larger number of flights, benefiting passengers and those shipping cargo that would otherwise have had to be shipped more slowly, less directly, and at greater expense. Place-based policies also often anticipate indirect effects such as job creation and higher wages: that is, induced changes in the location and levels of activity, alongside changes in inputs and the efficiency of combining those inputs. These effects may arise if the policy changes private sector behavior (such as firms deciding to relocate, or workers switching from agrarian to industrial jobs) or triggers a private sector investment response. It is often claimed (or hoped) that place-based policies will trigger regeneration of a district, or growth in a lagging region. Given these indirect effects, analyses may understate the expected benefits. However, conversely, the justification for policies often hangs on overly optimistic promises of indirect effects, which seldom receive the analytical rigor needed to discipline the analysis. Parsing these effects clarifies the mechanisms through which a particular policy is thought to work. Figure 6.1 depicts the challenges of measuring quantity effects—direct and indirect—as well as placing a social valuation on these changes. Direct effects are relatively simple to measure, at least in principle. Examples include the number of extra people receiving health care or the number of minutes by which travel time has been reduced. It is much harder to identify and assign value to indirect effects because they are contingent on a set of underlying assumptions about how economic linkages work in a given context. To capture the form and size of indirect quantity effects on induced private investment requires an understanding of two factors. The first is the presence of complementary conditions (such as the business environment) that drives private sector location and investment decisions, mainly those of firms but also those of workers.
FIGURE 6.1 A Framework for Appraising Place-Based Policies Place-Based Policy
Direct Quantity Effects
Government diagnostic and coordination capabilities?
NO
Policies to foster domestic migration and income transfers
WEAK
Displacement effects?
YES
NO
Indirect Quantity Effects Necessary complements? • Natural endowments • Policy environment • Business ecosystem
Valuation • Externalities and nonmarket effects? • Clustering and productivity spillovers? • True price of unemployed inputs?
• Simplify intervention • Find anchor partners • Identify global value chains
Source: Elaboration based on Duranton and Venables 2018, for this volume.
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