Complementarities, Silver Bullets, and Big Pushes

However, these elasticities are country averages and as such obscure the fact that— as per the framework of this volume—whatever policy lever is thought to attract private sector investments, the desired indirect effect depends on a host of fundamental and complementary factors in a particular region, including those intrinsic to its viability. The marginal social utility of a job created in a locale may be high, but the marginal cost of creating that job is possibly higher still. Both need to be weighed in prioritizing projects.

In the end, the decision to engage in place-based policies directed at any of these types of regions will involve a host of economic and political factors. The point stressed here is that place-based policies in areas that are not clearly merely in need of resolving select market failures may imply trade-offs with aggregate efficiency and growth. Attempting to keep coal mining areas afloat even as they may follow Bannack and Kolmanskop into history will mean that resources are not devoted to more dynamic areas and—as the United Kingdom experienced—may not work.

Given other considerations, this choice may be socially optimal, even if it does not maximize overall growth. But to make such a choice, what is needed is a disciplined expectation of what is reasonable from a region, a clear-eyed view of the capabilities of government to design and execute, and a fair weighing of other options of migration encouragement, training programs, and income transfer safety nets.

Though this volume does not venture into the design of migration support or income transfer policies, the next chapter offers a framework for assessing the likely returns on the place-based policies that are often the first arrows drawn from the policy quiver.

Complementarities, Silver Bullets, and Big Pushes

A central theme of the framework is that policy assessment must take into account all the complementary factors required to achieve the hoped-for rate of return. There are some cases—such as releasing export restrictions on Bueno Aires harbor—where reforming a single regulation or investing in one piece of infrastructure may have been sufficient to turn around fortunes. However, a persistent theme of this volume is that this is not usually the case. Market failures, missing complementary factors, and distortions are often found in company. Hence there are few silver bullets that can be fired with success in the absence of other complementary initiatives: Nairobi needed the railroad, but it also needed the influx of skilled famers. If digital connectivity can lift the fortunes of places, a knowledge base and complementary investments will be crucial for its uptake. For example, in Japan, analysis of household data on online sales of products suggests that regional variation in e-commerce sales intensity is almost entirely driven by the share of college-educated people (Jo, Matsumura, and Weinstein 2019) (see figure 4.8), while lack of interventions in business training or access to credit explain the minimal effects of e-commerce on local rural economies in China (Couture et al. 2018). In India, more new businesses have been started along the Golden Quadrilateral—the major highway system connecting the four

major cities to the north, south, east, and west (Delhi, Kolkata, Mumbai, and Chennai)— along corridors where financial and land markets function well (Grover, Maloney, and O’Connell 2021).

Hence, policies to kick-start a lagging region frequently will require multiple subprograms. In some cases, the complementarities seem obvious and the design straightforward. For instance, both electricity and market access are arguably necessary for an export processing zone to be successful. Other interactions are much less well understood, including those that take place between hard infrastructure such as transport corridors or export processing zones discussed in chapter 7, and softer interventions such as training, entrepreneurial capabilities, business climate, and fiscal incentives discussed in chapter 8.

The most ambitious multidimensional programs are those motivated by the idea that complementing multiple policies at a large enough scale in a “big push” can propel a lagging region to ride scale economies and other spillovers to a higher equilibrium level of income. Such policies place the issues of complementarities at center stage and therefore require an extremely detailed understanding of what the underlying frictions and market failures are and how they interact, even as discontinuous effects are expected.

The iconic example of a big push, the Tennessee Valley Authority in Appalachia (see Kline and Moretti 2014), had several components: mainly energy generation (through the construction of numerous dams), transport (through the development of roads and canals), and education (through the construction of new schools). While small relative to the scale of the US economy, the transfers were substantial for the treated counties, amounting to up to 10 percent of local incomes at the beginning of the 1950s. Given that scale is key, it is important to note that many big push programs, such as Argentina’s Plan Belgrano and some European initiatives, commit far smaller levels of investment and may not reach the thresholds envisaged. Further, even if it were theoretically possible to push a region to a better equilibrium, this does not necessarily imply that in practice achieving this is feasible, or that “displacement effects” would not leave national welfare unchanged: Both New Jersey and Silicon Valley had potential to host a high-tech cluster, but once California had “moved first” and generated associated agglomeration and clustering externalities, shifting activity to the East Coast would be prohibitively costly. And even if New Jersey were to succeed in displacing Silicon Valley, it is not clear that the country would be better off for it (box 5.4).

Given the scale of resources required, and the complexity of assessing big push projects, either by decision or de facto, policy makers often recur to more modest approaches to incrementally removing barriers to growth in an already viable but lagging or recovering region. This may involve hard infrastructure projects, building the capabilities of entrepreneurs and workers while improving elements of the business climate. An example is the World Bank Upper Egypt Local