decade economic outcomes across member works of production trading intermediate between 1970 and 2000, and nally countries will also take longer. Assess- goods among countries within the region. the addition of 12 Eastern and Central ing the bene ts from integration This is the point at which China and some European countries by 2007. Just as thus requires a long time horizon, as of the other "second-wave" economies in the initial Coal and Steel Community increased labor mobility, investment formalized long-established economic in private and public capital, and East Asia have arrived. In Europe and other and cultural ties between the member other structural changes accelerate regions that industrialized earlier, the share countries, each subsequent expansion growth in lagging member countries. of manufacturing in the economy has fallen followed a long period of ever-closer quite rapidly, with only highly specialized interaction between members and Source: WDR 2009 team. manufacturing remaining, such as machine accession countries. a. European Union 2007. tools or information technology (IT) equip- ment. In these countries, the service sector, including the research and design of prod- of bilateral agreements among a fairly large ucts that will be manufactured elsewhere, number of countries (see box 3.8). East now accounts for the largest share, by far, of Asia, by contrast, has created tightly linked employment and economic output. entrepreneurial production networks with Openness helps a lot--but it has to be relatively little formal protocol. Initial inte- introduced with care. Each of today's suc- gration in North America was facilitated by cessful regions initially developed its manu- a shared language and cultural background facturing sector behind a fairly substantive between Canada and the United States. The wall of tariffs and other protections. Only as relatively recent addition of Mexico has their economies matured and became more removed some divisions between economies dependent on foreign inputs and markets of greatly different per capita incomes. for their products did they gradually open Openness and integration are most ben- their borders and integrate regionally and eficial for smaller or landlocked countries globally. The rise of interlinked production whose access to world markets depends on networks that cross international borders neighboring countries. Luxembourg's small within each region required more coordi- size does not matter, because it is tightly nation and cooperation among countries, integrated in the European economy and not just for trade in goods and services, but thus operates more like a specialized city in also to settle on common standards and a large country. Switzerland's being land- regulations. locked has not constrained the development The process proceeded somewhat differ- of highly specialized manufacturing and ser- ently in each region, most formally within vice sectors. It can connect to world markets Europe, where the EU's political and eco- by air or through neighboring countries, and nomic integration superseded a patchwork its neighbors are significant destinations for 120 WORLD DEVELOPMENT REPORT 2009 its outputs. Integration has enabled the two overcome their significant external bar- countries to benefit from specialization and riers--the thick borders in the map that scale economies that would otherwise be opened this chapter (see map 3.2). Smaller achievable only in far larger countries. countries do not have this luxury. They To facilitate integration, industrial must learn to manage their borders more regions invested heavily in physical infra- rapidly to achieve economic integration structure that promotes intraregional trade. with their neighbors to attain competitive Initially, sea and river transport was most production scale and to access world mar- important for exporting manufactured kets. Countries and regions that do this products, requiring good coastal and river faster will have an advantage, but it will not ports. More recently, interrelated produc- be easy. By providing a vast unskilled labor tion processes require more timely avail- pool--and relatively little human or physi- ability of intermediate products, which has cal capital--countries like China and India moved a larger proportion of trade to road, can absorb new manufacturing capacity for rail, and air links. a long time. These are precisely the types of activities that might provide a path to middle income for the poorest countries. What's different for today's China also demonstrates the benefits of its developers? economic rise for its neighbors. Almost all Are the conditions today different, or is this East Asian countries have sometimes sig- just a continuing or recurring phase of glo- nificant trade surpluses with China in most balization similar to that of a hundred years manufacturing sectors.71 ago? In fact, goods and factor markets may Second, there has been an unprec- be no more closely linked today than they edented fragmentation of production pro- were a century ago. They may be some- cesses. This includes not only the intrafirm what more integrated for trade, no more division of manufacturing steps across integrated for capital, and less integrated several places, but more important the for labor.69 So how can lagging regions and intraindustry trade of increasingly special- countries join the group of leading world ized components and services, sometimes regions? Do they need to wait their turn, over long distances. Advances in communi- or are there ways for them to break out of a cations technology facilitate these complex geographic determinism? buyer-supplier networks. Although inte- Somecleardifferencesinthecurrentphase grated in global markets, production tends of globalization and economic development to be regionally concentrated. For smaller relate to the dynamics of economic geog- countries, this may be both a threat and raphy and the persisting divisions between an opportunity. The threat is that smaller countries. First, the scale and speed of eco- countries with poor infrastructure and low nomic integration in recent decades have skills will remain outside global trading been unprecedented. The economic liberal- networks. The opportunity is that, while ization in China and India, as well as in Rus- spatial concentration remains beneficial sia and South America, adds huge numbers for production, increasing specialization of unskilled workers to global production allows concentration and scale economies capacity.70 In many ways this is a reemer- within subsectors in which even small play- gence of those regions (Asia accounted for ers can carve out a niche. almost 60 percent of world GDP as recently In 1999 India's then-prime minister, Atal as the early nineteenth century). Behari Vajpayee, remarked on some of the China and India, because of the enor- same issues that have been discussed in this mous size of their home markets, are essen- chapter: "We can change history but not tially world regions of their own. With no geography. We can change our friends but formal internal divisions, they benefit from not our neighbors."72 Is he correct? On one scale economies and provide the incen- level, certainly. Countries cannot just pack tive for investors and trading partners to up and move to a better neighborhood the Division 121 way individuals can. But in an economic Many world regions continue to face and political sense, countries can change the impacts of significant division. But this their neighborhoods. Japan and the United Report shows that countries can improve States overcame deep divisions of history their economic fortunes by changing their and geography to become close neighbors neighborhoods virtually and practically. by developing extensive transport links For this, they must do two things. First, and increasing economic interdependence. they must overcome the limitations and Mexico and Turkey may be changing neigh- barriers of geography by developing close borhoods by reorienting economic ties from trade and transport links with markets and their traditional cultural backyards to more sources of investment in rich and emerging prosperous countries in another part of regions of the world (see chapter 6). And their neighborhood. European integration second, they need to seek strength in num- ended centuries of division and war. Since bers by "thinning" their borders and inte- December 2007, travel from the Portuguese grating their economies with their physical Algarve to Estonia is possible without once neighborhood (see chapter 9). showing identification. Geography in motion Overcoming Division in Western Europe The day will come when you France, you Russia, you Germany, all you nations of the continent, without losing your distinct quali- ties and your glorious individuality, you will merge into a superior unit, and you will constitute European fraternity. --Victor Hugo, from a speech at the 1849 International Peace Congress V ictor Hugo was laughed at when II. Destructive nationalism--and its Organization for European Eco- he said this, as were several of economic dimension, protection- nomic Cooperation (OEEC) in 1948 his predecessors who proposed ism--were indeed partly blamed for to implement the Marshall Plan. Its European integration. It took the catas- the disaster. Economic integration was mandate was to reduce trade barriers, trophe of two world wars to get people thus viewed as the best way to avoid particularly quota restrictions. Europe to take the idea seriously and make another war. That it should come in the early postwar years was a tariff- policy makers ready for radical change. through peaceful means and with and quota-ridden economy. Remov- The scale of devastation and misery is the main objective of maintaining ing trade barriers fostered the rapid the key to understanding the drive for peace was--and remains--a unique growth of trade. Between 1950 and integration: on top of the horrifying endeavor. In this respect, European 1958, manufacturing exports grew by death toll, the war caused enormous integration is a clear success. But it almost 20 percent a year in West Ger- economic damage. The war cost Ger- was not clear in the 1940s and 1950s many, 9.2 percent in Italy, and 3.8 per- many and Italy four or more decades that this vision of "Peace through Inte- cent in France. Additionally, average of growth and put Austrian and French gration" would succeed, particularly annual GDP growth was 7.8 percent in gross domestic products (GDPs) back because it came at the same time as the West Germany, 5 percent in Italy, and to levels of the nineteenth century.1 Cold War's division between the East 4.4 percent in France. Correlation is Overcoming division and its dra- and the West. not causality, and reconstruction was matic consequences was the objective Under American pressure, 13 a strong engine of growth. But the of European leaders after World War European countries created the rapid growth as European trade was Map G2.1 The division in Western Europe has gradually dissipated Stages of economic integration 1952 1990 2007 Source: WDR 2009 team. Geography in Motion 123 Figure G2.1 The stairway to success a custom union remove all tariffs for The institutional index of integration for the European Economic Community Six intra-EEC trade and establish a com- Institutional Index for Integration for EEC6 mon external tariff, but also a unified 100 economic area would promote free Monetary Union (1999) labor mobility, integrated capital mar- 90 kets, free trade in services, and several 80 Common Market (1993) common policies. This degree of eco- 70 nomic integration was not feasible without deep political integration. So, 60 EMS (1979) in retrospect, "using economics as a Customs Union (1968) 50 Trojan horse for political integration worked like a charm."2 As"guardians of 40 the Treaty,"the Court and the European 30 CAP (1962) Commission would control those coun- tries (especially France when de Gaulle 20 returned to power) that came to reject 10 the level of supranationality implied by 0 the Treaty. From 1966 to 1986, however, 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 the deep integration promised by the Year Rome Treaty stalled (see figure G2.1). Source: WDR 2009 team. Europeans began to erect barriers that took the form of technical regulations and standards, fragmenting markets--a liberalized was changing the minds reasons. Belgium, Italy, Luxembourg, classic reaction by lobbying industries of European policy makers. European and the Netherlands joined the project to defend their rents. integration was not just a political in 1951, and these six would become The Single European Act (1986) project--it also made economic sense. the driving force behind European relaunched the process of deepening eco- The European Coal and Steel Com- integration (see map G2.1). The ECSC nomic integration--all the more stun- munity (ECSC) was launched by showed that economic cooperation was ning given the slow disintegration during France and Germany, who invited other more feasible than political or military the 1970s. Emphasizing the mobility nations to place these two sectors under integration. of capital, the Single Act was also partly its supranational authority. The proj- The Treaty of Rome in 1957 created responsible for the birth of the Euro- ect was both political and economic the six nations of the European Eco- pean Monetary Union (EMU). Indeed, because it applied a supranationality nomic Community (EEC). The move the fixed exchange rate of the European onto two sectors that were considered committed the six to unprecedented Monetary System implied, with free strategic for economic and military economic integration. Not only would capital mobility, the loss of monetary sovereignty. This made the EMU more politically palatable for countries com- Figure G2.2 Border effects between the European Union and the United States remain more than twice that within the European Union mitted to fixed exchange rates. Overcoming division means reduc- Ratio of trade within borders to trade across borders ing the impact of borders on trade 80 flows. Has this been so in the European 70 Border EU9 United States Union (EU)? One way to answer the 60 question is to compare the volume of 50 trade within borders with the volume of bilateral trade between countries. The 40 Border United States EU9 ratio of the two is the "border effect." 30 Fontagné, Mayer, and Zignago (2005) 20 Within EU9 do this for the EU-9, the six founders 10 plus Denmark, Ireland, and the United 1980 1985 1990 1995 2000 Kingdom.The border effect for reported Year intra-EU trade fell from around 24 in Source: Fontagné, Mayer, and Zignago 2005. Note: The border effect is the reverse of the volume of trade within natural borders to the volume across borders. the late 1970s to 13 in the late 1990s--a 124 WORLD DEVELOPMENT REPORT 2009 Geography in motion substantial increase in integration (see The European regional integration sovereignty applied for membership. figure G2.2) unmatched in the world. process has spread. As the EU deepened That the EU with its unmatched supra- The border effect between the EU-9 and and enlarged, the cost of discrimina- nationality remains so attractive for the United States, while decreasing fast tory treatment (the natural implication outsiders is evidence of an enduring during the period, remains more than of any regional integration process) for success. twice that within the EU. Borders in the outsiders increased, creating a "domino EU have become thinner, but they have dynamic of regionalism."3 Even Euro- not disappeared. pean countries that most valued their Contributed by Philippe Martin. Part Two shaping economic geography In the past generation, there has been a slow revolution in economic thought, brought about by the recognition of imperfectly competitive markets, due mainly to increasing returns to scale, spillovers, and circular causation. A new way of thinking has transformed the classical analysis of industrial organization, economic growth, and international trade, and has delivered what were at rst controversial, but now widely accepted, implications for the progress of developing countries. Part two of the Report illustrates the interplay between scale economies, factor mobility, and transport costs to explain the formidable forces that shape the spatial transformation described in part one. Chapters 4, 5, and 6 are the stops in a tour of the"engine room,"each spotlighting a di erent facet of the interactions among agglomeration, migration, and specialization. CHAPTER 4 Scale Economies and Agglomeration T he most celebrated example in eco- one such occupation, fruitfully carried out nomics is perhaps the simplest. in villages. But such trades as manufactur- On the first page of The Wealth of ing and commerce can be carried out only Nations, published in 1776, Adam Smith in bigger settlements, because they require wrote of the benefits of dividing labor to access to both workers and customers. make pins. A single unskilled worker with- Caveats notwithstanding, the benefits of out the benefit of machines might make producing large quantities in a single plant fewer than 20 pins in a day. But in a pin or place have increased as transport costs factory that Smith visited, 10 workers, who have fallen in the two centuries since Smith divided among themselves the 18 operations visited the pin factory. Those who doubt the involved in making a pin, were produc- awesome potential of scale economies and ing 48,000 pins a day. Rather than strug- how access to world markets helps exploit gling to produce just a few pins a day, each them should visit Dongguan, a city half- worker was turning out almost 5,000. Later way between Guangzhou and Shenzhen in in Smith's classic work are two important Southeast China. Until the 1980s it was a qualifiers: the gains from dividing labor are collection of sleepy villages in China's Pearl limited by market size, and not all activities River delta. Since then it has rushed head- exhibit increasing returns to scale. long into the world of increasing returns The ability to transport products wid- (see box 4.1). Every year, millions of peo- ens the market, so cities are located near ple in the developing world enter this new the most natural and efficient of transport realm and the implications, for them and systems--waterways. Places blessed with for policy makers, are nothing short of this natural infrastructure often do well, revolutionary. while other places must bide their time. As This chapter summarizes the experience Smith wrote, of entrepreneurs over the last two centuries in exploiting economies of scale in produc- There are in Africa none of those great inlets, such as the Baltic and Adriatic seas in Europe, tion. It focuses on "agglomeration econo- the Mediterranean and Euxine seas in both mies," whose exploitation requires locating Europe and Asia, and the gulphs of Arabia, in areas densely populated by other produc- Persia, India, Bengal, and Siam in Asia, to ers. It next provides a brief synopsis of about carry maritime commerce into the interior two decades of work by economists seeking parts of that great continent: and the great to understand these scale economies-- rivers of Africa are at too great a distance work that has diminished the disconnect from one another to give occasion to any between research and the real world, and considerable inland navigation.1 that yields valuable policy insights. It then Besides, not all activities exhibit scale assesses whether policy makers in the devel- economies, and some do not need large oping world have been learning from this 126 markets to thrive. Subsistence farming is experience and analysis. Scale Economies and Agglomeration 127 BOX 4.1 Scale economies in an almost unreal world: the story of Dongguan, China In 1978 what today is the city of Dong- Dongguan's development since the the magnetic recording heads used in guan in China's Guangdong province 1970s, and particularly in the last decade, hard disk drives worldwide. Another pro- was but a collection of villages and small exempli es (perhaps in exaggerated duced 60 percent of the electronic learn- towns spread over 2,500 square kilome- fashion) the economic forces shaping ing devices sold in the U.S. market. A ters on the Pearl River, midway between East Asia's middle-income economies third produced nearly 30 million mobile Guangzhou to the north and Shenzhen (see the table below). phones, more than enough to provide and Hong Kong, China, to the south. The Location and favorable factor prices a mobile phone for every man, woman, area's population of 400,000 relied on undoubtedly spurred Dongguan's early and child in Peru or República Bolivari- shing and farming and--though not growth. For the rst decade and a half ana de Venezuela. the poorest in China--was not especially after China's reforms began, small and Agglomeration or external scale econ- prosperous. medium enterprises from both Hong omies are equally visible. The knowl- Today Dongguan is home to about 7 Kong, China, and Taiwan, China, were edge spillovers and lower logistics costs million people. More than 5 million of its attracted to Dongguan by plentiful sup- from locating close to input providers residents are migrants who work in the ply of land and low-cost labor, and by its and export traders have produced glob- thousands of factories that dot the city, proximity to both Guangzhou and Hong ally important industry clusters for knit- churning out a wide range of products Kong, China. Despite these factors, Dong- ted woolens, footwear, furniture, and in such huge volumes that recent media guan's rapid growth in the 1990s can toys. But the cluster that has dominated accounts have assigned Dongguan the best be understood through economies the industrial landscape of Dongguan label of "factory of the world." Dong- of scale, whether in the production of since the mid-1990s is telecommunica- guan's economy has grown at more than intermediate goods or di erentiated tions, electronics, and computer com- 20 percent annually since 1980, and in products, and agglomeration effects, ponents. Of the parts and components 2004 its gross domestic product (GDP) within and across industries. Combined used in manufacturing and processing was about $14 billion--greater than with reductions in transport costs and personal computers, 95 percent can be Iceland's. If one includes only registered improvements in logistics, technological sourced in Dongguan, and for several urban residents (as in o cial statistics), progress demonstrates that such e ects products, Dongguan's factories account Dongguan's GDP per capita of $9,000 in have emerged as important characteris- for more than 40 percent of global pro- 2004 made it the wealthiest city in China. tics of global production. duction. Even if the city's oating population of The internal scale economies are obvi- migrant workers is included, its GDP per ous. In 2005 a single plant in Dongguan Contributed by Shubham Chaudhuri. capita in 2004 was still more than $2,000. manufactured more than 30 percent of Source: Gill and Kharas 2007. Dongguan in numbers Average annual GDP growth, 1980­2005 (%) 22.0 GDP (US$, billions) 14.2 Population: registered residents (millions) 1.6 Population: total, estimated (millions) 7.0 GDP per registered resident (US$) 8,999 GDP per capita (US$) 2,070 Exports (US$, billions) 35.2 Imports (billion US$) 29.3 Government revenues (US$, billions) 1.0 Government expenditures (US$, billions) 1.2 Electricity consumption (kWh, billions) 35.2 Water consumption (ft3, billions) 1.5 Environmental impact indicators Sulfur dioxide emissions (tons, thousands) 199.4 Industrial waste water (tons, millions) 225 Sulfur dioxide emissions meeting standards (%) 92.9 Industrial water discharge meeting standards (%) 90.1 Industrial solid wastes (tons, thousands) 28.6 Industrial solid wastes meeting standards (%) 86.5 Global market share in 2002 of computer and electronics components manufactured in Dongguan (%) Magnetic heads and computer cases 40 Scanners and mini-motors 20 Copper-clad boards and disk drives 30 Keyboards 16 AC capacitators and fly-back transformers 25 Motherboards 15 Source: Dongguan Government 2005. 128 WORLD DEVELOPMENT REPORT 2009 The main findings: tate scale economies in marketing and distributing agricultural produce, medi- · Developing economies are entering a um-size cities provide localization econ- new realm of agglomeration. A century omies for manufacturing industries, and of experience indicates that as countries the largest cities provide diverse facilities develop from agricultural to industrial to and foster innovation in business, gov- service-oriented production,entrepreneurs ernment, and education services. and workers leave behind not just their vil- · Policy makers have often misjudged the lages and their agrarian occupations, but potency of market forces. Many policy also a world in which scale does not mat- makers perceive cities as constructs of ter much. More and more of them enter the state--to be managed and manipu- not just larger and denser settlements, but lated to serve some social objective. In also a world in which scale matters--where reality, cities and towns, just like firms production and distribution enjoy scale and farms, are creatures of the market. economies,especially those associated with Just as firms and farms deliver final and places.Proximity matters more,not just for intermediate goods and services, towns access to markets for goods and services, and cities deliver agglomeration econo- but also for access to ideas. mies to producers and workers. So city · A portfolio of places is needed for eco- administrators are better advised to nomic growth. Research over the last learn what their city does, and to help it generation indicates that different forms do this well, rather than try to abruptly of human settlement facilitate agglom- change the course of their city's des- eration economies for different forms of tiny. Planners and policy makers should production. A somewhat-oversimplified see their role as prudent managers of a (but not altogether incorrect) generaliza- portfolio of places, to get the most from tion would be that market towns facili- agglomeration economies. Table 4.1 A dozen economies of scale Type of economy of scale Example 1. Pecuniary Being able to purchase intermediate inputs at volume discounts Internal 2. Static technological Falling average costs because of fixed costs of operating a plant Technological 3. Dynamic technological Learning to operate a plant more efficiently over time 4. "Shopping" Shoppers are attracted to places where there are many sellers 5. "Adam Smith" Outsourcing allows both the upstream input suppliers and downstream Static specialization firms to profit from productivity gains because of specialization Localization Workers with industry-specific skills are attracted to a location where 6. "Marshall" labor pooling there is a greater concentration.a 7. "Marshall-Arrow-Romer" Reductions in costs that arise from repeated and continuous production Dynamic learning by doing activity over time and which spill over between firms in the same place The more that different things are done locally, the more opportunity there 8. "Jane Jacobs" innovation is for observing and adapting ideas from others External or Workers in an industry bring innovations to firms in other industries; similar agglomeration 9. "Marshall" labor pooling to no. 6 above, but the benefit arises from the diversity of industries in one Static location. Urbanization Similar to no. 5 above, the main difference being that the division of labor 10. "Adam Smith" division is made possible by the existence of many different buying industries in the of labor same place The larger the market, the higher the profit; the more attractive the location 11. "Romer" endogenous Dynamic to firms, the more jobs there are; the more labor pools there, the larger the growth market--and so on Spreading fixed costs of infrastructure over more taxpayers; diseconomies 12. "Pure" agglomeration arise from congestion and pollution Source: Adapted from Kilkenny 2006. a. For a formalization, see Krugman 1991a. Scale Economies and Agglomeration 129 This chapter discusses, in general terms, the implications of experience and analy- BOX 4.2 Sharing, matching, and learning sis for reshaping urbanization strategies in the developing world. Chapter 7 continues Three reasons explain why rms in a The ability to go beyond industry- this task of reframing the debate over urban particular industry often locate close speci c sharing, matching, and learning (localization economies) strategies. to each other. Geographic concentra- tion helps in-- to citywide processes (urbanization economies) requires additional mech- A guide to scale economies · Sharing. Broadening the market anisms. These include the e ects of for input suppliers, allowing them The benefits of increasing scale can be cumulative causation and the inter- to exploit internal economies of either internal or external to an individual penetration of production and trade scale in production (average costs across industries. They also include firm or farm. External economies are syn- decline as the scale of production gains from the cross-fertilization of onymous with "agglomeration economies," rises). This sharing of inputs also ideas. The concentration of workers which include the benefits of localization permits suppliers to provide highly and suppliers leads to a concentra- (being near other producers of the same specialized goods and services tai- tion of consumer demands. lored to the needs of their buyers. commodity or service) and urbanization If economies of scale are large The result is higher pro ts for all, (being close to producers of a wide range and unexhausted, and if rms can accompanied by easier access to a of commodities and services). Consump- compete not only on price but also broader range of inputs. through product di erentiation, tion externalities also are associated with · Matching. Expanding the availabil- strong centripetal forces come into agglomeration, but these are not yet well ity of the range of skills required play. In addition, by formally intro- studied in the literature.2 So, this chapter by employers to facilitate better ducing distance (the cost of shipping deals with production-related scale econo- matching to their distinctive needs. inputs and outputs), the framework mies (see table 4.1).3 At the same time, workers nd it used in this Report provides useful less risky to be in locations with insights into the centrifugal forces · Internal economies arise from the larger many possible employers. that explain spatial dispersion in a size of a plant to better exploit fixed costs · Learning. Accelerating spillovers of country. (numbers 1 through 3 in table 4.1). A knowledge and allowing workers larger steel mill can get volume discounts and entrepreneurs to learn from Sources: Gill and Kharas 2007, based on from suppliers--implying fixed costs of each other. Duranton and Puga 2004. transport and trade--and reap the ben- efits of dividing labor within the firm. · Localization economies arise from interactions, and as urbanization econo- a larger number of firms in the same mies, arising from between-industry inter- industry and the same place (numbers 4 actions.5 The reasons for producers to gain through 7 in table 4.1). Spatial proximity from proximity to others depend on the helps because immediate access to com- sharing of capital inputs, information, and petitors in the same sector allow firms labor. They also depend on improving the to stay abreast of market information matches between production requirements in negotiating with customers and sup- and types of land, labor, and intermediate pliers.4 Clustered firms can also share a inputs--and learning about new techniques larger and more dependable pool of spe- and products (see box 4.2). cialized labor. Internal scale economies are higher in · Urbanization economies arise from a heavier industries larger number of different industries in Internal increasing returns to scale are the same place (numbers 8 through 11 found in manufacturing and services, based in table 4.1). A management consulting on various sources of data. The internal company can benefit from locating near scale economies range from negligible or business schools, financial service pro- low among light industries, to high among viders, and manufacturers. heavy and high-technology industries (see Agglomeration economies depend not table 4.2). Based on engineering estimates, just on size (a big city or industry) but also a summary of sector-specific studies that on urban interactions. They are tradition- examines the minimum efficiency scale of ally classified as localization economies production and cost-saving finds significant arising from within-industry economic increasing returns in motor vehicles, other 130 WORLD DEVELOPMENT REPORT 2009 Table 4.2 Internal scale economies are low in light industries and high in heavy industries manufacturing sectors, with clothing, knit- Findings Data source ting, leather, and textiles at the lower end of the spectrum.9 Increasing output cuts costs Constant returns to scale: apparel, leather, Based on trade data (Antweiler and footwear, textiles, wood products Trefler 2002) in U.S. manufacturing, in the industries High increasing returns to scale: machinery, of middle-income countries (Chile), and pharmaceuticals, instruments, iron and steel, in the European car, truck, and consumer petroleum and coal products durables industries.10,11 Constant returns or low increasing returns to Based on engineering estimates to Based on trade data, a third of all goods- scale: leather goods, footwear and clothing, examine cost gradients and changes in producing industries have increasing timber and wood, textiles minimum efficiency scale (Junius 1997, cited from Prateen 1988 and Emerson and returns to scale.12,13 Manufacturing indus- High increasing returns to scale: Motor vehicles, others 1988) other means of transportation, chemicals, tries with the highest plant-level economies engineering, printing and publishing and industry-level externalities are petro- Low increasing returns to scale: footwear, Based on markups in manufacturing leum and coal products, petroleum refin- apparel, food products, leather industries for 14 OECD countries (Junius ing, pharmaceuticals, machinery, and iron 1997, cited from Oliveira and others 1996) High increasing returns to scale: tobacco, and steel. Industries with constant returns pharmaceuticals, office and computing include footwear, leather, textiles, apparel, machinery, railroad equipment and furniture. Low increasing returns to scale: apparel, leather Based on markups of prices over marginal Markups are another source of informa- products, textiles costs for two-digit sectors in the United States covering 1953­84 (24 sectors) tion. Because increasing returns to scale High increasing returns to scale: electric, gas, (Roeger 1995) and sanitary services, motor vehicles and confer market power on firms, markups of equipment, chemicals, tobacco price over marginal cost can be a proxy for Low increasing returns to scale: textiles, milk Based on production function estimates plant-level scale economies. Studies find a products, lumber mills, fish oil and meal products for 1963 Census of Manufacturing range of markups for U.S. manufacturing, Establishments in Norway (27 industries) High increasing returns to scale: basic metal, from 15 percent in apparel to more than 200 (Griliches and Ringstad 1971) transport equipment, cement products, fixtures, percent in the electric, gas, and sanitary ser- beverages vices. For 36 manufacturing sectors across Low increasing returns to scale: clothing, Based on cost and profit data in (167 19 member countries of the Organisation knitting, leather, textiles industries) four-digit SIC manufacturing industries for 1970 in Canada (Baldwin for Economic Co-operation and Develop- High increasing returns to scale: petroleum, and Gorecki 1986) and labor productivity ment (OECD), the highest markups are in basic and fabricated metal, transport equipment and output estimates for 90 four-digit tobacco, drugs and medicines, and office industries in Canada between 1965 and 1970 (Gupta 1983) and computing machinery--and the lowest in footwear, apparel, and wood products.14 Low increasing returns to scale: apparel, wood Based on estimates of firm-level products production function estimates for 6,665 While manufacturing data dominate plants in Chile during 1979­86 (Levinsohn the literature, increasing returns in services High increasing returns to scale: other and Petrin 1999) chemicals, food products, printing and publishing also are evident. The best-studied sector is Source: WDR 2009 team. electric power generation, where the inter- Note: OECD = Organisation for Economic Co-operation and Development; SIC = Standard Industrial nal increasing returns to scale are consider- Classification. able.15 The highest markups are in utilities transport equipment, chemicals, machinery, and sanitary services.16 Scale economies engineering, and paper and printing. In the also are found in banking and finance.17 three-digit product category, the highest A study of commercial banks in 75 coun- returns to scale are in books, bricks, dyes, tries shows that banks with larger loans and aircraft.6 By contrast, internal scale and deposits have lower average costs--and economies are negligible in rubber and plas- that banks operating in larger financial sys- tics, leather and leather goods, footwear and tems require less proportionate increases in clothing, and textiles.7 financial capital and have lower risk man- Based on cost and value added estimates, agement costs.18 different sources point to similar findings. A sample of 5,000 manufacturing firms Localization economies arise from in Norway shows evidence of scale econo- input-sharing and competition within mies at the individual industry level.8 For the industry Canadian industries at the four-digit level, Localization economies come from geo- returns to scale average 10 percent for 107 graphically concentrated groups of firms, Scale Economies and Agglomeration 131 linked by the technology they use, the mar- industry's labor force. About six of every kets they serve, the products and services 10 pairs of sheer hosiery sold in the United they provide, and the skills they require. States were knitted with Macfield yarn.22 Competitive pressures that force firms in the Together with other large North Carolina same sector to innovate or fail also lead to producers (Unifi, Regal, and Spanco), they productivity growth. Conditions tend to be make up more than three-quarters of the competitivewhenupstreamanddownstream industry's $3.7 billion worth of textured firms and associated institutions in a par- yarn products.23 The localization of the ticular industry (say, electronic machinery yarn and hosiery industries in North Car- or petrochemicals)--including universities olina is a powerful manifestation of intra- and trade associations--"cluster" together. industry external economies. Other channels for localization economies are the less easily measured "Marshall- Urbanization economies come Arrow-Romer externalities,"19 which come from industrial diversity that mainly from knowledge spillovers. fosters innovation Proximity to similar firms influences As cities grow, urbanization economies the location decisions of firms. Consider become more important.24 Urban diversity the hosiery industry in the United States. can foster the exchange of ideas and tech- Shortly after 1900 New York City became nology to produce greater innovation and the U.S. center for garment production and growth.25 Firms in different industries can distribution. But after World War II gar- share indivisible facilities or public goods, ment production moved south, to North a wider variety of intermediate input sup- Carolina.20 Many knitting and weaving pliers, a larger pool of narrowly specialized mills moved to be closer to the supply of workers, and risks. The evidence of greater yarn and to take advantage of cheaper importance of across-industry knowledge power, labor, and land. spillovers can be seen in established cities. Today, the hosiery industry, localized In fairly mature cities, such as Los Ange- in North Carolina, boasts many brands-- les, and Philadelphia, competition and city among them, Sheer Energy, Silken Mist, Just diversity help employment growth, indica- My Size, and No Nonsense--all competing tive of urbanization economies of between- in a $2 billion market. According to the U.S. sector innovation.26 On New York's Wall Census Bureau, about 150 establishments Street and in the city of London, financial producing women's full-length and knee- firms, insurance companies, and banking length hosiery in the early 2000s, half the syndicates benefit from being close to one nation's total, were located in North Caro- another. And co-location stimulates the lina. They shipped $973 million worth of growth of other specialist services, such as hosiery, about 75 percent of the national legal, software, data processing, advertising, total, and employed 13,497 people, including and management consulting firms. These 11,567 production workers.21 Adding men's clustered firms, by providing a thicker socks and stockings, more than half of a $6 market for highly educated individuals, billion industry is in North Carolina. benefit from drawing on the same large One reason textile producers went to pool of human capital. They also gain from North Carolina was to exploit productiv- the generation and diffusion of knowledge ity gains from proximity to upstream yarn amongst one another. producers. The yarn and pantyhose indus- Evidence of urban agglomeration econ- tries are tightly knit--in relationships omies comes primarily from developed delicately stitched together at each step countries.27 But there is also evidence of of production--but fiercely competitive. external economies in developing coun- Macfield, a textile giant and a leading pro- tries, wherever data are available. A survey ducer of yarns for pantyhose, socks, outer- of 12,400 manufacturing firms in 120 cit- wear, upholstery, and industrial products ies in China points to the higher produc- operates five plants in North Carolina tivity of firms in more populous cities.28 and employs about a quarter of the yarn Agglomeration economies in Indonesian 132 WORLD DEVELOPMENT REPORT 2009 people fell from just over 55 percent in 1960 to about 33 percent in 2004. Production tech- BOX 4.3 Agglomeration economies in Indonesia nology shifts away from constant returns to Much of the rigorous evidence of · Localization economies are strong increasing returns to scale. And over time, agglomeration economies comes for textiles and chemicals. scale-augmenting technical change boosts from developed countries. An excep- · Urbanization economies are strong scale economies. Imperfect and monopolis- tion is Indonesia, where recent for nonmetallic minerals and tic competition become the dominant forms research helps to identify the deter- machinery, though weak during of market structure. minants of industrial concentration. some periods. The analysis focuses on four broad The world is more urban, and the con- groups--chemicals (including Activities subject to urbanization centration of economic mass in the densest petroleum, rubber, and plastics); and dynamic economies are poor urban centers is greater as well. In 1900 the textiles (including garments, leather, candidates for policies that seek to number of people in the largest 100 cities and footwear); nonmetallic miner- spread out economic mass within added up to just 4.3 percent of the world's als (including glass, ceramics, and a country (see chapter 8 for a more population. The same 100 cities now have cement); and machinery (including detailed discussion). Such rms prefer 7.5 percent of the total, and the largest 100 electrical and nonelectrical machines, to stay put, since this helps learning, transportation equipment, and and they thrive in fairly large and cities, almost 10.5 percent. Despite ample instruments). It sheds light on how diverse cities. The agglomeration open space, almost all recent development the size and type of scale economies economies for textiles and chemicals in the United States has been less than 1 in uence the extent and pattern (largely static and local) indicate that kilometer from earlier developments.29 of agglomeration in a developing policies to deconcentrate production Even today, only about 2 percent of the country. in these industries might succeed land area of the United States is built up or Localization economies--the ben- if accompanied by improvements paved. Only agglomeration economies can e ts of locating near other rms in in infrastructure and governance in the same industry--have been more the areas chosen for relocation. The explain this extreme clustering of firms and important than urbanization econo- agglomeration economies make the workers in cities. mies for manufacturing, and static nonmetallic minerals and machinery agglomeration economies are more (essentially static and urban) likely As producers seek scale economies, important than dynamic (or learning to resist relocation to smaller urban agriculture disperses but related) externalities. The sector- centers. manufacturing clusters speci c ndings of tests for static As economies develop, farms spread out to externalities show that Source: Kuncoro, forthcoming. exploit scale economies in production. In the United States about 1,500 kilograms of agricultural products are produced annu- manufacturing between 1980 and 2003 vary ally to feed each American, whereas the over time; however, in the broadest terms, Chinese make do with about 600 kilograms these benefits are mainly static rather than per person. In 2005 the average cropland dynamic and somewhat more likely to arise in the United States was 20.4 hectares per from localization than from urbanization farmer, in Australia it was 45 hectares, and (see box 4.3). in Canada it was 47 hectares. Average farm size in Brazil is about 19 hectares.30 But A different realm scale economies in agriculture are generally Countries develop by shifting their econo- difficult to obtain in low-income countries. mies from traditional subsistence-based The cropland per farmer was a fraction of agricultural activities to higher-value manu- that in developed countries: 0.16 hectares in facturing and services. Along the way, firms China, 0.30 in Bangladesh and Indonesia, rather than farms become the dominant and 1.20 in Nigeria.31 production unit. The production of differ- As economies develop, manufactur- entiated manufactured goods and services ing and services become more important, increases as a share of the economy's out- firms cram in closer together to harness put. Between 1900 and 2000 the share of the agglomeration economies. In France, the global population in industrial or service- United Kingdom, and the United States, dominant urban localities rose from 15 per- 75­95 percent of industry is localized cent to 47 percent. The global employment (clustered or concentrated relative to over- share in agriculture among working-age all economic activity), while less than 15 Scale Economies and Agglomeration 133 percent is dispersed.32 In the United States also rises (see chapter 2).39,40 The important more than a third of aerospace engines are types of agglomeration economy change as produced in three cities: Hartford with development progresses. In particular, as an about 18 percent of total employment, and economy becomes more knowledge based, Cincinnati and Phoenix with another 18 knowledge spillovers, which require prox- percent together.33 Over time the spatial imity, become more important. Evidence concentration of industries in U.S. states suggests that knowledge industries are spa- has increased.34 Using continuous space tially concentrated.41 without considering administrative bound- Services are even more spatially con- aries and based on concentration of plants, centrated than manufacturing--for two more than half of the United Kingdom's reasons. First, they tend to use less land per 122 four-digit industries are localized, and employee. Banks, insurance companies, only 24 percent are dispersed. The rest are hospitals, and schools can operate comfort- randomly distributed.35 ably in high-rise buildings that economize Spatial clustering is more pronounced on land and allow for high density. Second, with high-skill and high-technology because of external economies, business industries (electronic computing machin- services have even greater potential for ery, process control instruments, semicon- agglomeration, as firms serve one another: ductors, and pharmaceuticals) than light every bank needs advertising, every adver- industries. This is consistent with the doc- tising firm a bank account. The potential umented findings of higher-scale effects in for codependence and agglomeration is heavier industries. High-skill and high-tech thus intrinsic to services.42 industries have more capital-intensive pro- Services are prominent among the most duction technology. They are also likely to agglomerated industries in the United benefit more from the various mechanisms States.43 Larger cities have been amassing that generate external economies (discussed service jobs from areas less than 20 kilo- earlier). meters away.44 Between 1972 and 1992, In the Republic of Korea the ranking of jobs in the United States became more industries by their localization economies spatially concentrated, driven primarily by follows the ranking of industries by their the rising localization of service activities spatial concentration across cities. Heavy in larger cities,45 as small and medium- and transport industries (metals, chemi- size counties lost jobs to the more urban cals, and transport equipment) tend to be areas.46 For instance, in Suffolk County, concentrated in a few highly specialized Massachusetts, which includes Boston, 35 cities to take advantage of local scale exter- percent of the workforce is in business ser- nalities, while traditional or light indus- vices, nearly twice the national average of tries with low scale externalities (food and 18 percent.47 In the United Kingdom nearly textiles) are more dispersed.36 High-tech 60 percent of all venture capital offices are industries (computers, aircraft, medical in London.48 London-based venture capital instruments, and electronic components) offices favor investment in London-based tend to be more concentrated than dura- small and medium enterprises to get bet- ble-good, machinery-related industries ter information: they can easily visit and (metal works, industrial, refrigeration, and monitor these enterprises. As communica- machinery and equipment).37 Cities in the tion costs fall, services become more trad- Republic of Korea have also become more able, allowing providers to take advantage specialized.38 of narrower specialization and agglom- eration economies. For instance, financial Services become even more densely services can be disaggregated into more clustered than manufacturing refined categories of retail banking, con- As countries move to a more mature phase sumer credit and financing, commercial of development, their economies become and corporate banking, investment bank- more knowledge based and service ori- ing, and so on. And within investment ented. The spatial concentration of activity banking, there is further specialization 134 WORLD DEVELOPMENT REPORT 2009 in mergers and acquisitions, corporate rumors, to the word-of-mouth learning in finance, fixed income, debt management, neighborhoods.52 and the like. Learning mechanisms also explain agglomeration in cities.53 As Alfred Mar- Cities facilitate scale economies shall implied, when knowledge spillovers of all types exist, "The mysteries of the trade become A plant in an isolated location can benefit no mysteries but are as it were in the air."54 from internal scale economies, but unless Knowledge spillovers are difficult to mea- it is situated in an area of density, it cannot sure, because they can seldom be traced enjoy the competitive benefits associated through transactions. With patent cita- with localization or urbanization econo- tions, however, it is possible to identify a mies. Towns and cities bring together paper trail for some knowledge spillovers. large pools of skilled labor and suppliers U.S. patent citations are spatially concen- of specialized intermediate inputs and trated, with citations 5 to 10 times more by doing so, enhance employer-employee likely to come from the same standard met- and buyer-seller matches. Input-sharing is ropolitan statistical area as originator pat- an important channel for agglomeration ents.55 Another strand of research focuses economies.49 Density of activity allows on workers as the primary vehicles of more refined specialization and a wider knowledge, implying that economies with variety of intermediate inputs. Averag- substantial labor mobility across industries ing across industries, a firm's relocation will exhibit a greater spread of ideas and from a less-dense location (of 499 or fewer growth.56 neighboring employees in the same indus- try) to a denser location (of 10,000­24,999 Agglomeration economies are amplified neighboring employees) results in a 3 per- by density and attenuated by distance cent increase in purchased input inten- Cities obviously reflect the demand for sity.50 The composition of a city emerges density. People choose to live close to one from the scope for agglomeration econo- another, paying high rents and tolerating mies and their interaction with other crime and congestion. This density helps aspects of microeconomic behavior. reduce distances of all types. Cities are thus Large cities with more firms allow work- a natural market creator and a conduit for ers to hedge against sector-specific risks. internal and external scale economies. Firms Smaller specialized cities expose workers to are drawn to dense areas concentrated with greater industry-specific shocks but provide people and infrastructure by the possibil- favorable match-specific advantages. In ity of serving a large local market from a both cases the concentration of economic large plant at low transport costs.57 Increas- activity lowers the search costs between ing return-to-scale production technology firms and workers, which results in fewer leads to large factories with many workers. unfilled vacancies, lower risk of job loss, The sizable workforce forms a large local and shorter durations of unemployment. market. By reducing transport costs, cities The large variety and quantity of inputs with a large local demand attract firms in to share in cities also implies better qual- different industries. So a self-reinforcing ity-matching. For instance, because of the process of agglomeration that begins with better matching possible, married couples the expanding local market further raises with university education, are increasingly industry productivity. found in large cities, up from 32 percent in Plants in dense economic environments 1940 to 50 percent in 1990.51 Cities make tend to be larger.58 As local market scale it easier for producers to find inputs and increases, firms are more likely to outsource for customers to experiment and discover their service functions to local suppliers.59 new possibilities. Examples of easy dif- This outsourcing further encourages com- fusion of information and social learning petition and diversity in the local business range from the congregation of diners in service market, which reinforces outsourc- certain restaurants, to the propagation of ing. Firms are attracted to locations with Scale Economies and Agglomeration 135 large concentrations of other firms in their Table 4.3 Scale economies amplify with density and attenuate with distance industry and with large demand.60 The large Finding Data sources and growing academic literature suggests Scale economies amplify with density . . . that doubling city size will increase pro- ductivity by 3­8 percent.61 In the Republic Doubling economic density increases 1988 data on output per worker in U.S. states productivity by 6 percent (Ciccone and Hall 1996) of Korea, a plant in a city with 1,000 work- Doubling employment density increases Data for the late 1980s on nonagricultural ers could, without altering its input mix, productivity by 4.5­5.0 percent private value added per worker in European increase output by 20­25 percent simply by NUTS regions (Ciccone 2002) relocating to a city that has 15,000 work- A one-standard-deviation increase in the Data on five traditional manufacturing ers in the same industry.62 And the spatial share of own-industry local employment industries in 224 U.S. metropolitan areas concentration of people reduces the cost of in the first period will raise that industry's between 1970 and 1987 (Henderson, Kuncoro, employment level by 16­31 percent in a later and Turner 1995) producing knowledge because information period transmission, competition, spying, imita- A 10-percent increase in local own-industry Republic of Korea city-industry data for 1983, tion, learning, innovation, and the com- employment results in 0.6­0.8 percent 1989, 1991­93 (Henderson, Lee, and Lee 2001) mercialization of new ideas are easier.63 In increase in plant output, for the same level of inputs the United States a staggering 96 percent of innovations occur in metropolitan areas.64 and attenuate with distance. Agglomeration economies are influ- Increasing distance from the city center by 1980 data for 356 new manufacturing firms in enced by geographic scope, and the den- 1 percent leads to a 0.13 percent decline in Brazil (Hansen 1990) productivity sity of economic activity and the distance between economic agents influence the Doubling the distance to a regional market Firm data in auto-component and agricultural center lowers profits by 6 percent machinery in Brazil and the United States productivity gains from scale economies (Henderson 1994) (see table 4.3). For example, doubling the Doubling travel time to a city center reduces Data for eight industries in Brazil (Sveikaukas density of economic activity in European productivity by 15 percent and others 1985) Nomenclature of Territorial Units for Sta- Own-county (lagged and contemporaneous) Plant-level data on productivity, 1972­92, in tistics (NUTS1) regions can increase total effect on plant productivity, but no effect from 742 U.S. counties (Henderson 2003b) factor productivity growth by 0.42 percent- neighboring county age points a year.65 Evidence from Brazil Effects of own-industry employment on new 12 million U.S. establishments from Dun & and the United States indicates that dou- plant openings attenuate rapidly within the Bradstreet Marketplace database (Rosenthal first five 1-mile concentric rings and Strange 2003) bling the distance to dense metropolitan centers reduces productivity by 15 percent; Source: WDR 2009 team. doubling the distance from 280 to 550 kilo- meters reduces profits by 6 percent. The introduced in The Wealth of Nations, that concept of distance can be generalized, of the "invisible hand" of perfect competi- in this context, from distance in physical tion.68 But perfect competition is an artifi- space to distance in industrial space. For cial theoretical construct: it assumes a large example, spillovers between industries are number of infinitesimal firms with negli- more likely if industries share related sci- gible influence over market prices, even in entific facilities.66 Furthermore, the extent the immediate vicinity of the firm's loca- to which distance attenuates agglomera- tion. Its assumption of constant returns to tion economies differs for different types scale further implies the so-called problem of agglomeration. For example, knowledge of "backyard capitalism."69 That is, in the spillovers that rely on face-to-face commu- world of constant returns to scale, small- nication decay more quickly with distance scale production is as efficient as large-scale than the home market effect.67 production, so every household should be producing a fully diversified range of goods A portfolio of places and services in its own backyard. Economics Adam Smith introduced scale economies, professors, when pressed by students to give factor mobility, and transport costs as a real-world example of such an industry, central to understanding the nature and would offer subsistence agriculture--small causes of the wealth of nations. But until farms producing wheat or rice, whose pro- the 1980s most economists were happier to duce could not be distinguished from those anchor their inquiries on another concept of others. Never mind that most people no 136 WORLD DEVELOPMENT REPORT 2009 longer worked on small farms in countries By the late 1980s scale economies were that had grown out of poverty. It led to con- standard features of the explanations for venient characterizations of the economy in international trade. By the early 1990s, which all firms and workers were identical, growth theorists had accepted the need to so one firm or worker could be considered incorporate imperfect competition among representative of all. Scale economies were firms into aggregate formulations of an inconvenient--they required acknowledg- economy. By the mid-1990s, theorists were ing that specialization differentiated people beginning to show how these ideas could be and products. used to understand the spatial distribution Occasionally, the contradiction between of economic activity, including the rise of internal increasing returns and perfect towns and cities. With the new economic competition would surface, but because of geography, researchers came to realize the technical difficulties it raised, it quickly that the dichotomy between internal and would be buried again.70 Then, during the external economies is often false. Why? 1970s, two economists at Princeton Univer- Because, in modeling the microfoundations sity proposed a technical solution to model of agglomeration economies, the source of increasing returns to scale, opening a door external economies have often been found for researchers to the same realm that so in the interaction of internal scale econo- many firms and workers had inhabited mies with other influences, such as trans- since the industrial revolution.71 port costs. Table 4.4 Thirty years of theoretical advance recognize the importance of scale economies Recognizing scale economies: recent Subject Main insights Key publications theoretical advances Industrial Increasing returns to scale and imperfect Spence 1976; Dixit The literature on the microeconomic organization, competition can be incorporated into formal and Stiglitz 1977 foundations of agglomeration economies 1970s economic models flourished in the last 20 years by combin- Urban External economies within cities and systems Mills 1972; Diamond ing models in the paradigms summarized economics, of cities; different levels of agglomerations are and Mirrless 1973; in table 4.4 and insights about urban 1970s related to city functions and Henderson 1974 economics that emphasize the tension International Increasing returns and imperfect competition Krugman 1980, 1981; trade, 1980s explain intraindustry trade between countries Ethier 1982; Helpman between benefits from the concentration with similar endowments; initial endowments may, and Krugman 1985; of economic activity and costs arising from through trade and specialization, influence the Grossman and that spatial concentration.72 In general, long-run rate of growth; trade unleashes forces of Helpman 1995 both convergence and divergence researchers have progressively recognized that economic growth has different impacts Economic Increasing returns-to-scale activities are Krugman 1991; geography, characterized by agglomeration and imperfect Fujita, Krugman, on firms and workers depending on their 1990s competition, while constant returns-to-scale and Venables 1999; sector and location. The underlying reason activities remain dispersed and competitive, Henderson 1999 is the love for variety in consumption and helping to explain spatial distribution of economic activity and growth of cities the economies of scale in production; the proximate reasons are product differentia- Endogenous Perfect competition and knowledge-related Romer 1986; Lucas growth, 1980s or human capital­related externalities imply Jr. 1988 tion, monopolistic power, specialization, aggregate increasing returns and explain why and location externalities. growth rates may not fall over time and why wealth The formal recognition of scale econo- levels across countries do not converge mies, externalities, and imperfect competi- Endogenous Imperfect competition explains why the incentive Romer 1990; tion makes economic theory conform more growth, 1990s to spend on R&D does not fall, and knowledge Grossman and spillovers explain why R&D costs fall over time, Helpman 1991; Aghion closely to the world in which policy makers resulting in more and better products that fuel and Howitt 1992 live. The policy implications of this work growth arise from the way economic production Endogenous Imperfect competition and Schumpeterian entry Aghion and Howitt relates to trade, ideas, and cities. growth, 2000s and exit of firms, with entrants bringing new 2005; Rossi-Hansberg technologies, explain how a country's growth and Wright 2007; Intraindustry trade. The main insight and optimal policies vary with distance to the Duranton 2007 · technology frontier; knowledge accumulation in coming from a formal recognition of cities leads to growth increasing returns to scale and product Source: Adapted from Gill and Kharas 2007. differentiation is that trade may take Scale Economies and Agglomeration 137 place between economies that are similar Smaller cities specialize, receiving in factor endowments: both interindus- industries as they mature and relocate try and intraindustry trade may profit- Even after controlling for natural com- ably take place. The main implication is parative advantage, externalities are still that countries may, in theory, encourage important in explaining the patterns of some activities and ensure comparative specialization and diversity among cities advantage. (see table 4.5). The production of nontradi- · Idea-driven economies. The insight is tional items is more concentrated in diverse that the nonrival nature of ideas makes U.S. cities, while standardized traditional them different from other factors of pro- goods are concentrated in smaller special- duction, such as capital, land, and labor, ized cities. Similarly, in Japan, smaller cit- in that the market may underinvest in ies are specialized, while low-tech activity the creation of new ideas. The main and standardized high-tech production implication is that governments should, processes are located offshore. Likewise, in theoretically, subsidize some strands of the Republic of Korea, large cities are more research and development (R&D), such service oriented and smaller cities, manu- as those that will ensure the continuance facturing oriented.78 of the comparative advantage a country Mid-size cities tend to specialize in has acquired in certain areas. mature industries, not new ones, and larger · City-based growth. The main insight is cities specialize in services not manufactur- that activities that display increasing ing.79 Improved infrastructure and falling returns generated by factors external to transport costs have encouraged standard- a firm tend to be concentrated in cities, ized manufacturing production to move while those displaying constant returns out of high-rent centers to smaller cities. remain more dispersed. The main impli- cation is that policies to keep cities busi- Table 4.5 Agglomeration economies vary by city size and profile, and by the industry life cycle ness-friendly and livable become more Main finding Data important as economies develop. Localization economies are more important for heavy Data for two-digit manufacturing Urban systems exhibit some stylized industries; urbanization economies are more important industries in Japan (Nakamura for light industries 1985) patterns. Larger cities tend to be more diversified and service oriented: they Localization economies become less important, giving Cross-sectional data for the way to urbanization economies, as cities expand in size United States and Brazil innovate, invent, breed new firms, and (Henderson 1986) expel mature industries.73 Smaller cities Scale economies from labor pooling are stronger Annual firm employment data tend to be industrially specialized: they in newer and expanding markets, while those from for four U.S. metropolitan areas produce or manufacture and receive relo- knowledge spillovers and specialized asset-sharing are and three two-digit industries cated industries from diversified cities.74 more important in mature markets (Hammond and Von Hagen 1994) The relative city-size distribution and For mature capital goods industries, there is evidence Panel data of 742 urban counties of localization economies but none of urbanization for 1970­87 (Henderson, Kuncoro, industrial concentration in specific cit- economies; for new high-tech industries, there and Turner 1995). ies tend to be stable over time. An urban is evidence of both localization and urbanization system tends to be made up of a few large economies diversified cities and many smaller, more For all industries both localization and urbanization Data for five traditional and three specialized, cities. 75 effects are important. For traditional industries most new high-tech manufacturing effects die out after four or five years, but for high-tech industries in 224 metropolitan The stylized observation in most coun- industries, the effects can persist longer. The biggest areas between 1970 and 1987 tries is an urban hierarchy of a few large effects are typically from conditions of three to four (Henderson 1997) cities and many smaller cities with var- years ago, in the county and metropolitan area ied economic functions.76 At the global The historical industrial environment of cities matters. In Growth data for the largest level, "world cities" at the top of the hier- fairly mature cities urbanization economies encourage industries (1956­87) in 170 U.S. industrial growth cities (Glaeser and others 1992) archy, such as New York, London, Paris, and Tokyo, are characterized by a diverse For high-tech industries a 1-standard-deviation increase City-industry data for the Republic in diversity of the local manufacturing base increases of Korea, 1983, 1989, 1991­93 industrial structure, predominantly ser- productivity by 60 percent, but diversity has no effect on (Henderson, Lee, and Lee 2001) vice based, and a labor force with a wide standard industries (such as textiles, or food). range of skills.77 Source: WDR 2009 team. 138 WORLD DEVELOPMENT REPORT 2009 Production in large cities focuses on ser- in production. This pattern became even vices, nonstandardized manufacturing, more marked during the 1990s.86 and R&D.80 The relocation of manufactur- Many business and economic historians ing to the suburbs has been documented in have argued that the extra costs of coordi- Colombia, Indonesia, the Republic of Korea, nating and monitoring multilocation firms and Thailand.81 It is common to find that relative to integrated firms have come down services do not deconcentrate from city cen- significantly following key developments in ters to their surrounding suburbs.82 transport and communication technolo- gies, as well as new management practices.87 Large cities diversify, incubate new Technological progress in transport and ideas and firms, and push out mature telecommunication made it less costly for industries firms to separate their production facilities New firms often start in diverse cities, but from their headquarters and management they move to specialized ones after they facilities. Firms can locate their production mature. Of all new plants in France, for facilities in environments with same-sector example, 84 percent were created in cities specialization, and their headquarters in a with above-median diversity.83 Some 72 metropolis with a concentration of busi- percent of firm relocations are from an area ness service employment. Furthermore, with above-median diversity to an area with the reduced communication costs that above-median specialization. In the United make transportation of service industry States almost all product innovations are in outputs (through electronic transmittal) metropolitan areas. Industrial diversity and cheaper did not imply the "death of dis- city size are both good for innovative out- tance" and the fading of cities into obscu- put.84 Trial plants are based in large cities rity, contrary to many predictions.88 In this in Japan, but mass production plants are context, while distance has become less in small cities or rural areas. Young firms important for transmitting information, it appear to need a period of experimentation has become more important for transmit- to determine their ideal production pro- ting knowledge. Telecommunication can cess.85 In the early learning phase, diver- be a complement to, but it is certainly not sified cities act as "nurseries" for firms to a strong substitute for, face-to-face interac- try out a variety of processes. Once a firm tions, which involve several forms of com- identifies its ideal process, it can begin mass munication simultaneously, notably body production in specialized cities, where all language and verbal conversation (see box firms share similar processes or specializa- 4.5).89 The geographic distribution of com- tions (see box 4.4). mercial Internet domains suggests that the The different economic functions that Internet is a complement to face-to-face cities serve can be seen in the clustering interactions (primarily within-city) as well of headquarters from different sectors and as a substitute for longer-distance commu- concentrations of business services in a few nication, such as phone or postal mail.90 large cities while production plants from each sector congregate in smaller special- Activities that cities specialize in are ized cities. In 1950 there was little differ- stable, and so are city-size distributions ence across U.S. cities in their proportions Externalities imply that history matters. of managers and production workers. That is, modern-day location patterns for Although the largest cities already housed an industry are strongly influenced by the more managers, there was no clear ranking historical industrial environment of cities by city size. By 1980, however, the differences and thus by the localization economies. across cities had increased substantially, and Such intangibles include the local stock a clear ranking by size had emerged. Larger of knowledge relevant for an industry or cities had become specialized in manage- a labor force with specific acquired skills. ment and information-intensive activity, Two otherwise-identical enterprises in the which benefit from face-to-face contacts, same city could benefit differently from the and smaller cities had become specialized local agglomeration depending on how long Scale Economies and Agglomeration 139 BOX 4.4 When sowing and reaping happen in different places: rising interdependence of cities Urban specialists and economists have tories as the market adjusts to the whims services or advertising agencies; for pro- long debated whether specialized or and fancies of fashion. duction facilities, this means places with diverse cities are more conducive to Clusters of similar rms are sometimes other such plants. Headquarters are usu- growth. Cities that are narrowly special- promoted as the best environment for ally in bigger cities, because professional ized create greater economies of agglom- innovation. But studies nd instead services tend to exhibit greater economies eration, so a rm's productivity increases that diverse metropolises do better in of agglomeration, are less land-intensive, with proximity to similar rms. Mean- breeding new products and processes. and employ highly educated employees while, a diverse mix of activities makes For example, the adoption of computer- willing to pay for big-city amenities. If land cities more likely to grow, particularly in controlled machinery for cutting metals markets work well, the ensuing increase in new sectors. The main conclusion: both has been faster in situations in which land prices prompts production establish- diversity and specialization are important, many rms (ranging from furnace ments to relocate to smaller, more special- but at di erent points in a rm's life cycle. manufacturers to aircraft producers) have ized towns and cities. A "balanced" urban system is not one in similar technical needs but are not direct Cities in the United States provide a which all cities are similarly specialized or competitors. Firms for which innovating is good illustration. In 1950 the ratio of man- diversi ed, but one in which both diversi- important (such as electronics producers) agers to production workers was similar ed and specialized cities coexist. prefer diversity during the early innova- across cities of di erent sizes. By 1990, For young rms, urban diversity is more tive phases, and then they relocate to however, cities with between 75,000 and important. A new businessman may not specialized cities for mass production. For 250,000 people had 20 percent fewer know all the details of the product to be manufacturing and services, unlike agri- managers per production worker than made, what components to use, where to culture, "sowing" and "reaping" can take the national average; cities with 1.5 to 5 source them, which workers to hire, and place in di erent locations. million people had 20 percent more man- how to nance the venture. Firms using Just as product development and mass agers per production worker; and those similar technologies in di erent sec- production increasingly take place at larger than 5 million people were 50 per- tors are more likely to share information di erent locations, so too does manage- cent above the national average. A similar about new practices and technologies ment and production. Half a century ago trend can be seen in other countries such than rms in the same sector. For rms in the di culties associated with managing as France and Germany. more standardized or mature industries, businesses from a distance made rms Policy makers should be aware of these urban specialization is more important. keep their headquarters and manage- developments. Since this growing interde- These rms typically bene t less from ment o ces close to their factories. Fall- pendence manifests itself in plant reloca- the exibility from urban diversity, and ing transport and communications costs tions away from large cities, governments by locating in a specialized environment; have made it much easier to manage pro- may be tempted to take away resources they can better reap the bene ts of urban duction from far away (see chapter 6). from them. This would kill the goose that agglomeration economies. For example, As a result, many rms have separated lays the golden eggs, since such reloca- auto rms in Detroit lower their costs management and production spatially, tions to smaller specialized cities are just a by sharing parts suppliers, and garment searching for the best possible conditions later part of a life cycle of rms that large, manufacturers in cities like San Pedro Sula for each. For headquarters, this means diverse cities helped give birth to. in Honduras bene t from thick labor mar- locations with other headquarters where kets that help workers move between fac- these rms can, for example, share legal Contributed by Diego Puga. each has been in the city. Similarly, two oth- known as Zipf's law: a city's population erwise identical cities would offer different size relative to the primate city is inversely types of external economies depending on proportional to its rank in the national their histories.91 hierarchy of cities.92 There is also persis- The influences of history and special- tence in the industrial concentration in ization are consistent with the observed specific cities.93 stability in the relative city-size distribu- Among mature industries the persis- tion and the industrial concentration in tence in employment patterns across cities specific cities over time. Within countries is high over time, and the convergence in the relative sizes of cities tend to remain individual industry employment across cit- unchanged. Among urban specialists, ies is slow. This persistence occurs despite this phenomenon is often represented as a high plant and employment turnover rates recurring relationship between a city's size for individual manufacturing industries, relative to the largest city in the country, and despite strong evidence that plants 140 WORLD DEVELOPMENT REPORT 2009 began in Boston in 1924, when the Mas- sachusetts Investment Trust was founded. BOX 4.5 Cities continue to thrive as telecommunication Today, Boston is still home to almost costs fall a third of U.S. employment in mutual As telecommunications improve, co-authorships all rose. Better tele- fund and asset management services. The cities become more important as a communications increase long-range Hartford insurance industry began even platform for interactions and knowl- interactions, but not at the expense earlier, in the late-eighteenth century. edge transfers. Recent studies in the of local interactions. Local merchants insured each other's United States and Japan document As ideas become more complex overseas trading expeditions by sharing the complementary roles of telecom- and di cult to communicate, the their profits and losses. These informal munications and face-to-face interac- value of intensive face-to-face inter- tions: people closer to one another action rises, and cities become even arrangements eventually grew into large physically call each other more often. more important. And if cities are insurance companies, starting with the One interpretation is that face- centers of telecommunication tech- Hartford Fire Insurance Company in 1810. to-face interactions generate more nology, improvements in information Other major Hartford insurers, including demand for telephone interactions. technology will increase their eco- Aetna, Connecticut General, and Travel- Since the mid-1980s, when faxes and nomic role. The rise of the New York ers, were founded in the early and middle e-mail became prevalent, business multimedia industry may signal the 1800s. Hartford is still known today as travel has risen more than 50 percent. comparative advantage of large cities Another evidence of increased face- in facilitating the di cult information the "insurance city," with a wide range to-face interactions with falling tele- ows in cutting-edge industries. In of related services such as life insurance, communication costs is the phenom- the developing world, the rise of Ban- medical insurance, fire/marine/casualty enal growth of co-authored articles galore is a case in point. insurance, and pension funds.98 in economics--from 12 percent in the 1960s to 56 percent in the 1990s. Sources: Gaspar and Glaeser 1998; Huber Apprehension of market forces Local, out-of-state, and international 1995; Sassen 1991; and Gottman 1977. Over the past century, producers and work- ers in the developing world have sought, and often found, their fortunes in towns and relocate as local wages and demand condi- cities. In the past three decades, researchers tions change.94 Historically, some cities have have analyzed and increasingly understood undergone major sectoral overhauls, but the gains from urban agglomerations of all they have tended to be the exceptions.95 shapes and sizes. But it is not yet clear that The persistence of an industry's employ- policy makers appreciate the sheer strength ment concentration in specific cities, which of these market forces and the benefits that implies the "lock-in" of industrial structure, come from harnessing them. can be explained by localization economies. More than half the developing world's These cities can better compete for and, governments surveyed in 2005 by the UN over time, retain plants and employment in Population Division expressed a desire that industry. A larger scale of own-indus- to make major changes to the spatial dis- try activity historically means that firms in tribution of their populations. Almost that locality today will operate more pro- three-quarters of developing country offi- ductively with greater accumulated knowl- cials expressed a strong desire to imple- edge about technology, sources of supply of ment policies to reduce migration into different quality inputs, and local culture urban areas or to take actions to reverse and its effect on the legal, business, and rural-urban migration trends.99 Many in institutional climate. These localization developed countries are equally fearful advantages are relevant for more traditional of urbanization in developing countries. manufacturing industries.96 They explain "The explosive growth of cities around the the longevity of many industrial clusters in world--especially the rise of huge, nation- certain locations--such as the world-class sized Third World metropolises--has cutlery cluster in Solingen, Germany, since U.S. scientists and officials worried. Chief 1348.97 among their concerns: "megacities increas- There is also evidence of persisting con- ingly will serve as incubators of diseases, centration of particular services in specific economic disruptions, and endless politi- cities. The American mutual fund industry cal crises."100 This worry was reflected in Scale Economies and Agglomeration 141 the goal of the 2006 World Urban Forum, Figure 4.1 The urban premium for household consumption can be considerable held to discuss "mega-cities with mega Maldives problems."101 The prevalent view was that Bolivia "cities in the developed world have histori- Angola Rwanda cally been engines of economic growth. Guinea But many cities in the Third World are so Peru Burundi dysfunctional that they have become drags Paraguay on economic progress."102 Gambia, The Mexico Some of the favored solutions: slow the Senegal massive migration to cities, decongest the Honduras largest cities in the developing world by Cambodia Mali establishing new cities, and make the big- Vietnam gest cities centers for cleaner high-technol- Brazil El Salvador ogy activities. These solutions all represent Guatemala a potentially costly misreading of the mar- Nepal Zambia ket forces that drive the spatial transforma- Djibouti tions for economic development. Chad Bhutan Uganda A misplaced fear of urbanization Colombia Ghana Economic activities in urban areas account Thailand Mauritania for as much as 80 percent of GDP in more Philippines urban and industrialized countries. The Cameroon urban share of economic activity in less Burkina Faso South Africa developed countries is about 50 percent. Morocco Just the 10 largest metropolitan areas in Bangladesh Sri Lanka Mexico, which account for a third of the Russian Federation country's population, generate 62 percent Malawi of its national value added.103 In Vietnam, Madagascar Ethiopia where the share of the urban population is India Indonesia 30 percent, the share of cities in national Tanzania output is 70 percent. In China 120 cities Nicaragua Swaziland account for three-quarters of the country's Côte d'Ivoire GDP.104 Clearly cities make a dominant Timor-Leste contribution to economic production, even Guyana Moldova in poor and middle-income countries. Costa Rica There is also ample evidence that urban Egypt, Arab Rep. of Chile areas in developing countries, including Ecuador those in the poorest countries in Africa, Benin Nigeria deliver external economies. Consumption Mongolia in urban and rural households in a broad Georgia Bulgaria cross-section of developing countries shows Pakistan that people with similar observable charac- Armenia Romania teristics enjoy higher consumption attribut- Turkey able purely to their urban location. The gains Jordan Croatia range from 2 percent in Hungary, the Krygyz Ukraine Republic, and Poland, to 30 percent in Costa Mozambique Rica, Ethiopia, India, Romania, and Tanza- Congo, Dem. Rep. of Tajikistan nia, and to more than 80 percent in Angola, Poland Bolivia, and Rwanda (see figure 4.1). Hungary Kyrgyz Republic These magnitudes make it futile for 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 policy makers to try to restrict the flow of Ratio of urban consumption premiums people to urban areas. Even when restric- to rural consumption levels tions have stemmed migration flows, the Source: WDR 2009 team calculations, using 120 household surveys in 75 countries. 142 WORLD DEVELOPMENT REPORT 2009 economic costs have been high. China's attractive to investors, a city must satisfy policies to restrict rural-urban migration the demands of its dominant or growing until the late 1990s stunted urbanization, industries for both real estate and facili- with between half and two-thirds of Chi- ties. For example, professional services and nese cities remaining too small. For the financial services require large amounts of typical city in China, being too small is office space, which can be more efficiently estimated to result in a loss of about 17 per- provided vertically in high-rise office cent in net output per worker; for at least a buildings. Manufacturing requires large quarter of the cities, these losses may range amounts of land for factories to produce between 25 and 70 percent.105 goods, and for warehouses to store products and materials. And the recreation, tourism, A misplaced preoccupation with size, and entertainment sectors require highly not function, of cities visible, pedestrian-friendly areas of cities A city's prospects for prosperity and even and retail space. survival are determined by how nimbly The ability and ease of a city to adapt its the same piece of land is adapted to chang- land to different uses according to chang- ing market demands. Given that land is an ing market needs will enable its sustain- immobile factor critical to the production able growth. The last 800 years in Hong of any activity, the real estate choices that Kong, China, and the last 300 in New York cities provide influence the magnitude of show the importance of markets in signal- external economies and the nature and ing and implementing this urban renewal specialization of city economies. To be (see boxes 4.6 and 4.7). In New York the mercantile trade grew out of the early shipping industry. In turn, the mercantile trade industry would help give birth to the BOX 4.6 Hong Kong, China: market forces led the way, city's modern finance industry. Traders in government followed New York City in the late-nineteenth cen- Hong Kong, China, with a land area ties. For many decades, the private tury thrived by sharing access not only to of about 1,000 square kilometers, sector showed more commitment to physical transportation infrastructure (the less than a quarter the size of Rhode and interest in urban redevelopment. harbor, canals, and railroads), but also to Island, started out as a shing village. Between 1960 and 1980 the gov- intermediate inputs of specialized services In the 1200s Hong Kong, a hilly and ernment experimented with urban not available elsewhere (such as scheduled barren island, saw its rst population renewal and comprehensive redevel- sailings, wholesalers, and ship brokers). boom as Chinese ed the mainland to opment to improve environmental escape war and famine. People made conditions, tra c circulation, and Later, these inputs to trade became the a living on salt production, pearl community facilities. Over subse- foundations for shared inputs in finance, diving, and shery trades. Between quent decades, the exibility in land with maritime insurance underwriting the 1650s and the 1800s, Hong Kong use planning and the participation the subsequent basis for other forms of was also a military outpost and naval of the private sector would prove investment.106 base, and its economy continued to crucial to satisfying the demands on Cities that provide fluid land and property rely on trade. By the end of World land for housing, commerce, industry, markets and other supportive institutions-- War II in 1945, the population in Hong transport, recreation, and commu- Kong, China, had been reduced to nity use. This combination enabled such as protecting property rights, enforcing less than half the prewar total of 1.6 Hong Kong, China, to ourish into the contracts, and financing housing--will more million. regional center of business and nan- likely flourish over time as the needs of mar- In the 1950s and 1960s, Hong Kong cial services that it is today. kets change. Successful cities have relaxed took up manufacturing buttons, Consistent with the tradition of min- zoning laws to allow higher-value users to arti cial owers, umbrellas, textiles, imal government intervention in Hong bid for the valuable land--and have adopted enamels, footwear, and plastics. Kong, China, the private sector has flexible land use regulations to adapt to their Squatter camps provided homes for been the driving force behind urban the masses. The camps led to disas- transformation. The government con- changing roles overtime. ters--like the Shek Kip Mei re--until tracted out urban redevelopment to a The benefits of agglomeration econo- the governor responded by putting specialist organization dominated by mies arise from the density of economic up multistory residential buildings. private development interests. activity. These are the advantages for an Conditions in public housing were information technology startup locat- basic, with communal cooking facili- Source: Adams and Hastings 2001. ing in Silicon Valley or a bookstall owner Scale Economies and Agglomeration 143 BOX 4.7 Reinvention and renewal: how New York became a great city New Amsterdam was founded as a Dutch New York characterized SoHo as a com- a generation, the transformation in the colony in 1614. It passed into British hands mercial slum. But today the area, once meatpacking district was as stark as the and became New York in 1664. Manhat- called Hell's Hundred Acres, is a busy contrast between night and day.b Today, tan, the Bronx, Brooklyn, Queens, and commercial and retail district and home more than 35 wholesale meat companies Staten Island were brought together to New York University.a still operate there. But the area is now in 1898 in the form we know today. Wall Street. The nancial district is also home to world-class restaurants, art Throughout its history, New York has con- one of the city's best-known and old- galleries, a fashionable retail corridor, tinually rebuilt, reinvented, and renewed est neighborhoods. Today's Wall Street and night clubs that take advantage of itself. Once a fur-trapping and shipping neighborhood is part of Manhattan Com- the enormous former factory spaces. hub because of its natural harbor, New munity District 1, which extends south Real estate prices have skyrocketed. Mr. York City is today a global nancial cen- from Canal Street to the tip of Manhattan Inconiglios paid $50 a month when he ter and a regional powerhouse in mass at Battery Park and includes Governor's moved to the meatpacking district. In media, arts, information and communica- Island. It is home to the New York Stock 2007 the Carlyle Group and Sitt Asset tion technology (ICT) innovation, and Exchange and the NASDAQ, the world's Management acquired a pair of buildings medical research. The New York metro- two largest stock exchanges. on West 14th Street for $70 million.c politan area is home to more than 18.7 The street's name was originally De Wall Williamsburg. This neighborhood million people with a GDP of $1,133 bil- Straat in reference to the Walloons, Belgian reinvented itself from a booming trade lion, making it the second-largest urban farmers who were the majority of the port to a rich industrial town after the agglomeration in the world, after Tokyo. residents living in New Netherland around Civil War. With the construction of the New York had a gross metropolitan prod- Fort Amsterdam in 1630. The beaver belt Williamsburg Bridge in 1903, many Jewish uct of $950 billion in 2005, making it the was the single most important commodity families who lived in Manhattan's Lower largest regional economy in the United in New Netherland. Trade encouraged new East Side crossed the East River to a bet- States. If it were a country, New York City activity in the production of food, timber, ter life in Williamsburg. When industries would be the world's seventeenth larg- tobacco, and eventually slaves. In the late- left the area in the 1960s and 1970s, Wil- est, ahead of Switzerland. At more than eighteenth century there was a button- liamsburg became an immigrant ghetto. $56,000, it has the second highest per wood tree at the foot of Wall Street under But the cheap rent also made the neigh- capita production in the world. which traders and speculators gathered borhood an artistic hub. The neighbor- A tour of four neighborhoods reveals to trade informally. In 1792 this arrange- hood evolved into a mix of Italian, Polish, the city's versatility and vibrancy. ment was formalized with the Buttonwood Hispanic, and Hasidic residents. In 2005 SoHo. In the 1700s SoHo was farmland. Agreement, which laid the groundwork for New York City approved zoning changes By the early 1800s it was primarily resi- the New York Stock Exchange. that would allow for open spaces, parks, dential, inhabited by the wealthy and, Meatpacking district. In 1969, when a ordable housing, and light industry. soon after, by the middle class. In due Vincent Inconiglios moved to a loft on Today, prices average $700­$900 per time rapid development attracted many Gansevoort Street in the meatpacking square foot, and prominent waterfront businesses. Hotels, theaters, stores, man- district, it was a no man's land. The neigh- developments range in the millions.d sions, minstrel halls, casinos, and brothels borhood was de ned by a stench that appeared along Broadway. Starting in overpowered the senses. Down the street Sources: Seeman and Siegfried 1978; Shaw the 1880s the textile industry settled in from Mr. Inconiglios was a pickle fac- 2007; Biedermann 2007; Lynch and Mulero 2007. the area. By the 1950s artists ocked to tory, and an importer of Spanish melons a. Seeman and Siegfried 1978. the area because of low rents, a result of occupied the shop downstairs. The area b. Shaw 2007. people, industry, and commerce shifting was teeming with barrels of bones, meat, c. Biedermann 2007. uptown. In October 1962 the City Club of and men in bloody white coats. Within d. Lynch and Mulero 2007. locating close to other bookstalls on Dada- they are moving to has lower wages and bhai Naoroji Road in Mumbai, India. cheaper land. While the financial sector of London is But bigger city size and economic den- largely concentrated in a few square miles sity bring their own problems. For people of the City and Canary Wharf, financial and firms, city living comes at a price in firms also benefit from being located both developing and developed countries. anywhere in Greater London. Firms ben- Traffic in central London moves at only efit from locating close to other firms in 11 miles per hour107--the same speed as either the same or different industries and horse drawn carriages a hundred years ago. unless all of them move together, they will Beijing is notorious for its pollution-in- become less profitable, even if the location duced smog. Land in Mumbai is among the 144 WORLD DEVELOPMENT REPORT 2009 most expensive in the world. High levels of that reduce the gains from agglomeration crime are an accepted feature of city living economies. around the world. Millions of city dwellers But restricting the growth of cities is live in overpopulated slum housing, with not the answer. There is no evidence that little or no access to basic amenities and the agglomeration economies of megaci- services. These are the costs of density, the ties have been exhausted. Indeed, evidence diseconomies of agglomeration. suggests that the growth of vehicles in the The main source of diseconomies is the developing countries is increasing with per paucity of land in places where agglomera- capita income along a path similar to that tion economies take hold. Land is limited followed by the richer countries.108 The and as economic growth occurs, it has to problem has more to do with the spatial be used with increasing intensity. Take structure of the city and investments in Manhattan in New York City, which has an infrastructure. Vehicle ownership is ris- area of less than 35 square miles. In 1800 ing 15 to 20 percent annually in much of it had a population density of just under the developing world.109 But most coun- 3,000 people per square mile. By 1850 this tries have not matched this growth with a had risen to about 23,500, peaking in 1910 parallel expansion of transportation infra- with a population density of more than structure, so traffic congestion is severe. 100,000. Today, the population density is Cities in developing countries only devote about 70,000. With land in fixed supply, its half as much land space to roads as in the use eventually can offset any further ben- United States. But it is not just a matter of efits from agglomeration economies. The increasing this capacity. In cities such as way to offset the fixed supply of a factor of Bangkok and Manila, it is the management production is to substitute other factors for and the use of road space that is important. it, and the rise of skyscrapers in many large Part of the problem is that in many cities urban areas is an illustration of this substi- the responsibility for road infrastructure tution of capital for land. The building of has devolved from central to local govern- subway systems in many of the developed ments, which do not always have the neces- countries' larger cities is another example. sary resources. But such substitution has its limits, and the Combined with the differing propensi- increasing shortage of land in cities leads to ties of industries to benefit from agglomer- higher rents and congestion costs for work- ation economies, the resulting constraints ers and firms. explain why the spatial distribution of Better transport can, by reducing the economic activity within a country is not economic distance to density, in essence restricted to a single center, but rather make land a less-binding resource. Indeed, consists of multiple centers of differing with the long-term decline in transporta- sizes. For policy makers the challenge is to tion costs, cities have expanded. In 1680 best relax the constraints generated by the London was only 4 square miles and, congestion and overcrowding of land and because of the difficulties of traveling, resources so that the benefits of agglom- more than 450,000 people were crammed eration can be maximized. In many cases into this small area. By 1901 the city had these constraints have been tightened by expanded to 24 square miles, and the misguided land use policies and planning average population density had fallen to failures, only adding to congestion (see 79,000. In 2001 London's 627 square miles chapter 7). had a population density of 13,203 people per square mile. An expanding city meant A misplaced fascination that millions of commuters have to be with "new" cities transported from the suburbs, large vol- The land Chicago was built on is not all umes of retail goods have to be delivered that different from the more sparsely to shops, and manufactured products developed places around Lake Michigan. have to be shipped out. All of this leads Yet the difference in economic production to congestion or diseconomies of scale and household earnings between Chicago Scale Economies and Agglomeration 145 and other settlements on the lakefront for economic reasons, but some were cre- in Wisconsin and Indiana is stark. And ated for political reasons. Have these new along the 10-hour drive through Texas towns and cities, met their goals? Generally on Interstate Highway 75, wages and land not. rents spike in Fort Worth, Austin, and San Antonio and drop off sharply at points in · New cities do better when they are between. It is hard to reconcile these huge located near larger successful cities. But differences in economic density with the they often suffer from the same govern- minor differences in physical geography; ment-related failures that led the gov- it is as if the areas of Fort Worth and San ernment to establish them, especially the Antonio cast a shadow over the points in failure to manage large cities well. That is, between. A better understanding of eco- governments that do badly in managing nomic geography, characterized by exter- large old cities also do badly in managing nal economies, is required to harness small new cities. economic forces. But it is not always obvi- · New cities attract residents, sometimes ous that developing country governments even more than anticipated, but often understand economic geography or appre- not the people intended. That is, gov- ciate these forces. ernments can set up (noncapital) cit- A survey of new city initiatives in the ies, and they sometimes become viable, Arab Republic of Egypt, Brazil, Hun- but not for the reasons the government gary, India, and República Bolivariana de envisaged. Venezuela is sobering. Brazil transferred · These cities attract people because of its capital city from the coast to the mid- the circular causation that the new eco- western interior more than 900 kilometers nomic geography emphasizes: work- away. República Bolivariana de Venezuela ers and entrepreneurs come to seek picked Ciudad Guayana in the 1950s, a city markets, and then more people come in the southern part of the country, to be because this is where the markets are. the industrial "growth pole" of the central But there may be huge opportunity and southern region and to attract people costs, because the counterfactual could and jobs from the already rapidly growing be more organic growth of settlements. metropolitan region in the north. In many That is, it makes sense for private agents formerly planned economies, the more to come to these cities since others are common practice was building industrial already there, but large efficiency losses towns to accelerate industrialization. In may result from the country's point of Hungary, Dunaujvaro was designed as a view. Once a "bad" location is picked, "steel town," Tiszaújváros as a "chemistry it may not fail entirely because of cir- town," and Kazincbarcika as a "mining and cular causation, but that means the eco- heavy industry town." The Soviet Union nomic costs of the mistake are greater, built Magnitogorsk into a steel town in an not smaller, since the country will pay area with huge reserves of iron ore to chal- these costs for a long time. lenge its capitalist rivals. · New noncapital cities that seem to suc- Some new towns were built around met- ceed are those where the purpose and ropolitan areas to alleviate the pressures location are chosen over time by markets that the large cities faced. Navi Mumbai and in cases in which the government was established in 1972 with the hope of hastens the pace of growth by coordinat- developing a twin city for Mumbai, and to ing investments in infrastructure, hous- decongest Mumbai. Egypt started a com- ing, and general governance. prehensive new town construction program around Cairo and away from Cairo to create For these reasons, cities and towns should a "new population map of Egypt" starting be seen as market agents that, just like firms in the 1970s, and the construction is still and farms, serve market needs. ongoing. Many of these cities were created CHAPTER 5 Factor Mobility and Migration T he largest movement of people in the conditions.2 In a globalizing economy capi- world occurs every year around the tal is mobile and will move quickly. Labor, beginning of February, as millions in by contrast, tends to be less mobile for cul- China travel to be with their families for the tural and linguistic reasons. Second, a strong Lunar New Year. In 2006, to mark the Year policy consensus supports the free flow of of the Dog, about 11 million people traveled capital for foreign direct investment, even if out of Shanghai alone, and 10 million trav- this consensus is not always fully manifested eled into the city; 60 million people traveled in the policies of the many countries where on the last day of the festivities. In Febru- external and internal obstacles remain. ary 2008 ice and snow storms frustrated the Relative to capital, labor is subject to more plans of an estimated 200 million people political restrictions and to explicit and trying to travel across China to be with implicit barriers. Some novel insights come their families for the New Year. Similarly, in from considering agglomeration economies the United States during the Thanksgiving and human capital together. Based on these period, millions take to the roads, airports, insights, this chapter makes a case for facili- bus and train stations. The number of trips tating the voluntary movement of people. longer than 50 miles increases by half, with Textbooks teach us that the factors of about 10 million people a day traveling over production--capital and labor--move the holiday weekend, almost twice the daily to places where they will earn the highest average during the rest of the year.1 The ris- returns, and that these are the places where ing volume of holiday travelers in almost each factor is scarce. But by recognizing that every country, rich or poor, is a telling reflec- increasing returns to scale are important, tion of just how many people live and work policies can be made better. Unlike unskilled in a place other than where they were born. labor and physical and financial capital, This chapter is about the mobility of skilled labor--embodying human capital, labor and capital, how their movements a person's education, and endowment of help to concentrate economic activity, and skills and talent--earns higher economic how these flows mitigate differences in wel- returns where it is abundant, not scant. This fare that can accompany economic concen- explains the clustering of talented people tration. It emphasizes movements of labor, in cities, the migration of entrepreneurs especially, for two reasons. First, although to leading areas within countries, and the many countries and regions are still thirsty rising number of skilled migrants moving for investment, national reforms and inter- to wealthy countries, all places where their national agreements since the 1970s have skills seem plentiful but are nonetheless eliminated most restrictions on the flow of highly rewarded. Recognizing the growing capital. The scarcity of capital in some places benefits to human capital in areas where it now has less to do with actual barriers and has already accumulated changes the think- 146 more to do with unfavorable investment ing about how governments should try to Factor Mobility and Migration 147 raise growth and achieve spatial conver- theories viewed the outmigration of gence in living standards. skilled people as both socially traumatic But policy makers in many developing and an economic loss. New theories rec- countries--particularly in South Asia and in ognize that migration, when driven by Sub-Saharan Africa--have been conditioned economic forces, is a positive and selec- by an early literature on migration to worry tive process. The interactions between about the specter of rising urban unemploy- agglomeration and labor migration ment, overburdened city services, social ten- power places forward. sions in economically vibrant areas, and a · The policy challenge is not how to keep "brain drain." As a result, many countries still households from moving, but how to restrict the movement of people. Yet direct keep them from moving for the wrong and indirect restrictions, although not effec- reasons. Instead of trying to fight the pull tive at stemming the flow of people, create of agglomeration economies on workers unnecessary friction and impose the cost of and their families, governments should forgone opportunities for economic growth work to eliminate the factors that push and convergence in living standards. people out of their home areas. By doing Although researchers are now less skep- so they can improve the quality of migra- tical about the benefits of labor migra- tion and encourage economic growth. tion, policy makers in both developing Labor mobility driven by economic rea- and developed countries are not so sure. sons leads to greater concentration of What can they learn from each other? This people and talent in places of choice and chapter documents the disconnect between adds more to agglomeration benefits in the implications of recent research and these places than to congestion costs. the migration policies in developing and developed countries, showing how they are From mercantilism to globalization changing. to autarky, and back again Keep in mind three points: Restrictions on the flow of capital, labor, · The facts about labor migration can be and goods fragmented the world economy surprising. Although international migra- betweenthetwoworldwars,butglobalization tion still captures the greatest attention in picked up speed after the end of the Cold War the media, by far the largest flows of people in 1990, loosening the restrictions and inte- are between places in the same country, grating the world economy. Capital mobil- and not from villages to cities, but from ity within and across countries increased. economically lagging to leading rural International labor mobility--particularly areas.3 Although the movement of people unskilled labor--declined after the mass to cities is on the rise, particularly in South movements in the nineteenth century and and EastAsia,the most sustained pattern of only recently began to rise. But the mobility internal mobility within developing coun- of people within countries has accelerated. tries has been from lagging rural areas, So, for the movement of labor over the last like Western Kenya and Bihar in India, to century, distance has diminished, but divi- leading rural areas in those countries, like sions not only have increased (many more the Central Highlands and Punjab, and a borders) but indeed may have become more large share of this migration is temporary.4 obstructive (many more restrictions). And when people move across national borders, they do not go far.5 Most interna- Capital flows--up sharply since the 1970s tional migration takes place within world The mobility of capital across borders, par- regional "neighborhoods," particularly ticularly investment capital, has increased between developing countries.6 since the 1970s. The world is returning to · Movements of capital and labor are an age of capital mobility abandoned at the driven by the benefits of agglomeration. onset of World War I. From 1880 to 1914, a Early migration theories were based on growing share of the world economy oper- surplus labor, fixed "exogenous" rates ated under the classic gold standard and a of growth, and job creation--and these global financial market centered in London. 148 WORLD DEVELOPMENT REPORT 2009 The gold-standard fixed exchange rates and national aims, domestic policy goals, and underpinned a stable and credible regime "beggar-thy-neighbor" trade strategies that that enforced discipline on countries. Interest encouraged strict capital controls. Interna- ls. rates tended to converge and capital to flow tional capital flows petered out, and invest- with relative eaease across borders, const nstraineded ment from abroad was viewed with suspicion. only by the limits of technology. Many rapidly So prices and interest rates across countrie fell ic ies industrializing countries outside Europe--inrop out of sync. Even during the Bretton Woods the Americas and in Asia--took part in an era from the end of World War II to 1971, increasingly global economy.7 re lob as countries attempted to rebuild the global The fluid economic environme onom ronment was economy, fears of mobile capital that had mobi destroyed by two world wars and the global wo taken hold during the interwar years proved economic retraction in between. From 1914 difficult to dispel. Indeed, capital controls to 1945, monetary policy was used to pursue were sanctioned to prevent currency crises. we Figure 5.1 International capital flows have surged since the 1970s Gross private capital flows Percentage of GDP 35 World Sub-Saharan Africa South Asia 30 Middle East & North Africa Latin America & Caribbean 25 Europe & Central Asia East Asia & Pacific 20 15 10 5 0 1970 1975 1980 1980 1985 1985 1990 1995 2000 2005 Year Source: World Bank 2007j. Figure 5.2 A large share of capital now as direct investment flows as direct investment Foreign direct investment, net inflows Percentage of GDP 5.0 World Sub-Saharan Africa South Asia 4.5 Middle East & North Africa Latin America & Caribbean 4.0 Europe & Central Asia East Asia & Pacific 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1970 1975 1980 1980 1985 1985 1990 1995 2000 2005 Year Source: World Bank 2007j. Factor Mobility and Migration 149 But the growing volume of trade made an estimated 48 million emigrants, between it difficult to constrain the flow of capital, 10 and 20 percent of the population, left and in the early 1970s, the constraints began Europe (see table 5.1).12 Unlike international to loosen. Fixed exchange rates were aban- migration today, the movement of people doned, creating an international economic across borders in the first and second periods environment that could accommodate capi- of labor migration was not driven by a lack tal flows and market development. Political of economic growth or development in the stability, structural reforms, and regula- sending countries. Indeed, the first coun- tory structures lowered the risks to foreign try to industrialize and the most advanced investment in developing countries, and at the turn of the twentieth century--Great capital markets responded with enthusiasm Britain--was by far the largest sending coun- (see figures 5.1 and 5.2). By 2000, capital try. Economic analysis shows a positive cor- mobility returned to levels seen in 1914.8 relation between emigration and the extent of Capital has become the most mobile fac- industrialization in the sending country.13 tor of production. Converging real interest A long period of autarky and economic rates, declining spreads between deposit and nationalism began in 1910. Unprecedented lending rates, and shrinking risk premiums restrictionswereplacedontrade,investment, on the sovereign debt of developing coun- and immigration, stifling the international tries are evidence of an international envi- movement of capital and labor. The trickle ronment in which capital can go where it of international migrants consisted mainly wants to, even if it does not always go where of refugees and displaced persons, unrelated people wish it would. Indeed, recent com- to economic development. parisons of the marginal product of capital The postindustrial period of migration between high-income and lower-income began in the 1960s, characterized by new countries show little evidence of friction preventing the flow of capital to poor coun- Table 5.1 In the late-nineteenth century most international migrants came from better-off Europe tries. Instead, the lower capital ratios in poor Top sending countries in 1900 and 2000 countries are explained by lower efficiency Percentage of Top emigrant- Percentage of and a lack of complementary factors.9 Top emigrant-sending sending country's sending countries sending country's countries in 1900 population in 1900 in 2000 population in 2000 Labor flows across borders--blocked for British Isles 40.9 Mexico 10.0 much of the twentieth century Norway 35.9 Afghanistan 9.9 In a pattern similar to that of capital flows, Portugal 30.1 Morocco 9.0 from a peak in the late-nineteenth cen- Italy 29.2 United Kingdom 7.1 tury, the mobility of labor across borders declined for most of the twentieth century, Spain 23.2 Algeria 6.7 with the rise of economic barriers at the Sweden 22.3 Italy 5.7 onset of the Great Depression and World Denmark 14.2 Bangladesh 5.0 War II. Geographers have long recorded Switzerland 13.3 Germany 4.9 the movement of humankind, from the Finland 12.9 Turkey 4.5 earliest migrations out of Africa to Europe and Asia,10 to the resurgence of movement Austria-Hungary 10.4 Philippines 4.3 across borders. They categorize the modern Germany 8.0 Egypt, Arab Rep. of 3.5 history of international migration into four Netherlands 3.9 Pakistan 2.4 distinct periods: mercantile, industrial, Belgium 2.6 India 0.9 autarkic, and postindustrial.11 Russian United States 0.8 During the mercantile period, from 1500 Federation­Poland 2.0 to 1800, the movement of people around the China 0.5 France 1.3 world was dominated by Europeans. Agrarian settlers, administrators, artisans, entrepre- Europe 12.3 neurs, and convicts emigrated out of Europe Japan 0.9 in large numbers. During the industrial Total (Europe and Japan) 11.1 Total (of countries 1.9 period that followed--sometimes referred to listed) as the first period of economic globalization, Sources: Massey 1988, Parsons and others 2007, in Ozden and Schiff 2007. 150 WORLD DEVELOPMENT REPORT 2009 forms, no longer dominated by flows out of the top, each accounting for between 3 Europe. People began to move from lower- million and 4 million emigrants. income countries to wealthy countries, with The volume and flow of international a surge in migrant labor from Latin America, migration is no longer mainly associated Africa, and Asia. In the 1970s, countries that with population growth or demographic had been major sources of migrating labor pressure. Unlike the 1960s and 1970s, to Northern Europe and the Americas-- international immigrants are not from such as Italy, Portugal, and Spain--began the poorest, least developed countries. to receive immigrants from Africa and the Voluntary international movements of Middle East. The growing wealth of oil-rich people tend to originate from countries countries in the late 1970s made economies with rapidly growing economies and fall- in the Persian Gulf new destinations. And by ing fertility rates. Emigration today is the the 1980s, migration to East Asian countries outcome less of desperation and more of spread beyond Japan to Hong Kong, China; integration.15 the Republic of Korea; Malaysia; Singapore; The pattern of international migration is Taiwan, China; and Thailand. also shifting, from South-North to South- Today, about 200 million people are for- South.16 Although the top three receiving eign born, roughly 3 percent of the world countries are members of the Organisation population.14 The flows of new interna- for Economic Co-operation and Develop- tional migrants have varied--from a ment (OECD)--the United States, Ger- 2-percent increase between 1970 and 1980, many, and France, in that order--Côte to 4.3 percent from 1980 to 1990, and to d'Ivoire, India, the Islamic Republic of Iran, 1.3 percent from 1990 to 2000. Poor and Jordan, and Pakistan are now among the middle-income countries now send the top 15 destinations. But migration of labor most emigrants, led by Bangladesh, China, from the low- and middle-income countries the Arab Republic of Egypt, India, Mexico, of the South to the wealthy countries of the Morocco, Pakistan, the Philippines, and North is still large, 37 percent of interna- Turkey (see table 5.1). But Italy, Germany, tional migrants in 2000. Movement between and the United Kingdom still rank near Northern countries made up 16 percent of Table 5.2 Close to home: the largest international flows of labor are between neighboring countries Percentage of world migrants recorded as a bilateral movement between pairs of countries/regions, circa 2000 Destination countries/regions Countries/ UE15 & AU & HI regions of origin USA Canada EFTA NZ Japan MENA LAC ECA MENA AFR EAP SAS Total USA n.a. 0.16 0.34 0.04 0.02 0.03 0.43 0.04 0.05 0.03 0.15 0.02 1.29 Canada 0.54 n.a. 0.10 0.02 n.a. 0.01 0.02 0.01 n.a. 0.01 0.01 0.01 0.74 EU15 & EFTA 2.22 0.98 5.59 1.13 0.01 0.14 0.68 0.78 0.16 0.39 0.20 0.19 12.47 AU and NZ 0.06 0.02 0.16 0.23 n.a. n.a. n.a. 0.01 n.a. 0.01 0.03 0.01 0.55 Japan 0.28 0.02 0.06 0.02 n.a. n.a. 0.04 0.01 n.a. n.a. 0.05 0.01 0.50 HI MENA 0.10 0.03 0.06 0.01 n.a. 0.12 n.a. 0.02 0.72 0.01 0.04 0.03 1.14 LAC 10.22 0.36 1.45 0.05 0.13 0.10 2.07 0.17 0.08 0.14 0.14 0.25 15.15 ECA 1.27 0.39 4.75 0.26 n.a. 0.92 0.07 16.98 0.33 0.34 0.18 0.41 25.88 MENA 0.47 0.17 2.85 0.10 n.a. 1.49 0.04 0.16 1.79 0.28 0.05 0.12 7.52 AFR 0.41 0.12 1.58 0.10 n.a. 0.25 0.02 0.11 0.18 7.00 0.03 0.16 9.97 EAP 3.32 0.71 1.09 0.63 0.54 0.48 0.06 0.14 0.14 0.09 3.86 0.27 11.32 SAS 0.83 0.31 1.13 0.12 0.01 2.66 0.02 0.13 2.07 0.14 0.37 5.67 13.46 Total 19.71 3.25 19.14 2.72 0.74 6.22 3.45 18.56 5.53 8.44 5.10 7.15 100 Source: Parsons, Skeldon, Walmsley, and Winters 2007. Notes: AFR = Africa; AU = Australia; EAP = East Asia and Pacific; ECA = Europe and Central Asia; EU15 = European Union 15; EFTA = European Free Trade Association; HI MENA = High-income countries in the Middle East and North Africa region; LAC = Latin America and the Caribbean; NZ = New Zealand; SAS = South Asia; n.a. = not applicable. Factor Mobility and Migration 151 migration and that between Southern coun- of immigrants to the United States, 20 per- tries accounted for 24 percent, with Argen- cent to France, and 10 percent to Germany tina, China, Côte d'Ivoire, India, the Islamic come from countries with which they share Republic of Iran, Jordan, Pakistan, and a border, 81 percent of immigrants to Côte South Africa as important destinations. d'Ivoire, 99 percent to the Islamic Republic There is a strong tendency for labor to of Iran, and 93 percent to India are from move between countries in the same world neighboring countries. neighborhoods, particularly for South- International migrants tend to stay South migration (see table 5.2). Migration within regional neighborhoods, particularly of labor is usually from countries with a in developing world regions, most notably in shared land border.17 While only 30 percent Sub-Saharan Africa (see figure 5.3). Almost Figure 5.3 Migrants from East Asia, Latin America, and the Middle East and North Africa go mainly to OECD countries, but most in South Asia and Sub-Saharan Africa stay close to home Destination of emigrants from countries in East Asia & Pacific Destination of emigrants from countries in Europe & Central Asia Percent Percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 OECD Other Within Other Unidentified OECD Other Within Other Unidentified countries high-income region developing countries countries high-income region developing countries countries countries countries countries Destination of emigrants from countries in Latin America & Caribbean Destination of emigrants from countries in Middle East & North Africa Percent Percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 OECD Other Within Other Unidentified OECD Other Within Other Unidentified countries high-income region developing countries countries high-income region developing countries countries countries countries countries Destination of emigrants from countries in South Asia Destination of emigrants from countries in Sub-Saharan Africa Percent Percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 OECD Other Within Other Unidentified OECD Other Within Other Unidentified countries high-income region developing countries countries high-income region developing countries countries countries countries countries Source: Ratha and Xu 2008. 152 WORLD DEVELOPMENT REPORT 2009 BOX 5.1 Regional labor mobility has been falling in Sub-Saharan Africa The rate of labor migration within devel- to move within a country: to pursue job The Southern African Development oping regions is highest in Sub-Saharan opportunities and to diversify risks to Community (SADC), a loose alliance of Africa, but it has fallen since the 1960s. income. Indeed, the economic rationale nine countries of Southern Africa formed More than 60 percent of emigrants from for movement from a lagging to a leading in 1980, coordinated development proj- Sub-Saharan countries move to other area of the same country is virtually indis- ects to lessen economic dependence on countries in the region. The higher rate of tinguishable from that for moving across South Africa during the Apartheid era. labor movement within the region rela- a border in a region like Sub-Saharan Part of this alliance was a provision for the tive to other developing world regions is Africa, where these movements are over ow of labor between member countries. partly a consequence of the large number relatively small distances and for the most The recent anti-immigrant violence in of land borders, but also of the relative part unmonitored. But many migrants South Africa is a setback for regional inte- permeability of these borders and the dif- also move across borders within a frame- gration and migration. culty of monitoring the ow of people work of formal agreements between Kenya, Tanzania, and Uganda have crossing them, despite numerous legal countries. Since the 1960s, a web of formed the East African Community (EAC), restrictions. bilateral and multilateral agreements has a regional intergovernmental organiza- Migrants represented just over 3.5 grown in an attempt to reap the bene ts tion for interterritorial cooperation with percent of the population in Sub-Saharan and control the costs of labor mobility roots extending to 1948 before indepen- Africa in 1960 but only 2.3 percent by within subregional neighborhoods. dence. The EAC, gaining strength as a 2000. In 1960 the stock of migrants rela- In West Africa governments have framework for economic integration since tive to the population was much higher in attempted to manage population move- 1999, recently introduced East African Southern Africa than in other corners of ments within the Economic Community passports and temporary passes to speed the region, but it has since fallen to about of West African States (ECOWAS), which the movement of labor. the level of migrants in Western Africa has had the most in uence on the ow The movement of labor across borders (see the table below). In Eastern Africa and composition of migration in Sub- in Sub-Saharan Africa's neighborhoods and Central Africa the stock of migrants Saharan Africa. Established in 1975, could be encouraged. During economic has fallen signi cantly. ECOWAS includes a protocol allowing the contractions, policy makers in these neigh- Voluntary migration across borders free movement of people and the right borhoods feel the same xenophobic politi- in Sub-Saharan Africa is motivated by of residence and establishment for the cal pressures as governments in rich coun- the same reasons that prompt people citizens of its member countries. tries do to favor native workers and ration public services to nonnatives. Less than one-third of governments in Sub-Saharan Sub-Saharan Africa's stock of migrants has fallen since 1960 Africa have rati ed the International Con- Per 1,000 population, by regional neighborhood vention on the Protection of the Rights of Neighborhood 1960 1970 1980 1990 2000 All Migrant Workers and Members of Their Eastern Africa 37.3 31.6 35.3 31.2 17.9 Families. To really reap the bene ts from labor mobility for faster economic growth Central Africa 40.7 44.2 35.9 20.6 16.0 with convergence across Sub-Saharan Afri- Southern Africa 49.7 40.6 33.3 34.5 30.6 ca's regional neighborhoods, much more can be done to welcome migrants and Western Africa 28.0 27.3 34.6 28.5 30.0 open channels for the ow of remittances Sub-Saharan Africa 35.6 32.8 35.0 29.0 23.0 to their home countries. Source: UN Population Division, in Lucas 2006. Source: Lucas 2006. 17 percent of recorded international migra- act as economic engines of growth in devel- tion around 2000 occurred within Europe oping regions--to Côte d'Ivoire in West and Central Asia, though a large part of this Africa, to South Africa in Southern Africa, resulted from border changes and changes to Thailand from countries in the Greater in the definition of who was "foreign born" Mekong Region in South Asia (see box 5.2), in these countries. The second highest rate and to Argentina from Bolivia, Chile, Para- of labor mobility between countries in the guay, and Peru. Distance is not the whole same region was for Sub-Saharan Africa (see story. Divisions, in the form of language and box 5.1). culture, also determine the pattern of inter- Cross-border migration within subre- national migration, with more than half of gional neighborhoods flows to countries that migrations occurring between countries Factor Mobility and Migration 153 with a common language. Of course, a com- mon language and other cultural factors BOX 5.2 Cross-border migration in the Greater Mekong reinforce the neighborhood effects. Subregion Immediately after World War II--when economies were growing rapidly, wage The Greater Mekong Subregion Remittances from Thailand to inequality was falling, and the volume of (GMS), with 315 million people, com- Cambodia, Lao PDR, and Myanmar labor movement across borders was low-- prises Cambodia, the Lao People's are estimated at $177 million to $315 international migration was not really a Democratic Republic, Myanmar, Thai- million a year. In Cambodia they land, Vietnam, and the Guangxi and are important for 91 percent of the thorny political issue. But after 1975--as Yunnan provinces of China. Despite households interviewed in one of the growth in high-income countries slowed, marked disparities in economic main sending provinces. wage inequality increased, and the volume development among its members, Much of this migration, however, of international migrants swelled--immi- the subregion is extremely dynamic, will remain irregular and unregu- gration became a heated topic of debate in with annual growth rates averaging lated, increasing the vulnerability electoral politics. Indeed, selective "man- above 6 percent in recent years. of migrants, the majority of whom aged immigration" policies first introduced Thailand's higher wages, faster do not use social services because growth, and more favorable social they fear deportation. One of the in Australia and Canada in the 1980s are and political climate attract people biggest problems is ensuring access becoming popular in other high-income trying to escape poverty in Cambodia, to schooling for children, who also destination countries.18 Lao PDR, and Myanmar. For Thailand su er from a lack of health care. With the return to globalization since the migrants are a reservoir of cheap For the same reasons that migrant the end of the Cold War, the movement of and exible labor and a boost to its adults rarely receive health treat- labor across borders resumed, but govern- competitiveness in some sectors. And ment, migrant children rarely receive ments still restrict the number and influ- Thailand alone is estimated to have 1.5 vaccinations. million to 2 million regular and irregu- Despite the bene ts of labor mobil- ence the characteristics of immigrants. This lar migrants from the GMS. Removing ity, facilitating legal ows of people contrasts sharply with the "first era of glo- them could reduce Thailand's GDP by has been slow. Sending countries balization" in the nineteenth century, when around 0.5 percentage points a year. generally lack the capacity to man- the flows of labor were free of obstruction. By some estimates, more than half age the mass export of labor and to Restrictions on immigration arise and are of migrants enter Thailand holding protect the rights of their nationals sustained by wage inequality in receiving legal documentation and then over- abroad. Receiving countries have countries, rather than by unemployment stay, becoming illegal. Migrants are fairly weak migration frameworks, disproportionately young, of working often implemented hastily as an or absolute wages. They are more likely to age, and male. Those from Myanmar "after-the-fact" response to large be tightened when international labor flows are, on average, less educated and less numbers of migrants. The absence of increase and to be loosened in periods of literate than the average for the popu- an adequate legal and policy frame- domestic support for trade.19 lations of origin, indicating a push to work, typical of regional neighbor- migrate, or negative self-selection. hoods in developing country regions, Internal labor mobility--growing But self-selection is positive among increases the costs (and risks) of rapidly, despite restrictions migrants from Cambodia, who have migration and reduces its bene ts. slightly higher education attainment With improvements in transport tech- than the population back home. Source: World Bank 2006e. nology and infrastructure, the mobility of labor within countries rose steadily throughout the twentieth century, accel- erating in its last two decades. The vol- ume and velocity of internal voluntary migration, of concern to policy makers for in most of the developing world,21 except decades, are growing despite predictions to in Latin America, where movements the contrary.20 Declining agriculture and between cities dominate.22 Rural-to-rural rising manufacturing have changed the migration, difficult to document, has been distribution of labor in low-income and largely ignored.23 emerging middle-income countries since Migration from rural areas to cities has the mid-twentieth century in South Asia been gaining importance since the mid- and Sub-Saharan Africa, and long before 1970s, especially in the urbanizing econo- in East Asia and Latin America. Migration mies of South and East Asia, with the rapid of labor from lagging to leading rural areas rise of manufacturing and services. In remains the dominant internal movement India, where movements from poor to rich 154 WORLD DEVELOPMENT REPORT 2009 BOX 5.3 From facilitating to restricting to (again) facilitating labor mobility in China In the second half of the twentieth cen- millions back to the countryside. Then, · Rural-to-urban migration must be con- tury, China undertook some of the most with the Great Leap Forward (1958­60), trolled strictly. active internal migration policies ever the government abandoned all attempts · Movements between settlements of observed, initially to great economic to control the ow of labor, again seek- similar population size need not be bene t, but increasingly to the detriment ing to accelerate industrial development, controlled. of growth and development. Now, these motivating another surge of workers to policies are changing again. China's cities. By 1960 China's urban popu- · Flows from larger to smaller settle- In the 1950s the government sought lation had doubled from that in 1949. ments or between rural areas should be to stimulate industrialization through In the 1960s and rst half of the 1970s, encouraged. policies that encouraged rapid urbaniza- the urban population fell, a consequence tion. Households were given incentives of the relocation of intellectuals and Under the hukou, each individual has to move to cities, and rural workers urban elites to the countryside during the an o cial place of residence, and the responded en masse, answering the Cultural Revolution (1966­76). Then, with documents verifying residence are similar demand to participate in reconstruction an abrupt shift in policy in 1976, the ow to a passport. People are allowed to work and industrial development. As a result of people to the cities surged anew. legally, to receive social security bene ts of these e orts, the urban population of In the early 1980s the government including health coverage, and to access China had by 1953 grown by a third, to 78 became particularly preoccupied with the food rations only in their place of resi- million. The rst Five-Year Plan (1953­58) speed of urbanization. Although rural-to- dence. A change in o cial place of resi- promoted urban development, creating urban migration was responsible for only dence can be granted only by permission, forces that pulled people to the cities, 20 percent of the growth of China's cities similar to a local authority granting a visa. complemented by the collectivization of from 1949 to 1980, evidence of burdened But some forms of legal temporary migra- agriculture and the establishment of the infrastructure and services in Shanghai tion would be allowed to meet shifts in commune system. and Beijing occupied the attention of labor demand. In apparent response to a larger-than- policy makers. As the government's preoccupation expected ow from villages, the govern- The hukou household registration system with the size of China's cities and the ment tried to stem the ow, centralizing became the main policy tool to regulate the pace of urban growth changed, the hiring, restricting travel, and rationing ow of workers. It has four tenets: hukou was tightened or loosened--for grain in cities. But these measures failed to example, by relaxing the residency slow the out ow of Chinese rural workers, · Migration, especially to urban areas, requirement to receive food rations and the pressure on cities grew so much should be allowed only if compatible or extending the rights of temporary that the government mobilized to move with economic development. migrants. Despite the controls, lax China's industrial growth and concentration has been accompanied by massive movements of workers Internal labor migration between 1995­2000 Migration from Migration from Migration within the western region central region coastal region to to coastal region coastal region HEILONGJIANG JILIN WESTERNWESTERN REGIONREGION LIAONING LIAONING LIAONING MONGOL BEIJING BEIJING BEIJING NEI Beijing Beijing Beijing TIANJIN TIANJIN HEBEI HEBEI TIANJIN HEBEI COASTAL GXIA COASTALCOASTAL REGIONREGION SHANXI SHANDONG QINGHAI IN SHANDONG N SHANDONG Migration totals GANSU JIANGSU JIANGSU SHAANXI HENAN WESTERNWESTERN JIANGSU 2,000,000 REGION SHANGHAI ANHUI SHANGHAI SHANGHAI HUBEI 1,000,000 SICHUAN ZHEJIANG ZHEJIANG ZHEJIANG CHONGQING 500,000 COASTALCOASTAL JIANGXI COASTAL COASTAL HUNAN 250,000 REGIONREGION REGIONREGION 100,000 REGION GUIZHOU FUJIAN FUJIAN FUJIAN TAIWAN TAIWAN TAIWAN YUNNAN GUANGXI GUANGDONG GUANGDONG GUANGDONG HONG KONG HONG KONG HONG KONG MACAO MACAO MACAO HAINAN HAINAN HAINAN Source: Huang and Luo forthcoming, using data from the Population Census of China. Factor Mobility and Migration 155 BOX 5.3 From facilitating to restricting to (again) facilitating labor mobility in China--continued enforcement allowed large ows of to the pool of surplus labor. And China's information, and job search assistance, migrant workers to settle in cities under industries are in constant need of low- and recourse to legal action in cases of "temporary" status. Indeed, in the past cost labor. employer abuse. 30 years, the labor force requirements to Recognizing the growth dividend from Recent research suggests that the fuel China's spectacular growth perfor- allowing labor to ow freely, the govern- restrictions have taken a toll: many Chi- mance have relied on migrants who are ment has been loosening the hukou in nese cities are smaller than they should temporary under law but in fact perma- recent years, even facilitating migration. be.b In many areas, such as Chengdu and nent residents. Migration restrictions have declined. The Chongqing, governments are again facili- Today the movement of people from labor market has become more e cient. tating a rapid rural-urban migration (see rural areas to cities is again surging. And mobility decisions are much more chapter 7). One in ve rural workers migrates, and responsive to economic factors.a Begin- migrants account for a third of urban ning with pilot programs in selected employment. In 2005 average incomes in municipalities, migrants from rural areas Source: WDR 2009 team. cities were three times the rural average. will be given access to health and social a. Poncet 2006. The mechanization of farming has added protection services, training, labor market b. Au and Henderson 2006a. rural agricultural areas have historically Skills--the motor of internal and been the dominant form of internal migra- international migration tion, movements from villages to cities have A rush of labor matching the migrations out increased sharply in recent years. Migra- of Europe at the turn of the twentieth cen- tion from the poor Indian state of Bihar tury has not yet taken place, and perhaps it has doubled since the 1970s, mainly to cit- never will. But unlike the flow of unskilled ies, and not to the agriculturally prosper- labor, that of skilled labor--with human ous states in India's Northwest, as before. capital--has been on the rise. Globalization In Bangladesh two-thirds of all migration and selective migration policies are likely to from rural areas is to cities. And in China, ease travel for skilled labor within countries with the easing of residency restrictions, and across borders. migration from rural areas to cities now Within countries, education attainment predominates (see box 5.3). continues to determine who moves and Uniform measures of internal migration who does not--certainly from rural areas are rare. Because there are so few household to cities. People with more education are surveys that regularly measure labor mobil- more likely to migrate in their own country ity, and the questions asked about migra- (see figures 5.4 and 5.5).24 Many temporary, tion vary, comparable indicators can be seasonal migrants with little or no educa- calculated for only a few countries. Ques- tion also migrate.25 But education boosts tions about migration are more likely to the velocity of labor mobility, by opening be asked in countries that experience large employment opportunities farther afield movements of labor and with governments and shortening the job search at migrants' that are concerned about migration. Among destination.26 the countries included in table 5.3, for Education also increases the likelihood example, are stable nations (such as Argen- of people moving abroad. The interna- tina and Costa Rica), where migration is tional migration of skilled workers rela- more likely to reflect economic motives, as tive to that of unskilled workers has been well as countries that have recently experi- rising since the 1970s for every developing enced conflict (such as Bosnia and Herze- world region (see figure 5.6). The high- govina, the Democratic Republic of Congo, est proportions of skilled emigrants (as Rwanda, and Sierra Leone), where internal a percentage of the educated workforce) mobility is also due to flight from the threat are from Africa, the Caribbean, and Cen- of violence. tral America. Many Central American 156 WORLD DEVELOPMENT REPORT 2009 Table 5.3 Rates of labor mobility vary widely across countries in the developing world Internal Recent migrants Internal Recent migrants migrants (less than five Recent migrants (less than five Recent Country and year of (% of years, % of total migrants Country and year of (% of years, % of total migrants survey (ranked by working-age working-age (% of internal survey (ranked by working-age working-age (% of internal stock of migrants) population) population) migrants) stock of migrants) population) population) migrants) Bosnia and 52.5 12.8 24.5 Costa Rica 2001 19.9 2.5 12.4 Herzegovina 2001 Brazil 2001 19.5 3.3 16.7 Paraguay 2001 39.0 7.3 18.7 Sierra Leone 2003 19.0 3.7 19.3 Bolivia 2005 37.7 5.0 13.3 Nicaragua 2001 18.6 3.1 16.9 Morocco 1998 33.4 6.0 18.1 Guatemala 2006 17.5 3.3 19.1 Azerbaijan 1995 33.2 19.4 58.4 Haiti 2001 17.5 2.8 15.8 Honduras 2003 29.0 5.5 19.2 Argentina 2006 17.2 1.4 8.1 Venezuela, R. B. de 28.3 3.0 10.7 Kyrgyz Republic 1997 16.2 4.7 29.2 2004 Romania 1994 15.1 1.9 12.8 Congo, Dem. Rep. 27.1 7.8 28.9 of 2005 Croatia 2004 14.7 1.2 8.0 Dominican Republic 26.9 4.0 14.9 Bulgaria 2001 14.3 1.4 10.0 2004 Cambodia 2004 14.2 2.8 19.4 Armenia 1999 24.5 22.4 91.7 Tajikistan 2003 9.9 1.5 15.7 Mauritania 2000 24.2 2.9 12.0 Mongolia 2002 9.8 0.0 0.4 Albania 2005 23.9 4.1 17.3 Kazakhstan 1996 9.3 1.4 14.7 Ecuador 2004 22.7 5.3 23.4 Madagascar 2001 9.3 0.0 0.0 Vietnam 1992 21.9 3.1 14.3 Mozambique 1996 8.1 0.0 0.2 Rwanda 1997 21.5 5.9 27.6 Malawi 2005 2.7 1.1 43.2 Colombia 1995 20.1 5.3 26.3 Micronesia 2000 1.2 0.3 23.6 Source: WDR 2009 team, estimates using household surveys. Note: Internal migrants are individuals who are not living in the same district in which they were born. This definition does not count returnees as migrants--that is, persons who moved away from their place of birth in the past, but returned by the time of the survey. Recent migrants migrated in the five years before the year of the survey. Figure 5.4 In Latin America and the Caribbean internal migrants are more educated than those who stay behind Education comparison between internal migrants and nonmigrants at place of origin and at time of migration Percentage 40 35 30 25 20 15 10 5 0 Costa Rica Honduras Venezuela, Paraguay Guatemala Nicaragua Dominican Brazil Haiti R.B. de Republic Education level attained Migrants, primary Migrants, secondary Migrants, post-secondary Nonmigrants, primary Nonmigrants, secondary Nonmigrants, post-secondary Source: WDR 2009 team drawing from selected household surveys. Factor Mobility and Migration 157 and island nations in the Caribbean had Figure 5.5 Internal migrants are more schooled than workers in the places to which they move more than half their university-educated Comparison between internal migrant and nonmigrant workers at migrant's place of destination citizens living abroad in 2000. And close to 20 percent of skilled workers have left Tajikistan Sub-Saharan Africa.27 This could be taken as evidence that human capital is becom- Colombia ing more mobile internationally--or that Venezuela, R.B. de "selective" immigration policies in wealthy countries are biasing the composition of Albania international migration toward those with skills. But the increase in the migration of Congo, Rep. of Nonmigrant, primary completed skilled labor is due to the rise in higher Migrant, primary completed levels of education worldwide, most nota- Croatia Nonmigrant, secondary completed bly for countries sending the majority of Migrant, secondary completed international migrants. In relative terms, Mongolia the cross-border movement of skilled labor Malawi has remained fairly constant as a share of the stock of skilled labor in sending coun- Brazil tries. Rather than human capital becom- ing more mobile, more human capital is Vietnam simply available, propelling larger volumes of migration.28 Argentina The rapid development of telecommu- Micronesia nications and other forms of information and communication technology has sepa- Haiti rated the mobility of human capital from the mobility of labor. In a trend likely Bolivia to accelerate, more services in the pro- duction processes of industries based in Dominican Republic wealthy countries are being located "off- shore" in low- and middle-income coun- Kyrgyz Republic tries, where human capital is cheaper. Paraguay What began with the export of software development and maintenance services Bulgaria from the Indian city of Bangalore to firms across the world has developed into Madagascar a burgeoning trade in services requiring a wide array of skills, from simple cus- Costa Rica tomer communications--particularly from countries like India and the Philip- Guatemala pines, where English is widely spoken--to Honduras financial accounting and computer main- tenance. There is, as yet, no evidence that Nicaragua the export of "disembodied" human capital over telephone lines and the Inter- Cambodia net will substitute for the flow of skilled workers. But by creating the possibility Mozambique of separating human capital from labor, 0 10 20 30 40 50 60 70 80 90 100 information and communication tech- Percentage nology has further increased the mobility Source: WDR 2009 team drawing from selected household surveys. of skills relative to people. 158 WORLD DEVELOPMENT REPORT 2009 Figure 5.6 Migration from developing countries is becoming more skilled Labor mobility and voluntary migration for economic gain are the human side of Latin America & Caribbean Sub-Saharan Africa Percentage of emigrants Percentage of emigrants the agglomeration story. 100 100 As for firms, localization and urbaniza- tion economies arise from knowledge spill- 80 80 overs between people in proximity. For this 60 reason, people are often more economically Low skill 60 productive when they are around others, 40 40 Medium skill especially for people with skills. Migra- tion and agglomeration feed off each other. 20 20 Highly skilled Whether this is agglomeration in leading 0 0 places within a geographic area, in leading 1975 1980 1985 1990 1995 2000 1975 1980 1985 1990 1995 2000 areas within countries, or in leading coun- Year Year tries within regions, human capital flows to Europe & Central Asia Middle East & North Africa economically leading places. At every spa- Percentage of emigrants Percentage of emigrants tial scale, migration is the way that people 100 100 who invest in education and skills realize 80 80 the returns on their investment. An important insight of the agglomera- 60 60 tion literature--that human capital earns higher returns where it is plentiful--has 40 40 been ignored by the literature on labor 20 20 migration. Preoccupied with urban unem- ployment and squalor in the fast-growing 0 0 cities of the South, early research on labor 1975 1980 1985 1990 1995 2000 1975 1980 1985 1990 1995 2000 Year Year migration advocated restrictions.29 Govern- ments often acted on these prescriptions, East Asia & Pacific South Asia Percentage of emigrants Percentage of emigrants instituting migration abatement policies, 100 100 but to little effect: flows from the country- side to cities and from lagging to leading 80 80 provinces continued unabated. The only effect of restrictions may have been forgone 60 60 economic growth and slower spatial con- 40 40 vergence in living standards. Increasing returns to scale and spillovers 20