Why Is a Region Not Thriving Already?

and efficiently so: not every poor place has the potential to be rich, and their populations will eventually need to move to more prosperous areas. Further, while the choice of location for needed trading centers along portage sites is, in historical hindsight, arbitrary and multiple possible spatial equilibria were possible, the successful agglomerations that materialized are likely to prevail and remain dominant. Chicago and Montreal will have no regional competitors.

Why Is a Region Not Thriving Already?

Policy makers are thus not painting on a blank canvas and are more constrained than often acknowledged in how much they can alter economic geography. The question “Why is a region not growing already” helps answer whether place-based policies are appropriate, and, if so, which policies might work best. There may be three broad reasons why an area has stagnated:

1. The place is viable but held back by market distortions or failures. Many regions of developing countries can be viewed as areas where “development hasn’t arrived yet”: the accumulation of human, physical, and knowledge capital has not materialized. This raises the question posed by Robert Lucas Jr. (2002) in his inquiry into growth economics of what distortions or market failures are preventing the rapid flow of capital and knowledge capital and what are the key market failures or frictions that need to be resolved (see Kline and Moretti 2014; Bartik 1990). ■ Absent public goods. Productivity-enhancing public goods and public amenities are definitionally underprovided by the private sector. As discussed in chapter 2, the

Kenyan highlands had latent comparative advantage in exporting tea, but needed transport in the form of the rail link between Mombasa, on the coast, to Lake

Victoria, in the west, before it could access markets and attract human capital in the form of experienced farmers (see box 2.1 in chapter 2). Public eradication of hookworm in the American South led to a rise in education, returns to education, and incomes (Bleakley 2007). As discussed later in this chapter, providing electricity to the Tennessee Valley raised incomes and stimulated industry. In all successful regions, public education plays a central role. The processes of innovation and technology transfer are replete with market failures that need to be addressed (Cirera and Maloney 2017). ■ First-mover coordination problems. Even though congestion costs may be high in current cities, firms may be willing to seed a new agglomeration only with the assurance that others would join them. This “first-mover” problem is fundamentally a coordination failure that can cement existing congested agglomerations. Governments can resolve this by building infrastructure, branding new city plans, attracting catalytic large private investors around which other firms may coordinate, and so on. Smaller shifts in agglomerations are easier to support than large ones. ■ Distortions and missing markets. Many government interventions—whether place-based or not—create spatial inefficiencies. As a particularly dramatic

example, Buenos Aires was literally a backwater in the early colonial period. After the American Revolution in 1776, Spain sought to counterbalance emerging US power, and permitted trade through the port of Buenos Aires, allowing it to realize its potential as one of the great ports and cities of the world. Today, business ecosystems, in addition to government-imposed distortions, may lack financial markets or other support services that would attract firms. In new research for this volume, Grover, Maloney, and O’Connell (2021) find that areas along the Golden Quadrilateral highway system in India with better financial access have benefited the most from increased connectivity. Duranton et al. (2016) find that spatial differences in urban land market policies (such as land ceilings and sales taxes) have critical implications for misallocation of factors within and across districts in India. Labor market frictions may lead to high unemployment rates. Some seemingly spatially blind policies addressing other social ends, such as income taxation, minimum wages, or carbon taxes, can generate spatially biased distortions.

There are unquestionably places with untapped potential to be realized by reforms and interventions in these areas. Lifting Spanish trade restrictions on the natural port of Buenos Aires in 1775 transformed it from a from a backwater to one of the world’s richest cities, with arguably the premier opera house on the planet. The construction of the Uganda Railway through the Kenyan highlands, and the subsequent immigration of skilled farmers, led to the development of a dynamic tea industry and the emergence of Nairobi from swamp to great capital city. In China, the establishment of the Special Economic Zone and associated policy “rules of the game” in 1979 allowed Shenzhen to take advantage of its labor force and position across the straights from Hong Kong SAR, China, to attract foreign direct investment and transform from a fishing village to China’s Silicon Valley. In each case, policy altered the spatial distribution of national activity, but could do so only because there was a fundamental latent source of economic advantage that could be released by eliminating distortions, providing necessary complementary factors, or resolving market failures.

2. The place is viable but transitioning from negative shocks. Extreme trade and technology shocks have hit cities and regions around the world, but the installed man-made infrastructure, housing stock, and institutions offer the foundations for new, as yet unidentified industries to emerge. In the classic adjustment mechanism, as agglomeration forces weaken with the retreat of lost tradable sectors, the productivity of a city declines and housing prices drop to some degree, compensating for lower wages and dampening incentives to migrate, while possibly attracting new low-skilled residents (Rosen 1979; Glaeser, Kahn, and Rappaport 2000; Glaeser and Gyorko 2005). For decades, the burned-out, rat-infested ruin of Detroit’s Michigan Central Station was a must-see symbol of a dying city where automotive jobs had moved abroad and the wealthy population had fled to the suburbs. About 80 percent of owner-occupied single-family

housing was valued at least 30 percent below construction costs. After decades of decline, the city is seeing a renaissance as a nascent tech hub. The combination of real estate bargains, several nearby world-class universities, installed research and development capacity in automotive automation, established venture capital industries, and a welcoming investment environment have made it an attractive option compared with the stratospherically costly Silicon Valley, Boston, or New York. But then Boston, too, has reinvented itself. Glaeser (2005) notes that “in 1980, Boston was a declining city in a middle-income metropolitan area in a cold state.” What enabled it to successfully transition from a decaying manufacturing base was the high human capital, distinguished universities, and established infrastructure that made possible a transition to high tech, finance, and education and that attracted cognitive and non-routine task workers.

For both types of lagging regions, there is a clear role for public policy, by providing public goods or redressing market failures. The question is how governments can intervene to kick-start a region or accelerate its transition to a new economic base. Chapters 7 and 8 discuss broadly two types of policies and the lessons learned to date. The first is called “hard infrastructure,” which consists primarily of physical transport–based construction including roads and digital connectivity, but also the transport corridors and export processing zones constructed around them. The second, called “soft infrastructure,” relates to educational, entrepreneurial, legal, and other investments and reforms. A central message of this volume is that these types of soft infrastructure are often essential complements to hard infrastructure if its potential is to be realized.

3. The place is nonviable. There are places like Kolmanskop so far below a threshold of remoteness (distance) and a critical mass of economic activity that there is no package of hard and soft policies that would work. In economic terms, it may not be reasonable to expect a positive discounted net present value of the investment.2

The good news is that most people around the world live in places that are not very remote. Map 5.1 and the accompanying analysis done for this volume show that 85 percent of the world’s population lives within an hour’s drive of a city of 50,000 people. That share increases to 95 percent for driving times within three hours. For example, Canada is a country as large as a continent, but most of its population lives within a thin band bordering the United States.

There are exceptions. Hill and Gaddy (2003) show that the Russian Federation’s vast geography has become a source of long-lasting drag on growth and pain because for 70 years, Soviet planners moved tens of millions of people and thousands of large-scale industrial enterprises to Siberia, making them languish in cold and distant places with limited economic prospects. The move was an attempt to equilibrate migration and effectively reverse the productivity-augmenting agglomeration dynamic.