## conclusions emerge when analyzing disparities within individual large emerging markets such as ## Source details **Canonical URL:** [conclusions emerge when analyzing disparities within individual large emerging markets such as](https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021038-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2021/english/wpiea2021038-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2021/english/wpiea2021038-print-pdf.pdf.json) --- ### Emergence and patterns of regional disparities - In developing countries, real household consumption levels are approximately 75 percent higher in leading regions than in lagging regions; for advanced economies, the corresponding consumption gap is less than 25 percent (World Bank 2009). - Spatial concentration is extreme: 55 percent of the world population is concentrated in 1 percent of the world land area. - Historical patterns: regional disparities often widen during early industrialization and later stabilize and decline (Kuznets-style divergence and re-convergence). - United Kingdom: regional disparities (coefficient of variation of GDP per capita) increased by almost 40 percent between 1871 and 1911 before stabilizing and slowly converging until the late 1970s (Crafts 2005). - United States: disparities in GDP per capita across states increased between 1840 and 1880, then began to narrow. - China: output per capita in coastal regions rose to more than twice the level in inland regions during rapid growth episodes. - In fast-growing economies, all subnational areas typically experienced wage and income gains even as leading regions benefited most; in some slower-growing or relatively closed economies (for instance Brazil and Colombia), regional disparities have decreased over time despite continued population concentration. ### Drivers of regional disparities: agglomeration, productivity, and migration - Agglomeration economies and clustering: - Firms obtain advantages from proximity to customers, suppliers, and other firms including knowledge spillovers and thick labor markets. - Elasticities and productivity impacts cited: - In advanced economies, the elasticity of productivity with respect to economic size is around 3–6 percent. - Each doubling of economic size raises productivity by around 5 percent, implying a city of 5 million may have productivity 20–30 percent higher than one of 200,000. - In developing countries, estimated elasticity of productivity with respect to city size is around 8 percent (twice that in developed economies). - Informal and traditional agricultural activities may have productivity four or five times lower than modern urban activities. - Persistence and first-mover problems: - Agglomeration creates “first-mover” or coordination problems; individual firms do not internalize benefits to other firms, implying threshold effects and tipping points—policy “big-push” may be required. - Transport and connectivity improvements have ambiguous effects: they can enable cluster formation (increasing disparities) or, in the limiting case of perfect connectivity, allow factor-price equalization (reducing disparities). - Migration and labor market adjustment: - Migration may fail to equalize real incomes because moving costs (financial, social, loss of networks) vary and spatial wage differentials differ by skill type (skilled vs unskilled). - Declining areas can enter a vicious circle: outmigration of young skilled workers reduces tax base → deterioration of public services → harder to retain/attract skilled workers → persistent decline and urban decay. - Housing prices and social benefit structures significantly affect mobility. ### Spatial equilibrium and distributional implications - Spatial equilibrium may result in persistent differences in productivity and real incomes: - Higher productivity in clusters with correspondingly higher wages and land rents can leave lagging regions with lower real incomes if land/housing prices compensate. - Equilibria are not generally efficient due to multiple externalities (positive agglomeration externalities vs congestion/pollution) and coordination failures. - Sectoral localization: - Agglomeration often operates at the sectoral level (“economies of localization”), making it hard for declining regions to attract new tradable-sector clusters; they may instead specialize in non-tradable, low-skill activities. ### Policy typology and trade-offs - Three policy classes: - Spatially blind (people-based) policies: nationally applied measures that assist lagging households without targeting places directly. - Examples: strengthen public services (health, education, utilities such as rural electrification); progressive taxation and social protection that assist lagging households. - Spatially connective policies: connect peripheral areas to markets to facilitate movement of goods, services, people, and ideas. - Examples: infrastructure investment in highways, railroads, ports, airports, public transportation, and information/communication networks; efforts to facilitate mobility (“mobility towards opportunity”). - Returns highest where lagging regions have relatively high economic density. - Spatially targeted (place-based) policies: target local demand, business conditions, and employment in lagging regions. - Examples: location-specific tax treatments, investment subsidies, targeted public employment, funding of research/higher education facilities, local infrastructure, regulatory relief, special economic zones. - Trade-offs: - Spatially connective policies can reinforce regionally unbalanced growth by enabling mobility of the most productive workers to leading regions and withdrawing human capital from lagging areas. - Place-based policies can foster balanced activity but risk hampering aggregate growth by distorting spatial allocation of capital and labor, creating fiscal costs, and generating horizontal-equity concerns. - Policy effectiveness depends on country-specific context, scale, governance quality, and whether interventions address genuine market failures or simply relocate activity. ### Implementation considerations and effectiveness - Effectiveness drivers: - Infrastructure and public capital often perform better than tax exemptions or subsidies. - Projects succeed when targeting high-return interventions at appropriate scale and with local ownership and rigorous cost-benefit analysis. - Risks: white elephant projects, political capture, corruption, and poor maintenance; mitigation requires coordination with local authorities, businesses, and citizens, and strong governance. - Design principles: - Tailor mix to country and regional characteristics (sparsely populated lagging areas vs densely populated lagging areas). - Consider agglomeration strength, interregional mobility, market interconnectedness, resource endowments, employment elasticities, and institutional quality. - Account for fiscal costs, policy space, and implementation capacity; prioritize governance and institutional strengthening where capacity is weak. - Specific policy levers affecting mobility: - Housing policy: constrained housing supply in booming areas (due to zoning, building codes) raises housing costs and reduces migration incentives; reforms to land use, zoning, and support for social housing can increase housing affordability. - Social benefits portability: non-portability of local social benefits (for instance municipal housing vouchers or locally administered programs) discourages mobility; portability reforms can improve labor mobility. ### Case studies: lessons from Germany (reunification) and Italy (Mezzogiorno) - German reunification: - Labor productivity in the East was 30 percent of the West at reunification. - By 2019, East GDP per capita and disposable income stood at, respectively, approximately 75 percent and 85 percent of Western levels; cost of living was lower in the East. - Unemployment fell from a post-reunification high of 20 percent to 7 percent. - Financial transfers from West to East equaled, for extended periods, about one-third of the East’s GDP, and are still on the order of 10 percent of GDP; transfers included infrastructure (20 percent of all transfers) and investment subsidies (9 percent). - Outcomes: manufacturing growth, emergence of industrial clusters, productivity growth in less developed regions, but convergence largely stalled after 2000 and net emigration (especially of the young) persisted. - Italian Mezzogiorno (South): - South’s GDP per capita remains little over half that of the North; unemployment exceeds 20 percent; attracts 1 percent of Italy’s inward FDI. - Post-World War II Cassa per il Mezzogiorno (1950–1984) had initial success (1951–1973 saw convergence), but loss of autonomy and later misallocation reduced effectiveness. - EU Structural and Investment Funds and later local autonomy policies produced mixed to limited productivity and employment gains. - Weak institutions, political clientelism, corruption, and organized crime undermined regional policy effectiveness; regional investments helped more where institutional quality was higher. ### Conclusions and outlook - Regional disparities are sharp and persistent in both advanced and developing economies: - In advanced economies, recent rises in regional disparities are often symptomatic of sector- and place-specific negative shocks and deindustrialization. - In developing economies, disparities often accompany uneven economic takeoffs and strong agglomeration forces, and may be larger due to variation in public-service provision. - Policy implications: - First line of action: spatially blind, people-based policies to assist lagging households (basic services, national tax and social systems that support underprivileged households). - Complementary measures: spatially connective policies (transportation and ICT infrastructure, better housing affordability in leading regions, portability of social benefits). - Targeted role: spatially targeted, place-based policies to create regional employment where factor mobility obstacles are large (public-investment projects, relocation of government/research facilities, location-specific tax incentives, regulatory relief). - The appropriate policy mix must be country- and context-specific, balancing rapid regionally uneven growth against inclusive regional development objectives. - Uncertainty from technological change: - Remote work and communications advances (accelerated by the COVID-19 pandemic) could reduce geographic inequality if workers and firms relocate out of large conurbations; however, impacts on productivity, learning, and innovation remain uncertain. *wpiea2021038-print-pdf - conclusions emerge when analyzing disparities within individual large emerging markets such as* ### conclusions emerge when analyzing disparities within individual large emerging markets such as ### wpiea2021038-print-pdf - conclusions emerge when analyzing disparities within individual large emerging markets such as ### Emergence and patterns of regional disparities - In developing countries, real household consumption levels are approximately 75 percent higher in leading regions than in lagging regions; for advanced economies, the corresponding consumption gap is less than 25 percent (World Bank 2009). - Spatial concentration is extreme: 55 percent of the world population is concentrated in 1 percent of the world land area. - Historical patterns: regional disparities often widen during early industrialization and later stabilize and decline (Kuznets-style divergence and re-convergence). Examples and numeric patterns: - United Kingdom: regional disparities (coefficient of variation of GDP per capita) increased by almost 40 percent between 1871 and 1911 before stabilizing and slowly converging until the late 1970s (Crafts 2005). - United States: disparities in GDP per capita across states increased between 1840 and 1880, then began to narrow. - China: output per capita in coastal regions rose to more than twice the level in inland regions during rapid growth episodes. - In fast-growing economies, all subnational areas typically experienced wage and income gains even as leading regions benefited most; in some slower-growing or relatively closed economies (for instance Brazil and Colombia), regional disparities have decreased over time despite continued population concentration. ### Drivers of regional disparities: agglomeration, productivity, and migration - Agglomeration economies and clustering: - Firms obtain advantages from proximity to customers, suppliers, and other firms including knowledge spillovers and thick labor markets. - Elasticities and productivity impacts cited: - In advanced economies, the elasticity of productivity with respect to economic size is around 3–6 percent. - Each doubling of economic size raises productivity by around 5 percent, implying a city of 5 million may have productivity 20–30 percent higher than one of 200,000. - In developing countries, estimated elasticity of productivity with respect to city size is around 8 percent (twice that in developed economies). - Informal and traditional agricultural activities may have productivity four or five times lower than modern urban activities. - Persistence and first-mover problems: - Agglomeration creates “first-mover” or coordination problems; individual firms do not internalize benefits to other firms, implying threshold effects and tipping points—policy “big-push” may be required. - Transport and connectivity improvements have ambiguous effects: they can enable cluster formation (increasing disparities) or, in the limiting case of perfect connectivity, allow factor-price equalization (reducing disparities). - Migration and labor market adjustment: - Migration may fail to equalize real incomes because moving costs (financial, social, loss of networks) vary and spatial wage differentials differ by skill type (skilled vs unskilled). - Declining areas can enter a vicious circle: outmigration of young skilled workers reduces tax base → deterioration of public services → harder to retain/attract skilled workers → persistent decline and urban decay. - Housing prices and social benefit structures significantly affect mobility. ### Spatial equilibrium and distributional implications - Spatial equilibrium may result in persistent differences in productivity and real incomes: - Higher productivity in clusters with correspondingly higher wages and land rents can leave lagging regions with lower real incomes if land/housing prices compensate. - Equilibria are not generally efficient due to multiple externalities (positive agglomeration externalities vs congestion/pollution) and coordination failures. - Sectoral localization: - Agglomeration often operates at the sectoral level (“economies of localization”), making it hard for declining regions to attract new tradable-sector clusters; they may instead specialize in non-tradable, low-skill activities. ### Policy typology and trade-offs - Three policy classes: - Spatially blind (people-based) policies: nationally applied measures that assist lagging households without targeting places directly. - Examples: strengthen public services (health, education, utilities such as rural electrification); progressive taxation and social protection that assist lagging households. - Spatially connective policies: connect peripheral areas to markets to facilitate movement of goods, services, people, and ideas. - Examples: infrastructure investment in highways, railroads, ports, airports, public transportation, and information/communication networks; efforts to facilitate mobility (“mobility towards opportunity”). - Returns highest where lagging regions have relatively high economic density. - Spatially targeted (place-based) policies: target local demand, business conditions, and employment in lagging regions. - Examples: location-specific tax treatments, investment subsidies, targeted public employment, funding of research/higher education facilities, local infrastructure, regulatory relief, special economic zones. - Trade-offs: - Spatially connective policies can reinforce regionally unbalanced growth by enabling mobility of the most productive workers to leading regions and withdrawing human capital from lagging areas. - Place-based policies can foster balanced activity but risk hampering aggregate growth by distorting spatial allocation of capital and labor, creating fiscal costs, and generating horizontal-equity concerns. - Policy effectiveness depends on country-specific context, scale, governance quality, and whether interventions address genuine market failures or simply relocate activity. ### Implementation considerations and effectiveness - Effectiveness drivers: - Infrastructure and public capital often perform better than tax exemptions or subsidies. - Projects succeed when targeting high-return interventions at appropriate scale and with local ownership and rigorous cost-benefit analysis. - Risks: white elephant projects, political capture, corruption, and poor maintenance; mitigation requires coordination with local authorities, businesses, and citizens, and strong governance. - Design principles: - Tailor mix to country and regional characteristics (sparsely populated lagging areas vs densely populated lagging areas). - Consider agglomeration strength, interregional mobility, market interconnectedness, resource endowments, employment elasticities, and institutional quality. - Account for fiscal costs, policy space, and implementation capacity; prioritize governance and institutional strengthening where capacity is weak. - Specific policy levers affecting mobility: - Housing policy: constrained housing supply in booming areas (due to zoning, building codes) raises housing costs and reduces migration incentives; reforms to land use, zoning, and support for social housing can increase housing affordability. - Social benefits portability: non-portability of local social benefits (for instance municipal housing vouchers or locally administered programs) discourages mobility; portability reforms can improve labor mobility. ### Case studies: lessons from Germany (reunification) and Italy (Mezzogiorno) - German reunification: - Labor productivity in the East was 30 percent of the West at reunification. - By 2019, East GDP per capita and disposable income stood at, respectively, approximately 75 percent and 85 percent of Western levels; cost of living was lower in the East. - Unemployment fell from a post-reunification high of 20 percent to 7 percent. - Financial transfers from West to East equaled, for extended periods, about one-third of the East’s GDP, and are still on the order of 10 percent of GDP; transfers included infrastructure (20 percent of all transfers) and investment subsidies (9 percent). - Outcomes: manufacturing growth, emergence of industrial clusters, productivity growth in less developed regions, but convergence largely stalled after 2000 and net emigration (especially of the young) persisted. - Italian Mezzogiorno (South): - South’s GDP per capita remains little over half that of the North; unemployment exceeds 20 percent; attracts 1 percent of Italy’s inward FDI. - Post-World War II Cassa per il Mezzogiorno (1950–1984) had initial success (1951–1973 saw convergence), but loss of autonomy and later misallocation reduced effectiveness. - EU Structural and Investment Funds and later local autonomy policies produced mixed to limited productivity and employment gains. - Weak institutions, political clientelism, corruption, and organized crime undermined regional policy effectiveness; regional investments helped more where institutional quality was higher. ### Conclusions and outlook - Regional disparities are sharp and persistent in both advanced and developing economies: - In advanced economies, recent rises in regional disparities are often symptomatic of sector- and place-specific negative shocks and deindustrialization. - In developing economies, disparities often accompany uneven economic takeoffs and strong agglomeration forces, and may be larger due to variation in public-service provision. - Policy implications: - First line of action: spatially blind, people-based policies to assist lagging households (basic services, national tax and social systems that support underprivileged households). - Complementary measures: spatially connective policies (transportation and ICT infrastructure, better housing affordability in leading regions, portability of social benefits). - Targeted role: spatially targeted, place-based policies to create regional employment where factor mobility obstacles are large (public-investment projects, relocation of government/research facilities, location-specific tax incentives, regulatory relief). - The appropriate policy mix must be country- and context-specific, balancing rapid regionally uneven growth against inclusive regional development objectives. - Uncertainty from technological change: - Remote work and communications advances (accelerated by the COVID-19 pandemic) could reduce geographic inequality if workers and firms relocate out of large conurbations; however, impacts on productivity, learning, and innovation remain uncertain. *Italic source: wpiea2021038-print-pdf - conclusions emerge when analyzing disparities within individual large emerging markets such as* ### 48. 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