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					                                                       Part Three
         reframing the policy debates

Can crowded cities in developing countries pull people in and power them out of poverty?
Does migration help those who move and those left behind? How can trade help the
world’s wealthy and most destitute? What can policy makers do to address the three big
challenges facing the developing world—a billion slum dwellers, a billion people living
in remote and underserved areas, and the “bottom billion”? Part three of the Report
provides the answer: economic integration. How? By using spatially blind institutions,
spatially connective infrastructure, and spatially targeted incentives and calibrating the
response to the difficulty of integration. Chapter 7 explains what economic integration
means for metropolises, cities, towns, and villages. Chapter 8 proposes how integration
between economically leading and lagging areas can benefit everyone. Chapter 9
lays out the difficult steps needed to successfully integrate the world’s most isolated
countries. In doing so, the chapters in part three revisit and reframe long-standing policy
debates on urbanization, territorial development, and international integration.
      CHAPTER 7   Concentration
                  without Congestion
                  Policies for an inclusive urbanization

                  A         team of urban experts, as part of
                            a routine exercise in 1974, forecast
                            the size of the world’s most popu-
                  lous cities in 2000. Kinshasa, the Democratic
                  Republic of Congo’s capital, would grow to 9
                                                                        Projections now suggest that cities in
                                                                    developing countries will double in three
                                                                    decades, adding another 2 billion people.
                                                                    Indeed, large cities in developing countries
                                                                    will grow bigger to provide the urbanization
                  million, more than London today. Pakistan’s       economies sought by entrepreneurs, workers,
                  Karachi would expand to 16 million, almost        and innovators. But this will happen mostly
                  as large as New York City. The forecasts were     in economies that are doing well. Medium-
                  way off (see figure 7.1). Kinshasa’s popula-       size cities remain the backbone of urban
                  tion is about half of London’s today, Kara-       systems, providing the localization econo-
                  chi’s about half of New York City’s. Why          mies that producers with more specialized
                  were the experts, generally good at forecast-     needs seek. But they will flourish only where
                  ing national populations, so wrong in pre-        economies are industrializing. Smaller cities
                  dicting city sizes?                               and towns continue to serve and to depend
                      The reason: forecasting the spatial dis-      on surrounding rural settlements. But they
                  tribution of people in a country is not the       will grow rapidly only in areas where farms
                  same thing as predicting the size of its          and village economies are doing well.
                  population. As shown in earlier chapters,             The spatial transformations that lead
                  spatial transformations—the growth of             to the rise of cities and towns will not be
                  cities and leading areas—are linked closely       orderly. Informal settlements—slums and
                  to changes in the economy, especially the         shantytowns—may form and expand as the
                  sectoral transformations that accompany           rising demands of workers and firms out-
                  growth and the opening of an economy to           strip the capacities of governments to insti-
                  foreign trade and investment. So predict-         tute well-functioning land markets and to
                  ing the size of a city is economic forecasting,   invest in infrastructure and accommodation.
                  a hazardous occupation. Take Guangzhou            If today’s developed countries are a guide, it
                  in China. Its population in 2000 was more         takes many decades to address within-city
                  than a third larger than the 4.5 million          disparities and to absorb informal settle-
                  predicted in 1974. Beijing’s was half the 19      ments into more organized city structures.
                  million predicted. The experts could not          Trying to restrict rural-urban migration can
                  have foreseen China’s economic liberal-           be counterproductive. Why? Because limiting
                  ization and growth, which quickly would           density and diversity stifles innovation and
                  change the country’s spatial structure. Sim-      productivity.
                  ply extrapolating past trends, they should            Policy makers, if they are not careful, can
                  instead have examined the market forces           end up harming these transformations. By
                  of agglomeration, migration, and special-         not instituting flexible regulation and versa-
                  ization—and the government policies that          tile land use conversion, they can make urban
198               help or hinder them.                              areas inhospitable to firms and investors. By
                                                                        Concentration without Congestion                                                      199

not providing adequate water, sanitation,         Figure 7.1     The growth of cities has been grossly overestimated
schools, and health care in rural areas, they
can prematurely push villagers to towns and                                                    Guangzhou
cities. By not investing enough in the infra-                                                  Tokyo
structure of rapidly growing cities, they can                                                  Hong Kong, China
encourage congestion. More generally, by                                                       Istanbul
not responding appropriately to the needs of                                                   Bangalore
spatial transformations for different types of                                     Delhi
places, they cannot reap the full benefits of                                      Lagos
density and diversity, which congestion and                                    Chicago
division can undermine.                                                   Osaka-Kobe
    To help nations benefit from urbaniza-                                    Leningrad
                                                                         Buenos Aires
tion, this chapter proposes a policy frame-                                    Mumbai
work—informed by the stylized facts of                               New York–Newark
spatial transformations (chapter 1) and the                               Los Angeles
insights about agglomeration economies                                             Paris
that drive these changes (chapter 4). It out-                                   Bogotá
lines the policy priorities and their sequenc-                                Shanghai
ing, using the experiences of countries that                                    Kolkata
                                                                             São Paulo
have urbanized well and of those that have                                      Jakarta
struggled. The main messages:                                                   London
•   Rural-urban transformations are best                                        Karachi
    facilitated when policy makers recognize                               Mexico City
    the economic interdependence among                                         Bangkok
    settlements. Within a country’s hierar-                             Rio de Janeiro
    chy of cities, towns, and villages, each                                  Kinshasa
    specializes in a different function and has                                   Seoul
    strong interrelationships with others. So                                    Tehran
    the policy discussion should be framed                                    Baghdad
    not at the extremes of the national level     –60          –40         –20             0           20         40       60          80         100         120
    or the individual settlement. Instead, it                                    Prediction error relative to population in 2000, %
    should be framed at the level of what is      Source: Satterthwaite 2007.
                                                  Note: Comparison of predictions in 1974 with estimates of city populations in 2000. Bar indicates the extent to
    termed an “area,” usually a state or prov-    which the city population was overpredicted in 1974 relative to its size in 2000. A negative number indicates
    ince. Policy makers should see themselves     that a city size was greater in 2000 than predicted.
    as managers of the portfolio of places in
    such an area. An area approach can also             urban shares, for example, traffic con-
    inform national urbanization strategies.            gestion and slums may not be the major
    While area-specific urban shares in the              policy problems. But in rapidly urban-
    population will determine priorities for            izing areas, congestion can quickly set
    all levels of government (central, pro-             in. And metropolitan areas may need,
    vincial, and municipal), a nation’s urban           in addition, to address within-city divi-
    share can be a good guide to the overall            sions posed by shantytowns and slums.
    complexity of its challenges.                 •     Prioritizing and sequencing of policies
•   Policy challenges become more com-                  can help governments facilitate inclu-
    plex with urbanization. Cities and                  sive urbanization even in the early
    towns provide fi rms and families the                stages of development. Each dimension
    benefits of proximity, but the compact-              of the integration challenge requires
    ness of activity produces congestion,               a different family of instruments. For
    pollution, and social tension, which can            areas of incipient urbanization, the pol-
    offset those benefits. Whether a policy              icy challenge is one-dimensional: build
    is desirable depends on if it addresses             density with spatially blind institutions.
    the market’s failures and abets concen-             For areas of intermediate urbanization,
    tration. In countries or areas with low             it is two-dimensional: build density and
200                                     WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                               reduce economic distance with spatially        Principles for managing a portfolio
                                               connective infrastructure. And for areas       of places
                                               of advanced urbanization, it is three-         Debates about urbanization often evoke
                                               dimensional: build density, overcome           images of overcrowded cities, visible con-
                                               distance, and address the economic             centrations of poverty, and appalling envi-
                                               and social divisions—caused, say, by           ronmental degradation. This can result in a
                                               slums—with spatially targeted inter-           general policy stance to control urban growth
                                               ventions. But at every stage, policy mak-      and curb rural-urban migration. Geographi-
                                               ers should emphasize the spatially blind       cally targeted interventions to clear or clean
                                               institutions that encourage density in         up slums that proliferated during low- and
                                               the right places.                              middle-income stages of development can
                                           The chapter first summarizes how                   end up dominating the discussion.
                                        urbanization policies can help places facili-             This chapter reframes the urbanization
                                        tate agglomeration economies. It next out-            debate. Historical evidence suggests that
                                        lines a framework for economic integration            urbanization in developing countries will
                                        to guide the management of a portfolio of             continue to be rapid at early stages of eco-
                                        places, using the experience of places that           nomic growth—much of the rise in urban
                                        have urbanized successfully. It then dis-             shares takes place before nations get to
                                        cusses examples of the framework in action            upper-middle incomes. But the rising den-
                                        in today’s developing countries.                      sity is to be welcomed if it produces agglom-
                                                                                              eration economies. The debate should not
                                                                                              be mainly about the pace of urbanization,
                                                                                              the amount of rural-urban migration, or
      B OX 7.1    Are the policy messages of this Report antirural?                           the ways to eradicate slums with targeted
                  No.                                                                         interventions. Instead, it should be about
                                                                                              the efficiency and inclusiveness of the pro-
      The economic geography of nations           • Sound macroeconomic policies to           cesses that transform a rural economy into
      does not conform to a simple                  reduce market distortions, elimi-
                                                                                              an urban one. And it should be about how
      urban-rural split. A continuum of             nate biases against agriculture,
                                                    improve the business climate,
                                                                                              policy can best address the coordination
      density gives rise to a portfolio of
      interrelated places. Symbiosis is the         stimulate competitiveness, and            failures that arise at each stage of urban-
      rule. At the head is a country’s lead-        promote investment and adopt              ization. “The poor are gravitating to towns
      ing city, and below it, a spectrum            new technologies.                         and cities, but more rapid poverty reduc-
      of settlements—secondary cities,               Such “aspatial” policies promote rural   tion will probably require a faster pace of
      small urban centers, towns, and             development—both in agriculture and         urbanization, not a slower one—and devel-
      villages.                                   the nonfarm economy—so that every           opment policy makers will need to facilitate
         A low-income country’s portfolio         place becomes better equipped to par-       this process, not hinder it.”1 And because a
      of places consists of primarily rural       ticipate in industry and services.
      areas. At this phase of incipient                                                       rural-urban transformation involves both
                                                     These policies will dispropor-
      urbanization, the mainstay of a strat-                                                  the urban and the rural, urbanization strat-
                                                  tionately benefit rural households
      egy to facilitate spatial transforma-       because the rural nonfarm economy           egies must include measures to improve
      tions necessary for economic growth         typically accounts for 30–50 percent        rural lives and livelihoods (see box 7.1).
      is a set of spatially blind policies:       of rural employment. Likewise, rural
      • Versatile and well-implemented            households engage in diverse eco-           The principle: maximize agglomeration
        regulations governing land mar-           nomic activities, with nonagricultural      economies across the portfolio of places
        kets to enforce property rights,          sources contributing 35–42 percent          Concentration, associated with rising density,
        safeguard land tenure, improve            of household income. Growth in the
                                                                                              brings potential benefits from “thick” mar-
        land transfers, ease land use con-        nonfarm sector will stimulate growth
                                                  in agriculture as inputs become             kets. But it also brings congestion and squa-
        version to reflect market needs,
        and bolster land taxation                 cheaper, profits are reinvested in agri-    lor. The main aim of urban policy is to help
      • Basic and social service provision        culture, and technological change           settlements deliver agglomeration economies
        to improve education and health,          allows better farming methods.a             while reducing the grime, crime, and time
        increase productivity, and encour-        Source: WDR 2009 team.                      costs that come with rising concentration.
        age mobility                              a. Feder and Lanjouw 2001.                  At different stages of urbanization, the bind-
                                                                                              ing constraints to promoting concentration
                                                                           Concentration without Congestion   201

while controlling congestion differ, as do the               in each of these types of place. In predomi-
priorities at each stage of urbanization.                    nantly rural neighborhoods, the policy
                                                             challenge is one dimensional and corre-
•    Incipient. Areas of incipient urbaniza-                 sponds to the need to build density. In areas
     tion—with urban shares of about 25 per-                 where urbanization has gathered momen-
     cent—are predominantly agricultural or                  tum, the challenge is two dimensional. It
     resource based, with low economic den-                  incorporates the need to promote density
     sity. The priority is simply to facilitate              and overcome problems of distance caused
     agglomeration forces and to encourage                   by congestion. In areas of advanced urban-
     internal economies of scale for plants,                 ization, the challenge is three dimensional.
     mills, and factories in towns. Because it is            For metropolises, again, there is a need to
     not yet clear which places will be favored              encourage density and overcome distance.
     by markets and for what purposes, neu-                  To this should be added the need to elimi-
     trality between places should be the                    nate divisions within cities, which segregate
     watchword for policy makers.                            the poor in informal slums from the rest, in
•    Intermediate. As urbanization pro-                      formally settled parts (see figure 7.2).
     gresses, economic alliances strengthen
     within and between urbanized areas.                     The unit for deliberating government
     Many firms and plants in the same sec-                   action: an area
     tor colocate to take advantage of sharing               Different parts of a country urbanize at
     inputs and knowledge spillovers. In such                different speeds. Unevenness is the rule,
     areas—with urban population shares of                   not an exception. And there are synergies
     about 50 percent—the promotion of                       and economic interdependencies among
     localization economies is the highest                   settlements of different sizes. Refram-
     priority. Efficiency in production and                   ing urbanization policies to better meet
     transport is the watchword.                             the economic imperatives at all stages of
•    Advanced. For highly urbanized areas,                   the rural-urban transformation requires
     productivity and consumption bene-                      rethinking the spatial scale for deciding
     fits arise from urbanization economies                   policy priorities and design. This Report
     associated with the diversity and inten-                makes the case for considering policies at
     sity of economic activity. While func-                  an appropriate geographic scale: an “area,”
     tionality is the goal for industrial towns              or state or province, generally the middle
     and cities, the watchword for postindus-                tier of government between the central and
     trial metropolises, with urban shares of                municipal. The scale should be big enough
     about 75 percent, is livability.                        to permit both rural-urban and interurban
                                                             linkages. The experience of Beijing, Shang-
The policy rule: sequence and calibrate                      hai municipality, and Guangdong prov-
The spatial dimensions of density, distance,                 ince supports a deliberately designed area
and division spotlight the policy challenge                  approach to urban strategy. Two other areas

Figure 7.2     The dimensions increase with the level of urbanization

    One-dimensional area                 Two-dimensional area                  Three-dimensional area
          (density)                       (density + distance)              (density + distance + division)

    Incipient urbanization             Intermediate urbanization               Advanced urbanization

                                                            DENSITY                             Large city
                DENSITY          Towns                                         DISTANCE            DIVISION
                   Towns                                                        Secondary

Source: WDR 2009 team.
202   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      in western China—Chengdu and Chongq-                     geographic transformations for the push
      ing—are now taking the same approach to                  from middle to high incomes.
      urbanization, with some success.
         An area approach does not rule out the
                                                            A framework for integration
      aggregation of urbanization strategies to a
      national level. High-density areas tend to            As urbanization advances, the policy impera-
      have populations concentrated in metro-               tives change, with the instruments spanning
      politan cities, intermediate-density areas in         the spectrum from spatially blind to spatially
      medium-size cities, and low-density areas in          targeted. While the policy debates overempha-
      small towns and villages. In the same way,            size the most spatially explicit of government
      more urbanized countries have more of their           actions, such as slum-upgrading programs,
      people in high-density areas, and less urban-         successful urbanization aimed at integrating
      ized countries have some high-density areas,          every nation’s portfolio of places requires the
      but most people are in low-density areas.             use of the full range of instruments—institu-
      Urbanization policies should incorporate              tions, infrastructure, and incentives.
      this unevenness of economic development.
         A country’s aggregate urban share can              Spatially blind “institutions” to
      be a good indicator of the complexity of              facilitate economic density
      the urbanization challenges it faces. In the          The responsibility for building institutions
      simplest case, one area may characterize an           that will be the bedrock for urbanization in
      entire country, as for Singapore. For larger          all parts of the country lies mainly with the
      countries, a careful aggregation can help             central government. Chief among them are
      determine the priorities at different levels          those governing the management of land. In
      of government.                                        this Report, “institutions” encompass three
                                                            broad sets of measures: law and order (espe-
      •   In countries where urbanization is incipi-        cially the defi nition and enforcement of
          ent, such as Ethiopia, with three-fourths of      property rights), the universal provision of
          its population in rural areas, the integra-       basic services, and macroeconomic stability
          tion challenge is unidimensional: facilitat-      (see “Navigating This Report” for details).
          ing density. To be sure, the capital cities and   These are core mandates for the central gov-
          a handful of other cities even in predomi-        ernment, and delivering them—or failing
          nantly rural nations face multidimensional        to—will alter the geographic distribution
          challenges in their spatial transformation.       of economic activities forever.
          But the top priority is the set of aspatial           The institutions governing land markets
          policy instruments that apply universally         include a comprehensive land registry; cred-
          to all places—establishing market institu-        ible mechanisms for contract enforcement
          tions to regulate land use and transactions,      and conflict resolution; flexible zoning laws;
          and delivering such basic services as secu-       and versatile subdivision regulations that
          rity, schools, streets, and sanitation. So in     help, rather than hinder, the conversion of
          the countries of Sub-Saharan Africa and           land for different uses. The transformation
          Central Asia, the role of national govern-        of the agricultural sector from one based on
          ments is pivotal in laying the foundations        communal land rights to individual prop-
          of inclusive urbanization.                        erty rights is the sine qua non for urbaniza-
      •   Where urbanization is intermediate—as             tion. The evidence clearly shows that once
          in many parts of the countries of East            property rights have been established and
          and South Asia such as India and Chi-             density is increasing, land regulation and
          na—central and provincial adminis-                planning can ensure the efficient coordi-
          trations must also build transport and            nation of different land uses. But if regu-
          communication infrastructure.                     lations are overzealous, they can hinder
      •   Where urbanization is more advanced,              the benefits of density and agglomeration
          as in the countries of Latin America,             economies. Similarly, rigid land use conver-
          North Africa, and Eastern Europe, cen-            sion rules, which may be a consequence of
          tral, state, and municipal governments            inflexible regulations, can be detrimental to
          must synchronize efforts to facilitate the        density, as are overly restrictive minimum
                                                                 Concentration without Congestion                                          203

building standards. The fourth institution       similar to that of other parts of the New
is adequate housing finance.                      World (see “Geography in Motion: Over-
    Institutions for fluid land markets          coming Distance in North America”). After
remain important. The property rights            winning the Anglo-French Seven Years’
embodied in land titles are essential for        War of 1756–63, the British vigorously
converting assets into usable wealth.2 The       debated whether to claim the small Carib-
practical problems of titling, not least the     bean islands of Guadeloupe (1,628 square
cost of implementation, should not deter         kilometers) or Canada (9.8 million square
strengthening the legal framework for indi-      kilometers) as the spoils of victory.8
vidual property ownership. Indeed, formal           The development trajectories of North
titles are necessary for functioning land and    America and Latin America would diverge
property markets. Although customary sys-        radically. In Latin America, the Spanish
tems of tenure still permit informal trans-      colonialists gave large tracts of land to a
actions, the absence of formal titles hinders    handful of individuals, along with the right
the conversion of land to areas of higher        to tax the local populace. Customary com-
economic return. Informality is a brake on       munal property rights determined land
land development, constraining an efficient       use, making people less willing to move. In
spatial transformation.                          North America, by contrast, there were few
    Consider preindustrial Europe. With          barriers to the acquisition of land, creating
more secure individual property rights to
land, English cities grew rapidly.3 Indeed,
England may have been the first to indus-
trialize because it introduced such rights          B OX 7 . 2   Land reform to jump-start urbanization:
before other European countries. The                             aiding villeins in Denmark
Nobel prize–winning economist Douglass
North uses this to spotlight what land insti-       In central Copenhagen a “pillar             In 1788 the abolition of villeinage
                                                    of freedom” commemorates land               further improved the bargaining
tutions can do for long-run growth and
                                                    reform. The monument honors the             power of tenants. Policy interven-
development.4                                                                                   tions in the credit market also helped.
                                                    final abolition, in 1788, of “villenage,”
    The “enclosure” movement made indi-             a form of serfdom common in West-           In 1786 two public credit institutions
vidual private property rights possible.            ern Europe in the Middle Ages. At the       were established to provide loans for
Starting around 1500 open commons were              beginning of the eighteenth century         land purchases, complementing an
fenced, hedged, or otherwise closed off and         less than 1 percent of agricultural         already rather active and efficient pri-
deeded or titled to individuals. By 1545            land was farmed by land-owning              vate credit market. The result: credit
                                                    peasants, and large amounts of land         did not constrain many prospective
around 40 percent of England’s surface area
                                                    were common property. Required to           buyers.b
belonged to private individuals. The Enclo-                                                        Market-based transactions, facili-
                                                    work for landlords, “villeins” could
sure Act of 1604 fostered the conversion of         not move without their landlord’s           tated by government land policies,
open commons into private plots, which              consent. But starting in 1760, most         formed a large class of owner-
continued until the early twentieth centu-          communal land was transformed into          occupier farmers, later a driving force
ry.5 Most researchers agree that enclosures in      private holdings. Between 1788 and          behind Denmark’s 1849 Constitution
England increased agricultural productivity,        1807, landlords sold around half of         and emerging democracy. By pro-
                                                    their land to tenants. By 1835 almost       moting education for the poor and
which released labor from the land, and pro-
                                                    65 percent of the land was owner            for rural residents, they also spread
vided the food surplus to support the rapidly
                                                    occupied.a A few decades later, Den-        basic services and gave a strong
increasing urban population.6 This allowed          mark experienced a “take-off” into          impetus to industrialization and small
England to become, for a time, the “work-           industrialization and urbanization.         towns.c Denmark’s population rose
shop of the world.”7 More evidence on how              This urbanization did not mean           sharply—in preindustrial societies,
aspatial institutions initiate urbanization         rural squalor. Structural, techno-          a growing population is a sign of
comes from Denmark (see box 7.2).                   logical, and institutional changes          prospering agriculture. After 1890
                                                    reduced the value of tenancy to             agriculture fed a surge of industrial
    Another example of what widespread
                                                    landlords, increasing the economic          growth in small townsd instrumental
private property rights can do for growth,                                                      in Denmark’s industrialization.e
                                                    leverage of tenants. In a 1784 decree
and for density, comes from North America           the century-old obligation of land-
and the countries of Latin America and the                                                      Contributed by Thomas Markussen.
                                                    lords to collect taxes on behalf of         a. Henriksen 2003. b. Henriksen 2003.
Caribbean. In the early period of European          the state was waived on land the            c. Henriksen 2003. d. Pedersen 1990.
settlement, Canada and the United States            landlord sold to their former tenants.      e. Christensen 2004, p. 1.
were seen as having economic potential
204   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      land markets and a predominantly owner-            Overly stringent regulations undermine
      operated agricultural sector on the western        investor confidence and unnecessarily dis-
      frontier.9 The U.S. Homestead Act of 1862          tort housing markets. Consider Mumbai.12
      gave individuals the right to 160 acres of         Overly restrictive land and building regula-
      unoccupied public land, the early founda-          tions have put unnecessary upward pressure
      tion of a strong property rights system.           on land and property prices, hampering the
          Contemporary research confi rms the             city’s competitiveness. Height regulations
      role of well-enforced individual property          hold Mumbai’s buildings to only between
      rights. A study of 80 countries fi nds that         a fifth and a tenth of the number of floors
      institutional quality does more for long-          allowed in major cities in other countries.
      run growth than either geographic factors          The city’s topography should exhibit a high-
      or a country’s openness to trade.10 Another        density pattern similar to that in Hong Kong,
      study of 75 countries finds that security of        China, but it is instead mostly a low-rise city
      property rights, as measured by an index           (see box 7.3). Half of all poor workers com-
      of expropriation risks, aids development.          mute less than 2 kilometers to work.
      And when such institutional effects are                Stringent restrictions on land use con-
      accounted for, physical geography has weak         version produce shortages of affordable
      effects on a country’s average income.11           housing, hurting migrants to a city. For
          In incipient urbanization areas or in          this reason, the average ratio of the median
      nations where the rural share is high, the         house price to the median annual house-
      institutions governing property rights             hold income in many African and Asian
      may be both the base and the mainstay              cities is twice that in many large U.S. cit-
      of the policies for a rapid and sustainable        ies.13 Bangladesh has a per capita income of
      urbanization. By contrast, when there is no        $1,230, less than 3 percent of the U.S. per
      secure individual land and property rights,        capita income of $44,070.14 But in Dhaka
      land transactions and urbanization may             prime land prices are similar to those in
      become divisive. Consider China, where             New York City. As much as 20 percent of
      land is collectively owned in rural areas and      the city’s inner area is underserviced. Tracts
      farmers do not enjoy clearly defined or fully       of centrally located, publicly owned land
      protected land property rights. There, the         remain idle and underdeveloped, while
      conversion of land to industrial use gener-        the rest is allocated for low value-added
      ates social conflict because farmers perceive       uses—a cantonment, public housing, and
      land confiscation as inappropriate without          residential areas for government workers.
      fair compensation. The problems are simi-              Stringent land development parame-
      lar in many Sub-Saharan African countries,         ters—including minimum plot sizes and
      where 90 percent of the land is communal.          road widths, setbacks, and land for commu-
          Land use and building regulations              nal facilities—exclude a majority of house-
      become important as urbanization                   holds from formal land ownership. Indeed,
      advances. Governments regulate land mar-           although the underlying plot might be titled,
      kets for two reasons. First, regulation can        the dwelling may be rendered illegal because
      ensure the appropriate separation of land          of the failure to meet official construction
      between different uses, such as preventing         standards. Without a downward revision
      the location of heavily polluting industries       of standards, the benefits of legal title are
      in residential areas. Second, it can ensure        lost. Such legal codes also contribute to red
      the integration of private and public uses of      tape and excessive housing costs.15 In Addis
      land, such as providing space for transport        Ababa high construction standards have rel-
      infrastructure in densely populated areas.         egated many low-income households, which
      But land use regulation can be overzealous,        might otherwise possess a tradable title, to
      upsetting the delicate balance between the         the ownership of “illegal property.”16
      public interest and private opportunity.               In 1979, the federal government in Bra-
          A city’s future depends on investor confi-      zil, by passing a national land use regulation
      dence in its prospects and its responsiveness      setting a minimum lot size of 125 square
      to future changes in the demand for land.          meters and frontage of 5 meters, effectively
                                                                              Concentration without Congestion                                                        205

B OX 7.3        Bombay fights the markets, and more than half of Mumbai’s residents live in slums
The city of Mumbai, once known as Bom-                  of Greater Mumbai went the other way,                    is curtailed. The government relies on
bay, provides sobering lessons. In the                  lowering the permitted FSI to 1.33 in 1991.              property taxes and on inflated real estate
1960s and 1970s, city planners decided                  Almost all buildings in Mumbai with an                   prices for revenue, so it has little incentive
that Bombay’s population should be                      FSI exceeding 4.5 were built before 1964.                to fight the groups that resist relaxation
controlled at about 7 million. Land regu-               Under the rules that existed until recently,             of building height restrictions.
lations and infrastructure policies were                new buildings, including those in the cen-                  The result is a vicious circle of supply
designed accordingly. But people flooded                tral business district, were subject to the              shortages and high land prices. Mumbai
into the city anyway, and today the city is             FSI of 1.33. As a consequence, space con-                slipped from 25th place to 40th in the
more than twice the intended size, with                 sumption in Mumbai averages 4 square                     league table of “best cities for business”
the highest population density of any                   meters, much less than the 12 square                     between 1995 and 1999. It remains
metropolitan area in the world. Estimates               meters in Shanghai and the more than                     India’s premier business city—it topped
indicate that 54 percent of Mumbai’s 16                 20 square meters in Moscow. And about                    Chennai and Bangalore in investment
million people now live in slums, and                   half of its residents are huddled within 2               in 2007 and was the top destination for
another quarter in degraded apartments.                 kilometers of the city center (see the figure            domestic migrants. But how quickly it
   The Floor Space Index (FSI)a regula-                 below).                                                  reforms its regulations and builds infra-
tions in Mumbai were introduced in 1964,                   Meanwhile, high housing costs account                 structure will decide how long it will
stipulating the maximum building space                  for as much as 15–20 percent of the                      keep this position.
for every square meter of the plot of land.             income of a low-income family. Rent
In Mumbai it was set at 4.5. The standard               control regulations freeze 30 percent of                 Source: WDR 2009 team; Bertaud 2003.
practice in cities with limited land is to              Mumbai’s housing stock, leaving it dilapi-               a. The FSI is the ratio of the total floor space
                                                                                                                 in a building to the area of the plot on which
raise the permitted FSI over time to accom-             dated because landlords see little point                 it is built. For example, suppose a building
modate urban growth, as in Manhattan;                   in investing. Weak property rights imply                 covers half of a plot that is 1,000 square
Singapore; Hong Kong, China; and Shang-                 that only 10 percent of the housing stock                meters in size. If this building has 10 floors, it
hai. Instead, the Municipal Corporation                 has legal title, so land redevelopment                   exhibits an FSI of 5.

Land should be used better in Mumbai, and people should not live so close to work


                                                                                                      % of households
25                                                                                                    35
                                                                                                      25                 All households

                                                                                                      20                  Poor households



 0                                                                                                     0
     0      5           10     15       20       25       30        35      40       45          50        0–1   1–2    2–3   3–5 5–10 10–15 15–20 20–30 >30
                             Distance from central business district (km)                                                 Distance to work (km)
Source: Bertaud 2003.                                                                                 Source: Baker and others 2005.
                                                   Undeveloped land outside      Airport
                                                   municipal limits              Port
                                                   Undeveloped land inside       Industries
                                                   municipal limits              Slums
                                                   Transport                     Built-up area
206   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      excluded many low-income residents from               Occupant-owned housing, usually a
      access to land in the formal sector. Many          household’s largest single asset by far, is
      suburban low-income developments could             important in wealth creation, social secu-
      not meet the 125-square-meter requirement,         rity, and politics. People who own their
      but were built on land owned by developers.        house or have secure tenure have a larger
      Outside the formal sector, such develop-           stake in their community and thus are
      ments could not be legally supplied public         more likely to lobby for less crime, stronger
      services. So more than half the population         governance, and better local environmental
      in regional capitals, such as Recife and Sal-      conditions.21
      vador, lives in slums or informal areas.17,18
      After democratization in 1988, cities were         Spatially connective infrastructure
      encouraged to service the informal sector.         to reduce distance to density
      Although the national minimum lot size             Policies to unify land markets and facilitate
      requirement remained in place, areas could         labor mobility remain important for the
      be designated as Special Zones of Social           buildup of economic density at all stages of
      Interest and exempted from the require-            urbanization. But they are not enough for
      ment as part of a package to secure tenure         dealing with the more complex challenges
      and improve services.                              of advancing urbanization. In Seoul and
         Land market restrictions can have               Shanghai, downtown traffic averages 8 kilo-
      adverse spillovers on the urban economy            meters an hour; in Bangkok, Manila, and
      and blunt the instruments intended to aid          Mexico City, it averages 10 kilometers an
      urbanization. Unless basic institutions for        hour or slower; in Kuala Lumpur and São
      land markets and social services are in            Paulo, it averages 15 kilometers an hour or
      place, infrastructure development will be          slower. Workers in Jakarta, Kinshasa, Lagos,
      hindered, and spatially targeted interven-         and Manila spend on average 75 minutes
      tions will likely be ineffective.                  commuting to work.22 For such areas, con-
         Regulations for housing finance affect           gestion can eat away the benefits of rising
      urbanization. Since the deregulation of            density. Spatially connective infrastructure
      fi nancial systems in the second half of the        must join the spatially blind institutions as
      1980s, market-based housing fi nancing has          priorities for inclusive urbanization.
      expanded rapidly. Residential mortgage                 Connective infrastructure needs insti-
      markets are now equivalent to more that 40         tutions. Successful cities react to growing
      percent of gross domestic product (GDP) in         traffic congestion with spatially connective
      developed countries. But those in develop-         infrastructure. But preceding such infra-
      ing countries are much smaller, averaging          structure in all successful cities (or accom-
      less than 10 percent of GDP.19 The public          panying it in the fastest urbanizers) is a fluid
      role should be to stimulate well-regulated         land market and an empowered local gov-
      private involvement. For example, private          ernment. The sequencing of policies should
      initiatives of the type developed by the           be spatially blind measures to create condi-
      Grameen Bank in Bangladesh, Bancosol               tions suitable for economic concentration,
      in Bolivia, and the Housing Development            followed by connective policies to deal with
      and Finance Corporation in India show              congestion.
      that uncollateralized lending can nour-                The United Kingdom in the nineteenth
      ish housing finance even in countries with          century is illustrative. With systems of
      budding fi nancial systems and weak legal           governance varying widely across towns,
      and regulatory structures. Establishing the        the Reform Act of 1832 and the Municipal
      legal foundation for simple, enforceable,          Corporations Act of 1835 brought about
      and prudent mortgage contracts is a good           regularization of municipal government.23
      start. When a country’s fi nancial system           Municipal authorities could take over pri-
      is more developed and mature, the public           vately owned sewerage, water, and gas
      sector can encourage a secondary mortgage          systems. By the 1880s they had started pur-
      market, develop financial innovations, and          chasing land to compete with private utili-
      expand the securitization of mortgages.20          ties, transport, and other services. In doing
                                                               Concentration without Congestion     207

so, they unified the hodgepodge of preexist-      2 million in 1930.30 To address ever more
ing private systems, separating sewage and       complex urbanization, the City Planning
drainage systems from the water systems,         Commission was created in 1938. After
and extending the reach of basic services to     studies and public debate, the 1916 Zoning
poor areas.24 The Land Enquiry Commis-           Resolution was replaced in 1961. The new
sion recognized that “municipal land own-        resolution incorporated parking require-
ership, town planning and the building up of     ments and emphasized open space.
the system of transit will go hand in hand and       Although based on the leading plan-
each will help the other.”25 By the end of the   ning theories of the day, aspects of those
nineteenth century, institutions governing       zoning policies have revealed shortcom-
land markets were maturing and adapting          ings over the years. The emphasis on open
to the changing urban requirements.26            space has sometimes resulted in buildings
    With this as background, the United          that overwhelm their surroundings. Since
Kingdom’s urbanization was rapid. In 1830        then, new approaches have been developed
the average GDP per capita was $1,749 (in        to make land use conversion more respon-
1990 international prices), roughly equiva-      sive to changing needs. A more flexible
lent to Honduras, Mozambique, or Paki-           approach at the Department of City Plan-
stan in 2003.27 The urban share rose from        ning encourages a mix of uses that creates
28 percent in 1830 to 69 percent in 1910.28      lively urban streetscapes that can sustain
At the top of the urban hierarchy: London,       increased density.31
whose population grew from 2 million in              New York City provides an example of
1830 to 6.6 million in 1900.29                   the changing spatially blind institutions
    Institutions and infrastructure must         necessary for spatially connective policies.
evolve continually. As areas urbanize and        Indeed, their interaction enabled the den-
nations develop, the networks for public         sity of Manhattan, the Bronx, Brooklyn,
transit become more complex, and institu-        and Queens to increase from 230 people per
tions such as legislation governing land use     square kilometer in 1820 to more than 5,000
must also adapt. Building a new transport        in 1900 and about 12,000 today.
network requires the purchase of contigu-            Successful urbanization requires con-
ous plots of land, and holdouts can extract      necting ever wider areas. Inevitably, density
huge rents or thwart the project entirely.       brings crowding. New York shows the enor-
Compulsory purchases (“eminent domain”           mous benefits of an efficient metro system in
in the United States) may be necessary, with     reducing congestion while encouraging den-
the safeguard of just compensation for           sity. The key is an integrated system of mass
land owners. Another safeguard is that the       transport (see box 7.4). Dense city centers
acquired land be for “public use,” although      and skyscrapers are feasible only when thou-
how widely this should be interpreted can        sands of office workers can be transported
be contentious.                                  efficiently to downtown offices.
    The United States, by the mid-nineteenth         Long-term success does not rule out
century, had a reasonably well-defined           occasional bouts of congestion, but it does
system of property rights. As New York’s         require flexible institutions. A British pam-
transportation network expanded, and             phlet published in 1860 observed that
the needs of the city changed over the past
century, its institutions evolved. The 1916         [F]rom day to day, and from year-to-year, the
Zoning Resolution has been amended to               streets of London become more and more
                                                    crowded, and must . . . come to a dead-lock
respond to shifts in population and land
                                                    between Westminster and the City, unless
use. Waves of immigration helped swell the          some more efficient remedy can be provided.
city’s population from 5 million in 1916 to         The great City lies as it were handcuffed,
almost 8 million in 1960. New mass transit          panting and exhausted under the weight of
routes and growth corridors were created.           its own wealth.32
And with the rise of the mass-produced
automobile, car registrations in New York           London’s congestion appeared no closer
State exploded from 93,000 in 1915 to about      to resolution in 1939, with traffic averaging
208                                     WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                                                                           of the substitution of one scarce resource,
      B OX 7.4    Widening the reach of New York City                                      travel time, for another even more scarce
                                                                                           resource, land. It is not efficient to devote
      New York’s subway system has             more than 100,000 passengers on             so much urban land to roads that conges-
      become one of the busiest and most       the day of the opening ceremony.            tion is completely eliminated. Some urban
      extensive in the world, serving nearly   Subway trains, at close to 40 miles an
                                                                                           congestion is likely to be optimal, if for no
      5 million passengers every day with      hour, were much faster than trolleys
      26 train lines operating on 800 miles    (6 miles an hour) and elevated trains       other reason than to prompt policy mak-
      of track. As New York City spread into   (12 miles an hour). More people could       ers to review and update institutions and
      a wider metropolitan area, commuter      now be moved at faster speeds.              infrastructure.
      bus networks and rail lines grew.           It has been a never-ending struggle          As cities specialize, intercity infrastruc-
      New York City’s commuter rail system     to expand the transport system fast         ture becomes a priority in the most dynamic
      is the most extensive in the United      enough to accommodate population            areas. There is a symbiosis between cities
      States, with about 250 stations and      growth. Most of the subway system
                                                                                           and their peripheries, but economic rela-
      20 rail lines serving more than 150      in use today was built between 1913
      million commuters annually.a             and 1931; the number of annual rail         tionships also join other cities in an urban
         Public transportation in New York     passengers jumped from 500 million          hierarchy. Transport links between cities
      City began in the late 1820s with        in 1901 to 2.5 billion in 1929.b In 1940    reinforce agglomeration economies and
      horse-drawn omnibuses. The first         the city unified the three indepen-         generate complementary and specialized
      steam-driven cable car line opened       dent subway lines under public own-         functions. In the United States the mega-
      in 1883. In 1909 electric trolleybuses   ership, allowing for a more integrated      lopolis stretching from Boston, through
      replaced them, and for 70 years trol-    approach to transport development.
                                                                                           New York City, Philadelphia, and Baltimore
      leybuses ran in all five boroughs of        The payoff is inclusive and sustain-
      New York City. The first elevated line   able urbanization. New York’s Metro-        to Washington along the northeastern coast
      (“el”) opened in 1868. By 1880 most      politan Transportation Authority has        is linked by highways and rails (the fi rst
      Manhattan residents were within a        served a 5,000-square-mile region           freight rail link was between Baltimore and
      19-minute walk of an “el,” which took    since 1968. According to the 2000           Washington in 1827).35 Japan also invested
      passengers above the congested           U.S. census, New York City is the only      in spatially connective infrastructure to
      streets.                                 locality in the United States where         link its two largest agglomerations Tokyo-
         The mid-1880s saw rapid immigra-      fewer than half of all households own
                                                                                           Yokohama and Osaka-Kobe (see box 7.5).
      tion. Overcrowding was rife. As in       a car—the figure is even lower in
      London, an underground rail network      Manhattan at fewer than a quarter—              In the Republic of Korea, Seoul-Incheon
      was seen as necessary. But it took a     compared with 92 percent nationally.        (in the northwest) and Pusan (the second
      blizzard in March 1888, completely       One in every three users of mass tran-      largest city at the southeast tip) were linked
      paralyzing the streets, to provide       sit in the United States and two-thirds     as early as 1905 by the Gyeongbu Rail, and
      the impetus for an underground rail      of the nation’s rail riders live in New     in 1970 by the 400-plus-kilometer Gyeo-
      system. The subway was designed          York City and its suburbs.c                 ngbu Highway. In 2004 the bullet train—the
      both to move people about within         Source: WDR 2009 team.                      Korea Train Express—connected the two
      Manhattan, and to connect tracts of      Note: a. The New York City Transit
      undeveloped land.                        Museum Teacher Resource Center, and         cities in two hours’ travel time. In the Pearl
         After years of political wrangling,   the Port Authority of New York and New      River Delta—a region of China studded
                                               Jersey Official Web site. b. The New York   with factories and interwoven by freeways—
      a plan for a subway was approved in
                                               City Transit Museum Teacher Resource
      1894. In 1904, the Interborough Rapid    Center. c. The New York City Transit        the economies of several cities are linked
      Transit Company opened and carried       Museum Teacher Resource Center.             together so effectively that, according to the
                                                                                           chief executive officer of a large electronics
                                                                                           manufacturer, “In practice, we are a single
                                                                                           vast factory scattered across the territory.”
                                        8 miles an hour, 33 not so different from
                                                                                               Demand management and public trans-
                                        the 10–11 miles an hour in central London
                                                                                           port encourage development of higher den-
                                        today.34 This may suggest an “equilibrium
                                                                                           sity. There are many instruments to increase
                                        level” of congestion. The city’s economic
                                                                                           connectivity, among them—36
                                        density consistent with this equilibrium
                                        depends on the quality of spatially connec-        •   Improving transport options—say,
                                        tive infrastructure. In this sense, the value          through better transit management that
                                        of additional investment in such infra-                increases the use of, or gives preference
                                        structure is not as much in the long-run               to, high-occupancy vehicles
                                        abatement of congestion as in the continu-         •   Managing land use—through transit-
                                        ally rising economic density for any given             oriented development or smart growth
                                        level of congestion. Congestion is the result          that gives preference to new develop-
                                                                       Concentration without Congestion                                       209

B OX 7.5    Promoting concentration in Japan between 1860 and 1980:
            spatially connective policies for Tokyo-Yokohama and Osaka-Kobe
Japan’s manufacturing industries are             Industries that left the traditional          promote concentration while preventing
spatially concentrated—a trend that can       industrial cores were mostly exporters           the grime and time costs of rising density.
be traced to the Meiji era starting in the    of machinery and electronic appliance            These efforts did not interfere with the
1860s. In Tokyo both state-owned fac-         plants. They continued to enjoy localiza-        profit motives of enterprises, but instead
tories and private industrial complexes       tion economies from producing similar            strengthened agglomeration economies.
were concentrated along the main river.       and related products in new clusters.            Government policies and market forces
Gradually small machinery workshops           Their locations alongside the Tomei high-        reinforced each other spatially to sustain
conglomerated, and industries expanded        way connecting Tokyo and Nagoya gave             economic growth.
toward the south along the new Tokaido        easy access to markets and high-tech
                                                                                               Contributed by Keijiro Otsuka and Megumi
railway connecting Tokyo, Yokohama, and       enterprises in the urban centers.                Muto.
areas farther south.                             The geographic distribution of indus-         Sources: Fujita and Tabuchi 1997; Sonobe and
   After World War II, when exports to the    tries over several decades of rapid growth       Otsuka 2006; Whittaker 1997; Overseas Eco-
United States began to accelerate, indus-     reflected the government’s efforts to            nomic Cooperation Fund 1995.
trial production became concentrated
in the Keihin industrial zone around
Tokyo and Yokohama, and in the Hanshin        Connected cities in Japan facilitate agglomeration economies in Tokyo-Yokohama (Keihin) and
industrial zone around Osaka and Kobe.        Osaka-Kobe (Hanshin) by road and rail
This led to heavy traffic congestion,
water shortages, and air and water pol-
lution. In 1962 the Japanese government
responded by instituting Zenso—the Inte-
grated Spatial Development Plan—which
aggressively developed the Pacific Ocean
Industrial Belt by linking the core agglom-
erated areas between Tokyo and Osaka                                                                      Sapporo
and establishing new industrial zones in                                                                                      HOKKAIDO
between. The investments included the
bullet train (Shinkansen) and other trunk
railways, expressways, and ports (see the
map to the right).
   Despite heavy infrastructure invest-
ments in new industrial clusters in more
remote regions, they could not attract
industries out of the Pacific Ocean Belt.
During the miraculous growth era of
the 1950s through 1970s, industries
remained spatially concentrated, thanks                                                                              HONSHU
to the mobility of workers, even though
there has been massive relocation of
industries from the congested core
to surrounding new industrial areas.                                                                         Tokyo
Enterprises that remained in core urban                                           Osaka
clusters upgraded from standardized
products to high-tech products and
new models by taking advantage of
urbanization economies accruing from
diverse economic activity and a large
pool of skill and talent. Other enterprises
retained their central management
functions in the core agglomerations to                                                                               Main railroads
benefit from the convenience of face-                                                                                 Main highways
to-face communications with banks,
government offices, and major industrial
organizations.                                Source: WDR 2009 team.
210   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

          ments along established public transport       buses operating on unsegregrated and con-
          routes                                         gested roads. But suburban rail and subways
      •   Launching general policies and pro-            require huge investments in fi xed capital, so
          grams—such as freight transport man-           dedicated busways (plus their more sophis-
          agement and market reforms.                    ticated relation, “bus rapid transit”) have
                                                         been gaining in popularity.
          Pricing mechanisms can be most effec-              Busways, most common in Latin
      tive in optimizing private car use. Extreme        American cities, cost about $10 million a
      but effective are Singapore’s auction per-         kilometer to install. Operating in Bogotá,
      mits to purchase cars. Add the car taxes,          Colombia; Curitiba and São Paulo, Brazil;
      and the cost of a car in Singapore is four         and Quito, Ecuador, they are being planned
      to five times the world price. Amsterdam,           or built in many other cities. A more expen-
      London, and Stockholm also have schemes            sive alternative, ranging in cost from $10
      that price road use according to the time of       million to $30 million a kilometer, is light
      day and level of congestion—substantially          rail, a modern form of tram covering short
      reducing peak-time car traffic and car emis-        distances. It usually feeds a larger system
      sions. The revenue streams from congestion         of heavy metro rail. Cities with light rail
      charging could be earmarked for reinvest-          include Hong Kong, China; Kuala Lumpur;
      ment in public transportation. But such            Singapore; Sydney; and Tunis.
      schemes require substantial investment in              The most costly mass rapid transit option
      technology to ensure the efficient collection       is the metropolitan subway system, which
      of fees.                                           has the largest capacity. Building costs aver-
          Easier to implement are simple regula-         age more than $100 million a kilometer,
      tions or traffic plans that reduce the num-         explaining why there are fewer than 200 sys-
      ber of vehicles in specific parts of a city         tems in the world, mostly in industrialized
      or overall. In Tehran entry to parts of the        countries.39 But their number is growing:
      city center is restricted to essential traffic.     China, India, and the República Bolivariana
      Budapest and Buenos Aires have pedes-              de Venezuela have built subways. When cit-
      trian-only zones in the city center, easily        ies reach a certain size and density, a subway
      reached by public transport. Gothenburg            is the only transport mode capable of mov-
      (Sweden) and Bremen (Germany) restrict             ing large numbers of people to concentrated
      private car links between different zones          job centers. The benefits that come from
      (“cells”), encouraging public transit. India’s     enabling such density include efficiency
      Chandigarh built some 160 kilometers of            and productivity gains—traditionally in
      wide-cycle paths to ease traffic on arterial        industry, increasingly in services (see chap-
      roads.37 The most popular restraint limits         ter 4)—but also lower energy consumption,
      the use of vehicles on specific days accord-        less pollution, and greater compactness,
      ing to their registration plate number, as         which increase interaction and encourage
      in Athens, Bogotá, Lagos, Manila, Mexico           nonmotorized transport for short intracity
      City, Santiago, São Paulo, Seoul, and Sin-         trips. Compact and densely packed cities
      gapore. Such measures have been proven             might also meet the imperatives of climate
      easier to enforce than expected, with wide-        change (see box 7.6).
      spread public acceptance.38                            Public transport, successful on its own,
          Demand management is the most cost-            has encouraged new developments at higher
      effective means of increasing mobility. But        densities, which in turn permit more suc-
      traffic will increase even with the best poli-      cessful public transport while reducing the
      cies, especially in rapidly growing cities.        economic distance between places. Manag-
      Investments in public transport infrastruc-        ing all this takes patience and the discipline
      ture can connect different parts of a city         to build from the bottom. The establish-
      and guide land use and urban expansion.            ment and strengthening of land and prop-
      Mass rapid transit includes subways, subur-        erty market institutions—including secure
      ban rail, and dedicated busways, all having        property rights, flexible land use regula-
      a capacity and performance far superior to         tions, and ease of land conversion—is not
                                                                       Concentration without Congestion                                                     211

B OX 7.6    Climate change calls for a different urban form, not slower urbanization
Urbanization is associated with industrial-    correlated with carbon emissions.d At the              network is 99 kilometers, and 60 percent
ization, which increases emissions of car-     national level, Sweden and Japan have                  of its population lives within 600 meters
bon dioxide (CO2) and other greenhouse         used incentives and regulation to greatly              of a metro station. Only 4.5 percent of
gases. And increasing wealth tends to be       reduce the emissions intensity of their                trips are by mass transit in Atlanta, a
associated with higher energy consump-         economies. At the urban level, an empha-               fraction of the 30 percent in Barcelona.
tion, for instance through motorization.       sis on density and smart choices that                  For Atlanta to achieve Barcelona’s metro
But to be concerned about the climate          reduce distance can help do the same.                  accessibility would require building an
does not mean that urbanization should         This requires land use policies that favor             additional 3,400 kilometers of metro
be slowed. If anything, economic density       compactness and transport policies that                tracks and about 2,800 new metro sta-
may need to be encouraged even more.           guide urban form and provide convenient                tions. This would allow the Atlanta metro
   Historical data going back to the nine-     and efficient public transit.e                         to transport the same number of people
teenth century show that today’s rich             Atlanta and Barcelona illustrate alter-             that Barcelona does with only 99 kilome-
countries experienced rising per capita        native urban growth scenarios. They                    ters of tracks and 136 stations.
carbon emissions as they urbanized and         had similar populations of 2.5 million                    Density makes the difference.
industrialized through the twentieth           to 2.8 million, but Atlanta had a density
century.a Industrialization, motorization,     of six people per hectare in 1990, and                 Source: WDR 2009 team.
                                                                                                      a. Marland, Boden, and Andres 2007. b.
and consequently carbon emissions in           Barcelona had 176.f In Atlanta the longest
                                                                                                      World Bank 2002, figure 2.1; Lanne and Liski
developing countries follow the trajecto-      possible distance between two points                   2003, figures 1, 4, and 5; and data in devel-
ries of developed countries in their earlier   within the built-up area is 137 kilome-                oping countries from http://cdiac.esd.ornl.
stages of development.b For instance, per      ters; in Barcelona, the distance is only               gov/ftp/ndp030/nation.1751_2004.ems.
capita carbon emissions in Germany dou-        37 kilometers. Per capita CO2 emission                 c. Bento and others 2003. d. Scholz 2006;
bled from 0.8 metric tons of carbon in 1880    was 400 metric tons in Atlanta, 38 tons                Vance and Hedel 2006; Golob and Brown-
                                                                                                      stone 2005; Ingram 1997; International
to 1.6 in 1900. In the United States and the   in Barcelona.g Atlanta’s metro network
                                                                                                      Union of Public Transport. e. Bento and
United Kingdom, carbon emissions were          is 74 kilometers long. but only 4 percent              others 2003; Scholz 2006; Vance and Hedel
about 2.5 in 1900. Today’s developing          of its population is within 800 meters                 2006; Golob and Brownstone 2005. f. Ber-
countries have lower average emissions         of a metro station. Barcelona’s metro                  taud 2004. g. Kenworthy 2005.
at the equivalent GDPs per capita of Ger-
many, the United Kingdom, and the United       Countries can change their energy trajectories
States in 1880 and 1900. Botswana’s car-
                                               Per capita carbon emissions (tons, metric)
bon emissions were 0.36 per capita in 1987     20
and 0.57 in 1996 (see figure at right).
   The trend in most developing countries      18
suggests continuing growth in carbon
emissions both in total and per capita.        16
The policy response to the projected
increases in urbanization and carbon           14
emissions in developing countries should
not be to try to prevent the growth of         12
cities. This would not be feasible or desir-
able in light of the evidence on growth        10
and poverty reduction. Instead, growth                    Germany, France,
in cities—many of which might double in                   Canada, the United Kingdom,
size over the next few decades—should                     and the United States
                                                6         1880–1940
be managed to create urban areas far
more carbon efficient than many of
today’s mature cities.
   Monocentric structures and high popu-        2
lation densities tend to reduce the length
and number of motorized trips.c Compact         0
cities use less energy for transport, con-          0              5                10               15               20               25               30
sume less land for housing, and use less                               GDP per capita (1990 international Geary Khamis $, thousands)
energy for heating. Several studies find       Sources: Carbon emission data worldwide can be found in the Oak Ridge National Laboratory, U.S. Department
that high population density is negatively     of Energy at; Lanne and Liski 2003.
212   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      easy. But without the commitment to such           authorities powers to retain the houses built
      institutions, and without investment in            under slum-clearance schemes, paving the
      connective infrastructure, targeted inter-         way for future public housing schemes.
      ventions to deal with slums are unlikely to        Better transport was part of the solution,
      work.                                              evidenced by conferences in 1901 on the
                                                         subject of “Improved Means of Locomo-
      Spatially targeted interventions to                tion as a First Step towards the Cure of
      reduce social and economic divisions               the Housing Difficulties of London.” The
      For the three-dimensional problem faced            conferences passed a resolution that “a
      by advanced urbanization areas, spatially          complete system of transportation radiat-
      blind and connective instruments must be           ing from urban centers, and which shall be
      supplemented with spatially targeted inter-        cheap, rapid, and under municipal owner-
      ventions to address the social and economic        ship, is a primary step towards dealing with
      division within a city’s boundaries—most           the housing problem.”40 Londoners obvi-
      visibly, slums. The lesson of experience           ously understood that connective policies
      is that spatially targeted efforts succeed         must precede targeted interventions.
      when they are applied where land markets               Indeed, the link between improvements
      work reasonably well, basic social services        in spatially connective transport infra-
      are widely accessible, and a connective            structure and the solution of London’s slum
      infrastructure links the city’s core to its        problem was made clearly in the policy
      periphery.                                         discourse of the time. In 1890 the Cheap
         Institutions and infrastructure are             Trains for London Workers Bill proposed
      prerequisites for successful interventions.        extending the provision and further regu-
      Successful programs to integrate slums             lating the fares on “workmen’s trains.” The
      have been built on a foundation of spatially       private railway companies already had been
      blind and spatially connective policies. This      obliged by law to introduce these trains in
      integration included the establishment of          1883, to provide an affordable means of
      institutions to effectively govern the work-       commuting to working-class workers who
      ing of the housing market, a spatially blind       lived in the suburbs but earned their living
      provision of social and basic services to all      in central London. By lowering the cost of
      settlements, and transport infrastructure          commuting, the suburbs could be devel-
      investments to connect the newly created           oped, decongesting London’s central areas.
      housing areas.                                         Likewise, during the late-nineteenth
         Slum clearance requires a legislative basis     and early twentieth century, governments
      to empower local authorities to take action        across North America and Western Europe
      and institutions to facilitate an orderly con-     implemented large-scale slum clearance
      version of land from agricultural to residential   and re-housing. Landowners were com-
      or other purposes. At the same time, subur-        pensated, and the cleared land was sold for
      ban development is made feasible through           redevelopment. These programs would not
      the provision of basic amenities and social        have succeeded without a rapid expansion
      services alongside ongoing improvements in         of transport infrastructure. New transport
      the transport connectivity of cities with their    systems helped “open up” the outskirts, or
      suburbs and surrounding counties.                  suburbs, of cities, making periurban hous-
         In London social outcry at the dreadful         ing attractive for both real estate develop-
      conditions of Victorian slums provided the         ers and urban workers. The resulting flight
      impetus for slum clearance and improve-            to the suburbs was also both a cause and
      ment. But the efforts were preceded by             a consequence of the relocation of many
      steps to improve housing markets and               industries to the peripheries. And it coin-
      transport systems. The Housing of the              cided with the spread of basic social ser-
      Working Classes Act 1890 provided local            vices and recreational amenities.
      authorities with the power to build houses             Policies to integrate slums into cities
      for the working classes and to clear areas         have worked where institutions and infra-
      of unfit housing. An amendment gave local           structure were adequate. After World
                                                                 Concentration without Congestion                                       213

War II, Sweden urbanized rapidly and             the new housing developments to the local
Stockholm’s population grew swiftly, from        city economies. As infrastructure improved
741,000 in 1950 to 1.39 million in 1980.41       even more, particularly after the passage of
Stockholm had an inadequate and dilapi-          the Housing and Urban Development Act
dated housing stock, while rents were high       1965, the more prosperous residents left the
relative to most other European cities. 42 In    city centers for the suburbs.48
reaction, the Swedish government formed             Better connective infrastructure is a pre-
the Royal Housing Commission in 1945. A          condition for applying targeted policies to
plan was formulated to demolish slums in         deal with slum housing. This takes time,
Stockholm and other cities, and re-house         but both Hong Kong, China, and Singapore
the displaced slum dwellers in publicly          show that it can be done over decades rather
provided rental housing in well-designed         than centuries. Regardless of differences in
high-rise buildings on the city’s periphery.     the speed, the sequencing of policies appears
The first generation of high-rise residential     to be the same: targeted policies to integrate
buildings was integrated with the provi-         slums cannot come before the application of
sion of schools, health clinics, and recre-      geographically blind and connective policies
ational and shopping facilities, as well as      (see box 7.7).
service centers. Spatial connectivity to city
centers was ensured through easy access to
transport.43                                        B OX 7 . 7   Speeded up, but still in sequence: spatial integration
    Swedish authorities managed to con-                          in twentieth-century Hong Kong, China
tinually upgrade urban living conditions
throughout the 1960s and 1970s. With the            Before World War II, Hong Kong,           spatially blind institutions had to
                                                    China, developed its administrative       be adapted over time as the city
Million Homes Programme the government
                                                    structure and legislative framework       developed and the urbanization
set itself the aim of ending innercity squalor                                                progressed. The 1939 Ordinance was
                                                    to govern land markets. In 1935,
and overcrowding by building 100,000 new            mounting awareness of poor living         amended in 1958, 1969, and 1974. a
dwellings a year from 1965 to 1974, adding          conditions in urban slums led to the      Having established the necessary
one-third to Sweden’s aggregate housing             formation of a Housing Commission.        planning framework, Hong Kong,
stock of 3 million units.44 The new settle-         This was followed by the Town Plan-       China, was better placed to imple-
ments provided basic amenities, including           ning Ordinance of 1939, which estab-      ment spatially connective policies in
                                                    lished a Town Planning Board.             the 1970s. These policies were a nec-
schools and clinics, and were linked to urban
                                                       Nevertheless, the proper imple-        essary response to the doubling of
employment centers through well-planned                                                       car registration within a decade and
                                                    mentation of the ordinance and town
traffic systems.45                                   planning in Hong Kong, China, had         the concomitant increase in conges-
    Similar lessons come from the United            to wait until after the passage of the    tion that was a product of the city’s
States. By the end of the nineteenth cen-           Town Planning Regulation in 1954. It      rapid economic growth of around 10
tury, American philanthropists had raised           was only after the famous Shek Kip        percent a year.
awareness of the hardships facing slum              Mei slum fire of 1953 that efforts to        Institutions and infrastructure went
                                                    develop public housing programs           hand in hand. With effective plan-
dwellers. They urged building regulations
                                                    went into full swing. In 1965 the         ning laws in place, the government
to ensure minimum standards in the con-                                                       was able to introduce the Temporary
                                                    Working Party on Slum Clearance was
struction of new tenements.46 But it was not        formed. It took Hong Kong, China (a       Restriction of Building Development
until the 1930s that the government became          city in a hurry), more than 30 years      Ordinance of 1973 in the Pok Fu Lam
active in the provision of housing.47 Follow-       before it began effectively address-      and Mid-Levels areas of Hong Kong,
ing the Great Depression, the United States         ing the problem through spatially         China. This in turn paved the way for
Housing Authority was established by the            targeted interventions. Hong Kong,        building the Mass Transit Railway,
                                                    China, first had to develop and           modifying building height restric-
Wagner-Steagall Housing Act of 1937, which
                                                    strengthen the spatially blind institu-   tions in the area around the Kai Tak
allowed for subsidized loans to be made                                                       Airport, and accelerating relief for an
                                                    tions governing the operation of land
to local housing authorities for clearing           and housing markets, and connective       overloaded transport network.
dilapidated areas and building replacement          infrastructure to improve the use of         The result: the city now ranks
homes. A sound legal framework enabled              land.                                     among the world’s top five in infra-
national and state authorities, civil society          The first land use strategy and        structure efficiency, and the slums are
organizations, and private developers to            zoning plan—the “Colony Outline           gone.b
deal concertedly with slums. Good intra-            Plan and Outline Zoning Plans”—           Source: WDR 2009 team.
                                                    were only drawn up in 1963. The           a. Bristow 1984. b. Cullinane 2002.
urban public transport systems connected
214   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

         Targeted interventions may have to wait             South Africa’s experience is more sober-
      until institutions and infrastructure have         ing. When the fi rst post-apartheid South
      been improved. The experience of developed         African government came to power in 1994,
      countries remains relevant today. Costa Rica,      it faced a housing crisis with an estimated
      South Africa, and Singapore show why.              deficit of 1.5 million housing units and
         During the 1980s, the combination of            an additional requirement of 170,000 new
      rapid in situ population growth, migration,        units a year. Some 18 percent of households,
      and an influx of refugees from war-torn             or 7.4 million people, lived in slums.53 The
      neighboring countries made Costa Rica’s            new housing policy that emerged from
      already acute urban housing shortage even          multiparty negotiations was implemented
      worse. This led to the creation of a National      through the Housing Act of 1997, provid-
      Housing Finance System in 1986. The aim            ing housing-related subsidies to as many
      was to provide subsidies to low-income             people as possible for renting, purchasing,
      households for house purchases or construc-        constructing, and improving homes.
      tion. Households were able to supplement               But the requisite institutions and con-
      the funds that they received with loans from       nective infrastructure were not yet in place.
      private institutions, including commer-            A range of reforms—including changes to
      cial banks, savings and loans institutions,        regional government boundaries, financial
      and cooperatives. Minimum wage house-              support mechanisms, and housing-related
      holds were entitled to a full subsidy, while       legislation—were introduced simultane-
      households earning more than four times            ously. Indeed, the Housing Act repealed,
      the minimum had access to smaller subsi-           incorporated, or amended 35 separate
      dies and loans at near-market conditions.49        pieces of legislation.54 The first wave of low-
         Costa Rica’s housing subsidy succeeded          cost housing developments, on the periph-
      because the necessary spatially blind insti-       eries of major cities, lacked basic amenities
      tutions and spatially connective infrastruc-       and transport links to city (and job) cen-
      ture were in place to facilitate its targeted      ters. These developments failed to amelio-
      interventions. As early as 1869 the govern-        rate intraurban divisions. Recent shifts in
      ment decreed that primary education was            policy are more encouraging. The Breaking
      a basic universal right. The 1949 constitu-        New Ground national housing program has
      tion guaranteed free access to secondary           focused on integrating low-income com-
      education as well. Costa Rica’s government         munities through improvements in access
      invests more than 20 percent of its budget         to public transportation and basic social
      in education each year, and has a literacy         and commercial services.55
      rate of about 95 percent to show for it.               Improving institutions and infrastruc-
      Similar investment in the public medical           ture and intervening at the same time is
      system reduced infant mortality rates, with        a tall order for any government, but Sin-
      an average life expectancy at birth of 79          gapore shows it can be done (see box 7.8).
      years.50 Although incomes are much higher          Perhaps the most successful example of how
      in Costa Rica’s central regions, social indi-      slums can be eradicated, Singapore is to
      cators are similar across the country.51           some extent an anomaly. It is one of the few
         Costa Rica has well-functioning institu-        countries that have managed to implement
      tions governing the land market. An effec-         all three sets of integration policies simulta-
      tive property registry system is in place.         neously. Singapore was successful because it
      Indeed, more than 80 percent of property           had exceptionally rapid economic growth
      owners possess registered titles, and there is     and a focused government in power since
      a high degree of legal security.52 The capital     1965. The fact that it is a city-state helped
      city, San José, is linked with the major pro-      greatly, indirectly providing a general les-
      vincial cities by an efficient and affordable       son: successful urbanization takes coordi-
      bus system, and private bus companies con-         nated action at all levels of government.
      nect San José and its outlying suburbs. In             Most countries will not be able to rep-
      many ways, Costa Rica is a model for other         licate Singapore’s efforts—aligning priori-
      developing countries.                              ties and the effort of central, state, and city
                                                                   Concentration without Congestion                                            215

governments is difficult for any country
that is not a city-state. More likely, they will      B OX 7 . 8   Singapore: from slums to world city
have to sequence their policy efforts along
the path followed by Costa Rica and earlier           At independence in 1965, 70 percent           ernment became a major provider
developers such as Great Britain, Sweden,             of Singapore’s households lived in            of infrastructure and services. The
                                                      badly overcrowded conditions, and             scarcity of land made good plan-
and the United States. South Africa shows
                                                      a third of its people squatted on the         ning an imperative. Multiyear plans
the difficulties of trying to implement all            city fringes. Unemployment aver-              were produced, implemented, and
three sets of policies simultaneously.                aged 14 percent, GDP per capita               updated. Finally, the housing author-
                                                      was less than $2,700, and half of the         ity (HDB) was mandated to undertake
“An I for a D”—a policy instrument                    population was illiterate. Falling            a massive program of slum clearance,
for each dimension of urbanization’s                  mortality rates and migration from            housing construction, and urban
challenge                                             the Malay Peninsula implied rapid             renewal. Public housing has been
                                                      population growth, further increas-           an integral part of all development
The sequence of policies corresponds to
                                                      ing the pressure on both housing              plans. At the height of the program,
different levels of urbanization. Incipient           and employment: 600,000 additional            HDB was building a new flat every
urbanization requires mainly the applica-             units of housing were needed, and             eight minutes. Of Singapore’s popu-
tion of spatially blind policies. Intermediate        private supply was less than 60,000.          lation, 86 percent now lives in pub-
urbanization requires the addition of spa-            An account of this time comes from a          licly built units. Most own their flats,
tially connective policies. And advanced              contemporary visitor to Singapore:a           encouraged by special housing funds
urbanization requires these and spatially                                                           financed from the Employees Provi-
                                                      The undercover walkways are usually
                                                                                                    dent Fund, a mandatory retirement
targeted efforts. So the success of the new           taken over by hawker stalls and junk.
                                                      Laundry hangs from poles thrust out of        scheme. Serviced land was made
policy is predicated on the successful imple-         windows above—just like in old Shang-         available. Through the Land Amalga-
mentation of the ones introduced before it.           hai. This is Singapore, in the early 1970s.   mation act, the government acquired
    For a predominantly rural country whose           We were all devastated at the time—we         almost one-third of city land. Slum
                                                      who didn’t live here. From 1871 to 1931
urban share is less than a quarter or so, the         the city’s Chinese population rose from       dwellers were relocated to public
portfolio of places is faced with what might          100,000 to 500,000. By 1960 it is estimated   housing.
                                                      that more than 500,000 Chinese were              For a city-state in a poor region, it
be termed a one-dimensional challenge—to              living in slum-like conditions—indoors.       is not an exaggeration to assert that
facilitate density (see table 7.1). It is not         Equipped with only one kitchen and one
                                                      bathroom, the shophouses were designed        effective urbanization was respon-
obvious where this density will increase              for two extended families at most. After      sible for delivering growth rates that
first, and governments are best advised to             extensive partitioning many of them           averaged 8 percent a year through-
allow market forces to play themselves out.           housed up to 50 individuals.                  out the 1970s and 1980s. It required
Neutrality between places is the rule, and its           Today, less than 40 years later,
                                                                                                    a combination of market institutions
urbanization strategy should consist mainly                                                         and social service provision, strategic
                                                      Singapore’s slums are gone. In their
of spatially blind institutions. They include                                                       investment in infrastructure, and
                                                      place is one of the cleanest and most
                                                                                                    improved housing for slum dwellers.
the provision of basic and social services, the       welcoming cities in the world. The
establishment of market institutions and law          secret? First, institutional reforms          Sources: Yuen 2004, Yusuf and
and order, the security of property rights,           made the government known for                 Nabeshima 2006.
                                                      its accountability. Then, the gov-            a. Cockrem 2007.
the efficient operation of the land market,
and sound macroeconomic policies. Regu-
lations must be versatile enough to facilitate
efficient land use conversion, and standards        a two-pronged response: continuing the
for building must be enforceable without           task of building spatially blind institutions,
being overly restrictive. This is a tall order     and investing in spatially connective infra-
for governments in countries at the low lev-       structure to offset the congestion that might
els of income with which low urbanization          otherwise offset the efficiency gains from
rates are associated. They should not make         “localization economies” (see chapter 4).
it harder by attempting spatially explicit             For a highly urbanized country with
policies.                                          urban shares above 75 percent, urbaniza-
    For a rapidly urbanizing country with          tion should emphasize livability, creativity,
urban shares between one fourth and three          and urban social integration—the delivery
fourths, managing its portfolio of places is       of “urbanization economies.” These coun-
mainly a two-dimensional challenge—to              tries face a three-dimensional challenge—to
build density and reduce distance to den-          build density, reduce distance, and diminish
sity. A two-dimensional challenge requires         divisions. To be sure, these countries have
216                                        WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Table 7.1   An instrument per dimension—a simple framework for urbanization policies
                               Incipient urbanization            Intermediate urbanization                Advanced urbanization
 Urban shares                  Less than 25 percent              About 50 percent                         More than 75 percent
 Examples                      Kampong Speu, Cambodia; Lindi,    Chengdu, China; Hyderabad, India         Greater Cairo, the Arab Republic of Egypt; Rio
                               Tanzania                                                                   de Janeiro, Brazil
 Dimensions of policy          1-D: Build density                2-D: Build density, reduce distance      3-D: Build density, reduce distance, eliminate
 challenge                                                                                                division
 Instruments for integration
 Institutions                  Land rights; basic education,     Land use regulations; universal          Land use regulation and land taxation;
                               health and water and sanitation   provision of basic and social services   universal provision of basic services
 Infrastructure                                                  Transport infrastructure                 Transport infrastructure; demand management
 Interventions                                                                                            Slum area development; targeted programs to
                                                                                                          reduce crime and environmental degradation
Source: WDR 2009 team.

                                           a varied economic geography: their port-                 level roughly the same as Benin, Cambodia,
                                           folio of places consists of a handful of one-            or Tajikistan. Since then it has transformed
                                           dimensional areas, a good proportion face                itself into a leading industrial country.56
                                           two-dimensional challenges, and some face                Consistent with the stylized facts of chapter
                                           three-dimensional challenges. Spatially blind            1, the Republic of Korea’s sectoral transfor-
                                           and connective policies continue to facilitate           mation has been accompanied by an equally
                                           agglomeration economies, but now they also               radical spatial transformation. In 1960
                                           are prerequisites for successful interventions           about 75 percent of all Korean citizens lived
                                           to reduce within-city divisions.                         in rural areas. By 1990 the country was 75
                                                                                                    percent urban, and today the urban share of
                                                                                                    the population exceeds 80 percent.57
                                           The framework in action                                      Institutions to ensure the universal
                                           Low-density areas should build economic                  availability of basic social services helped
                                           density through rural-urban transforma-                  the nation lay the foundations of rapid and
                                           tions and stronger links between villages                successful urbanization. In 1960 the pro-
                                           and towns. Rapidly urbanizing areas should               portion of the overall population age 15 and
                                           ensure that the productivity gains from eco-             over with no schooling was 36 percent, and
                                           nomic density are not offset by congestion               by 1980, when it had entered the intermedi-
                                           costs. Highly urbanized areas should focus               ate urbanization stage, this proportion had
                                           on livability by promoting social integra-               fallen to less than 15 percent. By 2000, some
                                           tion and the gains from economic concen-                 years after it entered the advanced stage,
                                           tration. The priorities at the national level            the proportion was less than 5 percent. The
                                           correspond with the predominance of one                  years of schooling of the average member
                                           or more of these types of areas.                         of the labor force had increased from five
                                                                                                    years in 1960 to nine years in 1980, rising
                                           Incipient urbanizers (one-dimensional                    to more than 12 years by 2000.58 A simi-
                                           areas): institutions for more efficient                   lar story unfolded for health-related ser-
                                           rural-urban transformations                              vices. In 1980 only 4 percent of children
                                           The recent developers show that success                  were immunized against measles. By 1989,
                                           does not require explicitly spatial policies             95 percent were. In 2006 only one child in
                                           to lay the groundwork for successful urban-              every 100 was not immunized.
                                           ization. For areas of incipient urbanization,                Matching the universal provision of educa-
                                           the policy priorities remain the provision of            tion and health services has been the nation-
                                           basic social services and the improvement                wide flexibility in land use conversion.59 In
                                           of land markets.                                         particular, the Republic of Korea’s govern-
                                               Emphasize social services. In 1960 the               ment has been willing to convert agricultural
                                           Republic of Korea had a GDP per capita                   land for industrial purposes. The central
                                                                  Concentration without Congestion                                               217

government also encouraged local govern-         coastal provinces (see map 7.2). Its GDP per
ments to promote the conversion of agricul-      capita in 2005 was only 34 percent of the Chi-
tural land through the formation of smaller,     nese average,61 with almost 75 percent of its
more localized industrial complexes.             population classified as rural. The challenge
    While some areas have inevitably been        Guizhou faces is building density to facilitate
left behind in the Republic of Korea’s urban-    agglomeration economies. Its 11th Five-Year
ization process, none has been left disadvan-    Plan (2006–10) aims to deliver an urban share
taged. Take Eumseong county, a largely rural     of 35 percent by focusing on the area’s larg-
area in Chungcheongbukdo province (see           est city, Guiyang. With the improvements
map 7.1). As the Republic of Korea indus-        in spatially blind institutions in China, this
trialized and urbanized, the county experi-
enced a continual outflow of people. In 1968      Map 7.1   The Republic of Korea—three areas at different stages of urbanization
the population exceeded 120,000, but by
1990 it had fallen to just under 75,000. But
even as the people of Eumseong were seeing
their neighbors move closer to Korea’s major
cities, they got better education and health
services and improved streets and sanitation.
Between 1969 and 1990, middle and high
                                                                             3D Area: Seoul
school teachers tripled in Eumseong county                                   Metropolitan Area
from 1,000 to around 3,000. And the num-
ber of hospitals per million population in
Chungcheongbukdo province doubled from                                             KYONGGI
around 400 in 1980 to 800 in 1990, while the
water supply coverage increased from less                                                          1D Area: Eumseoung
than 30 percent to almost 60 percent. People
left Eumseong, but the Korean government                                                       NORTH
did not abandon the county—instead, it                                                      CHUNGCHONG

continued to emphasize the universal provi-                                    SOUTH
                                                                            CHUNGCHONG                                    NORTH
sion of basic and social services.                                                                                      KYONGSANG
    The Republic of Korea is not the only
successful economy to provide evidence of
the framework in action. Over the last two                                                                                   2D Area: Daegu
                                                                                                                             Metropolitan Area
decades, China has been gradually putting in                                       NORTH
place the institutions to improve its urban-                                       CHOLLA

ization processes. An urban land market has
been created, and regulations standardizing                                                               SOUTH KYONGSANG

the assignment of land use rights have been                                                                                     PUSAN
established.60 In the 1980s the urban planning
law was aimed at controlling the size of large                                 CHOLLA
cities, but the 10th Five-Year Plan (2001–05)
instead chose to emphasize the synergistic
development of China’s large, medium, and
small cities. The household registration sys-
tem, which for years had imposed restric-
tions on rural migrants looking to move to
urban areas, has been reformed, and the 11th
Five-Year Plan (2006–10) aims to further
strengthen land market institutions.
    Against this backdrop the urbanization
prospects of China’s one-dimensional areas                          CHEJU
have improved. Take Guizhou province. In
southwest China, and home to almost 40
million people, Guizhou lags far behind the      Source: WDR 2009 team.
218                                                        WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Map 7.2         China—three areas at different stages of urbanization                                                    system. The results are more security of ten-
                                                                                                                         ure—leading to easier transactions, higher
                                                                                                                         land values, and more land investments—
                                                                                                                         and greater mobility to urban areas.
                                                                                                                             Kampong Speu illustrates the critical
                                                                                                                         issues for areas of incipient urbanizers.
                                                                                                                         Spatially blind policies to encourage rural-
                                                                                                                         urban integration should be the mainstay
                                                                                                                         of a government’s strategy: improve land
                                                                                                                         markets and property rights, improve rural
                                                                                                           JILIN         and urban social services, and encourage
                                                                                                                         inclusive governance in towns and small
                                                       NEI MONGOL
                                                                                                                         cities (box 7.9 discusses the importance of
                                                                                                                         land titling in Cambodia and Vietnam).
                                                                      BEIJING                                                Secure tenure promotes greater invest-
                                                                                                                         ment in land and shelter, improves the abil-
                                                                    HEBEI                                                ity to transfer land, and enhances access to
                                                                                                                         credit. China, Pakistan, and Vietnam con-
                                                       SHANXI                SHANDONG
                                                                                                                         firm its importance for investment in low-
                                                                                                                         density areas. Farmers use more labor and
                                        SHAANXI             HENAN
                                                                                                                         inputs on owned plots than on leased land.
                                                                                                                         They also use land as collateral for new
                                                                                                                         activities and benefit from increases in land
                                                                                                                         prices. In India the prices for titled land are,
                                                                                                                         on average, 15 percent higher than those for
                                                                            JIANGXI                                      untitled land. In the Philippines secure hous-
                1D Area: Guizhou
                        Province                       HUNAN          2D Area: Changsha–Zhuzhou–                         ing commands prices 58 percent higher than
                                                                      Xiangfan Cluster
                                   GUIZHOU                                            FUJIAN                             housing without title, and in Jakarta prices
                                                                                                                         for secure housing are 73 percent higher.62
                                                                                                     TAIWAN                  Despite these obvious advantages, more
                                             GUANGXI             GUANGDONG                                               than 50 percent of the periurban population
                                                                          HONG KONG                                      in Africa and more than 40 percent in Asia
                                                                    3D Area: Pearl                                       lives under informal tenure. In many coun-
                                                                    River Delta                                          tries improving land tenure (and registra-
                                                                                                                         tion) is hindered by political and customary
                                                                                                                         tenure arrangements. In Africa, where cus-
                                                                                                                         tomary institutions cover between 90 and 98
Source: WDR 2009 team.                                                                                                   percent of the land, policies to formalize land
                                                           appears to be more realistic now than would                   tenure must start with customary systems
                                                           have been the case two decades ago.                           and gradually add features of modern land
                                                               Define and enforce land rights. Kam-                       registration. Once community-recognized
                                                           pong Speu province in Cambodia, about 100                     rights are obtained in Benin, Ghana,
                                                           kilometers southwest of Phnom Penh, covers                    Mozambique, and Namibia, individuals can
                                                           about 7,000 squares kilometers. It has about                  apply for land certification and full registra-
                                                           700,000 people, and is 10 percent urban. A                    tion, and both can be used for credit.
                                                           few market towns serve its farming com-                           Improve land administration. Central
                                                           munes of Mohasaing, Ou, Traeng Trayeung,                      Asia and Eastern Europe have the most sys-
                                                           and others. Many villages are beneficiaries                    tematic experience in tackling land admin-
                                                           of the land registration and titling begun in                 istration, from Central European countries
                                                           2000. The aims are to strengthen land tenure                  with old traditions of land markets, to Cen-
                                                           security and land markets, formulate policies                 tral Asian countries where no land markets
                                                           for land administration and management,                       existed. During the transition from plan to
                                                           develop mechanisms for dispute resolution,                    market, countries tried to reestablish equity
                                                           and establish a national land registration                    in land and property rights, deepen land
                                                                         Concentration without Congestion                                          219

   B OX 7.9    Titling land for a sustainable rural-urban transformation
   “Application receipts”                           This view was backed by the 1992                   Red books increase land market
   in Cambodia                                    land law, which ruled that an application         activities, and these activities increase
   Cambodia is formalizing ownership of           receipt is a valid claim on the plot. In 2004     agricultural productivity by transferring
   land through the distribution of land          the government initiated a comprehensive          land to the most productive users, reduc-
   titles, with immediate benefits in higher      land management and administration pro-           ing inefficiencies.f The liberalization of
   productivity and land values.a Although        gram, and one of its central components           the land market has been followed by
   the courts and other formal institutions       includes a systematic titling scheme. By          increased mobility as households sell
   to resolve land conflicts are slow, formal     the end of 2005 about 457,000 plots had           land to take up new economic oppor-
   land rights documents carry authority          been registered under this program, and           tunities in the wage labor sector.g So a
   in most rural communities. If landhold-        166,000 titles had been distributed.e             more fluid land market has facilitated the
   ers hold a formal title to a disputed plot                                                       ongoing shift in Vietnam from a predomi-
   of land, their position is considerably        “Red books” in Vietnam                            nantly agricultural economy to a more
   strengthened, even if the conflict is          In 1981 Vietnam moved to a system simi-           diversified and urbanized economy. It is a
   resolved through informal means.               lar to the Chinese “household responsibil-        big part of a strategy that has yielded per-
      In 1989 individual land use in agricul-     ity system,” with land users entitled to          haps the most impressive poverty reduc-
   ture was codified by law.b Rural residents     keep surplus production above a fixed             tion in any country in recent history.h
   were encouraged to submit applications         quota. In 1988 some individual property           Contributed by Thomas Markussen.
   for land ownership certificates, and appli-    rights to agricultural land were trans-           a. Markussen forthcoming; World Bank 2003b.
   cations came in for 4 million plots. Due to    ferred to farmer households. In the 1993          b. Boreak 2000.
   the limited administrative capacity and        land law, the distribution of land use            c. Sophal, Saravi, and Acharya 2001.
   reach of the government, only about half       certificates—known as “red books”—                d. Sovannarith and others 2001.
                                                                                                    e. Deutsch 2006.
   a million titles were actually distributed.c   was mandated. Red books come with
                                                                                                    f. Deininger and Jin 2003; Ravallion and van
   But people who applied got an “applica-        the rights to sell, rent, mortgage, and           de Walle 2006b.
   tion receipt,” and this document often         bequeath land. So the idea of a land mar-         g. Ravallion and van de Walle 2006a.
   worked as a formal title.d                     ket was formally sanctioned.                      h. World Bank 2003b.

and capital markets, and improve public
functions such as land taxation, planning,                B OX 7 . 1 0    Land markets in transition
and asset management. Now they have to
improve mechanisms to enable registrations,               In the first phase, Eastern Europe and         cadastres. More efficient, a com-
valuations, and transactions (see box 7.10).              Central Asia restored property rights,         bined system is easier to make self-
                                                          privatized state-owned assets, and             financing.
    Instituting mechanisms to govern land
                                                          promoted equity in housing. Next,            • A local champion is needed, pref-
use and conversion can be difficult. Some                  they rebuilt the land administration           erably not a surveyor or a lawyer.
nations fear that land conversion would hurt              systems for cadastre and registration          Enthusiastic change managers
grain production and food security (China                 followed. Proper records were needed           were instrumental in Moldova and
and the Arab Republic of Egypt). Many oth-                to stimulate real estate markets and           the Czech Republic. Competent
ers are constrained by traditional forms of               take care of land allocation and con-          officials in the Russian Federation,
land tenure, such as the communal systems                 solidation. Information infrastructure,        Serbia, and Turkey were needed
in Africa and the ejido in Mexico. In cases of            institutional capacity, and databases          to design and implement the new
                                                          were the areas of focus. Now some are          systems. Systematic registration
unclear property title, land conversion tends             entering the third phase of collecting         was not necessary because good
to benefit the state and the developers at the             property taxes, managing public land,          land records predated socialism,
cost of the farmers or rural households that              and issuing building permits.                  and there were few transactions
traditionally held or cultivated this land.                  Some lessons:                               during the socialist period.
    In Mexico the traditional communal land               • Reforming dysfunctional legal and          • A solid system with Web-based
system has evolved to enable land transac-                  institutional systems such as those          applications to reduce user
tions. After the 1917 revolution, Mexico dis-               in Latin America, may be more diffi-         transaction costs and the oppor-
tributed more than 100 million hectares, or                 cult than starting anew (the Kyrgyz          tunities for corruption can be
                                                            Republic, Georgia).                          updated on its own.
50 percent of its arable area, from large farms
to ejidos, rural communities organized along              • A single agency should be respon-          Contributed by Cora Shaw and Gavin P.
                                                            sible for both registration and            Adlington.
the precolonial indigenous social structures.
But the redistribution undermined property
rights, and the requirement that land be used
for self-cultivation precluded rental markets.
220                                       WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                          In 1991 the system gave more freedom to eji-                 congestion. The priorities include pro-
                                          dos to sell and rent land. Of 150,000 hectares               viding social services for rural and urban
                                          used for urban development between 1995                      residents, ensuring fluid land markets, and
                                          and 2000, more than two-thirds were from                     investing in infrastructure in and around
                                          ejidos. The off-farm income of the farm-                     the growing city centers.
                                          ers increased 45 percent. (Box 7.11 presents                     Expand administrative jurisdictions
                                          promising examples.)                                         to coordinate infrastructure investments.
                                                                                                       Among the many cities that have absorbed
                                          Intermediate urbanization                                    rural Koreans are Seoul and Daegu. Both
                                          (two-dimensional areas): institutions                        of these cities were initially able to urbanize
                                          and infrastructure for increasing                            against a backdrop of spatially blind poli-
                                          density and reducing congestion                              cies, but they soon began to face congestion,
                                          Rapidly urbanizing areas expect a con-                       which required spatially connective policies.
                                          tinuing influx of migrants and increasing                     Indeed, housing congestion in Seoul became

      B OX 7.11     Strengthening land market institutions for rural-urban integration
      Land management on Douala’s                     secondary rights allow small-scale farm-            for better land use planning in urban
      urban fringe—Cameroon’s                         ers to hire migrant workers in exchange             areas. Areas for improvement include the
      Mbanga-Japoma Project                           for temporary rights to cultivate plots.            equity of service provision, since rural and
      Mbanga-Japoma, a land development proj-         The system is highly structured, with               urban residents have different needs, and
      ect in Douala, Cameroon, provides serviced      specific days of the week designated for            the weak rural voice, since urbanites are
      land at a reasonable price and reconciles       laborers and others who are working on              believed to be more organized.
      formal and customary development prac-          the borrowed land. Land tenure in the vil-
                                                      lage is almost exclusively under the cus-
                                                                                                          Land consolidation in Indonesia
      tices. The first phase, covering 160 hectares
                                                                                                          The Land Consolidation Program imple-
      30 kilometers from the city center, started     tomary system, controlled by the village
                                                                                                          mented in Indonesia in the 1990s shows
      as a partnership among public institutions,     council, allowing for secondary rights
                                                                                                          how to facilitate the orderly develop-
      formal private investors, and customary         allocations. Strong demand from nearby
                                                                                                          ment of fast-growing areas and to plan
      owners. The partnership develops the site       urban markets for horticultural produce
                                                                                                          the development of vacant areas on the
      with primary and secondary infrastructure       makes cultivating of even a small plot
                                                                                                          urban fringe.
      services (roads, water, sewerage, drainage,     profitable and thus attractive to migrants.
                                                                                                            The mayor has the authority to deter-
      electricity), delineating blocks of land of
                                                      Inclusive administration—the                        mine the location of consolidation areas
      between 1 and 8 hectares. The developer
                                                      Republic of Korea’s integrated cities               and to manage and supervise the pro-
      gives back 45 percent of the land to cus-
                                                      The Republic of Korea developed the rural-          cess. But the key actors are the private
      tomary landowners, keeping 55 percent.
                                                      urban integrated city to overcome the               landowners and the occupiers of (state-
      Blocks are then subdivided and sold, either
                                                      shortcomings of earlier rural development           owned) land.
      by the developer or by customary owners.
                                                      initiatives. The integrated city policy incor-        The minimum requirement for land
      The final cost of a serviced plot is much
                                                      porates rural counties with cities in a uni-        consolidation is to have at least 85 per-
      lower than one provided by the formal
                                                      fied spatial framework. It aims to improve          cent of landowners representing at least
      private sector.
                                                      local public services and local administra-         85 percent of the land area give their
         Although there are questions about eli-
                                                      tion and reduce rural-urban disparities.            agreement. All participants contribute
      gibility for purchasing the serviced plots,
                                                         Starting in 1994 the government                  by providing land for infrastructure and
      the approach provides a new perspective
                                                      selected 49 cities and 43 counties as can-          services. The amount of land a partici-
      for partnerships in managing rural-urban
                                                      didates. The selection criteria included            pant is required to give up is determined
      land use in and near Sub-Saharan cities.
                                                      historical homogeneity, natural topo-               by consensus. Small landowners who
      Secondary land rights and farming               graphical conditions, and the potential             cannot contribute land can contribute
      in central Mali                                 for balanced development within the                 money or labor. The contributions fund
      Secondary land rights—including share-          integrated city. The selected cities and            infrastructure and utilities—and build
      cropping, tenancy, and borrowing land           counties held public hearings and citizen           a pool of “cost-equivalent land,” to
      under customary tenure—are often seen           surveys. After this screening, 41 cities and        be used only by small landowners to
      as exploitative because they do not give        39 counties were amalgamated into 40                enlarge their parcels.
      permanent tenure to users. But in some          rural-urban integrated cities.
      circumstances they can benefit both sec-           Attitude surveys suggest that residents          Sources: WDR 2009 team; Groupe Recher-
      ondary and permanent rights holders. In         and local councils see the benefits. Every-         che/Actions pour le Développement 2001;
      the village of Baguinéda, in central Mali,      one agrees that the integrated city makes           and Kim 1998.
                                                                   Concentration without Congestion                221

a severe problem in 1960 as the area grew        Map 7.3 Decentralization and localization
                                                 economies in Daegu
through the intermediate stage of urbaniza-
tion and absorbed a large influx of people                    Daegu urban area
from abroad after the country gained inde-                   Daegu city center
pendence from Japan and from rural areas                     Highways
                                                             KTX High-speed train
in the Republic of Korea. To help tackle this                Industrial centers
problem, the area of Gangnam, south of the
                                                                                    90 km
Han River, was absorbed into Seoul’s terri-                                                        Pohang
tory in 1963, and the Gangnam Development                 Gumi                      60 km          Machinery &
                                                                                            DAEGU auto:
Program initiated. This program involved a         Electronics
                                                      80 million                    30 km
                                                                                                   31 million
                                                                                                   cars per year
series of spatially connective infrastructure    mobile phones
                                                       per year,
projects spread over 30 years, including             1.4 million
                                                 LCDs per year
several bridges across the Han River and a
54.2-kilometer circular subway line to link                                                        Automotive:
Gangnam with central Seoul.                                                                        1.8 million
                                                                                                   cars per year
    Daegu’s story is similar. Between 1950 and                                           Busan
                                                                                         Container terminal:
1990, Daegu’s population swelled by a factor                                             1,500 kton
of six, from 355,000 to nearly 2 million,63 as                                    Changwon
                                                                     Machinery & auto: 240,000 cars per year
its thriving textile industry pulled in rural
                                                 Source: Daegu Metropolitan City.
migrants seeking a better life. The policy
response was to integrate Daegu and its hin-
terland by expanding its administrative zone
in 1987 and again in 1995, followed by build-    forefront of the Republic Korea’s export-
ing a subway system and expanding the city       led industrialization.
bus system. The city also experienced con-          Other examples are Chongqing and
tinual building and upgrading of local roads.    Chengdu, both rapidly urbanizing areas
In 1980 just over 40 percent of Daegu’s local    in southwestern China. In line with an
roads were paved, and by 1995, virtually all     unabashedly urbanization-based economic
had been paved.                                  growth strategy, China is piloting the “area
    Combining universal access to the most       approach” in western China. At about 43
basic services and reasonable land markets       percent, they have similar urban shares to
with investments to improve spatial con-         the average for China. The objective is to
nectivity with other areas of the country,       increase those shares to 70 percent in 2020,
Daegu has thrived. Manufacturing has             but in a manner that speeds the concentra-
deconcentrated from Daegu into the sur-          tion of economic activities while reducing
rounding Gyeongsangbukdo province,               rural-urban disparities in living standards.
and the local economy has diversified,            The mainstays of the strategy are institu-
reducing its reliance on the textile indus-      tions and infrastructure (see box 5 in the
try and moving into sectors with higher          overview).
value added production. Daegu now sits at           If markets favor the two places as much
the center of a vibrant urban system sur-        as the central and provincial governments
rounded by five cities, all with easy trans-      have, the two cities will improve the lives
port access to the central city, and each        of millions in the Chinese hinterland. The
having evolved to provide localization           initiatives have already had a local impact.
economies (see map 7.3). Gumi has been           In Chongqing rural incomes in the first half
dubbed “Korea’s Silicon Valley” for its          of 2007 increased faster than those of urban
specialization in electronics, while coastal     residents. Foreign investment is about the
Pohang and Ulsan, respectively, provide          same as it was in Shanghai a decade ago.
homes for the Pohang Steel Company and           Industries are attracted to the low wages
Hyundai. Ulsan also houses one of the big-       and low cost of land. According to govern-
gest shipbuilding industries in the world,       ment statistics, average wages, at $2 to $3 a
and both these cities have been on the           day, are much lower than those in Beijing
222   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      or Shanghai. In Chengdu farmer concen-                        intensification in central city areas. The
      trations are believed to have increased pro-                  plan sets out a series of spatially connective
      ductivity by 80 percent. Industrialization                    policies aiming to promote connectivity
      has been absorbing about 100,000 farmers                      between the three cities in the cluster. These
      a year, with some narrowing of rural-urban                    include highway and rail-based expressway
      income differences.                                           projects to connect Xiangtan with Zhuzhou
          Several areas at the intermediate stage of                and ring roads around each of the three cit-
      urbanization in China appear to conform                       ies. The plan is a good illustration of how
      to the principle of an additional instrument                  the principle of “an I for a D” can be made
      for the dimensional challenge of conges-                      operational using an area approach.
      tion. An example is the tri-city area in the                      Invest in transport connectivity while
      northeast of Hunan province, in central                       continuing institutional reform. Devel-
      China (see map 7.4). The cluster of three                     oped metropolitan areas rarely leave city
      cities—Changsha, Zhuzhou, and Xiang-                          growth unplanned. Land and housing
      tan—has a combined population of around                       markets help allocate residential and office
      13 million and accounts for about one-fifth                    space. Rapidly expanding systems need
      of the province. With an income exceeding                     clear property rights to provide incentives
      the national average by 17 percent and the                    for land transactions and correct land valu-
      Hunan average by 61 percent, this cluster is                  ation to avoid an urban bias and too much
      an intermediate urbanization area with an                     migration to the city. Singapore develops
      urban share of half.                                          land and housing plans every 10 years and
          An area plan—the fi rst of its kind in                     lets the market function once public and
      inland China—was formulated in 2005.64                        private sectors agree on which economic
      The plan specifies a regulatory land use                       activities to develop and which residential
      planning framework within which market                        patterns are needed to accommodate firms
      prices will be allowed to allocate land for                   and workers.
      different uses. It also provides planning                         Urban transport, along with urban land
      guidelines including, for example, enforc-                    management, determines the shape of the
      ing land use rights and promoting land                        city and its ecological footprint. Urban
                                                                    mobility is particularly important for the
                                                                    poor. In Buenos Aires 87 percent of the jobs
      Map 7.4 Changsha, Zhuzhou, and Xiangtan—spatially             in the metropolitan area are accessible in
      connective infrastructure in a two dimensional area
                                                                    45 minutes. In Mexico City 20 percent of
                                                                    workers spend more than three hours trav-
                                                                    eling to and from work each day. The urban
                                                                    poor in Beijing and Shanghai spend less
                                   Changsha                         than 5 percent of their income on transport
                                                                    because they walk or cycle. If they chose to
                                        Zhuzhou                     travel by bus, the costs would be 40 percent
       Loudi            Xiangtan                    Pingxiang
                                                                    of their income.65 Brazil’s vale de transporte
                                                  JIAN GXI          is an effective way to subsidize poor workers
                                          ZHUZHOU                   in the absence of good urban transport—
                                                                    financed by the central government and by
            H U NA N
                                                                    the employer in equal parts. Several large
                             Hengyang                               cities have public transport networks that
                                                                    are used extensively—metro in Delhi, Kol-
                    Main connective artery                          kata, and Mumbai, buses and metro in São
                    Secondary transport axis                        Paulo—but the network quickly becomes
                                                                    inadequate and congested because of the
                    Tertiary transport axis
                                                                    rapid population growth. Regular mainte-
      Source: China Urban Planning and Design Institute and Hunan   nance and new investments in infrastruc-
      Development and Reform Commission 2005.
      Note: The main artery is formed by the Beijing-Guangzhou
                                                                    ture are needed to sustain density in urban
      railway, Beijing-Zhuhai highway, and State Highway 107.       areas (see box 7.12).
                                                                     Concentration without Congestion                                      223

    Put infrastructure in the most promis-
ing places. Several countries have created            B OX 7 . 1 2    Retrofitting transport infrastructure in Bangkok
new cities to move a capital city (Brasília),
to decongest the capital (Seoul), or for eco-         In the 1990s it was estimated that the     Thailand, or to suburban districts of
nomic reasons. Creating new cities with               average car in Bangkok spent 44 days       Bangkok, because of the enduring
                                                      each year stationary in traffic. How       attraction of Bangkok’s agglomera-
the sole purpose of diverting population
                                                      did this situation come to pass? And       tion economies, sociocultural ameni-
from the capital is often risky, evidenced            how is it being remedied?                  ties, and key export infrastructure,
by Brazil, France, República Bolivariana de              A city of around 7 million people,      including its port.
Venezuela, the United Kingdom, and more               Bangkok is the product of hundreds            In recent years several flyovers and
recently Egypt and Nigeria.66 New cities              of years of incremental growth along       elevated expressways have been built,
become attractive to private investors only           traditional land configurations. The       along with an elevated railway system
after they reach a threshold, but there is no         result is a city woven with narrow         (Skytrain), dedicated bus lanes, and
                                                      lanes, many of them culs-de-sac            two peripheral ring roads. But car
way to know that threshold.67 And when
                                                      (called soi), but with few arterial        ownership has shot up, too, adding to
cities are created far from main transport            roads. Indeed, the arterial roads can      the traffic and diminishing the impact
networks and business centers, they are               be as far as 7 kilometers or more          of remedial investments. Looking to
unlikely to be economic successes.                    apart. According to a recent estimate,     the future, congestion pricing and
    When markets identify promising cities,           roads account for only about 6.1           increased parking fees appear to be
strategic investments in infrastructure and           percent of Bangkok’s land area in          promising policy options. Reducing
public goods can accelerate their potential           the inner city, and only 1.7 percent in    fares on the Skytrain and extending
                                                      its peripheral areas. In high-income       rapid transit to more of Bangkok,
for economic growth (see box 7.13). Second-
                                                      countries it is usual for 20 to 30 per-    perhaps using bus rapid transit, pose
ary cities that promote access to markets,            cent of urban land area to be devoted      greater challenges.
improve city management, and build human              to roads. Even with this extreme con-      Contributed by Austin Kilroy.
capital seem a better alternative. And if polit-      gestion, economic activity has been        Sources: Angel 2008, Bae and Suthira-
ical concerns dictate the creation of new cit-        slow to decentralize to other cities in    nart 2003, and Gakenheimer 1999.
ies, efficiency concerns will guide locations
to be close to growing markets and to have
access to infrastructure. Working with exist-      of 12 residents lives in a slum, and about
ing cities is preferable to creating new cities    one-third of new citizens in recent years are
from scratch. But, if new cities are created,      rural migrants. The city has taken steps to
they should be constructed on an appropri-         make urbanization inclusive. It built better
ate scale, close to markets, and planned to        schools, renewed parks, started community
generate demand-side links.                        centers, and improved main networks for
                                                   water and sanitation. Since 2000 a pub-
Advanced urbanizers                                lic-private bus rapid transit system, the
(three-dimensional areas):                         TransMilenio, has improved citywide acces-
institutions and infrastructure for                sibility. Travel times have fallen by an aver-
higher density and shorter distance,               age of 15 minutes, with larger reductions
and targeted incentives to                         for households in poorer parts of the city
address divisions                                  (see map 7.5). Aided by these infrastruc-
Successful metropolitan areas in both              ture improvements, Bogotá’s internation-
developed and developing countries have            ally recognized Programa de Mejoramiento
well-functioning land markets, representa-         Integral de Barrios has assisted the poorest
tive management, state-of-the art transport        neighborhoods to integrate with the city.
infrastructure, and social policies to inte-       Begun in 2003 it has already helped 930,000
grate low-income residents.                        people. The program is believed to have
   Use an inclusive mix of institutions,           contributed increases of up to 11 percent in
infrastructure, and incentives. Colom-             house values.68
bia’s capital, Bogotá, shows the resolve and           The Republic of Korea also provides
resources needed for inclusive urbaniza-           lessons. In the 1950s it had an estimated
tion in a metropolitan region. Although            136,650 unregistered slum districts, more
the area’s income places it in upper-mid-          than 2,200 in the core of Seoul.69 Spatially
dle-income levels, 43 percent of its popula-       targeted policies to redevelop Seoul’s slum
tion of 6.7 million is considered poor. One        areas started as early as the mid-1960s.
224                                       WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      B OX 7.13     New cities: escapes from urban jungles, or cathedrals in the desert?
      New cities were attempted in Europe with-      record at best. Cities closer to Cairo              ness within the area and with other cities
      out much success. In the United Kingdom        have attracted businesses and people,               in China; and its urban form:
      the Barlow Commission Report of 1940           though much fewer than anticipated.                 • Access to foreign markets. Locating the
      stimulated interest in new towns. Between      Cities distant from Cairo (including Sadat            SEZ close to the city of Hong Kong,
      1947 and 1968, Britain created 26 new          City, supposedly the new capital) remain              China, facilitated foreign investment,
      towns to control the growth of London          unattractive for skilled labor due to lack            technical assistance, and access to for-
      and stimulate development in Scotland          of amenities and transport links. The new             eign markets.
      and Wales. In 1965 France followed a simi-     cities have no more than 1 million inhabit-
                                                                                                         • Connectedness within the area. To
      lar program—nine towns, five in the Paris      ants (1 percent of Egypt’s population),
                                                                                                           spread the fruits of development, the
      area and four in lagging areas, were con-      compared with the 5 million target set
                                                                                                           boundaries of the municipality were
      structed. These programs soon were inter-      for 2005. The program was also costly: 22
                                                                                                           expanded to extend the benefits of
      rupted and put aside as unsustainable. The     percent of the Ministry of Infrastructure’s
                                                                                                           the city to all workers. The rural hukou
      new towns never reached their targeted         investment under the Fourth Plan (1997–
                                                                                                           was abolished in the municipality, and
      population, nor did they forestall the         2001) was spent in these new towns. This
                                                                                                           all urban services became accessible
      growth of London or Paris. The experience      will increase if the government continues
                                                                                                           to all residents. Placing the Shenzhen
      in developing countries has been mixed.        its policy of developing the urban fringes.
                                                                                                           city-area in the Pearl River Delta area
                                                     The emphasis on attracting investment
      Failure in the Arab Republic of Egypt                                                                ensured the best possible links to its
                                                     was not balanced by the need to make
      Egypt’s program of new cities is the                                                                 hinterland and other urban nodes in
                                                     cities attractive for skilled labor and acces-
      world’s largest. In 20 years Egypt has                                                               the Delta regions. Complementary
                                                     sible from the established urban centers.
      built 20 new cities and is preparing for                                                             decisions to ease the mobility and
                                                     Eventually, the creation of the new cities
      45 more. The first set of 24 cities was                                                              integration include investments in
                                                     had little impact on decongesting greater
      launched in 1974–75 as a manifestation of                                                            transport infrastructure and a shift
      the political commitment to conquer the                                                              from a road-based to a rail-based
      desert and ensure sustainable growth.          Success in China                                      system.
      Large industrial zones were created and        China’s approach recognizes the need to             • Functional urban form. The compre-
      generous tax incentives were given to the      create cities with access to major markets            hensive plan for Shenzhen envisions a
      private sector. Land was virtually free. The   and transportation networks. Shenzhen                 polycentric metropolis that connects
      “first generation” of new towns included       was the first special economic zone                   the SEZ to urban nodes through effi-
      six towns, each with its own industrial        (SEZ) to be approved by Deng Xiaoping                 cient transport.
      base and large target populations. a Ten       in 1980. From a small town with 30,000
      years later—by the mid-1980s—the next          inhabitants, it grew to 800,000 in 1988
      program based on satellite settlements         and 7 million in 2000. The new residents
      was launched, and nine second-genera-          include the best-trained professionals in           Sources: WDR 2009 team; Stewart 1996; and
      tion settlements were launched around          the country, attracted by high salaries,            World Bank 2007k.
      Greater Cairo. A third generation included     better housing, and education opportu-              a. For example, Sixth of October had an
                                                                                                         original target population of 500,000,
      twin towns close to provincial capitals,       nities for their children. GDP per capita
                                                                                                         which was raised in the late 1980s to 1 mil-
      such as New Thebes.                            increased more than 60 times.                       lion, and currently the target is 2.5 million.
         The performance of the six cities cre-         Shenzhen owes its success to its near-           The actual population is probably less than
      ated 30 years ago suggests a mixed             ness to Hong Kong, China; its connected-            200,000.

                                          But without the requisite investments in                    was closing in on the advanced stage of
                                          spatially blind institutions and spatially                  urbanization, and Seoul’s population level
                                          connective infrastructure in place, these                   had started to stabilize (see map 7.6). Fur-
                                          policies succeeded only in relocating the                   thermore, enough time had elapsed for the
                                          slums to new slum areas such as Mokdang,                    earlier spatially blind and connective poli-
                                          Nangok, and Shillim near the Guro Indus-                    cies to take full effect.
                                          trial Complex, whose textile and other                         Between 1984 and 1990, expanding
                                          industries provided low-skill employment                    road capacity struggled to keep up with the
                                          opportunities for rural migrants.                           growth of vehicle ownership. More exten-
                                             The Republic of Korea’s government                       sive plans of city-periphery integration were
                                          would have more luck when it tried again                    required, and in 1989 the New City Devel-
                                          with an expanded set of policies in the                     opment plan was launched. Five new cities
                                          1980s. By this time, the Republic of Korea                  were encouraged around 25–30 kilometers
                                                                                  Concentration without Congestion                                          225

Map 7.5     Bogotá’s TransMilenio has helped to integrate the poor

          TransMilenio                                    Minutes spent during rush hour within transport system
          Feeder routes
                                                                                                Average minutes saved,
                                                                                                weighted by number of
                                                          60                                    passengers


                                                          40                              10      10          13



                                                                   1          2          3       4        5          6
                                                               Poorest                                             Richest
                                                                              Neighborhood stratification

                                                                                    Before the TransMilenio
                                                 High                               After the TransMilenio
Source: Yepes 2008.

from Seoul. Central to the success of this                    In 1960 Istanbul’s population was about
integration were investments in connec-                    1.5 million, a modern-day Kansas City in
tive infrastructure. The subway system was                 the United States. With a population more
extended, and a beltway was constructed,                   than 10 million today, Istanbul is now one
easing traffic congestion.                                  of Europe’s largest cities, about the same
    During this period, 93 slum districts
covering an area of 427 square kilometers                  Map 7.6        Economic density in Seoul with good connections to other cities
were modernized, including the Wolgoksa-
dong and Mok-dong slum areas.70 Dwellers
in the former benefited from successful in                                                      Seoul
situ upgrading; those in the latter were relo-                       Ansan
cated as the government cleared the area
and replaced it with a modern apartment
complex. Squatters benefited from moving
subsidies of about $2,000 per person and                                                                  Chongju
the right to purchase a new apartment at a                                                                                        Daegu             Ulsan
    Turkey has also transformed itself from a                                                    Chonju
predominantly rural society to a primarily
urban one over the past half-century. Since                                                                                                         Pusan
becoming a member of the Organisation
for Economic Co-operation and Develop-                                                                                                      Changwon
ment (OECD) in 1961, Turkey’s urban share
increased from around one-third to two-                                     Mokpo
thirds,72 as GDP per capita more than tri-
pled to about $6,600.73 Driving this increase
in density was the rapid growth of Turkey’s                Source: WDR 2009 team and World Bank Development Research Group, based on subnational GDP estimates
cities, foremost among them, Istanbul.                     for 2005. See also Nordhaus 2006.
226   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      size as Chicago.74 Much of this growth has         population. Almost half of the city’s resi-
      been accommodated on the Asian side of             dents—some 5–6 million people—live
      the city, home to successive waves of rural        in dwellings that are or were gecekondu.
      immigrants. It is now the origin of a daily        Although settlements such as Sultanbeyli
      tidal wave of commuters who make their             have integrated themselves into the city,
      way across the Bosporus to work on the             others like Pasaköy have not.77 Istanbul
      European side of the city.                         still needs targeted programs to deal with
          Underpinning Turkey’s transformation           the divisions associated with the continu-
      to an urban economy are the spatially blind        ing existence of poorly serviced and under-
      reforms that accompanied the creation of           integrated informal communities.78
      the modern republic of Turkey. The Turkish             China’s Pearl River Delta faces similar
      constitution of 1924 included the adaptation       challenges. The area consists of nine cities
      of European laws to the needs of the new           and has a population roughly equal to that
      republic, endorsing private property rights.       of Spain, representing one of China’s most
      The reforms introduced under Mustafa               advanced urban agglomerations. With an
      Kemal Ataturk unified the country’s edu-            urban share of almost 75 percent in 2006,
      cation system, providing the backdrop for          it is a three-dimensional area with the
      better access to education over the last half-     triple challenge of building density, reduc-
      century. In 1960 the proportion of the adult       ing distance, and overcoming divisions.
      population more than 15 years old with no          The divisions are manifest in “urban vil-
      schooling was 67 percent, and in 2000, 18.6        lages,” many of which would be known as
      percent.75 And better health care services         slums elsewhere. They lack access to basic
      helped increase life expectancy from 51 years      sanitation services and are subject to envi-
      in 1960 to 71 years in 2005.76                     ronmental degradation. The cities of the
          The reforms of the 1920s helped to lay         Pearl River Delta area have been introduc-
      the foundation for Istanbul’s rapid expan-         ing spatially targeted policies to deal with
      sion, but the city has found itself grappling      urban villages. Guangdong province, where
      with congestion. In response, the city has         the area is located, began rebuilding urban
      improved its connective infrastructure, with       villages in June 2000. The city of Zhuhai,
      1973 marking the opening of the eight-lane         for example, aims to rebuild 26 adminis-
      Bosporus Bridge connecting the European            trative villages. An incentive scheme allows
      and Asian parts of the city. This was followed,    the village administration, residents, and
      in 1988, by the completion of the second Bos-      developers to share any land appreciation.
      porus Bridge. In 1989 the first light metro rail        Rural-urban integration has been part
      line opened between the areas of Aksaray and       of post-1978 liberalization in China. Under
      Kartaltepe. Meanwhile, a second light metro        the township model, the urban core has
      line opened in 2007, supplementing the 2005        responsibility for the surrounding rural
      construction of an 11-kilometer metrobus           hinterland. As the city grows and its area
      line. More are in the pipeline.                    of inf luence expands, the administra-
          With this prosperity has come division.        tive borders of the township also expand.
      Much of Istanbul’s rapid growth over the           Large cities promote the active inclusion
      last several decades has occurred through          of their surrounding hinterland by financ-
      the growth of informal settlements, such           ing investment in infrastructure and social
      as Sultanbeyli, Sarigazi, and Pasaköy on           services in the small cities and rural areas
      the Asian side. These settlements formed           under their influence (see box 7.14).
      as rural migrants took advantage of an                 Get regulations right. Shanghai, a metro-
      ancient legal precept, which survived the          politan area with special status as a province,
      Ataturk reforms: no matter who owns the            has a population of 13 million registered
      land, if people are able to get their houses       and 4 million permanent residents, spread
      built overnight and are moved in by morn-          out over 6,300 square kilometers. The
      ing, they cannot be evicted without being          urban share is almost 80 percent, with 18
      taken to court. Such settlements, called           urban districts and the Chongming rural
      gecekondu, house a large share of Istanbul’s       county. Urban land markets function well
                                                                        Concentration without Congestion                                     227

in allocating the urban land available under
the rural land conversion limits. Floor-area             B OX 7 . 1 4    Rural-urban integration in Beijing, Guangzhou,
ratios have adapted to changing market
needs and increased the space per person
                                                                         and Shanghai
from 3 to 12 square meters over the past 20              Beijing, Guangzhou, and Shanghai—            meters in 2003 to 550 kilometers
years. Land leases are a source of revenue.              all thriving areas—have plans to link        in 2005, and will be extended
   Shanghai’s built-up area has expanded                 rural and urban areas: to provide            again to 750 kilometers in 2010. In
                                                         education and health services, invest        Guangzhou the provision of roads,
from 300 to 500 square kilometers in the
                                                         in infrastructure and transport net-         electricity, and water to all rural
past decade. Passengers on the metro have                                                             settlements with more than 100
                                                         works, and construct townships.
increased tenfold, from 178,000 to 1.6 mil-                                                           residents was completed in 2007.
lion over the past decade, but its share of all          • Social services. The governments
                                                           provide vocational training and          • Integrating surrounding areas.
trips is just 2.5 percent. Many of the 4 mil-                                                         The three cities have encouraged
                                                           other services to support non-
lion transient workers in Shanghai live in old             agricultural employment and help           traditional industries to move
urban villages, affordable because they are                farmers transition from agriculture        from the central business district
not subject to regulations for density, height,            to nonagriculture. They also offer         (where rents are quite high) to the
                                                                                                      periphery (using fiscal incentives)
and public space. Given the difficulties in                 incentives for firms that will train
                                                           people and recruit the trainees after      and allow high value-added indus-
converting rural land, these urban villages                                                           try to move in to the core area. A
are attractive to developers, but developing               training. And they provide social
                                                           services such as medical insurance         township construction program
them would likely make the housing condi-                                                             was launched to have a city system
                                                           and pensions to rural residents.
tions worse for transient workers.                         Beijing subsidized rural coopera-          centered on an inner city of 10
   Less encouraging is Mumbai. Between                     tive medical insurance. Shanghai           million inhabitants, surrounded
the 1970s and 1990s, the city resisted the                 increased public spending on rural         by secondary cities, central towns,
                                                                                                      and villages. In 2003 Guangzhou
influx of migrants by instituting land use                  social services, including education
                                                           and health to cover farmers (100           initiated the building of 10 central
and building regulations that favored                                                                 towns financed by the city govern-
incumbents and prevented efficient use of                   percent covered by a rural collective
                                                           medical insurance plan). Guangzhou         ment. Shanghai has begun imple-
land.79 The result has been an evenly spread                                                          menting the “1966 plan,” which by
                                                           will establish a pension scheme to
development, but with congested streets                    cover all the local residents.             2020 aims to have one main city,
and the proliferation of slums.                                                                       nine secondary cities (traditional
                                                         • Infrastructure investments. In 2005
   Integrate slums into cities, using all                                                             historical centers), 60 new town-
                                                           Beijing built 304 kilometers of
                                                                                                      ships, and 600 central villages with
three instruments—institutions, infra-                     roads and linked all administrative
                                                                                                      1,500–3,000 residents each.
structure, and incentives. Cities without                  villages. In Shanghai expressways
slums is not a realistic vision for develop-               were extended from 200 kilo-             Source: WDR 2009 team.
ing countries, as recognized in the midterm
appraisal of India’s 10th Five-Year plan:
                                                      developing countries. But there is little con-
   There has, over the years, been a paradigm shift
                                                      sensus on the choice of policies required to
   in government’s slum policy prescriptions.
   Originally, a “slum free cities” policy was pre-
                                                      improve living conditions and livelihoods
   scribed. However, looking at the social dimen-     of slum dwellers, while not compromising
   sions of the whole problem and the various         the economic potential of metropolitan
   economic activities carried out by the slum        areas. Two questions have to be answered.
   dwellers, this concept has given way to reha-      When should slums be improved? And
   bilitation of slum dwellers. The rehabilitation    what should be done to develop slums? This
   involves either relocation or in-situ develop-     Report proposes that the right time to sys-
   ment of the slum areas. In the initial years of    tematically address the problem of slums is
   slum development, the focus was on provision       when the institutional and infrastructure
   of infrastructure in slums through the National    requirements are in place. And the correct
   Slum Development Program (NSDP) and now
                                                      approach is integration of slums into the
   there is renewed stress on provision of shelter
   to urban slum dwellers through the Valmiki
                                                      broader urban economy.
   Ambedkar Awas Yojana (VAMBAY).80                      If the problem is crime and squalor, the
                                                      better strategy would be to upgrade the
   Identifying and implementing poli-                 neighborhood. But if the problem is spa-
cies for managing slum formation is a                 tial inefficiency, steps to improve land use
major concern for policy makers in most               efficiency and compensate slum dwellers
228                                            WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                               for disruptions to their livelihoods probably                   improving slums are unlikely to be enough
                                               should take precedence. Interventions to                        for social integration, unless accompanied by
                                               improve living conditions in slums include                      infrastructure, institutions, and complemen-
                                               prevention measures, such as sites and ser-                     tary reform (see box 7.15).
                                               vices programs and remedial schemes (with                          Land use and zoning policies have often
                                               slum upgrading being the most common),                          excluded the poor from being physically
                                               packages of basic services, paving, shelter, and                integrated into dynamic labor markets,
                                               social integration. The Kampong Improve-                        while deficient transport infrastructure low-
                                               ment Program in Indonesia is probably the                       ers the possibility of connecting distant resi-
                                               oldest, largest, and best-known urban-up-                       dents to urban jobs. South African zoning
                                               grading initiative in the world. It combines                    policies under apartheid segregated white
                                               low investment costs of $23 to $118 per per-                    and black people in cities. City structure
                                               son, benefits 15 million people, and uses a                      can exacerbate social divisions and hinder
                                               participatory approach. The Orangi Project                      efforts to reduce inequality and discrimi-
                                               in Pakistan and the Accra District Reha-                        nation. The abolition of apartheid was not
                                               bilitation Project in Ghana are also prom-                      enough to reduce the disparities. To offset
                                               ising (see table 7.2). But the experiences all                  spatial income inequalities, local govern-
                                               show that spatially focused interventions for                   ments can subsidize transport costs of poor

Table 7.2   Interventions to integrate the urban poor
 Country (city)                    Focus and objectives                                                Key features and lessons
 Tunisia (National) Agence         Tenure security. Regularizes tenure, provides                       Triggered dynamic process of housing improvement; helped
 de Rehabilitation et de           infrastructure, house improvement support, plots for                explain low proportion of urban population in slums.
 Renovation Urbaine                displaced households.
 Brazil (Goiania) The Goiania      Tenure security. Public land occupied and tenure secured            Covers 100,000 former tenants. Local grassroots organization
 Federation for Tenants and        by appealing to rights of citizens to occupy unused and             successfully supported efforts to get tenure security and
 Posseiros                         untitled land.                                                      access to infrastructure and services.
 Peru (Ilo) Municipal              Land provision. Makes serviced plots available for                  6,000 lots serviced for housing by 2005. Despite a fivefold
 Government                        construction by low-income households.                              increase in local population in 1960–2000, no pressure for
                                                                                                       land invasions.
 Argentina (Buenos Aires,          Land provision. Serviced land donated to facilitate                 Program is the result of a series of actions and initiatives
 San Fernando, and San             resettlement and density reduction; plots allocated in              over the past 20 years, supported by an Argentine NGO that
 Jorge) IIED-America Latina        community-managed lottery.                                          lobbies provincial and municipal authorities.
 Namibia (Windhoek)                Flexible zoning laws. Group purchases and leases of land            Demonstrates how constraints in the form of urban land
 Shack Dwellers Federation         with communal services; plot sizes below official national           use standards and regulations can be overcome to make
 of Namibia and City               minimum.                                                            serviced sites more affordable to low-income households.
 Malawi (Lilongwe, Blantyre,       Land provision; flexible regulation. Lobbied government              Since 2003, approximately 760 plots for housing have been
 Mzuzu) Malawi Homeless            for land; demonstrated capacity of members to build good            provided and housing construction loans made available to
 People’s Federation               quality housing at low cost. Changing official standards             savings groups; slum accommodation containment and land
                                   important for cost.                                                 use improvement.
 Pakistan (Orangi) Research        Amenities provision. Community development of drainage              96,994 households in Orangi and 300 locations in Pakistan.
 and Training Institute            and sewerage systems, financed by local communities                  All costs can be covered by eliminating contractors and
                                   and government.                                                     modifying engineering standards.
 15 countries (South Asia,         Amenities provision. National federations formed by slum            Savings groups (mostly women) and their collective
 East Asia, and Africa) Slum       dwellers; initiatives to build and improve homes and basic          management of money allow groups to increase capacity
 Dwellers International            services.                                                           for cooperative action; negotiation of partnerships with
 Thailand (National)               Amenities provision. Infrastructure subsidies and housing           495 projects in 957 communities covering 52,776 households.
 Community Organizations           loans to community organizations formed by low-income               Activities identified by each community organization in
 Development Institute             slum households.                                                    partnership with local actors; funding sources include
                                                                                                       community contributions.
 Nicaragua (National) Local        Amenities provision. Cofinance small infrastructure                  484 projects benefiting some 60,000 households. Funds
 Development Program               projects (water, sanitation, drainage); house improvement           provided to local governments, NGOs, community
 (PRODEL)                          and microenterprise loans and support.                              organizations, and households.
Source: Sattherthwaite 2008, for this Report.
Note: IIED = International Institute for Environment and Development; NGO = nongovernmental organization.
                                                                      Concentration without Congestion                                    229

children, provide private-school vouchers,
and increase public-school spending.81                 B OX 7 . 1 5    Slum upgrading and prevention: what works?
                                                       Evidence from policy experience com-       performance monitoring mecha-
A strategy for inclusive urbanization                  piled by UN-HABITAT and the Cities         nisms that require the involve-
The Tinbergen principle proposes that one              Alliance shows that successful initia-     ment of all levels of government.
policy instrument is needed to address each            tives share several attributes. Among      Cambodia, China, and Vietnam,
policy objective.82 Applying the principle to          them, institutional strengthening and      for example, have strict upward
the policy issues addressed in this Report             coordination across government lev-        accountability regarding municipal
                                                       els seem to be the most important.         implementation on infrastructure.
implies that as many integration instru-
                                                          Stronger institutions. Countries        Brazil and Indonesia, on the other
ments are needed as there are dimensions               that have been successful in inte-         hand, have bottom-up perfor-
to a problem. As the integration challenges            grating slums into their cities have       mance monitoring, which enhances
increase with the stage of urbanization, the           strengthened their institutions and        citizen participation in planning
number of policy instruments required                  carried out complementary reforms,         and decision making. b Coordination
increases as well. Fortunately for develop-            which include a broader urban pov-         across government levels and with
ing nations, the capacity of markets and               erty reduction agenda (Indonesia,          the private sector is also critical
                                                       Islamic Republic of Iran, Mexico, South    for successful scaling up of slum
governments grows as they urbanize. But
                                                       Africa, and Turkey). Some have imple-      upgrading projects. One example
these policies must be introduced in the               mented policies to integrate the urban     is Indonesia’s Kampong Improve-
right sequence.                                        poor into the legal and social fabric      ment Program, and there are oth-
   The foundations for an inclusive urban-             of cities (Brazil, Chile, and Colombia),   ers (for example, Brazil, Colombia,
ization have to be instituted early in the             others have carried out reforms in land    Mexico, South Africa, Thailand, and
development process. To do this, govern-               and housing provision (India).             Tunisia) whose programs began on
ments must be selective. This chapter sug-                Coordination across govern-             a modest scale, and were success-
                                                       ment levels and with private               fully scaled up to the national level
gest how they can prioritize and sequence:
                                                       agents. Countries that performed           because of the involvement of all
•   In areas of incipient urbanization, the            well also made an effort to coordi-        levels of the government and the
    objective should be to facilitate a natu-          nate among central, regional, and          private sector.
    ral rural-urban transformation. The core           local authorities and the private
                                                       sector (Chile, Egypt, Sri Lanka, Thai-
    policy instruments are spatially blind             land, and Tunisia). But cities and
                                                                                                  Based on a contribution by Eduardo
    institutions that facilitate density in some                                                  López Moreno, chief, Global Urban
                                                       countries that were successful in          Observatory, UN-HABITAT.
    locations. These instruments include               the delivery of basic services and         a. Garau 2008.
    secure land tenure and property rights,            housing improvements had clear             b. Bazoglu 2008.
    basic and social services, and macro-
    economic policies that do not favor one
    productive activity (large industry) over
    another (small agriculture). Policy mak-
    ers should aim for neutrality between              Efficiency should be the watchword of
    rural and urban areas.                             policy makers.
•   In areas of intermediate urbanization,         •   In areas with advanced urbanization,
    the rapid growth of some cities cre-               divisions within cities caused by formal
    ates congestion. In addition to spatially          settlements and slums and by grime and
    blind policies to facilitate density, con-         crime add to the challenges of density
    nective policies to tackle congestion              and distance. In addition to spatially
    and economic distance become nec-                  blind and spatially connective policies,
    essary. They include investments in                spatially focused policies for address-
    transport infrastructure (to enhance               ing intracity divisions are necessary to
    connectivity both within and between               target the difficulties of slums, crime,
    cities) and encouragement of socially              and the environment—and to improve
    efficient location decisions by fi rms.              livability.
      CHAPTER 8   Unity, Not Uniformity
                  Effective approaches to territorial development

                  G          lobalization and liberalization
                             may rearrange production within
                             countries, leaving people concen-
                  trated in places no longer favored by mar-
                  kets. In Brazil, China, India, and the Russian    •
                                                                        When lagging areas have few people and
                                                                        a small share of the country’s poor, mea-
                                                                        sures to enhance migration should be the
                                                                        mainstay of development policy.
                                                                        In countries where lagging areas have
                  Federation, changes in both markets and               large numbers of the poor, but few
                  policies over the last century have altered the       impediments to their mobility, insti-
                  fortunes of places. Geographic differences            tutions that promote mobility should
                  in economic activities encourage migration            be augmented by spatially connec-
                  from lagging areas, concentrating people—             tive infrastructure. Some countries
                  including the poor—in leading areas. But              have high population densities in lag-
                  geographic unevenness in living standards,            ging areas—and large numbers of the
                  by creating or deepening divisions within             poor—but few cultural, linguistic, or
                  countries, can also lead to conflict, slowing          political impediments to labor and capi-
                  social and economic development.                      tal flows. Investments in infrastructure
                     Building on the findings and analysis in            that increase the flow of goods, people,
                  earlier chapters, this chapter discusses the          and information would aid economic
                  policy responses to widening or persistent            concentration and spatial convergence
                  differences in living standards between               in living standards.
                  areas of a country that markets favor with
                  greater economic mass and those that they
                                                                    •   In countries fragmented by linguistic,
                                                                        political, religious, or ethnic divisions,
                  do not. As in the rest of this report, the term       spatially targeted interventions may be
                  “area” is synonymous with a subnational               needed. When lagging areas face the triple
                  region or territory, so this chapter deals with       challenge of long distances to economic
                  the “regional development” (also referred             opportunities in leading areas, large
                  to as the “territorial development”) debate.          population densities, and large numbers
                  Logic and experience indicate that policy             of poor people, as well as domestic divi-
                  makers should calibrate their responses to            sions that limit the movement of labor
                  the severity of the challenge.                        and capital, institutions and infrastruc-
                  •   In countries where labor and capital              ture investments could be supplemented
                      are mobile, economic distance between             by targeted incentives to encourage eco-
                      lagging and leading areas should be               nomic production in lagging areas. But
                      addressed mainly with spatially blind             these incentives should not run coun-
                      or universal policies, for which the term         ter to the integration objectives pursued
                      “institutions” is used as shorthand.              through institutions that bring people
                      These policies should make it easier for          together and infrastructure that connects
230                   people to move toward opportunity.                lagging and leading areas of a nation.
                                                                               Unity, Not Uniformity                                            231

   Institutions, infrastructure, and incen-           In many countries, the decentralization
tives—these are the three parts of a success-      of administrative and fiscal responsibili-
ful policy approach to domestic integration.       ties has increased the role of subnational
In deciding among the integration options,         governments in the design and delivery of
governments have to consider the fiscal and         policies. Resources allocated to subnational
opportunity costs of these instruments. This       governments should come with agreements
chapter provides an organizing frame for           to ensure that local initiatives improve
governments to think through these options         national welfare along with local welfare
and find the best combination of policies.          (see box 8.1).
   A new approach. Policy discussions about           In addressing these policy issues, the
how to improve welfare in lagging areas            chapter provides an answer to a question
often begin with a focus on lagging areas—         of considerable concern to policy makers:
and an emphasis on targeted interventions          Should countries invest in people or in
or policy “incentives” to move production          places? The answer is to invest in activi-
to these places. Instead, territorial develop-     ties that produce the highest economic and
ment policies should integrate lagging with        social returns nationally. In leading areas,
leading areas, and the discussion of spatially     emphasize investment in places—durable
targeted incentives should come last—after         investments that increase national eco-
considering spatially blind policies such as       nomic growth. In lagging areas, emphasize
national revenue-sharing and social expen-         investment in people—portable invest-
diture arrangements and spatially con-             ments that stimulate mobility and acceler-
necting initiatives, such as transport and         ate poverty reduction.
communication systems. The experience of
developed and developing countries shows           People seek opportunities
that without these supporting institutions         Throughout history, people have moved
and infrastructure, incentives have been           from places with harsh geography to those
unsuccessful and expensive.                        offering a more pleasant climate and better

   B OX 8.1    Are the policy messages of this Report “anti-decentralization”? No.
   Spatially blind institutions are the bed-   policy makers may be inclined to tilt            on public services) but should move as
   rock of economic integration policies       expenditures toward politically popular          soon as feasible to outcomes (improve-
   seeking spatial efficiency and equity.      activities. In a highly decentralized coun-      ments in the national Millennium
   Regardless of where people live, they       try such as Brazil, progress on national         Development Indicators).
   should have affordable access to basic      priorities of eliminating illiteracy and       • Infrastructure—to maximize synergies
   services such as primary health care,       universalizing primary education is moni-        from infrastructure investments and
   education, sanitation, and security. How    tored using expenditure allocations, with        to regulate interstate commerce effi-
   these services are delivered depends on     the constitution determining that 25             ciently, design and planning decisions
   country circumstances.                      percent of state and municipal revenues          should be jointly made by subnational
      Decentralization in many countries has   from taxes and transfers be earmarked            governments affected by these invest-
   made subnational governments more           to finance primary education. But closer         ments and regulations.
   responsible for improving local welfare     inspection shows that around 10 percent        • Incentives—while subnational govern-
   outcomes. In Vietnam subnational gov-       of municipalities spend less than the con-       ments may be well suited to assess
   ernments were responsible for almost 50     stitutionally recommended amounts.b              local economic potential, the decision
   percent of public spending in 2002, up         Large and visible investments are politi-     of where to target incentives should
   from about 25 percent in 1992. In China     cally expedient signals to voters that their     lie with a national authority that can
   the ratio climbed from 67 to 72 percent     representatives are hard at work. So how         prioritize resources to accelerate overall
   between 1990 and 2004.a In the Philip-      can decentralization be consistent with          growth. How these programs are imple-
   pines the ratio was about 25 percent in     the spatially integrative policies discussed     mented can be decided locally.
   2002, up from 11 percent in 1990.           here?
      Problems arise when decentralization                                                    Source: WDR 2009 team.
   gets in the way of delivering spatially     • Institutions—resource allocations to         a. National Bureau of Statistics, China, 2005.
   blind policies. Rather than allocating        subnational governments could be             b. Instituto Brasileiro de Geografia e Estatís-
   resources to social services, subnational     based initially on inputs (expenditures      tica (IBGE) 2004.
232                                              WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Map 8.1     The poverty rate is high in China’s western interior, but most poor people live closer to economic density in the East

       Poverty rate:
       proportion of poor (%)                                                          Poverty density
             < 17.5
             17.6–35.9                                                                 Each dot represents
             36.0–51.6                                                                 50,000 poor persons

Source: WDR 2009 team.
Note: Poverty rates and counts are estimated for a $2/day poverty line in 2002.

                                                 economic opportunities. The concentration               country’s poor. The numbers on the other
                                                 of people in areas with hospitable natural              islands are much lower: 1.3 million in Kali-
                                                 environments attracted economic activities              mantan, 2.6 million in Sulawesi, 2.7 million
                                                 to these places, helping many to prosper even           in Nusa Tenggara, and 1 million in Papua.
                                                 when the initial conditions that made these             Chapter 2 showed that Honduras and Viet-
                                                 settlements economically attractive became              nam have similar (overlapping) geographic
                                                 less important. Mobility was not just for the           distributions of economic production and
                                                 well-off. Poor people also moved to econom-             poor people.
                                                 ically dense areas—to seek better lives.                    Using a sharper geographic resolution, a
                                                     Consider the current distribution of                similar distribution of the population can be
                                                 poor people in China (see map 8.1). The                 discerned within lagging areas. The north-
                                                 percentage of people living below $2 a day is           east of Brazil is the country’s poorest area.
                                                 high in the country’s lagging western areas.            Per capita incomes in the southeast were
                                                 But in absolute terms, many more poor                   2.9 times that of the northeast in 1939, and
                                                 people live in the dynamic coastal south-               2.8 times in 1992. Eight of the 10 poorest
                                                 eastern areas—the leaders in China’s rapid              states are in the northeast, two in the north.1
                                                 integration with the global economy. Even               The poverty rate is clearly high in the rural
                                                 before this integration happened, people                northeast and Amazon areas (see map 8.2).
                                                 did not concentrate in places with inhospi-             But even in the northeast, the mass and
                                                 table geography, such as the Qinghai-Tibet              concentration of poverty—the number of
                                                 Plateau with an elevation of 4,000 meters               poor people per square kilometer—is much
                                                 above sea level, or the highlands of the cen-           higher in urbanized agglomerations near the
                                                 tral region with elevations of 2,000 meters.            coast, from the lagging northeast all the way
                                                 The flat lands and warmer climates along                 to the dynamic regions of Rio de Janeiro and
                                                 the coast provided better conditions for                São Paulo in the southeast.2
                                                 farming and trade.                                          In some countries the market forces
                                                     Maps of many countries would also                   prompting factor mobility are not quite as
                                                 show that the poverty mass—the numbers                  strong. Their economic mass and poverty
                                                 of poor people—and economic mass coin-                  mass do not coincide nearly as much as in
                                                 cide. Java, the economically leading area in            countries such as China and Honduras.
                                                 Indonesia, is also the island in the archi-             Consider India, where more than 400 mil-
                                                 pelago where most poor people live. The                 lion people live in “lagging states” in the
                                                 islands of Java and Bali are home to 21 mil-            north-central part of the country, which
                                                 lion poor people, about 58 percent of the               includes—using the country’s poverty
                                                                                                   Unity, Not Uniformity                                                 233

Map 8.2    The poverty rate is high in Brazil’s Northeast and Amazon areas, but the poor are massed in areas along the coast

                                                            Poverty rate:                                                                          Poverty density
                                                            proportion of poor (%)
                                                                  < 12                                                                             Each dot represents
                                                                  12–25                                                                            5,000 poor persons

Source: State-level poverty rates computed by Phillippe G. Leite, based on the Brazil Household Budget Survey (Pesquisa de Orcamentos Familiares) 2002–03 (see World Bank

line—60 percent of the nation’s poor (see                        better access to domestic and international
map 8.3).3 Labor mobility from these areas                       markets.6
has been limited due to ethnolinguistic and                         Should today’s policy makers try to
class-based divisions, perhaps inclining                         correct historical accidents by reviving
people to stay in their own “enclaves.”                          investments in lagging areas and helping
    People are in these lagging areas for a                      them regain their past glory? Or should
reason. With rich soils and good internal                        they accelerate India’s integration with the
connections, the fertile Indo-Gangetic                           global economy and help people in lagging
plain attracted people. These areas were                         areas take advantage of new opportunities
historically among India’s most dynamic                          in places with greater economic density?
locations when the country accounted for                            India’s national policy discussion in
a quarter of the world’s gross domestic                          the mid-1970s focused on promoting spa-
product (GDP), between 1600 and 1700.4                           tially balanced growth to revive the lagging
But historical “accidents,” such as making                       areas with subsidized fi nance, investment
landlords responsible for paying land taxes                      subsidies, industrial infrastructure, and
to the British crown in these areas, eroded                      preferential industrial licensing. India’s lat-
agricultural productivity and infrastruc-                        est five-year plan recognizes the failures of
ture investments. 5 India is now reinte-                         industrial licensing and its inconsistency
grating into the world economy, resulting                        with growth. The discussion today is more
in economic dynamism in its coastal and                          about integration and the shift toward
metropolitan areas. These areas offer good                       promoting better health and education in
access to intermediate inputs and domes-                         lagging areas, along with strategic inter-
tic and international markets, provide reli-                     regional infrastructure investments that
able and high-quality local public services,                     connect the remote northeast with markets
and have a business environment condu-                           in the rest of the country.7 Similar regional
cive to entrepreneurship. About half of                          development policies have been imple-
manufacturing investments in 2005 were                           mented in other countries with internal
concentrated in only 10 of the country’s                         divisions along religious or ethnic lines,
more than 3,000 cities, the ones offering                        such as Nigeria and Ethiopia.
234                                             WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Map 8.3    Both the poverty rate and poverty mass are high in some of India’s lagging states

                                                         Poverty rate:
                                                         proportion of poor (%)                                                                      Poverty density
                                                               9.8–16.7                                                                              Each dot represents
                                                               16.8–24.8                                                                             50,000 poor persons
                                                               No data

Source: Based on poverty estimates for 2004–05 from the Planning Commission, Government of India.
Note: State-level poverty rates and counts are based on the sum of the number of urban poor and rural poor in 2004–05, which are calculated using different poverty lines.

                                                   Policies aimed at reducing such divi-                            leading areas, and also because of divisions
                                                sions have reinforced a natural tendency of                         from political, ethnic, religious, and linguis-
                                                people to seek places that offer better eco-                        tic differences. And all countries seek unity,
                                                nomic opportunities. Take the well-studied                          by lowering the barriers of internal divisions.
                                                German unification, a merger of two econ-                            A review of national constitutions from 20
                                                omies with few exchanges of goods and                               developing countries shows that promoting
                                                factors that propelled people from the east                         unity—reducing divisions—is an important
                                                to the west. The opportunity arose in the                           political objective (see box 8.2). In Nigeria
                                                summer of 1989, when people could leave                             an important article of unity is that people
                                                East Germany through Hungary. And with                              will not be discriminated by sex, religion,
                                                the fall of the Berlin wall on November 9,                          place of birth, ethnic, or linguistic associa-
                                                1989, direct migration from East to West                            tion. In India Article 16 of the constitution
                                                Germany became possible. With the bor-                              states that “no citizen shall, on grounds
                                                der open, 800,000 people left the east for                          only of religion, race, caste, sex, descent,
                                                the west in 1989 and 1990, 5 percent of the                         place of birth, residence or any of them, be
                                                eastern population (see box 8.2).8 Clearly,                         ineligible for, or discriminated against in
                                                the German unification started a move to                             respect of, any employment or office under
                                                density. It suggests that reducing distance                         the State.” For the most part, constitutions
                                                to economic density improves people’s wel-                          do not make places paramount—they focus
                                                fare, and labor mobility is the strongest                           instead on the welfare and unity of people
                                                natural mechanism for this.                                         (see box 8.3).
                                                                                                                        Unity does not mean uniformity. India’s
                                                Countries seek unity                                                national motto, for example, is “unity in
                                                Many countries have spatial differences in                          diversity.” But in many countries, policy
                                                production and poverty, mostly because                              makers have viewed uniformity as the main
                                                of economic distance between lagging and                            vehicle for unity. The European Union (EU)
B OX 8.2     The German integration: convergence and concentration with mobile labor
With the fall of the Berlin wall in 1989,            Migration from East to West Germany was                  Convergence of income across German
direct migration from East to West Ger-              possible after the fall of the Berlin wall               counties was noticeable between 1992
many became possible. Opening the bor-               Net migration from East to West Germany,                 and 2005
der led 400,000 people to leave the east to                                                                    Density
the west in 1989 and again in 1990, about 5          Thousands of people                                                              2005
percent of the eastern population (see the           180                                                      1.2
left figure). In later years, incomes started        160                                                      1.0
to converge and the process slowed. In               140
2001 a recession in Germany again led                                                                         0.8
about 100,000 people to leave the east for                                                                    0.6
the west. By 2007 more than 1.7 million                                                                                1992
                                                      80                                                      0.4
people had left the east (of about 17 million
at the time of the fall of the Berlin wall).                                                                  0.2
   Migration produced one predictable                 40
                                                      20                                                        0
outcome: incomes became more equal                                                                               1.5     2.0    2.5          3.0   3.5   4.0   4.5
between the two areas (see the right fig-              0
                                                           1991 1993 1995 1997 1999 2001 2003 2005                              Log, € (thousands)
ure). While the cross-country distribution                                  Year                              Source: Holzmann, Priebe, and Vollmer 2008.
of income in 1992 was clearly bimodal,               Source: Federal Statistical Office Germany 2007.
with the counties in the east forming the
lower peak, this was smoothed by 2005.               institutions of higher learning (see the map             for them to study or to find a job in the
Although the counties from the east are              below). In 2004, in the 18–29 age-group,                 economically more dynamic parts of
still located at the left of the distribution,       there were only 90 women for every 100                   Germany. Second, it is much harder for
their economic distance to western coun-             men in East Germany (including Berlin).                  women to find an attractive job locally
ties has shortened.                                    Why did East German women move to                      in the lagging areas than it is for men,
   Convergence in incomes has also pro-              the economically dynamic areas, while                    because these areas are typically domi-
duced more surprising outcomes. Almost               men stay in the lagging areas? There are                 nated by traditionally male jobs in agri-
all counties with more young women than              two explanations. First, women are on                    culture, manufacturing, and construction.
men are in the economically dynamic                  average more successful in school and                    Sources: WDR 2009 team, based on Kroeh-
areas of Germany, which also have better             higher education, which makes it easier                  nert and Vollmer 2008.

                   Women moved to the west seeking economic opportunity: in 2003, there were fewer women per 100 men
                   in the eastern part of the country (left), and higher taxpayer incomes in the west (right)

                                    Number of women,                                              Average income
                                    ages 18–29, per 100 men                   GERMANY             of taxpayers
                                         75–85                                                          Top 20%
                                         106–115                                                        Bottom 20%
                   Source: Kroehnert, Medicus, and Kinglolz 2006.               Source: Federal Statistics Office of Germany.

236                                        WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      B OX 8.3    Constitutions call for unity, not uniformity
      National constitutions reflect the evolu-      hibited.” Article 15 (3)—“For the purpose                  Brazil’s constitution calls for regionally
      tion of political discourse in most coun-      of promoting national integration, it shall             balanced economic development, setting
      tries and define interactions between          be the duty of the State to: (a) provide                out guidelines to promote capital flows
      the state and its citizens. A review of        adequate facilities for and encourage free              to lagging areas. The translation of these
      constitutions from 20 developing coun-         mobility of people, goods and services                  guidelines into practice has not produced
      triesa finds that all emphasize national       throughout the Federation; (b) secure                   the expected economic gains. And the
      unity as an important national objective.      full residence rights for every citizen in all          programs have been costly. The Constitu-
      Uniformity in economic outcomes across         parts of the Federation.”                               tion Funds—a prominent regional eco-
      areas is mentioned only in one—Brazil’s           Côte d’Ivoire: Article 30—“The Republic              nomic development program—provided
      constitution. Universal access to primary      of Côte d’Ivoire shall be one and indivisible,          subsidized credit worth more than $10
      education and basic health care are con-       secular, democratic and social. The Repub-              billion between 1990 and 2002 to help
      stitutional mandates in most countries.        lic shall ensure equality before the law to all         firms locate in lagging areas. The ineffec-
         Excerpts from the constitutional arti-      without distinction as to origin, race, sex or          tiveness of these interventions is evalu-
      cles of three African countries highlight      religion. It shall respect all beliefs.” Its prin-      ated elsewhere in this chapter.
      the importance that societies place on         ciple shall be: “Government of the people,
      national unity and integration:                by the people and for the people.”                      Source: WDR 2009 team; based on a review of
         Nigeria: “The motto of the Federal             Uganda: Article 3—“(i) All organs of the             constitutions from 20 developing countries.
      Republic of Nigeria shall be Unity and         State and people of Uganda shall work                   a. The countries are Argentina, Bolivia,
      Faith, Peace and Progress.” Article 15         towards the promotion of national unity,                Brazil, Colombia, and Mexico (LAC); Côte
      (2)—“Accordingly, national integration         peace and stability. (ii) Every effort shall            d’Ivoire, Ghana, Nigeria, and Uganda (AFR);
                                                                                                             Bangladesh, India, Nepal, and Pakistan
      shall be actively encouraged, whilst           be made to integrate all the peoples of
                                                                                                             (SAR); Kazakhstan, Poland, and the Russian
      discrimination on the grounds of place         Uganda while at the same time recogniz-                 Federation (ECA); China, Indonesia, and the
      of birth, sex, religion, status, ethnic or     ing the existence of their ethnic, religious,           Philippines (EAP); and the Arab Republic of
      linguistic association or ties shall be pro-   ideological, political and cultural diversity.”         Egypt (MENA).

                                           policies to integrate new member states call                   and training systems.11 The cohesion policy
                                           for “cohesion.” But the objective of cohe-                     aims to improve economic performance of
                                           sion—or unity—is pursued through poli-                         specific areas and help them catch up with
                                           cies for convergence. Convergence targets                      the rest of the union.
                                           include eliminating territorial disparities in                    Resource allocations of this scale to sup-
                                           economic development (economic cohesion)                       port integration may reflect the redistribution
                                           and in access to labor and income (social                      preferences of member states (particularly the
                                           cohesion). This “cohesion” is matched by the                   ones whose residents are footing the bill), but
                                           EU regional policy, which allocates about 60                   do these policies stimulate overall growth?
                                           percent of its funding to support areas of low                 Are they paying for the “wrong” type of
                                           development (less than 75 percent of the EU                    assets? Academic research shows that they are
                                           average GDP per capita).9                                      not well suited to maximizing aggregate eco-
                                               Accounting for 35 percent of total spend-                  nomic growth because they try to promote
                                           ing of the EU, the EU cohesion policy is trans-                spatial evenness and not agglomeration. Nor
                                           lated into practice through structural funds                   are they especially well suited to promoting
                                           (90 percent of spending) and the cohesion                      catch-up by lagging areas. Traditional cohe-
                                           fund (10 percent). The Agenda 2000 package                     sion policies that provide “hard” infrastruc-
                                           comes with a price tag of €236 billion, with                   ture and assistance to firms are unlikely
                                           €195 billion for structural funds; €18 billion                 to increase the competitiveness of lagging
                                           for the cohesion funds for Greece, Ireland,                    areas.12 Moving away from these programs to
                                           Portugal, and Spain; and €22 billion for new                   support education programs and institutional
                                           member states, in view of their 2004 acces-                    development could do much more.
                                           sion.10 Agenda 2000’s objectives include the                      Trying to use the same instrument to
                                           development and structural adjustment of                       pursue dual challenges of internal and
                                           lagging areas, the development of border                       external convergence is likely to make the
                                           areas and areas in industrial decline, and the                 policy lose focus. The EU’s fourth report
                                           adaptation and modernization of education                      on economic and social cohesion provides
                                                                                      Unity, Not Uniformity                                            237

a candid assessment of convergence across               per capita incomes. But the concentration
its regions and within individual coun-                 of economic production within member
tries.13 Between 1995 and 2004, there was               states—new and old—has been increas-
a tendency of aggregate convergence in the              ing, led by market forces driving faster eco-
EU, with new member states with lower                   nomic growth in their leading areas. Indeed
GDP per capita growing faster than the                  per capita incomes in several areas in some
EU-27 average. But at a more disaggre-                  new member states—Bratislavský kraj in
gated Nomenclature of Territorial Units for             the Slovak Republic, Közép-Magyarország
Statistics (NUTS) 2 regional level—sub-                 in Hungary, Mazoweickie in Poland, and
national areas larger than administrative               Zahodna Slovenija in Slovenia—have risen
units in most countries—the results show                to more than 75 percent of the EU average.
little effectiveness of directed interven-                 Ireland took a different approach for
tions in improving economic performance                 using EU funds. Rather than try to use the
of lagging areas. For the better-off EU-15,             EU funds to achieve both international
the number of people in lagging regions                 catch-up and to disperse economic produc-
has remained almost unchanged at 32 mil-                tion domestically, Ireland focused on one
lion, around 8 percent of the total. When               objective—national economic growth. From
the new member states are considered,                   being one of Europe’s poorest countries, it is
there has been international convergence in             now one of the richest (see box 8.4). Between

  B OX 8.4    An instrument per objective: Ireland used EU funds for international convergence
  Between 1977 and 2000, Ireland’s GDP           nied by a rising spatial concentration of eco-         Today, almost all regions in the new
  per capita grew from 72 percent of the EU      nomic activity. Compared with the other             member nations in Eastern Europe qual-
  average to 116 percent. What was behind        cohesion countries—Greece, Portugal, and            ify for EU financial support. They should
  Ireland’s success?                             Spain—Ireland’s economic concentration              consider the Irish example of using the
     Since joining the European Union in         rose much more (see the figure below). But          funds for international convergence and
  1973, Ireland received approximately           its per capita income grew much faster too.         not—until later stages—for spatially
  €17 billion in EU Structural and Cohesion      In 1977 Greece, Ireland, and Spain had per          balanced economic growth within their
  Funds through the end of 2003. In the first    capita incomes of about $9,000; Portugal’s          borders.
  two rounds of EU funding, the entire coun-     was about $6,000. By 2002 Portugal had an
  try was classified as an Objective One area.   income of $11,000, and Greece and Spain             Sources: Dall’Erba 2003, WDR 2009 team.
  Between 1993 and 2003 cohesion funds           close to $15,000. Ireland’s per capita income       a. Ireland’s National Development Plan
  supported 120 infrastructure projects at       had risen to $27,500.                               (NDP) 2000–06.
  the cost of about €2 billion.a The choice of
  projects was based on a national develop-
  ment plan, which focused on investments
  in economic infrastructure that stimulated     As Ireland’s income rapidly grew, economic concentration increased within the country
  long-term national economic growth.
                                                 Natural log of variance
  These included investments in leading          17.0
  areas and in connecting leading and lag-                                                                                            Ireland
  ging areas, such as the M50 (Dublin Ring       16.5
  Road), M1 (Dublin-Belfast), and improve-       16.0
  ments in the N4 (Dublin-Sligo), N7 (Dublin-                                                                                              Spain
  Limerick), and N11 (Dublin-Rosslare).
     The Irish also invested in education,       15.0
  training, and lifelong learning in all of      14.5
  Ireland to provide investors with a good
  business environment countrywide. With         14.0
  its skilled labor force and good logistics,    13.5                                                                                    Greece
  Ireland has become a popular destination
  for American firms wishing to reach Euro-
  pean markets. In 2004 Irish-based U.S.         12.5
  firms exported $55 billion worth of goods      12.0
  and services, mostly destined for Europe.         1977    1979    1981    1983     1985   1987   1989   1991   1993   1995   1997     1999    2001
     Ireland’s rapid convergence toward the                                                        Year
  incomes of Europe’s leaders was accompa-       Sources: Dall’Erba 2003; WDR 2009 team.
238                                              WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                                 1991 and 1998 Ireland was just one region for          places. Indonesia’s transmigration program
                                                 the purposes of Objective One support from             tried to relocate people from densely popu-
                                                 the EU.14 When the country grew past the               lated Java to less densely populated areas of
                                                 75 percent threshold, in July 1999, Ireland            Kalimantan, Papua, Sulawesi, and Sumatra.
                                                 created two regional “assemblies”—Border-              At its peak between 1979 and 1984, 535,000
                                                 Midland-Western, and the Southern and                  families or almost 2.5 million people were
                                                 Eastern. But spatial concentration of eco-             relocated. The objective was to promote
                                                 nomic production has increased in Ireland              “balanced demographic development” and
                                                 relative to Greece, Portugal, and Spain, the           reduce poverty by providing land and new
                                                 other three cohesion countries.15                      economic opportunities for poor landless
                                                                                                        settlers. But the program made almost no
                                                 A policy framework for integrating                     dent in the population density of Java, nor
                                                 lagging and leading areas                              did the high cost of the program reduce
                                                 People seek opportunity, and countries                 poverty much among the migrants.16
                                                 seek unity. Policies that integrate lagging               Relying solely on spatially targeted inter-
                                                 and leading areas can help with both. This             ventions is a common mistake. It is far bet-
                                                 section outlines a framework to guide                  ter to rely on institutions that work less
                                                 policy making. It proposes a calibrated                noisily. In France the concentration of eco-
                                                 combination of institutions, infrastruc-               nomic mass and convergence of disposable
                                                 ture, and incentives to address the domes-             incomes between leading and lagging areas
                                                 tic challenges posed by density, distance,             have been concurrent, producing a “scissors
                                                 and division. Used well, a combination of              effect” in the geographies of production and
                                                 these measures can help countries reap the             disposable income (see figure 8.1).17 The
                                                 economic benefits from increasing con-                  effect appears to be driven not by spatially
                                                 centration of economic activity, as well as            focused interventions but by spatially blind
                                                 the social, political, and economic payoffs            or “universal” progressive income taxation,
                                                 associated with converging living standards            social security, and unemployment benefits.
                                                 between lagging and leading areas.                     Although space is not explicitly considered
                                                    Policy makers, often viewing economic               in such policies, their effects and outcomes
                                                 concentration as inconsistent with spatial             can vary considerably across locations.
                                                 equity in living standards, have sought to             As the base of economic integration, such
                                                 reduce concentration through spatially                 “institutions” capture the benefits of spatial
                                                 targeted interventions. Many governments               concentration of production and deliver
                                                 fight market forces that promote the con-               convergence in living standards.
                                                 centration of people in economically dense                Even in the EU as a whole, the rising
                                                                                                        inequality of market incomes between 1985
Figure 8.1 France has benefited from increasing concentration of economic production and                and 1995 was partially offset by progressive
declining spatial disparities in disposable income
                                                                                                        tax and transfer policies. Increases in the
                                        Coefficients of variation                                       income of skilled people were moderated
GDP per capita                                                                    Income per capita
                                                                                                        through higher taxes, and the unskilled were
0.190                                                                                         0.085
                  Per capita disposable income (right axis)
                                                                                                        aided with transfers.18 Similarly, the pro-
0.185                                                                                           0.080   gressive tax structure in the United States
                                                                                                        reduced disparities in disposable incomes
0.175                                                                                                   across states, while production became
                                                                                                0.070   more concentrated, although the extent has
                                                                                                0.065   varied greatly over time as government poli-
0.165                                                                                                   cies changed (see box 8.5).
                                                                                                0.060      The experience of the EU and the United
                  GDP per capita (left axis)
0.155                                                                                           0.055   States in addressing spatial equity with
                                                                                                        aspatial tax systems is instructive. Skep-
0.150                                                                                           0.050
        1982   1984    1986      1988     1990      1992   1994     1996   1998   2000   2002           tics might counter that the coverage of
                                                   Years                                                the tax system is low in developing coun-
Source: Martin 2005.                                                                                    tries and that weak tax administration and
                                                                                                  Unity, Not Uniformity                                               239

   B OX 8.5      Taxation against spatial inequality? The U.S. federal income tax system
   A progressive federal income tax in                      tax income ratios for two groups of 10                  1). When Congress introduced payroll
   the United States has reduced income                     states are calculated: one recording the                withholding and quarterly tax payments
   inequalities among people. An unin-                      highest pretax incomes (Group 1), and                   during World War II, the progressive
   tended effect has been to reduce income                  the other the lowest (Group 2).a The fig-               tax system was reinforced. But these
   inequalities across states, showing that a               ure below shows the change in post-tax                  inequality-reducing effects started fading
   spatially blind policy can be a sharp instru-            income differences between the richest                  away between 1950 and 1970. A brief rise
   ment for reducing spatial inequalities.                  and poorest states. Directly imputable                  in these effects during the late 1970s was
      Data from the Internal Revenue Service                to taxation, it shows how the U.S. taxa-                followed by a fall in the 1980s and 1990s.
   show how much the income tax reduced                     tion system has helped to reduce income
   spatial inequality. To see this, first, pretax           inequalities across states.                             Source: WDR 2009 team.
   incomes of the top percentile of earners                    Never had the tax rate been higher                   a. Although both groups belong to the rich-
   in each state are divided by the U.S. per-               than in 1918, at 77 percent to finance the              est 1 percent of their respective states, keep
   sonal income, as published by the Bureau                 war. After World War I, tax rates declined.             in mind the sharp differences from one state
                                                                                                                    to another. In 1940, for instance, an income
   of Economic Analysis. Next, the same                     Lowered to 24 percent in 1929, the tax                  of about $47,000 made a tax filer part of the
   income dispersion ratio is calculated with               rate for top incomes rose again during                  wealthiest 1 percent in Mississippi, but part
   post-tax incomes. Then, the percentage                   the Great Depression (–26 percent in                    of the wealthiest 10 percent in the District of
   decrease between the pretax and post-                    1940 versus –7 percent in 1930 for Group                Columbia.

   Without an explicit spatial focus, U.S. federal income taxes reduce spatial disparities

    Percentage decrease in inequality due to taxation



         The 10 richest
         states converge
         to the mean 3
         times faster than
     –25 the 10 poorest
                             Increasing tax rates
     –30                     during Great
                                                                                                          Government increases
                                                                   Bridging the gap after WWII
                                                                                                          taxes for the bottom group
              1920             1930           1940             1950            1960           1970           1981            1990         2000           2003

                                                    10 U.S. states with highest income levels before taxes (within top percentile)
                                                    10 U.S. states with lowest income levels before taxes (within top percentile)

   Source: WDR 2009 team, based on analysis by Estelle Sommelier.

widespread informality in the economy will                       the automobile industry in 1925.20 The tax
reduce the potential benefits of progressive                      coverage and revenues were low, with only
taxes. But it is worth remembering that a                        10 percent of the households filing an indi-
century ago, when its tax system was intro-                      vidual tax return in 1916; today the ratio is
duced, the United States exhibited many                          93 percent.
of the attributes of a developing country                           Some evidence from developing coun-
today. Its population was mainly rural,                          tries points to the fact that income redis-
with just 28 percent living in metropolitan                      tribution through a progressive tax
areas in 1910.19 Wages were $0.72 an hour in                     system is difficult, and that the targeting
240   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      of expenditures by individual or household            tion regulations, local infrastructure
      income levels and the level of the average            development, and targeted investment
      tax rate are more important for the post-             climate reforms, such as special regula-
      transfer income distribution. Thus a high-            tions for export processing zones.
      yield proportional tax system may have a
      larger equalizing impact than a low-yield              These instruments for integration—
      progressive tax system.21                          institutions, infrastructure, and incen-
         Spatially blind tax and transfer policies       tives—span the range between universal
      will form the bedrock of public policies to        and geographically targeted policies. Each
      integrate countries spatially and help them        of the three categories can include taxes,
      benefit from concentration and conver-             public spending, and regulations.
      gence. But these policies may not be enough.           Adverse physical geography generally
      Depending on their conditions, nations need        increases economic distance, reducing
      a broader range of instruments for domestic        trade of goods and services and the flow
      integration. The challenge of economic inte-       of labor, capital, and information, making
      gration can be seen as reducing the distance       delivery of public services harder. In Papua
      between people—especially the poor—and             New Guinea, with the transport system
      economic opportunity. Misplaced popula-            fragmented by a rugged mountainous ter-
      tion densities, and barriers to mobility of        rain, the average travel time from a rural
      workers and entrepreneurs between leading          community to the nearest road is two and
      and lagging areas posed by internal divi-          a half hours. and to the nearest govern-
      sions, complicate the challenge.                   ment station is more than three hours. 22
         In general, a policy framework for eco-         In the more rugged parts of Peru, the
      nomic integration includes the following:          coverage of public infrastructure is low.23
                                                         Other such places include Chile’s Zonas
      •   Institutions (spatially blind policies). The   Extremas, western China, Upper Egypt,
          term is used here to categorize policies       the outer areas of Nepal, and northeast-
          that are not explicitly designed with spa-     ern Russia. Because of adverse conditions,
          tial considerations, but that have effects     poverty rates can be high in these areas.
          and outcomes that may vary across              But for the same reasons, unless prevented
          locations. These include such national         from leaving by government policies or
          policies as the income tax system, inter-      sociopolitical reasons, or enticed into stay-
          governmental fiscal relations, and gov-         ing by incentives, not many people live in
          ernance of land and housing markets,           these areas.
          as well as education, health care, basic           Integration reduces the economic dis-
          water and sanitation, and other govern-        tance between lagging areas and more
          ment initiatives.                              dynamic places. The most successful ini-
      •   Infrastructure (spatially connective poli-     tiatives, which balance economic efficiency
          cies). The term is used here as shorthand      and political feasibility, are adapted to
          to include all investments that connect        country circumstances. The circumstances
          places and provide basic business ser-         that matter most are the population den-
          vices, such as public transportation and       sities in lagging areas and the extent to
          utilities. These include developing inter-     which domestic divisions weaken market
          regional highways and railroads to pro-        forces. Where few people live in lagging
          mote trade in goods—and improving              areas, as in northeastern Russia, integra-
          information and communication tech-            tion policies should be different from
          nologies to increase the flow of informa-       those in places such as northeastern Brazil,
          tion and ideas.                                where lagging areas are densely populated.
      •   Incentives (spatially focused policies).       Where lagging and leading areas share a
          The term is used here to include spatially     common language and customs, as in Bra-
          targeted measures to stimulate economic        zil and China, integration policies have to
          growth in lagging areas. These include         exert less effort than in areas where dif-
          investment subsidies, tax rebates, loca-       ferences in language, ethnicity, or religion
                                                                          Unity, Not Uniformity    241

divide one part of a country from another,       them into one of these types. In Thailand
as in India or Nigeria.                          the northeast is densely populated and dis-
    In Brazil the distance between the lag-      tant from the economically dense capital
ging northeast and the leading southeast         area, but the sparsely populated south is
is coupled with high population densities        home to its Muslim minority. In India the
in the coastal areas of the northeast. But       lagging northeast is sparsely populated,
many Nordestinos have found opportuni-           whereas lagging areas in central India have
ties by moving to the dynamic southeast.         almost two-thirds of India’s poor. Sec-
As many as 4 million residents of Greater        ond, countries classified as Type 1 (with
São Paulo are Nordestinos.24 This indicates      sparsely populated lagging areas) can be
the high population density in the north-        unified or internally divided. But the strat-
east and the strong market forces of labor       egies for integration in these two types of
mobility, made possible by factors such as       countries—unified countries with sparsely
a common language and a strong national          populated lagging areas such as Russia, or
identity.                                        divided countries with sparsely populated
    Recall the maps of India, where some         lagging areas such as the Philippines—will
lagging areas have a high poverty mass and       not be different.
high poverty rate (see map 8.3). Integrating
these areas is especially challenging when       An instrument per dimension
subnational geographic groupings reflect             Institutions to overcome distance. In
ethnic, linguistic, or social differences.25     countries with sparsely populated lagging
The movement of people out of these areas        areas, the integration challenge is mainly
has been limited because of local prefer-        one of reducing economic distance. Poli-
ences and discrimination against particu-        cies that are universal—spatially blind in
lar groups (see chapter 5). Market forces        their design and national in their cover-
of factor mobility have been weakened by         age—can shoulder much of the task of suc-
internal political and social divisions—wit-     cessful economic integration. Developing
ness the hostility that Bihari workers have      countries in this category include Chile,
encountered in the more prosperous parts         China, Ghana, Indonesia, Kenya, Mexico,
of India. In such nations, the integration       Mongolia, Kazakhstan, Russia, Sri Lanka,
challenge involves overcoming economic           Uganda, and Vietnam. The primary objec-
distance, misplaced density, and domestic        tive of these policies should be to encour-
division.                                        age people migrate to places with economic
    Using the spatial dimensions of dis-         opportunities. For example, as Russia
tance, density, and division to characterize     moves further from plan to market, it will
conditions in a country, a suggestive tax-       have to offset a legacy of policies industrial-
onomy can be developed to help countries         izing its vast territory. Even today, millions
tailor integration policies to their specific     of people are subsidized to live in “cold”
economic geography. At least three types of      and isolated places in the northeast (see
countries can be distinguished:                  map 8.4), where they cannot take advan-
                                                 tage of new economic opportunities in the
•   Type 1: countries with sparsely populated    dynamic areas of the west.26
    lagging areas                                   Correcting land market distortions,
•   Type 2: unified countries with densely        removing restrictions on mobility, and pro-
    populated lagging areas                      viding essential services such as basic edu-
•   Type 3: divided countries with densely       cation, health care, water, and sanitation
    populated lagging areas                      should be universal policy priorities. The
                                                 costs associated with land sales—including
   This taxonomy can characterize lagging        fees, survey costs, and transfer fees—can
areas in most countries, but two qualifica-       make land transactions prohibitively expen-
tions are necessary. First, lagging areas in     sive. In Russia the fees for private survey-
some countries may be sufficiently hetero-        ing are equivalent to two years’ minimum
geneous that it is difficult to neatly classify   wages. These costs could slow migration by
242                                             WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Map 8.4 In the Russian Federation, population densities are highest in the economically vibrant and warmer west, but a communist legacy has left some
people in the cold interior

                                  Population per km2                                                                   Degrees Celsius
                                       0–4.86                                        RUSSIAN                               0–-3
                                       4.86–10.75                                   FEDERATION                             -3–-7
                                       10.75–20.14                                                                         -7–-11
                                       20.14–75.64                                                                         -11–-15
                                       >75.64                                                                              -15–-17
                                                                                                                           Seasonally frozen
                                                                                                                           Permafrost extent
Sources: Population density: Fay, Felkner, and Lall 2008; Ice Thickness: National Snow and Ice Data Center 2007.

                                                reducing the ability of less wealthy people                            Other countries may have just a few lag-
                                                to transact in land. 27 China’s household                          ging areas that are sparsely populated and
                                                registration system (the hukou system) has                         divided. In Indonesia, an otherwise unified
                                                been a barrier to rural-urban migration.                           country, places like Aceh are considered lag-
                                                Not having an urban hukou in urban areas                           ging areas, with divisions that weaken labor
                                                means that migrants may not qualify for                            and capital mobility. Policy makers may be
                                                public education or health benefits. This                           tempted to provide economic incentives for
                                                can produce large interregional wage dif-                          firms in these areas to compensate for the
                                                ferences. Recent research indicates that                           lack of factor mobility, but the accompany-
                                                removing such mobility restrictions would                          ing risk of creating enclaves of development
                                                reallocate labor across areas, reduce wage                         and deepening existing divisions should be
                                                differences, and lower income inequality.28                        considered. Instead, initiatives that promote
                                                But the benefits depend on the response                             economic integration by increasing fac-
                                                of the urban housing market to additional                          tor mobility may be better suited for both
                                                demand from newcomers.                                             economic and political reasons. Examples
                                                   Some countries can have sparsely popu-                          include spatially targeted programs to
                                                lated lagging areas and domestic divisions.                        improve education and equal opportunity
                                                In Lao People’s Democratic Republic, ethnic                        legislation to ensure that workers from lag-
                                                heterogeneity may make labor less mobile.                          ging areas do not face labor market discrim-
                                                Vientiane, the leading area, has a relatively                      ination in other parts of the country.
                                                low poverty rate, while the provinces in the                           Institutions and infrastructure to over-
                                                north and south have higher rates (see map                         come distance and density. When distance is
                                                8.5). But the poor are spread out quite uni-                       coupled with high population densities in lag-
                                                formly across the country. In such cases,                          ging areas, spatially connective infrastructure
                                                much of the policy response still should                           is also necessary. Countries in this category
                                                be spatially neutral, with special efforts                         include Bangladesh, Brazil, Colombia, the
                                                to ensure equal access to public services                          Arab Republic of Egypt, Thailand, and Tur-
                                                to people in these areas. Afghanistan and                          key. Isolation from markets in more dynamic
                                                Tajikistan are other examples of countries                         parts of the country (or the world) can reduce
                                                with divisions and sparsely populated lag-                         consumer welfare, as residents face higher
                                                ging areas.                                                        prices because of market fragmentation, and
                                                                                   Unity, Not Uniformity                                           243

workers and producers have less access to        Map 8.5 In the Lao People’s Democratic Republic, the poverty rate is high outside the capital
                                                 region, but poor people are scattered in remote communities
markets. In principle, infrastructure invest-
ments that connect peripheral areas to mar-
kets should improve both consumer welfare
and productive efficiency.
    With sizable concentrations of the poor                                                      P.D.R.
in lagging areas, spatially blind institutions
that promote the mobility of labor and cap-
ital and ensure the provision of basic ser-
vices must be aided by policies to improve
the access of entrepreneurs in lagging areas
to markets. Although migration will aid
spatial efficiency and equity, with large
numbers of the poor in lagging areas, this
could take a long time (see chapter 5). Bet-
ter infrastructural links between lagging
                                                       Poverty rate:
and leading areas, by improving market                 proportion of poor (%)                                    Poverty density
access, may allow some activities to flour-                  21–40
                                                            41–60                                                Each dot represents
ish in lagging areas. But they may increase                 61–80                                                2,000 poor persons
the concentration of economic activity                      81–100
in leading areas, because fi rms that value
agglomeration benefits will now be able           Source: Richter, van der Weide, and Souksavath 2005.
                                                 Note: Dots are placed randomly within each province and do not reflect population distribution.
to serve lagging area markets from farther
away (see chapter 6). Activities that respond
to better infrastructure in lagging areas are
those that do not exhibit agglomeration          spatial efficiency in production and spatially
economies—agriculture, agroprocessing,           egalitarian living standards.
and labor-intensive manufacturing such as           There is a long history of using connective
leather and wood products (see chapter 4).       infrastructure to integrate peripheral areas
    A useful way to conceptualize how infra-     with national markets. When accompanied
structure investments improve connectiv-         by institutions that integrate nations, such
ity is to think about a measure of market        infrastructure investments can pay off. In
access that captures the size and density        the United States, the Congress passed the
of market centers and the quality of trans-      Appalachian Regional Development Act in
port networks that link different locations      1965, relying on spatially blind institutions
to these centers. The measure comes from         and connective infrastructure to integrate
the gravity model used to analyze trade          the 22 million people in this lagging area,
between areas and countries, with the inter-     which spans 13 states, with the rest of the
action between two places proportional to        country. 29 The basic strategy combined
their size (population or economic density)      regionally coordinated social programs
and inversely proportional to the distance       and physical infrastructure. The 1965 Act
between them (see box 8.6).                      allocated 85 percent of the funds for high-
    Consider the Arab Republic of Egypt.         ways—seen as critical to meeting other
The location of human settlements has been       socioeconomic objectives—and, cumula-
dictated by a dominant natural geography         tively, highways have accounted for more
constraint—access to water. Most people,         than 60 percent of the appropriated funds
in leading areas around Cairo and Alexan-        through the mid-1990s. Other investments
dria as well as lagging areas in Upper Egypt     included hospitals and treatment centers,
around Aswan and Qena, live along the Nile       land conservation, mineland restoration,
(see map 8.6). As in the densely populated       flood control and water resource manage-
coastal zone in Brazil, institutions to inte-    ment, vocational education facilities, and
grate Egypt need to be complemented with         sewage treatment works. Between 1965 and
connective infrastructure to ensure both         1991, total personal income and earnings
244                                                 WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      B OX 8.6       Low market access in Mexico’s lagging south
      Quantitative information on regional                    that center. It is computed using an up-         the federal district, thanks to concentra-
      or local market integration is scarce.                  to-date digital map of transportation            tions of people and infrastructure. A quar-
      Summary statistics—such as the road                     infrastructure from the Mexican statistical      ter of Mexico’s GDP is generated within
      length in a state or province or the                    agency (Instituto Nacional de Estadística        two hours’ travel time from the center of
      straight-line distance to ports or urban                y Geografía, INEGI).a For each road seg-         the Federal District. The southern states
      agglomerations—are poor proxies for the                 ment, the database indicates the number          of Chiapas, Guerrero, and Oaxaca, the
      complexity of a national or regional trans-             of lanes and whether those lanes are             poorest areas, have low market access.
      portation network. To improve on them,                  paved or unpaved—and for railroad lines,
      a geographic representation of Mexico’s                 the number of tracks. For each category          Source: Deichmann, Fay, Koo, and Lall 2004.
      transport network is used to compute an                 of road or rail, average travel speeds are       a. The digital road and rail network includes
      index of accessibility for each municipio in            estimated to calculate how long it will          171,000 kms of roads, of which 84,000 kms
                                                                                                               are paved roads; 51,000 are unpaved; and
      the country as a simple measure of poten-               take to traverse each segment in the
                                                                                                               36,000 are paths and breaches. The rail
      tial market integration.                                transport network.b Urban population             network has an estimated total length of
          This index summarizes the size of the               data from the INEGI database indicate            14,000 kms. These values are calculated by
      potential market that can be reached                    the location and population size of about        a geographic information system (GIS) from
      from a particular point given the density               700 cities and agglomerations in Mexico.         1:1 million scale digital maps and may not
      and quality of the transport network in                 These urban centers accounted for about          necessarily match official statistics.
                                                                                                               b. Using travel time on a transport network
      that region. For any point in the country,              68 million of Mexico’s 97 million people
                                                                                                               provides a more accurate measure of acces-
      it is the sum of the population of urban                in 2000.                                         sibility compared with the computationally
      centers surrounding that point, inversely                  The map of market access (below)              much simpler straight-line distance, as
      weighted by the travel time to reach                    shows high values of the index around            employed, for example, by Hanson (1998).

      Market access in Mexico is highest around the national capital and low in the lagging southern states

                                                                                                                                    Accessibility Index
                                                                                                                             Low                          High

                                                                                                                                     City population,
                                                                                                                                     2000 (thousands)
                                      Mexico City                                                                                       100–500
                                                                                                                                        > 5,000


                                                         OAXACA                         CHIAPAS

      Source: Deichmann, Fay, Koo, and Lall 2004.

                                                    grew 48 percentage points faster on aver-               caused by ethnolinguistic or religious het-
                                                    age in the Appalachian counties than in                 erogeneity, the forces of factor mobility can
                                                    their economic “sisters,” population grew 5             be weak even over relatively short distances.
                                                    points faster, and per capita income grew 17            Examples include India and Nigeria. In
                                                    points faster.30                                        such cases, spatially focused incentives
                                                       Institutions, infrastructure, and incen-             may need to complement institutions and
                                                    tives to overcome distance, density, and                infrastructure to encourage economic pro-
                                                    division. When countries face divisions                 duction in lagging areas. Commonly used
                                                                                      Unity, Not Uniformity   245

Map 8.6 In the Arab Republic of Egypt, population densities are high in lagging areas, and connective
infrastructure is needed to help spatial integration

                                                                  Primary roads
                                                                  Secondary roads


                                                                                          ARAB REP.
                                         Low                                              OF EGYPT

Source: World Bank 2008b.

incentives include fiscal incentives and                 of people, encouraging them to seek eco-
subsidies, special economic zones, industry              nomic opportunities wherever they arise.
location regulations, and investment cli-                Second, they should help unify countries in
mate improvements.                                       the long term. Internal divisions may be a
   Only a few countries face the triple chal-            short-run constraint for economic integra-
lenges of distance, density, and division.               tion, but the diminution of division should
Nevertheless, incentives to promote eco-                 be a long-term objective. Third, policies
nomic development in lagging areas have                  that try to offset constraints posed by divi-
been widespread. The experience has been                 sions should not inadvertently strengthen
disheartening.31 In good measure this has                them. For example, making land and labor
been because incentives have been used                   laws or school systems different in lagging
instead of, rather than in addition to, inte-            areas may weaken economic and political
grative institutions and infrastructure.                 integration.
More often than not, geographically tar-
geted incentives would not even be neces-                The framework in action
sary if the policy objective was to integrate            This section uses the framework to discuss
leading and lagging areas, rather than pro-              how countries have used specific policies to
mote industry in economically unfavorable                integrate lagging and leading areas.
   Table 8.1 summarizes policy options                   Institutions that promote portable
for domestic integration using a calibrated              investments
combination of institutions, infrastruc-                    Investing in human capital. Universal
ture, and incentives. Policy makers should               primary education and basic health are
keep three points in mind in designing                   mandated across a broad range of develop-
integration strategies. First, policies should           ing countries, as shown by the review of
focus primarily on improving the welfare                 national constitutions discussed earlier. For
246                                       WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Table 8.1   An instrument per dimension—a framework for area, territorial, or regional development policies
                                                                                     Country type
                                                                     Densely populated lagging areas in        Densely populated lagging areas in divided
                           Sparsely populated lagging areas          united countries                          countries
 Examples (countries)      Chile, China, Ghana, Honduras,            Bangladesh, Brazil, Colombia, Arab        India, Nigeria
                           Pakistan, Peru, Russian Federation,       Rep. of Egypt, Mexico, Thailand,
                           Sri Lanka, Uganda, Vietnam                Turkey
 Dimensions of the         Economic distance (1-D)                   Economic distance                         Economic distance
 integration challenge                                               High population densities in lagging      High population densities
                                                                     areas (2-D)                               Internal divisions (3-D)
 What policies should      Labor and capital mobility                Labor and capital mobility                Labor and capital mobility
 facilitate                                                          Market integration for goods and          Market integration for goods and services
                                                                     services                                  Selected economic activities in lagging areas
 Policy Priorities
 Spatially blind           Fluid land and labor markets, security,   Fluid land and labor markets, security,   Fluid land and labor markets, security,
 institutions              education and health programs, safe       education and health programs, safe       education and health programs, safe water
                           water and sanitation                      water and sanitation                      and sanitation
 Spatially connective                                                Interregional transport infrastructure    Interregional transport infrastructure
 infrastructure                                                      Information and communication             Information and communication services
 Spatially targeted                                                                                            Incentives to agriculture and agro-based
 incentives                                                                                                    industry
                                                                                                               Irrigation systems
                                                                                                               Workforce training
                                                                                                               Local roads
Source: WDR 2009 team.

                                          example, constitutions state that primary                     between lagging areas and potential des-
                                          education should be free and universal,                       tinations have deterred migration. Reduc-
                                          regardless of the place of residence, and sup-                ing economic distance, an additional year
                                          plementary national laws specify how many                     of education increases out-migration from
                                          years of instruction are necessary to com-                    remote areas by 40 percent. 32 As Brazil
                                          plete primary education. In conflict-driven                    transformed from an agricultural to a man-
                                          or postconflict countries, basic education is                  ufacturing economy, migration flows from
                                          viewed as a tool for national reconciliation                  the lagging northeast to the dynamic south
                                          and ensuring territorial integrity.                           and southeast increased between 1960 and
                                             Despite such legislation, education,                       2000. In the northeast people who have at
                                          health, and poverty levels vary consider-                     least a primary education migrate more fre-
                                          ably among areas in many countries, par-                      quently than less educated people.33
                                          ticularly in Asia and Africa. In China, the                      One of the biggest success stories is in the
                                          human development index (a combination                        United States, where a rise in the schooling
                                          of education, health, and income levels) of                   of African Americans is believed to have
                                          the leading area in 2003 was 0.97, close to                   been an important causal factor behind their
                                          the Republic of Korea’s index, and that of                    “Great Migration” out of the South. In 1900,
                                          the lagging area was 0.59, about the same as                  90 percent of African Americans lived in the
                                          Lao PDR’s index (see figure 8.2). Chapter 2                    South, and only 4.3 percent of those born in
                                          pointed out that these gaps were even higher                  the region were living elsewhere. By 1950 the
                                          some years ago.                                               proportion in the South had declined to 68
                                             Developing human capital is essential                      percent, and 19.6 percent of those born in
                                          whether policies aim to bring jobs to peo-                    the region had left it. Census data for 1900,
                                          ple or encourage the movement of people                       1940, and 1950 show that better-educated
                                          to jobs. One of the main gains comes from                     people were more likely to migrate because
                                          helping people in lagging areas migrate to                    schooling increased their awareness of dis-
                                          areas with better opportunities. In Russia                    tant labor market opportunities and their
                                          the large economic and physical distances                     ability to assimilate into a different social
                                                                                   Unity, Not Uniformity                                        247

and economic environment, thus lowering           Figure 8.2     Living standards can vary considerably between leading and lagging areas
the costs.34 In another U.S. study of people      Human development index
tracked between 1968 and 1982, those with         1.0
high education levels showed less inclination
                                                  0.9                                                                                       0.97
to change professions but were more likely
to move geographically. A person with a col-      0.8                                                                          0.82
lege education was likely to move three times                               0.76
                                                                                         0.74        0.75
more often than a person with an eighth-          0.7
grade education or less.35                                                                                                     0.67
                                                  0.6                                    0.60                                               0.58
   Opening options for migration stimu-                        0.55
lates greater human capital investments:          0.5                                                0.49          0.50
people consider not only the local returns to
education but also the returns in other loca-     0.4
tions. If schooling options are available in      0.3
poor areas, potential migrants will invest in           Lao PDR       Indonesia     Mongolia    Vietnam     Philippines   Thailand      China
                                                          2000           2002        2002         2001         2003         2003        2003
additional human capital, anticipating that
jobs in leading areas require higher skills.      Source: Gill and Kharas 2007.

Employers in those areas are likely to favor
educated workers who signal themselves as         education quality because of the higher
more “able” than other workers from lag-          costs of delivering services in the northern
ging areas. In the United States, African         region. With poor implementation capacity
American school enrollment rates were             and underspending in lagging areas, the gap
significantly higher in southern states that       between “regional needs” and allocations
previously had experienced high rates of out-     from higher levels of government becomes
migration. An increase in earlier migration       even wider. Although this could be seen
rates explains 7.4 percent of the increase in     as spatial targeting of public spending, an
African American enrollment rates between         outcome-oriented policy framework would
1910 and 1930. As more African Americans          regard such efforts as spatially blind.
migrated from the South, migration became            Transfer mechanisms for public services.
more common and feasible, and school              Redistributive transfers from higher levels
enrollments rose in response.                     of government can reduce disparities in fis-
   Schooling has a strong effect on welfare,      cal capacity and public service provision
as in Brazil. Nine states in the northeast        across subnational jurisdictions. At least
have the worst education attainments, with        three criteria motivate their allocation:
gains smaller than in the rest of the coun-       •     Need. Areas with lower incomes would
try. Average illiteracy in the nine states fell         receive more investment, but richer
42 percent, less than the 49 percent in other           areas may also demand more resources
states, and is still twice the national aver-           to meet the needs of population growth
age (18 percent versus 9 percent). Differ-              and congestion.
ences in schooling explain more than half
the income difference between the north-
                                                  •     Efficiency. Areas with higher returns
                                                        to investment would receive more
east and the leading southeast. If the local            allocations.
populace had the same education profi le as
people in the southeast, average incomes in       •     Equality. Spending is equalized across
                                                        locations, so that public investments do
the northeast would increase by more than
                                                        not give an advantage to any single area.
half, moving from 62 percent of the Brazil-
ian average to 93 percent.36                          Need-based transfers can improve pub-
   Government programs, such as that for          lic service delivery in lagging areas, because
the universal primary education in Uganda,        local tax bases may be inadequate to gen-
often reflect national priorities. Uganda’s        erate enough revenues. Intergovernmental
program increased enrollments in the              transfers can help provide similar access to
north—the country’s poorest area (see box         public services for residents anywhere in
8.7). But more effort is needed to improve        the country. Such transfers are particularly
248                                        WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                                                                              and households) benefit from agglomera-
      B OX 8.7     Universal primary education in Uganda increased                            tion economies in leading areas. External
                                                                                              economies induce mobile factors to cluster
                   access to schools in the northern areas                                    geographically and turn them into quasi-
      President Museveni’s decision to               UPE has had an equalizing effect         fi xed factors. So if residents see benefits
      implement universal primary educa-          in access but not in quality and per-       from locating near other similar residents,
      tion (UPE) in 1996 made Uganda the          formance. In the northern area, high        they become locked into these locations,
      first African country to institute such a   rates of teacher absenteeism, low
                                                                                              less sensitive to tax differences. Moderate
      policy. UPE abolished tuition and con-      financial incentives to teachers, and
                                                  limited education infrastructure and        intergovernmental transfers fi nanced by
      tributions to parent-teacher associa-
      tions and school building funds. The        teaching materials produce low edu-         leading areas thus can fi nance public ser-
      impact on primary school enrollment         cation performance. And the per cap-        vices in lagging areas.
      has been large, with those in the poor-     ita budget allocations to the region            Although transfers can bridge short-
      est quintile gaining most and, within       do not always reflect the higher costs      term fiscal constraints in lagging areas,
      the poorest quintile, the enrollment        of delivering services there. A spa-        fiscal dependency is a danger. If intergov-
      of girls more than tripled between          tially blind program of education that
                                                                                              ernment transfers finance a large share of
      1992–93 and 2002–03. In the lagging         emphasizes outcomes would not be
                                                  geographically neutral.                     expenditures, subnational governments are
      northern area, girls’ enrollment rose
      from 40 percent to 73 percent.              Source: Bird and Higgins 2008.
                                                                                              unlikely to improve local revenue collec-
                                                                                              tion or be accountable to local residents.38
                                                                                              OECD countries have recognized these
                                                                                              disincentives, and many have reduced the
                                           important for subnational governments              equalization component of revenues and
                                           that depend heavily on federal transfers           grants (Italy and Spain, for example).
                                           to cover spending. They fi nance about 60               In India, where federal transfers redistrib-
                                           percent of subnational spending in devel-          ute resources to poor areas, average incomes
                                           oping countries and transition economies,          in low-income states are 40 percent of those in
                                           compared with about a third in member              high-income states. With local tax revenues
                                           countries of the Organisation for Eco-             linked to local incomes, the fiscal capacity of
                                           nomic Co-operation and Development                 low-income states is worse than that of their
                                           (OECD). In India central government                high-income counterparts.39 Compensating
                                           transfers fi nance more than 30 percent of          for this difference is a progressive fiscal redis-
                                           state spending. In China central-provincial        tribution system. Low-income states receive
                                           and provincial-local transfers fi nanced 67         48 percent of total central government trans-
                                           percent of provincial, 57 percent of prefec-       fers, compared with a 17-percent allocation
                                           ture, and 66 percent of county and lower-          to high-income states. The progressiveness
                                           level spending in 2003.37                          of transfers is also evident per capita—Bihar,
                                              The allocation rules for transfers thus         the poorest state receives Rs 501 per person in
                                           have a direct bearing on the potential for         tax transfers. Maharashtra—a high-income
                                           welfare improvement in different areas. But        state and home to India’s leading urban
                                           intergovernmental transfers that finance a          center, Mumbai—receives only Rs 298 per
                                           large share of subnational expenditures are        person. But the translation of resources into
                                           rarely made with spatial equity in mind.           services on the ground is not always visible in
                                           Indeed, the large transfers go to areas where      India’s lagging areas.
                                           people already receive high-quality services           Many developing countries are collecting
                                           (see box 8.8).                                     and disseminating credible information on
                                              Fiscal equalization transfers to lagging        service entitlements to increase the account-
                                           areas are financed by a net tax on the resi-        ability of service providers and improve
                                           dents of leading areas. A common concern           outcomes. Increasing access to reliable
                                           in the fiscal competition literature is that        quantitative information about service deliv-
                                           higher effective taxes in some areas will          ery outcomes makes it difficult for providers
                                           stimulate the out-migration of productive          to ignore this information as anecdotal or
                                           factors. The new economic geography pro-           irrelevant. Involving community members
                                           vides some hope that tax-induced migra-            in identifying concerns and encouraging
                                           tion will be limited if residents (both firms       them to do their own monitoring can create
                                                                                        Unity, Not Uniformity                                             249

B OX 8.8      Improving the spatial progressivity of Nigeria’s intergovernmental transfers
Poverty and service quality in Nigeria are            are lower than those in the southwest               The proposed changes would shift
worst in the north, particularly the north-           (3,700) despite the north’s having the            intergovernmental transfers toward
east, and much better in the south, particu-          highest overall poverty and worst service         states with the greatest need. The maps
larly the southwest.a, b Nigeria’s states rely        delivery.e To determine what would hap-           below show this shift in per capita
on fiscal transfers from the center to pro-           pen if transfers were spatially progressive,      terms.
vide most services. Nigeria’s allocation of           an illustrative policy experiment was
statutory grants (NGN 700 billion in 2006)c           developed by the World Resources Insti-           a. National Bureau of Statistics 2006.
 is not targeted using a clear principle that         tute to identify the implications. Popula-        b. See numerous measures of service qual-
                                                                                                        ity and access (National Bureau of Statistics
supports poverty reduction: 54 percent of             tion and land area, reflecting demand for         2006). Core Welfare Indicator Questionnaire
the funds are divided equally among all               services, are used to allocate 50 percent         (CWIQ). Data can be obtained from the
states regardless of population, land area,           of the statutory grant. Equal allocations         Nigerian Bureau of Statistics electronically
poverty, or other measures of need.d Indi-            are reduced to 5 percent (from 54 per-            from
cators of health care and education make              cent). Education and health care are split        cwiq/2006/survey0/index.html.
up only 7 percent of the transfer.                    between measures to support current               c. The 13 percent derivation of oil proceeds
                                                                                                        and disbursements from the oil fund (under
    The indicators chosen to direct that              service levels and those to support pro-          which 9 of the 36 southern states where
small percentage are regressive in that               gressive funding for states with the poor         oil is produced receive 13 percent of oil
they favor states with the best service               services. For education, school enroll-           revenues) represents about NGN 330 bil-
delivery and strongest infrastructure.                ment (increased from 4 to 5 percent) is           lion, or about one-third of total transfers to
Basing education transfers purely on                  used for the former purpose, and lack             states in 2006. While the derivation strongly
enrollments favors states that already have           of access to schooling (increased from 0          shapes Nigeria's overall transfers, this trans-
                                                                                                        fer is stipulated by the constitution, not by
education infrastructure and teachers,                to 5 percent) for the latter. Health care         statute and so is not included here (Nigeria
penalizing those that do not. Basing health           also received a 10 percent weight. The            Federal Ministry of Finance, downloaded
transfers purely on hospital beds similarly           allocation for revenue effort is kept at 2.5      and compiled from
supports better-off states that have the              percent. Poverty was added as a category          portal/detail.php?link=faac).
resources to build more hospitals.                    by weighting the number of poor and               d. Revenue Mobilization Allocation and Fis-
    Per capita transfers to states in the             the poverty rate (headcount ratio) at 2.5         cal Commission 2003.
                                                                                                        e. National Bureau of Statistics 2004.
north (about NGN 3,300 per person)                    percent apiece.

Nigeria’s statutory grant transfers per capita with actual transfers in 2006 (left) and with equity considerations (right)

                                   Actual                                                                     Proposed


                   Naira per capita                                                            Naira per capita
                        180–435                                                                     255–400
                        435–752                                                                     400–755
                        752–1375                                                                    755–1036
                        No data                                                                     No data

Sources: World Resources Institute;; Layke and Adam 2008.
250   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      a constituency of users willing to hold pro-           below the market rate and further restricted
      viders accountable.                                    mobility. Tenants do not want to lose their
          Effective service delivery thus depends            favorable position in existing contracts.42 In
      on having enough fi nancial resources and               Chile, meanwhile, the government’s success
      translating them into outcomes on the                  in targeting housing subsidies to the poor in
      ground. Investing in public goods in lag-              lagging areas has also created a strong incen-
      ging areas reduces migration possibilities             tive for people in these areas not to migrate,
      in the short term, because it improves the             impeding convergence across locations even
      attractiveness of lagging areas. But targeted          in a country that has a small population and
      social investments to develop portable                 homogenous society.
      assets can improve the welfare of people
      and facilitate their longer-term mobility by           Institutions and infrastructure to
      making them better prepared for work in                connect lagging and leading areas
      leading and intermediate areas.                            Transport infrastructure. Consider
          Portable pension benefits. Even with                Bangladesh, a two-dimensional country,
      portable assets, people may fi nd it hard to            where the most lagging areas are distant
      move. In several countries, a lack of pen-             from economic density but densely popu-
      sion portability is likely to slow the pace of         lated. Selected investments in correc-
      migration. Facing a potential loss in pension          tive infrastructure can help greatly. The
      benefits because of differences in schemes              bridge over the Jamuna River opened mar-
      or a lack of portability, workers may be less          ket access for producers in the northwest
      likely to move even when leading areas offer           around the Rajshahi division. Built at a
      higher wages. The European Commission                  cost of almost $1 billion, this bridge pro-
      finds precisely this problem.40                         vides the fi rst road and rail link between
          Better land market regulations. Well-              the northwest, an intermediate area with
      functioning land markets make it possible for          the more developed east, which includes
      people to acquire land, exchange it with oth-          the national capital region. Better market
      ers, and use it effectively.41 And policies that set   access and reduced input prices encouraged
      up defensible and tradable property rights for         farmers to diversify into high-value crops,
      land and housing are likely to facilitate peo-         such as modern varieties of rice and per-
      ple’s geographic mobility. The ability to defend       ishable vegetables.43 The government has
      rights legally rather than physically allows           complemented connective infrastructure
      people to leave their land to take advantage           policies with spatially blind institutions
      of short-term opportunities. And the ability           to improve coverage of social services. The
      to use land as collateral or sell it allows them       Expanded Program on Immunization aims
      to finance migration costs and benefit from              to immunize all children less than one year
      economic and social opportunities elsewhere.           old against the six vaccine-preventable dis-
          Government involvement in managing                 eases. The Health, Nutrition, and Popula-
      land markets and enforcing property rights             tion Strategic Investment Plan for 2003–10
      prevents households from wasting pri-                  improves coverage in districts with poor
      vate resources. But too much government                health indicators.44
      involvement can hurt efficiency. Large-scale                In the Islamic Republic of Iran, another
      public ownership can withhold land from                two-dimensional country in the terminol-
      the market and artificially increase prices,            ogy of this Report, connective infrastruc-
      precluding many poor people from entering              ture improvements are necessary for spatial
      the market. And high direct costs and com-             integration. In addition, spatially blind
      plicated procedures can reduce the incentive           education policies of improving schools as
      for people to formally exchange land.                  well as conditional cash transfers for chil-
          Policies to safeguard the poor from rising         dren to attend schools can improve welfare
      land and housing costs often have hindered             in lagging areas.45 Turkey’s lagging eastern
      market functioning. In the Czech Republic,             areas have 44 percent of the land but only
      where there is a large rental market, de facto         5.7 percent of national motorways, and
      rent control has kept prices significantly              asphalt road coverage is 40 percent that
                                                                            Unity, Not Uniformity                                        251

of the leading regions. The government’s         slower pace. Transport connectivity improve-
Village Infrastructure Support Project           ments in China’s intermediate areas can be
(KÖYDES) and Municipal Infrastructure            economically beneficial for lagging areas. By
Support Project (BELDES) have improved           reducing the transport cost from the west to
living standards in rural areas and small        the coast, infrastructure investments in the
towns by paving roads and providing sani-        central (intermediate) transportation hubs
tation and drinking water networks.46 And        in Henan, Hubei, and Hunan provinces may
investments in human capital are likely to       well have greater effects on the west’s devel-
benefit potential migrants as well as those       opment than improvements in the western
who stay behind.                                 area itself. But if China’s overall growth is the
   Information and communication tech-           main objective, infrastructure investments
nologies. Mobile phones have driven down         in the dynamic economic centers along the
provision costs, boosting penetration and        coast—Hebei, Jiangsu, and Shandong—
improving information flows. In 2003 China        could still provide the highest payoffs.50
had more mobile phone users (269 million)           In Brazil improvements to the road
than fi xed-line users (263 million). For 29      network between the 1950s and 1980s did
areas in China between 1986 and 2002, tele-      reduce transport and logistics costs. But
communication infrastructure was strongly        most of the economic gains accrued to the
associated with subnational GDP growth.47        center-west, with only small gains to the lag-
Because telecommunication investments            ging northeast. During this time, its share
are subject to diminishing returns, lagging      of the national network increased from 15
areas can gain the most from them.               percent to 25 percent. Even so, such invest-
   New technologies have lowered the costs       ments did bring economic density closer to
of delivering fi nancial services, making         the lagging northeast.
them more affordable. Many people in lag-           In Colombia, with water and land suitable
ging areas have limited access to fi nancial      for agriculture, the mountainous topography
services, relying on cash-based transactions     makes freight transport difficult. So some
outside the banking system. But with ris-        intermediate areas are not well integrated
ing international and national remittances,
better access to fi nancial services can help
people in these areas overcome credit
constraints. The proliferation of mobile            B OX 8 . 9   Exporting by mail in Peru—connecting small
services, even in remote areas, opens new                        producers to markets
opportunities to provide financial services                                                    need to use a customs agent, logistics
                                                    In many countries small enterprises
over a mobile phone network (m-banking).            are often excluded from export            agent, or freight forwarder or to con-
Reports from the Philippines indicate that          chains because they operate in vil-       solidate the merchandise; even the
3.5 million people have access to mobile            lages or small towns or do not have       packaging is provided. Firms or indi-
phones that can transfer money.48                   the needed information to export.         viduals need only to go to a post office
   Producers in lagging areas can receive           In Peru a trade-facilitation program      with a scale and a paper scanner and
                                                    called “Easy Export” connects small       to use the Internet to complete the
better information on prices they can get
                                                    producers to markets. The key to this     export declaration for the tax agency.
for their products. In Kerala, India, mobile        program is the most basic of transport       Has it made a difference? Within six
phones reduced the dispersion of market             networks—the national postal service.     months of inception, more than 300
prices so much that prices differed only by            How does it work? An individual or     firms shipped goods totaling more
the transport cost between markets.49 And           firm takes a package to the nearest       than $300,000. Most users are new
in Peru, a ubiquitous but often undervalued         post office, which provides free pack-    exporters—microentrepreneurs
communication system is connecting small            aging. The sender fills out an export     and small firms, producing jewelry,
                                                    declaration form, and the post office     alpaca and cotton garments, food
producers with markets—the postal service
                                                    weighs the package and scans the          supplements (natural products),
(see box 8.9).                                      export declaration form. The sender       cosmetics, wood art and crafts, shoes
   Greater benefits in intermediate areas.           pays the fee for the type of service      and leather, and processed food.
Intermediate areas closer to centers of eco-        desired. Goods with values of $2,000      And many of them are in the poorest
nomic mass are likely to gain more from             or less can be exported. The main         areas of the country.
connectivity-enhancing infrastructure, and          benefit is that the exporter does not     Source: Guasch 2008.
lagging areas are likely to gain less and at a
252   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      with large domestic and international mar-         the development of extensive rural road
      kets. Casanare, the nation’s largest rice pro-     networks led to significant economic bene-
      ducing area, has good potential for biofuels       fits, with considerable gains to the poor. But
      from corn and palm oil. But it takes 18 hours      the poor’s share often is not large enough
      to reach Bogotá and 50 hours to access a main      to significantly reduce income inequality,
      port. Improving road quality would increase        because the benefits from road extension
      market access and help the area’s economy.         could be greater for the rich.55 In Ghana
      La Mojana, an area with 5,000 square kilo-         the benefits of improving access to infra-
      meters of flatlands, close to the Atlantic ports    structure by the poor could be increased
      and most Colombian cities, is often flooded,        by complementary spatially blind policies,
      because it lies in the buffer zone of two major    such as education and health improve-
      rivers. Improving ecosystem management             ments, which would boost the use of that
      along with transport connectivity would            infrastructure.56
      improve its access to cities and ports.51
          Interregional infrastructure improve-          Institutions, infrastructure, and
      ments can bring higher economic concen-            incentives to overcome the 3-D
      tration. The potential benefits of improving        challenge of distance, density, and
      market access for peripheral areas may instead     division
      accrue to firms in larger agglomerations.52         Incentives to promote economic investments
      And improving transport connectivity can           in lagging areas have been widely used by
      further concentrate economic activity. Roads       countries to accelerate national economic
      and rails run both ways—better transport           growth and balance growth outcomes across
      connectivity not only provides market access       places. They seem to work better when they
      to firms in lagging areas, but also allows          reinforce market signals and address coor-
      firms in leading areas to reach markets. A          dination failures. They are less successful
      decline in transport costs helps competitive       when governments pick the places to sup-
      firms in leading areas easily scale up produc-      port growth. The following lesson seems
      tion to reach these new markets at lower cost      to emerge: let markets pick the place, while
      relative to local producers in lagging areas.      governments help to push the pace.
      So improving market access may hurt the                Incentives that exploit geographic
      production of standardized goods in lagging        advantages are more likely to succeed. To
      areas. But lower prices and better access to       stimulate economic growth, many gov-
      new products are likely to improve consumer        ernments have offered tax holidays, reli-
      welfare.                                           able infrastructure, and improvements
          Experience validates this conjecture. In       to the business environment. Often the
      Italy reducing transport costs between the         incentives are geographically focused—in
      north and south in the 1950s deprived Mez-         special economic zones—to quickly cre-
      zogiorno firms of their previous protection         ate enclaves of growth, leaving nationwide
      and accelerated their deindustrialization.53       infrastructure and governance shortfalls
      And in France, where transport costs within        to the longer term. There is an ongoing
      the country fell by 38 percent between 1978        debate over whether focused incentives
      and 1993, the geographic concentration of          slow the pace of economic reforms, but the
      employment increased.54                            interest here is in identifying where these
          In addition to growth effects that vary        incentives are more likely to succeed. Is
      across areas, it is also useful to consider        it desirable to provide incentives in areas
      the distributional effects of infrastructure       that already have good geography and
      improvements. Are the benefits of infra-            human capital? Or should they be reme-
      structure improvements large enough and            dial measures to offset market forces and
      distributed progressively enough to reduce         help develop lagging areas?
      overall income inequalities, with more                 In China and India, spatially targeted
      benefits accruing to the poor than the non-         incentives are most likely to succeed when
      poor? Empirical evidence on this question is       they reinforce geographic advantages, par-
      limited, but a study from Nepal shows that         ticularly in areas advantaged by good access
                                                                            Unity, Not Uniformity   253

to domestic and international markets                  Let markets pick the places. The Repub-
(see box 8.10). In Uganda the returns from         lic of Korea is one of the few success stories
infrastructure development in highways and         involving spatially targeted incentives. To
power supply are highest in areas that already     support economic growth in specific areas,
have a skilled labor force and a diverse mix       the national government worked with the
of industrial activities.57 These happen to be     private sector to identify areas offering pro-
along the corridor linking the country’s two       duction advantages. Consistency between
main agglomerations, Kampala and Jinja.            national industrial policy and regional pol-
Using infrastructure to spread out manufac-        icy objectives was instrumental. Although
turing, instead of facilitating its concentra-     deconcentrating economic activity from the
tion, can slow national economic growth.           Seoul metropolitan region was an implicit
    Incentives that enhance market links           policy objective in the government’s tax
and improve agriculture performance in             sharing, decisions to promote export-
areas with good natural geography can be           oriented “strategic industries” were at the
a part of development strategies for densely       core of industrial and regional policies.61
populated lagging areas where factor                   Spatial equity did not guide national
mobility is constrained. But before offering       industrial policies. In fact, areas picked by
incentives, agriculture needs to be assessed       the market in different phases of industri-
as an economic driver in the local economy.        alization were encouraged. In the 1960s and
World Development Report 2008 provides a           1970s, national industrial policies created
useful diagnostic technique to identify sub-       new industrial cities—Ansan, Changwon,
national areas as agriculture based, trans-        Kumi, Kwangyang, Pohang, and Ulsan.
forming, or urbanized—a country’s “three           The private sector (chaebols) established
worlds” of agriculture—based on the share          large branch plants with imported technol-
of aggregate growth originating in agricul-        ogy and borrowed foreign capital. Market-
ture and the share of aggregate poverty in         driven industrial and regional policy led to
the rural sector. Applying this technique          different specializations across the country,
can help identify whether agriculture will         with chaebol headquarters concentrating in
remain a prominent feature of lagging areas        Seoul, and production functions decentral-
in the short to medium term.                       ized to areas outside the capital. Since the
    Consider Malaysia, where agriculture           mid-1980s, industrial policy to support
is important in the regional economies of          high-technology activities triggered indus-
the lagging areas, which account for more          trial reconcentration in the capital region.
than 40 percent of the country’s people                To speed the growth, incentives were
(Sabah and Sarawak are home to more                complemented by infrastructure invest-
than 2 million).58 To encourage agricul-           ments that connected the southeast to the
tural development in the eastern peninsula,        capital region. The Gyeongbu expressway,
the national government has been offering          which connects Busan, Daegu, Daejeon, and
reinvestment allowances for capital expen-         Seoul, enabled industries in the southeast to
ditures related to farming, providing cold-        reach the capital region within five hours.
chain facilities and services for perishable       Thus industries producing standardized
agricultural produce and exempting food            intermediate goods in the capital and south-
processing from tax.59                             east regions benefited from considerable cost
    But in Ghana, where the lagging north is       reductions. In the Republic of Korea, it may
mostly in the arid Savannah zone and pop-          be fair to conclude that markets picked the
ulation densities are low, expanding agri-         place and governments pushed the pace.62
culture is less likely to facilitate territorial       Many countries have offered incentives to
integration. Without allowing for large-scale      create economic mass in lagging areas. The
migration or structural transformation, even       idea is that to attract firms, lagging areas
a sharp acceleration in productivity growth        need to offset higher transport and logistics
in groundnuts and other northern staples is        costs, weaker infrastructure, higher factor
insufficient to bring the north up to par with      prices, and lower levels of public services.
the south in the medium term.60                    European countries have a long history of
254                                           WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      B OX 8.10      Special economic zones bring growth if they exploit advantages in natural
                     and economic geographies
      Many developing countries have loca-                 ince and Xiamen in Fujian Province (see          rior states of Haryana, Karnataka, Punjab,
      tions where infrastructure conditions                the map below). In 1984 14 coastal cities        and Rajasthan. Even in the coastal states,
      and economic regulations are more hos-               opened their doors to overseas invest-           many SEZs are not along the coast. b
      pitable than those typical in the rest of            ment, and in 1988 the entire island of              Closer inspection reveals consider-
      the country. These locations, often called           Hainan was assigned SEZ status. Around           able diversity across product special-
      special economic zones (SEZs), enhance               the same time, the coastal belt around           ization, which range from standardized
      industry competitiveness, attract foreign            the Yangtze River Delta, the Pearl River         manufacturing to information technol-
      direct investment, and diversify exports.            Delta, and the Xiamen-Zhangzhou-                 ogy and pharmaceuticals. Compared
      Recent estimates suggest that there are              Quanzhou Triangle in south Fujian                with standardized manufacturing
      2,300 such zones in developing and tran-             opened for business with the world. In           products, human capital–intensive
      sition countries. a                                  the early 1990s the government opened            products depend more on reliable
                                                           up 11 border cities and six ports along          telecommunication infrastructure
      Look at China                                        the Yangtze River. The developments              and access to airports, not harbors.
      The earliest developing-country SEZs                 reflected a strategy of exploiting the           Moreover, India’s economic zones also
      were established in China under Deng                 best locations to access external mar-           target the large domestic market. Take
      Xiaoping’s leadership in the early 1980s.            kets.                                            Gurgaon, a satellite town a stone’s
      In 1978 the government decided to                                                                     throw from Delhi’s international air-
      open the country’s economy to the                    And at India                                     port, which 20 years ago was a cluster
      outside world. SEZs and “open” coastal               A cursory glance at India’s SEZs suggests        of villages (gaon is the Hindi word for
      cities were integral to this process. In             that they were not nearly as well located.       village). Now it is one of the main ser-
      1980 SEZs were established along the                 In 2007 SEZs were approved in coastal            vice-oriented corridors in the country,
      southeastern coast in Shenzhen, Zhu-                 states of Andhra Pradesh, Gujarat, Maha-         sitting in the middle of India’s largest
      hai, and Shantou in Guangdong Prov-                  rashtra, and Tamil Nadu, as well as inte-        consumer market. It houses such infor-

      China’s special economic zones opened the country to external markets

                                                    4 first special economic zones (1980)   Province of Hainan (1988)
                                                    14 coastal cities (1984)                6 ports of Yangtze (1992)
                                                    3 deltas (1985)                         11 border cities (1992)
      Source: WDR 2009 team, based on Huang and Luo forthcoming.
                                                                             Unity, Not Uniformity                                    255

    B OX 8.10    Special economic zones bring growth if they exploit advantages in natural
                 and economic geographies—continued
    mation technology service providers        in the 1980s. They are generally more       geographic advantages rather than try
    as IBM and Microsoft, along with such      profitable and have better social and       to offset them.
    consumer goods providers as Coca-          environmental track records than pub-
    Cola, Gillette, and Nestlé.                lic zones, except in East Asia’s govern-    Source: WDR 2009 team.
      Unlike China’s government-led            ment-run zones.                             a. SEZs take a variety of forms, which
    SEZs, India’s are being developed by          Location is the key: poor location is    include free trade zones, export processing
    the private sector, by such companies      the main obstacle to success. It seems      zones, enterprise zones, freeports, and spe-
    as Infosys and HCL, promoting infor-       to matter more where the zones are          cialized zones (Gauthier 2007).
                                                                                           b. Location of SEZs is based on SEZ INDI-
    mation technology development, c           located, not who owns and operates
                                                                                           AWEB at
    reflecting broader global trends. Of       them. The lesson from China and India is    SEZ_map.html.
    SEZs in developing countries, 62 per-      that spatially directed interventions are   c. Information on SEZs in India is drawn
    cent are private, up from 25 percent       more likely to succeed when they exploit    from the Indiastat database.

using industrial policies to attract firms to          incentives and building grants to lagging
lagging areas. But fiscal incentives, while            areas through the Local Employment
politically efficient, have not transformed            Act, along with relocation of 250,000
the economic fortunes of lagging areas: 63            manufacturing jobs from prosperous to
                                                      lagging areas.
•   In Italy one of the main objectives of the
    national economic program begun in 1965           A common theme in traditional
    was to eliminate development gaps between      regional policies focusing on taxes, sub-
    the south and the rest of the country. To      sidies, and regulations is that they were
    support this program, financial incentives      mainly central government initiatives to
    were provided to firms in the south through     create employment and provide infrastruc-
    partial exemptions of welfare contributions.   ture with the objective of dispersing (or
    Through 1992 public infrastructure and         fighting the concentration of) economic
    financial incentives promoted industrial        activity. They targeted specific fi rms in the
    development in the region.                     hope that they would become anchors in
•   In France the Fifth National Plan              the local economy and have large multi-
    (1966–70) provided assistance to agricul-      plier effects.64 But for the most part, these
    ture and began to direct industrial invest-    incentives have not stimulated sustained
    ment away from Paris toward low-income         growth in the lagging areas, imposing
    areas in the west. Light industries—with       large costs on taxpayers.
    lower transport costs and higher labor            Most European countries now focus more
    intensity—were targeted for relocation.        on “soft” interventions, such as investing in
•   The United Kingdom has supported               innovation and supporting research insti-
    economic development in northern               tutes and science and technology parks (see
    England, Scotland, Wales, and north-           table 8.2).65 Central government programs
    ern Ireland. During World War II, war-         have been replaced by greater cooperation
    time building controls directed industry       between the public and private sectors. And
    out of the south of England and into           rather than target specific firms, coordinated
    northern and peripheral areas. During          measures are attracting clusters of interre-
    the postwar recession in 1958, employ-         lated firms. Rigorous evaluations of these
    ment in coal mining, textiles, and ship-       programs are hard to come by. But innova-
    building declined, renewing interest in        tion policies that bring new information and
    bringing jobs to the north. The 1960s          technologies to lagging areas should in prin-
    saw regionally differentiated investment       ciple help in the long term.
256                                      WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Table 8.2 The OECD’s experience with incentives to stimulate lagging areas has been evolving   locating outside these three large cities were
                   “Traditional”        “New” regional policies   The economic                 eligible for a 50- to 100-percent reduction in
 Strategy          regional policies                              perspective                  import duties and income, sales, and capital
 Objective         Create jobs          Provide complementary     Incentives should be         gains taxes, as well as accelerated deprecia-
                   and provide          services, subsidize the   provided only to “new”       tion and lower interest rates. Their impact
                   large-scale          cost of innovation—       activities—products new
                   infrastructure       research institutes,      to the local economy         on economic decentralization was insignifi-
                                        science and technology    and new technologies to      cant because import duties on raw materials
                                        parks                     produce existing products    and capital goods were low to begin with,
 Main players      Central              Public-private            Public sector has limited    so the reductions had no effect on location
                   government           partnerships              information on what firms     decisions and lost revenues.69
                                                                                                   In India the Industrial Policy Resolu-
 Focus area        Incentives to        Encourage development     Public sector support        tion of 1956 set up a strict licensing system
                   attract individual   of clusters—both          must target activities,
                   firms                 sectors and business      not sectors; subsidized      to direct investment into lagging areas.
                                        development               activities must have         The Indian government decided that no
                                                                  strong spillovers            licenses would be issued to new industrial
Source: WDR 2009 team.                                                                         units in the vicinity of large metropolitan
                                                                                               areas. And state governments and financial
                                             The U.S. federal government is also               institutions were asked to deny support to
                                         involved in smaller “economic develop-                new industries in metropolitan areas even
                                         ment” programs. A recent review identi-               when they did not require an industrial
                                         fies 180 programs of U.S. federal agencies             license. Large public sector projects (steel
                                         addressing issues as diverse as planning              plants, for example) were located in the lag-
                                         and economic development strategies,                  ging states of Bihar, Madhya Pradesh, and
                                         industrial parks, infrastructure repair, and          Orissa. Industrial estates (or growth cen-
                                         building renovation. The agency with the              ters) received infrastructure investments
                                         greatest visibility in this group is the Eco-         and fi nancial incentives for private indus-
                                         nomic Development Administration (EDA)                trial investment in designated lagging dis-
                                         of the U.S. Department of Commerce.66                 tricts. The policies effectively stifled growth
                                         The EDA has spent more than $188 billion              in areas that had good market access and
                                         on economic development, but with little              human capital and did not allow exit of
                                         coordination among initiatives, or a com-             unproductive activities from lagging areas.
                                         mon policy objective. The EDA reports that            Even after more than 30 years of draconian
                                         its investments leverage about $37 in pri-            regulation, few districts in backward areas
                                         vate sector investment for every dollar that          became major industrial centers.
                                         it spends.67 No independent evaluation of                 The economic reforms in 1991 scrapped
                                         these programs is available.                          these licensing policies. The decline of pro-
                                             Area incentives, popular in developing            duction in inland areas continued, and
                                         countries, have produced mixed results                places with good market access and good
                                         at best (see table 8.3). In Brazil, where the         local business environments flourished.
                                         goal has been to attract “dynamic” indus-             The ten best-performing industrial dis-
                                         tries to the lagging north and northeast              tricts are now located south of the Vindhya
                                         by providing fiscal incentives, expendi-              mountain range, which divides north from
                                         tures have reached $3 billion to $4 billion           south.70
                                         a year. A recent impact evaluation shows                  Similarly, in the former Soviet Union,
                                         that the allocation of these “constitutional          central planners decided where firms would
                                         funds” did induce the entry of footloose              locate and tried to spread economic activity
                                         manufacturing establishments into lagging             throughout the country’s landscape. They
                                         regions—but incentives were not attrac-               spread production facilities across the former
                                         tive enough for vertically integrated indus-          Soviet Union’s millions of square kilometers.
                                         tries.68 Between 1970 and 1980 the Mexican            Far from markets and lacking specialization,
                                         government used fiscal incentives to pro-              their productivity suffered. How did the
                                         mote industrial development outside the               transition to markets change things? New
                                         three largest urban agglomerations. Firms             firms located closer to markets and old ones
                                                                                 Unity, Not Uniformity                                              257

in remote areas closed down. The result was      Table 8.3 A range of instruments has been used by governments to create economic mass in
                                                 lagging areas, with modest results
a 2.5 percent gain in firm productivity annu-
ally between 1989 and 2004.71                     Instrument              Examples
    Coordinating local and national incen-        Investment              Brazil: Constitutional funds (interest rate subsidies)—induced entry
tives. Incentives for lagging areas are best      subsidies               of footloose firms, but not for firms in vertically integrated industries
                                                                          (Carvalho, Lall, and Timmins 2005)
coordinated with national sectoral policies:
taking stock of various national economic         Tax holidays            Thailand: Income tax exemptions; sales tax reductions for firms locating
                                                                          in secondary cities in the 1970s—unsuccessful as deductions from
promotion initiatives and aligning spatial                                taxable profits did not induce firms to locate in unprofitable locations
interventions with these policies can help.                               (World Bank 1980)
For instance, spatially targeted subsidies        Reductions in           Mexico: Import duty and tax exemptions for deconcentrating
represent only 12 percent of Brazil’s export      import duties           manufacturing out of the three largest agglomerations—unsuccessful
promotion and industrialization subsidies,                                as tax rates were low to begin with (World Bank 1977, Scott 1982)
which favor the industrial southeast. Esti-       Industrial estates/     Chile: Free trade zones in zonas extremas with exemptions for customs,
                                                  free trade zones        value added tax, corporate profit, and real estate taxes—successful
mates suggest that these industrial subsidies
                                                                          in the high-tax, high-tariff period until the mid-1990s, performance
cost $42 billion in 1999, or 4.4 percent of                               declined with national import duty reduction from 35 percent in the
GDP.72 In Brazil initiatives to recruit firms                              1980s to 6 percent in 2000 (World Bank 2005b)
into the northeast clearly were fighting an        Regulation              India: Preference to backward areas in industry licensing (1956
uphill battle against broader industrial                                  industrial policy), with public sector–led industrial growth in lagging
                                                                          areas and regulations to stop industrial expansion in leading areas—
incentives that were better aligned with                                  few backward areas took off, and when regulations were relaxed, these
market forces.                                                            lagging areas declined further (Chakravorty and Lall 2007)
    In India, too, common pricing poli-          Source: WDR 2009 team.
cies to reduce overall inequalities hurt the
economic prospects of lagging areas. The
Freight Equalization Policy of 1956 stan-        and public works, an assured loan from the
dardized the prices for transporting “essen-     national development bank of R$500 mil-
tial” items such as coal, steel, and cement      lion, and exemptions from local taxes for
nationwide regardless of distance. Lost in       10 years. When the state government tried
the process were the location-based advan-       to renegotiate the deal fearing that it was
tages of resource-rich areas. The affected       too generous, Ford moved to Bahia, which
areas included southern Bihar, eastern           offered a package similar to the original one.
Madhya Pradesh, and western Orissa, each         Evaluations show that these “fiscal wars” cost
among the poorest, least industrialized          Brazilian taxpayers around $172,000 per job
parts of the country. The policy weakened        created—five times the cost of job creation
the incentives for private capital to locate     in a General Motors plant in Tennessee.73
production in lagging areas.                        Thinking through the design of incen-
    Decentralization often has been accom-       tives. Before using incentives to promote
panied by the efforts of subnational gov-        economic development in lagging areas,
ernments to create economic mass to meet         national and subnational governments
expenditure responsibilities. They offer fis-     should fi rst fi nd out why some areas are
cal incentives and tax expenditures to attract   being bypassed by the market. Is it because
firms to their jurisdictions. But if not coor-    of the low social returns to economic pro-
dinated, these incentives can be wasteful and    duction in these places, the low ability to
counterproductive.                               capture these returns, or the high cost of
    Look at the competition between states       fi nance?74 Have policies actively or inad-
in Brazil, where Bahia and Rio Grande do         vertently blocked local economic growth?
Sul competed to attract a Ford Motor Com-        The success of incentives depends on how
pany plant in the 1990s. Rio Grande do Sul       well the problem is diagnosed, perhaps
offered a package of incentives to Ford that     starting with area-specific natural, human,
included a R$210 million (around US$200          and infrastructure endowments.75 “Know
million) loan from the state at extremely        thy economy,” a phrase used in the World
favorable conditions (6 percent interest, 15     Development Report 2000/01, should be the
years to repay), additional state expendi-       motto of subnational governments. Good
tures of R$234 million on infrastructure         information can promote constructive
258   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      debate on development options and build            republican borders, limited interrepublic
      consensus around a development strategy.           trade, and duplicated economic produc-
           If the information and subsequent anal-       tion. In 1987, for example, 70 percent of all
      ysis points to specific opportunities for           production in Serbia was consumed in the
      growth, the next step is to identify whether       local market.77
      the planned incentives are to subsidize cap-           As discussed in chapter 5, analysis sug-
      ital formation or to promote innovation.           gests that factor mobility equalizes wel-
      If they are to attract fi rms with potential        fare across areas, weakening incentives to
      local multipliers, it is important to know         break away from an economic and political
      whether the product lines value agglomer-          union.78 By contrast, persistent inequalities
      ation economies, which would reduce the            across areas fuel disintegration movements.
      power of the incentives. For firms in sectors       Unity, not uniformity, is the valid principle
      in which economies of scale and agglom-            for both political and economic integration.
      eration are important for production, it is            This chapter has provided a framework
      less likely that spatially targeted interven-      for integrating lagging and leading areas as
      tions will attract them to lagging areas.          countries address economic distance, mis-
      Industrial surveys in Brazil, China, India,        placed density, and internal divisions. Eco-
      Indonesia, and Mexico show that manufac-           nomic forces are likely to produce spatial
      turing fi rms in many product lines value           divergence in growth outcomes. Economic
      both internal scale economies from mar-            models of geography and growth show that
      ket access and agglomeration economies             increasing returns to scale and agglomera-
      in deciding their location.76 Firms produc-        tion economies can start and sustain a vir-
      ing standardized products serving local            tuous circle of growth and investment in a
      markets, and those specializing in natural         few areas.
      resources, are less likely to value agglom-            For valid reasons, though, policy mak-
      eration economies than are those depend-           ers are concerned with reducing geographic
      ing on skilled labor, business services, and       imbalances soon, sometime between now
      access to information.                             and the long term. And sometimes, politi-
           And from a national growth perspective,       cal pressures can be such that widening
      it is important to find out whether relocating      divergence at any point is unacceptable.
      “targeted” industries produces net additional      The typical territorial development policy
      employment and output nationally. If not,          response has emphasized targeted incen-
      local efforts of attracting industry may be        tives and large-scale infrastructure to
      zero-sum games. If the relocated industries        encourage economic production in lagging
      are less productive, policy makers may face a      areas. However, the evidence reviewed in
      negative sum. If incentives are being used to      this chapter shows that many such policies
      promote innovation, it is important to ensure      have led to waste. In the meantime, poli-
      that local production processes can accom-         cies that address institutional bottlenecks
      modate the innovations.                            that can help people seize opportunities
                                                         elsewhere or improve their living standards
      Avoiding Balkanization:                            locally may be ignored.
      the political benefits of                              Even with such compromises, the big-
      economic integration                               gest part of the policy challenge lies in
      Economic and political objectives can              identifying the outcomes that can be real-
      clash, but more often they coincide. In the        istically sought, that is, which depend on
      Western Balkans, the former republic of            the stage of development and the fiscal and
      Yugoslavia became a federation after World         institutional capacities of a country. Where
      War II but disintegrated when its republics        incomes are low, it may be feasible only to
      declared themselves independent in the             reduce spatial disparities in poverty rates
      early 1990s. Fueling the disintegration was        and in access to essential shelter, water,
      rising autarky and fragmentation in Yugo-          health, nutrition, and education services.
      slavia since the mid-1970s, with barriers          China’s 11th Five-Year Plan passed by the
      to movements of people and capital across          National People’s Congress in 2006 states
                                                                                 Unity, Not Uniformity                                       259

that “the construction of public fi nance         Table 8.4   Assessing the performance of area development policies
system should be accelerated . . . to gradu-                               Reduce inequalities                Pro-poor?
ally equalize basic public services.” In Octo-    Performance                across regions?               (interpersonal   Avoid tradeoff with
                                                  criteria                (interregional equity)               equity)      spatial efficiency?
ber 2007 the 17th Congress again pointed
out that, to narrow regional disparities,         Institutions                     Yes                          Yes                Yes
equalization of basic public service provi-       Infrastructure                    No                              No             Yes
sion would be the priority. Upper-middle-         Incentives                        No                              No              No
income countries can be more ambitious           Source: World Bank 2008b, based on country-specific case studies.
in equalizing basic consumption indica-
tors across areas, and developed countries
such as those in the EU more ambitious           density and division, targeted incentives
still. Reducing spatial inequality in dispos-    are necessary.
able incomes may be the relevant target for          This framework was tested using
high-income countries.                           country-specific case studies of spatial
    But at all stages of development, forcing    integration, which included Brazil, Ghana,
economic production to spread evenly across      India, Mexico, Russia, and Uganda. Each
areas is both elusive and expensive. Growth      set of integration policies is examined using
generally is unbalanced, but it always           three criteria: (1) Do they reduce economic
brings more resources for societies to bal-      distance across subnational areas? (2) Are
ance development outcomes. Policy makers         these policies pro-poor? (3) Are these poli-
should identify and execute strategies that      cies spatially efficient (that is, do these poli-
balance development outcomes across areas        cies avoid tradeoffs with spatial efficiency)?
by means other than resisting the forces of      Table 8.4 summarizes the findings. Efforts
unbalanced growth—because that is tanta-         to strengthen institutions fare well on all
mount to fighting economic growth itself.         three criteria. Although infrastructure
    The framework in this chapter is             investments may not reduce economic dis-
intended to help policy makers identify the      tances or help the poor, they can be spatially
policies best suited to addressing domes-        efficient. Geographically specific incentives
tic integration. The suggested solutions         do not fare well.
consider country-specific conditions. The             Perhaps most important, the chapter
main points? First, integration strategies       identifies the point at which all discus-
should increase the access of the poor in        sions of territorial development policies
lagging areas to opportunities, through a        should start—with spatially blind institu-
set of spatially blind institutions. Second,     tions. Infrastructure that connects lagging
infrastructure that connects lagging to          areas to markets can help nations integrate.
leading areas is needed when the problem         Sometimes, not always, these discussions
of distance between lagging and leading          should include spatially targeted incen-
areas is coupled with misplaced popula-          tives. The right mix of integration instru-
tion density in the lagging areas. Third,        ments will bring the benefits that come
when the problem of economic distance            from both unbalanced growth and inclu-
comes accompanied by both misplaced              sive development.
      CHAPTER 9   Winners without Borders
                  Integrating poor countries with world markets

                  M             any leaders in Africa called for a
                                political union of the continent
                                at the time of independence.
                  Félix Houphouët-Boigny, Côte d’Ivoire’s first
                  president, was more pragmatic, promoting
                                                                     economies within their neighborhoods and
                                                                     with the rest of the world. Regional and
                                                                     global integration have been complements,
                                                                     not substitutes, in the development of these
                                                                     regions (see box 9.1).
                  a gradual increase in economic cooperation             But in most of the developing world, con-
                  with neighboring countries. He proposed            centration and convergence have been slow,
                  one of the first regional economic agree-           often because of persisting economic, politi-
                  ments in Africa, the “Conseil de l’Entente,”       cal, and cultural divisions between coun-
                  backed by a solidarity fund provided mainly        tries (see chapter 3). These divisions make it
                  by Côte d’Ivoire. The key elements of the          hard for countries to take advantage of scale
                  Entente were free trade and free movement          economies (see chapter 4), mobile labor and
                  of people.1                                        capital (see chapter 5), and falling trans-
                      The preferred destination of migrants          port costs (see chapter 6). Some developing
                  was, naturally, Côte d’Ivoire. Its share of        countries have tried to globalize through
                  foreigners increased from 5 percent in             unilateral liberalization; others have tried
                  1950 to 26 percent of its 16 million people        to integrate regionally. There have been suc-
                  in 1998—making the country one of the              cesses and failures with both strategies. This
                  top dozen destinations for international           chapter deals with ways to combine these
                  migrants in the world. Côte d’Ivoire ben-          strategies by increased cooperation among
                  efited as foreign workers contributed to            neighbors and strong connections to world
                  export-led growth in industry and agricul-         markets, while recognizing and avoiding the
                  ture. Sending countries—especially Benin,          tradeoffs that can arise between these two
                  Burkina Faso, Niger, and Togo—benefited             approaches.
                  from remittances and increased trade. The              The chapter proposes regional integra-
                  political crisis triggered by a coup in 1999       tion as a mechanism to increase local supply
                  affected the entire region. But Houphouët-         capacity and global integration to improve
                  Boigny had vested his country’s neighbors          access to markets and suppliers. Integra-
                  in its future, earning the nickname of “The        tion means cooperation between countries
                  Sage of Africa.”                                   in trade, domestic regulations and policies,
                      Côte d’Ivoire reflects the main lines of        regional infrastructure, and other cross-
                  argument in this chapter. In today’s devel-        border initiatives, including public goods.
                  oped regions—Europe, North America,                Regional integration implies cooperation
                  and Northeast Asia—most economic activ-            within a neighborhood of countries. Global
                  ities are highly concentrated, their exports       integration implies cooperation at an even
                  are specialized, and living standards are          wider international level.
                  converging. These regions have overcome                This chapter’s framework for policy
260               national borders and have integrated their         action uses a taxonomy of neighborhoods
                                                                          Winners without Borders                                          261

to organize thinking about how best to con-
front the development challenges of each of         B OX 9 . 1   Are the policy messages of this Report
the developing world’s regions.
   The main strategies are as follows:
                                                                 anti–global integration? No.
                                                    World Development Report 2009              hood, which affected the long-term
•   Countries close to large world markets
                                                    focuses on regional integration            stability of the agreement and the
    should strive to benefit from proximity          because that is where considerable         willingness to respond to unexpected
    to high economic density and become             scope for policy action now lies. But      events. With many previous efforts
    an extension of the large markets. Mex-         this does not imply that the message       at regional integration having failed,
    ico, the Caribbean, the European Union          is against global integration. Quite       the pursuit of further regional agree-
    (EU) accession countries, and the Repub-        the contrary. This chapter argues that     ments has drawn considerable skepti-
                                                    regional cooperation boosts the sup-       cism in development circles.
    lic of Korea are linked, respectively, with
                                                    ply capabilities of a neighborhood             This chapter argues that, given
    the U.S., EU, and Japanese markets. But                                                    current conditions, this skepticism
                                                    by providing regional public goods
    integration must go beyond a simple             and taking advantage of regional           is misplaced. Instability stemming
    free trade agreement to gain significant         specialization. In this way, it can        from macroeconomic policy and
    development benefits. The biggest chal-          broaden the gains for each country         poor governance is far less common
    lenge is to make domestic markets attrac-       from global integration. In this sense,    today than even a decade ago, so it
    tive enough to investors to be seen as an       regional and global integration are        is less likely that a country will import
                                                    complements, not substitutes. With-        problems from its neighbor even if
    extension of the large market nearby.
                                                    out global integration, the benefits       their economies are integrated. And
•   Countries with big neighbors but far            from regional cooperation would be         with the decline in transport costs and
    from world markets should develop               small or negative, as was true of many     expansion in global trade, the benefits
    their regional market. This requires            past regional agreements. But with-        from successful export-led growth are
    two instruments: institutional reforms          out regional integration, the benefits     higher than ever. To compete, coun-
    that facilitate intraregional trade and         from globalization might simply be         tries are now more willing to harmo-
                                                    unattainable for some countries,           nize their policies and institutions with
    factor mobility—and infrastructure
                                                    because they cannot compete on a           others, so the prospects for regional
    investments that link lagging to lead-          global scale by themselves.                cooperation have grown substantially.
    ing countries and the region to major              For many countries, especially in       That may be one reason why, in June
    world markets. Regional integration can         Africa where global export market          2006, 56 regional, 49 regional exten-
    naturally support regional production           shares have fallen, the benefits of        sion (cooperation between a regional
    networks. These networks maximize               global integration have been ephem-        agreement and an individual country),
    production-cost advantages that come            eral. Global integration is sometimes      5 superregional (cooperation between
                                                    seen as risky, and progress in the         two or more regional agreements),
    with increasing returns to scale, and they
                                                    Doha Round on several issues central       and fully 118 bilateral agreements
    allow small countries to specialize in          to developing countries, such as agri-     were signed or initiated under the
    niche products in regional supplier net-        cultural trade, has been slow. In the      World Trade Organization (WTO). By
    works. Greater cost efficiency on the sup-       same vein, past regional cooperation       acting under the global rules of the
    ply side makes it easier for such regions       also did not yield significant benefits,   game, these agreements strive to rec-
    to then integrate with global markets.          and many regional agreements fell          ognize and avoid tradeoffs between
                                                    apart. Those experiences also high-        regional and global integration.
•   Countries far from world markets in
                                                    lighted the uneven gains across large
    Central Asia, the small Pacific Islands,         and small countries in a neighbor-         Source: WDR 2009 team.
    and Sub-Saharan Africa—the world’s
    “bottom billion”—face the stiffest chal-
    lenges to economic growth and need a
    strong commitment for cooperative solu-
                                                    munity can support these integration
    tions. Regional integration can occur in
                                                    efforts through coordinated incentives.
    “natural” neighborhoods with three sets
    of instruments. They need close institu-         East, Central, and West Africa fall into
    tional cooperation and comprehensive          the third category. Resource-poor coastal
    regional infrastructure investments, as       countries in these neighborhoods have
    with the others. But they also may need       been the poorest growth performers in the
    cross-country compensation mecha-             world relative to other world regions.2 For
    nisms to sustain the integration effort       them, the Report suggests a pact involving
    because deep integration is likely to lead    regional governments and the international
    to uneven short-term gains and losses         community to improve social services and
    across countries. The international com-      human capital in lagging countries and to
262   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      improve infrastructure in leading countries        chains) than they can by relying on sup-
      where takeoff is most likely. This should be       pliers in one country alone (see box 9.2).
      augmented by preferential access to devel-         Global integration provides the demand
      oped country markets for regional exports.         and incentive to develop such efficient
      In return, both leading and lagging coun-          regional supply networks. This combina-
      tries in these “natural neighborhoods”             tion of regional and global integration has
      would allow freer intraregional movements          produced successful developers in today’s
      of labor, capital, goods, and services.            rich neighborhoods.
          Today’s developing countries, as late-            Plant data add further detail to aggre-
      comers, face a stark choice: stay divided          gate econometric fi ndings.5 Firms export-
      and lose ground, or become winners with-           ing to regional markets are hurt more by
      out borders.                                       power outages and inefficient border pro-
                                                         cedures than are firms exporting to global
      Regional integration to scale                      markets, although fi rms exporting time-
      up supply, global integration                      sensitive products such as textiles to global
                                                         markets are hurt by inefficient borders as
      to scale up demand
                                                         well. The efficiency of firms dictates where
      Some countries, such as Chile, Mauritius,          they sell their products: the least efficient
      and the well-known East Asian tigers, have         sell only in domestic markets, others serve
      integrated globally without much coop-             both regional and domestic markets, and
      eration within their world region. They            the most efficient are involved in domestic,
      enjoyed significant first-mover advantages.          regional, and international markets.6
      But many other developing countries have              A successful integration policy will con-
      found this hard to achieve, and some won-          centrate economic activities in places with
      der if the emergence of highly competitive         better access to markets and inputs, whether
      exporters like India and China makes the           subnational, national, or regional. Integra-
      likelihood of a successful export-led strat-       tion could lead to income divergence in a
      egy even lower today.                              regional neighborhood for a while, before
         The counterargument is that the range           successive waves of lagging countries catch
      of goods in which a country can develop a          up with the leading countries as growth
      comparative advantage has expanded along           spills over to the neighborhood. When the
      with the growth in global trade. Intermedi-        integration process is market driven, as in
      ate goods and services, more tradable and          East Asia, production factors will relocate
      traded, provide developing countries with
                                                         and promote convergence in country per
      a broader range of diversification oppor-
                                                         capita incomes within the neighborhood
      tunities than before.3 Empirical evidence
                                                         (see chapter 3). But when it is institution
      suggests this is true even for Sub-Saharan         driven, as in most developing neighbor-
      Africa.4 Across individual countries within        hoods today, political economy challenges
      each of nine Sub-Saharan African neigh-            can become major concerns.7
      borhoods, imports in the previous year
      of intermediate goods from neighbors are           Regional and global integration
      positively correlated with total exports in        imply tradeoffs
      the current year. As the level of interme-         Regional integration agreements, complex
      diate imports grows larger and crosses a           to negotiate, implement, and maintain,
      threshold, this effect becomes noticeably          are intensive in the use of administrative
      stronger.                                          resources. Efforts to align regional institu-
         These fi ndings show that higher exports         tions through such agreements can come at
      occur when countries cooperate regionally          the expense of domestic administration and
      (in terms of scale economies, greater fac-         unilateral liberalization that can determine
      tor mobility, and lower transport costs)           a country’s integration with the rest of the
      as well as integrating globally. Regional          world. Regional agreements also prevent
      cooperation means that firms in neighbor-           countries from pursuing more rapid global
      ing countries can produce final goods more          integration, when some members within a
      cheaply (by building international supply          region want to move more slowly.
                                                                               Winners without Borders                                           263

   B OX 9.2    Diversifying production through regional cooperation
   Diversifying an economy is no easy task.       be facilitated in several ways. Foreign           Nearly all members of the West African
   Hidalgo, Barabasi, and Haussman (2007)         direct investment can provide much of          Economic and Monetary Union can ben-
   show that the current export structure         the required information and know-how.         efit from cooperation in at least seven
   of a country determines how easy it will       So can learning from one’s neighbors.          product clusters (fruits and vegetables
   be to diversify its production base over       Cooperation between neighboring coun-          and their products, wood and its manu-
   higher-value products. They use the            tries can therefore help, providing the        factures, cotton, low-tech manufactures,
   metaphor of a forest representing the          scale attractive for foreign investors and     chemicals, and minerals) to reduce their
   product space (the same for all countries      the access to critical intermediate goods      overdependence on traditional agricul-
   in the world). Each tree is a product, and     that makes the leap to a new product less      tural exports, such as coffee and cocoa.
   firms are monkeys that can climb higher        costly and risky. Cooperation can provide         Southern Africa Customs Union mem-
   on a tree to improve their value added         an outlet for intermediate goods produc-       bers, except for South Africa, can gain
   (intensive diversification) or jump to         ers who sell to innovating firms elsewhere     significantly more than other unions from
   another tree with higher value (extensive      in the neighborhood.                           cooperation in natural-resource-based
   diversification).                                 When African exports during 1980–           and manufacturing clusters, because they
      Developing country firms find it easiest    2004 are mapped against a global prod-         have much easier diversification options
   to grow through intensive diversifica-         uct space of some 800 products (four-digit     driven by the logistics, finance, skills, and
   tion, which builds on capabilities they        industries), the Central African Economic      infrastructure that reflect their middle-
   already possess. The alternative, required     and Monetary Community appears to              income status.
   at higher incomes or in response to even       have only a few options for diversification       By looking at which areas of economic
   lower-cost competitors, is to jump to          (wood and its manufactures). Members           activity offer the most promise for further
   higher value trees. Even if a country is       of the East African Community have             development, countries can focus coop-
   lucky enough to have such higher value         more options because their exports are         eration on sector-specific infrastructure,
   trees close to its production base, the        more diversified (fruits and vegetables,       such as common standards, compliance
   jump remains costly and risky. It may          prepared food, fish, wood and its manu-        and metrology systems, and specific cur-
   require physical infrastructure, specific      factures, cotton, textiles, low-tech manu-     ricula to build a skilled labor force and
   know-how, knowledge of the tastes and          factures, metallic products, chemicals,        adapt new technologies. That can serve
   standards in the targeted markets, and         and minerals). Other countries with similar    as a complement to the general areas of
   easy and cheap access to specific inputs.      production structures have gone on to          cooperation in regional infrastructure,
   Haussman and Rodrik (2003) called these        diversify into such clusters as cotton, tex-   better business regulations, and a strong
   initial investment needs “cost discovery,”     tiles, and garments, which currently enjoy     judicial systems.
   a search by the first firms to explore these   preferences under the African Growth and       Based on contributions from Vandana Chan-
   new opportunities. Cost discovery can          Opportunity Act in the U.S. market.            dra, Jessica Boccardo, and Israel Osorio.

   The regional versus global debate is not           welfare improving than multilateral trade
new. It revolves around the welfare impli-            agreements if intercontinental transport
cations of potential trade diversion and              costs are much higher than intracontinental
trade creation compared with the first-best            trade costs.11 There are also noneconomic
welfare- improving effects of unilateral lib-         gains to regional integration initiatives,
eralization or multilateralism.8 Yet a “new           such as greater peace and security as well as
regionalism” debate has been launched                 increased bargaining power in international
with the recent proliferation of free trade           forums.12 These noneconomic motives are
agreements. One side of this debate sees in           sometimes more important than the eco-
regional integration a competitive liberal-           nomic in the decision to sign regional inte-
ization process that will ultimately support          gration agreements.
global integration.9 The other side sees the             Regional integration can take many
emergence of “spaghetti bowls” impeding               forms, from formal treaties regulating
global integration.10                                 many aspects of economic exchange and
   This debate will not be readily con-               cooperation to informal, de facto integra-
cluded. But the lens of the new economic              tion that follows from the private sector–
geography gives it a different perspective.           led deepening of economic ties. This variety
Some have argued that when physical geog-             allows for a different dynamic. While global
raphy is properly included in trade models,           agreements are comprehensive and rare,
regional trade agreements can be more                 regional agreements can start small and
264   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      move at a pace and scope with which each               Regional integration implies comple-
      party is comfortable. Each region needs to         mentary policy actions by participating
      find the path that allows it to benefit from         countries. The larger the number of par-
      both regional and global integration.              ticipants, the more complex the coordina-
                                                         tion, with a higher risk of failure. Specific
      Developed neighborhoods provide                    agreements based on country interest can
      useful insights—think big, start small             build variable-geometry regional integra-
      Successful neighborhoods in Europe, North          tion in which countries (or areas within
      America, and Northeast Asia provide three          countries as with the “growth triangle” in
      lessons for the design and implementation          East Asia) deepen their cooperation at their
      of regional and global integration initia-         own speed. Such cooperation on trade and
      tives: think global, start small, and com-         nontrade issues can gradually build a stron-
      pensate the least fortunate.                       ger neighborhood. This does not preclude
          Think global. For all developing neigh-        specific continentwide initiatives to carry
      borhoods, the most important export mar-           out projects with high fi xed costs, such as
      kets are outside the region. The Republic of       launching and maintaining a satellite.
      Korea, Mexico, and Romania are fortunate to            Compensate the least fortunate.
      be close to one of these large world markets,      Regional integration can produce win-
      but most nations are not. The main goal of         ners and losers across countries—at least
      any regional integration process should thus       in the short term.16 If two countries with
      be to promote sound export-led growth.             different domestic infrastructure integrate,
      Indeed, the success factor of regional inte-       the country with the better infrastruc-
      gration agreements is “open regionalism,”          ture will attract more industrial activities,
      setting low external tariffs and suppressing       which may deepen differences in income
      all the internal ones.13 This is a key differ-     and employment.17 Building a sustainable
      ence from the first wave of regionalism in          neighborhood of countries with different
      the 1970s, which simply extended inward-           endowments is thus helped by a compensa-
      looking import-substitution policies from          tion mechanism to ensure equitable shar-
      countries to regions.                              ing of the gains from integration. In the
          Start small. Regional integration ini-         EU, rich members subsidize infrastructure
      tiatives do not need to address all issues         development in poorer member nations. In
      immediately. Nor do they need to involve a         the Association of Southeast Asian Nations
      whole continent at once. The Latin Ameri-          (ASEAN), richer member countries have
      can and Sub-Saharan experiences in the             programs specifically designed to assist
      1970s show that comprehensive agreements           poorer member countries—the Integrated
      involving a large number of countries often        ASEAN Initiative. Some regions also have
      remain “paper agreements.”14 The Euro-             bilateral aid programs for their poorer
      pean Union started with a narrowly focused         neighbors.
      agreement—the European Coal and Steel                  One approach to compensation is pool-
      Community (see “Geography in Motion,               ing customs revenues collected in customs
      Overcoming Division in Western Europe”).           unions and redistributing them accord-
      The North American Free Trade Agreement            ing to each member’s development needs.
      (NAFTA) started with a free trade agree-           The West African Economic and Monetary
      ment for automobiles, between the United           Union (WAEMU) adopted a common exter-
      States and Canada.15 East Asia’s regionaliza-      nal tariff in 2000, and introduced a 1-percent
      tion accelerated in the 1980s, with Japanese       levy on all third-party imports to build a
      multinationals setting up manufacturing            compensation fund. By September 2006,
      export platforms across the region. Often          $500 million had been collected and shared.
      regional integration can start without a for-      Côte d’Ivoire and Senegal, the richest mem-
      mal agreement of any kind but with a state-        bers of WAEMU, contributed 60 percent of
      ment of intent for strategic cooperation that      the funds but received only 12 percent. Such
      gives firms comfort that any disputes will          transfers are politically feasible if the wealth-
      be resolved quickly and fairly.                    ier countries realize that they will benefit in
                                                                              Winners without Borders                                        265

the long run if their neighborhood prospers.          enough to trigger or sustain industrialization,
Revenue-sharing initiatives are strengthened          or that lack the capabilities to diversify and
by the involvement of a developed country as          advance up the value chain. Different coun-
an external partner willing to subsidize the          tries thus face different problems that require
process. The Economic Partnership Agree-              different policy responses to integrate them
ments (EPAs) currently being negotiated               into the global economy. Integration happens
between the EU and African, Caribbean,                largely through private activity in trade and
and Pacific countries are examples (see box            factor mobility. But most of the institutions
9.3).                                                 or infrastructure needed to connect a region
                                                      to the global economy are public goods,
Building integrated                                   requiring collective action to overcome coor-
neighborhoods: a framework                            dination problems and externalities.
                                                          Three types of policy instruments can be
The “thickness” of country borders is a self-
                                                      used to pursue regional integration. They
imposed obstacle to development, with iso-
                                                      also help with global integration.
lation increasing the economic distance to
markets (see chapter 3). On top of division,          •   Institutional cooperation can address coor-
some neighborhoods have small countries                   dination problems within neighborhoods
whose local markets are simply not large                  and foster greater scale economies.

   B OX 9.3    Economic partnership agreements between the EU and African, Caribbean, and Pacific
               countries can be made better
   Until 2007 the EU granted nonreciprocal           The goal is ambitious. The EPAs give     thus improving political and economic
   trade preferences to African, Caribbean,       incentives to ACP countries to increase     stability and creating a better business
   and Pacific (ACP) countries. This policy       regional trade and cooperation, unlike      and investment climate.
   did not comply with the WTO principle of       the previous arrangements that favored         One of the most difficult issues is the
   most-favored-nation treatment, but got a       a hub-and-spoke structure, discourag-       expected loss in tariff revenues, which
   temporary waiver that expired in Decem-        ing interaction with neighbors. And         are, on average, about 2 percent of gross
   ber 2007. The economic partnership agree-      while the previous trade preferences        domestic product (GDP) for Sub-Saharan
   ments (EPAs) between the EU and the ACP        were determined unilaterally by the EU,     countries. But for some, the loss can be 4
   countries are a new approach to promot-        the EPAs are jointly negotiated. Under-     to 6 percent of GDP, a sizable fraction of
   ing trade and achieving more general           standably, some countries are unwilling     the public purse. A phased reduction in
   development goals at the same time.            to cooperate on issues in which they        tariffs is designed to mitigate big declines
      In 2003 the EU started negotiating EPAs     might lose. But the EU can provide          in government revenues. Over the long
   with six self-defined ACP regions: the         incentives—like aid—to help overcome        term, the lost tariff revenues need to be
   Caribbean (CARIFORUM), Central Africa          such differences.                           replaced through reforms of domestic tax
   (CEMAC), Southeast Africa (ESA), West             Experience shows, however, that          and tax administration. A more radical
   Africa (ECOWAS), Southern Africa (SADC),       (North-South) trade liberalization alone    approach would be for the EU to provide
   and the Pacific.                               does not promote economic develop-          budget support to the most affected
      At the core of the EPAs are regional        ment. So the EPAs try to improve the        countries over a predetermined transition
   trade agreements between the EU and            coherence between trade and devel-          period.
   each of the six regions. The export struc-     opment. Besides trade in goods, the            Another issue involves complicated
   ture from these regions to the EU is het-      EPAs include trade in services as well as   rules of origin that need to be simplified
   erogeneous, often reflecting dependency        investment, public procurement, and         and liberalized. Technical assistance is
   on just a few products. But the EPAs are       competition law. Although the agree-        also needed to enable developing coun-
   broader in scope. They will extend 100         ments on trade of goods and services        tries to fulfill EU standards and stimulate
   percent duty-free and quota-free market        are about mutual—though asymmet-            a supply response to enhanced market
   access into the EU from each region (with      ric—trade liberalization, the trade-        access. “Aid-for-trade” programs provide
   simplified EU rules of origin) while permit-   related issues follow another route.        resources for such efforts.
   ting ACP countries to open their markets       They aim to support regional integra-
   to a lesser extent (on average 80 percent      tion by common regional regulation,
   within 15 years).                              harmonization, and implementation,          Contributed by Sebastian Vollmer.
266                                          WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                             •   Regional infrastructure, strategically                attractive the neighborhood of a country,
                                                 linking the neighborhood to the lead-                 the less attractive the individual country,
                                                 ing world markets, can reduce transport               particularly when its local market is tiny.
                                                 costs.                                                    Now that tariff preferences have fallen,
                                             •   Coordinated incentives involving all the              behind-the-border barriers are more impor-
                                                 neighborhood’s stakeholders and donors                tant determinants of the pattern of trade.
                                                 from the leading world markets can pro-               And by aligning domestic and international
                                                 mote factor mobility and converging                   standards and institutions, a neighborhood
                                                 living standards between leading and                  can improve its attractiveness for foreign
                                                 lagging countries in the neighborhood.                direct investment (FDI) and increase its
                                                                                                       opportunities for trade, particularly impor-
                                             Institutional cooperation                                 tant given the need to connect to regional
                                             Behind-the-border reforms. Institutional                  and global production networks and mar-
                                             cooperation—such as mutual recognition                    kets. For instance, the crisis facing the fish-
                                             agreements on technical and business pro-                 processing sector in Kenya in the 1990s
                                             cedures, adoption of international stan-                  would have been less severe if raw and semi-
                                             dards, and macroeconomic convergence                      processed fish providers in Kenya, Tanzania,
                                             frameworks—expands the size of regional                   and Uganda had all cooperated to adjust to
                                             markets, supporting scale economies.                      EU hygiene standards.20 Many countries
                                             Indeed, domestic and foreign firms assess                  in Sub-Saharan Africa are now aiming for
                                             investment opportunities and related gov-                 such cooperation.21
                                             ernment policies and the business environ-                    At-the-border policies. Facilitating the
                                             ment—such as property rights, regulation,                 flow of capital, labor, and intermediate
                                             taxes, fi nance, infrastructure, corruption,               inputs is a precondition for cross-border
                                             and macroeconomic stability—as part                       production networks. The WTO provides
                                             of a package that determines a country’s                  a framework for such liberalization that
                                             attractiveness for investment.18 Another                  permits the scope of agreements to vary.
                                             part is the quality of the legal system,                  Almost all new regional trade agreements
                                             which increases equity investments and                    include provisions on service liberalization,
                                             firm sizes.19 These effects spill over even to             but some of these services are embodied in
                                             countries with better institutional endow-                people and require corresponding agree-
                                             ments in leading world markets. The less                  ment on labor mobility, on which there is
                                                                                                       little uniformity (see table 9.1).22 Movement
                                                                                                       of labor raises economic and political con-
Table 9.1   Few regional agreements provide for full mobility of labor
                                                                                                       cerns that appear to be far higher than for
                                                                                                       traded goods or investments, so few agree-
 Degree of mobility
 stipulated                       Agreement
                                                                                                       ments provide the kind of mobility required
                                                                                                       for countries and people to benefit fully.
 Full labor mobility              European Union, Agreement on the European Economic Area,
                                  European Free Trade Association, Australia–New Zealand                   Financial and monetary cooperation
                                  Closer Economic Relations, Economic Community of West                improves capital mobility and increases a
                                  African States                                                       region’s attractiveness to FDI, especially for
 Market access for certain        Caribbean Community, North American Free Trade Agreement,            small countries.23 Indeed, small fi nancial
 groups                           Europe agreements, Group of Three, and Canada-Chile, U.S.-           markets tend to be less competitive and less
                                  Singapore, U.S.-Chile, Japan-Singapore Free Trade Agreements
                                                                                                       efficient because they cannot exploit the sub-
 Based on GATS mode 4,            ASEAN Free Trade Area, Euro-Med Association Agreements,              stantial economies of scale in financial mar-
 with additional provisions       New Zealand–Singapore Closer Economic Partnership,
 or limitations                   Southern Common Market agreement, and EU-Mexico,                     kets. Some market segments may be missing,
                                  EU-Chile, MERCOSUR, U.S.-Jordan Free Trade agreements                and small markets are less able to diversify
 No effective provisions for      Asia Pacific Economic Cooperation Forum, South Asian                  investments and operational risks. The
 labor mobility                   Association for Regional Cooperation, Central European               regulatory structure tends to be more costly
                                  Free Trade Agreement, and Common Market for Eastern and              and of lower quality in small markets, and
                                  Southern Africa
                                                                                                       ancillary services such as credit information
Source: World Bank 2004a, updated by the WDR 2009 team.
Note: ASEAN = Association of Southeast Asian Nations; GATS = General Agreement on Trade in Services;   are more difficult to maintain. Regional and
MERCOSUR = Southern Common Market.                                                                     global trade in financial services is the best
                                                                               Winners without Borders                                                  267

way to cope with being small—by opening          administrations gradually align their pro-
national markets to foreign financial inter-      cedures with EU standards. The goals are to
mediaries, by fully or partially integrat-       reduce the processing time for traders and
ing with a regional fi nancial system, and        transporters, reduce facilitation payments,
by gradually opening national markets to         reduce corruption related to international
international capital flows. The benefits of       transport and trade, and improve the effec-
regional financial integration increase as a      tiveness of controls and antismuggling
group of countries moves toward a single         efforts. The results provide an encourag-
currency, a single central bank, and a single    ing precedent for replicating and scaling up
licensing and regulatory system for financial     regional trade elsewhere.
services firms.24 But such integration also
reduces the policy flexibility in responding      Regional infrastructure
to shocks.                                       Regional transport infrastructure reduces
    Efforts beyond borders. Developing           the economic distance between trading
countries, particularly the landlocked,          partners, both within the neighborhood
are hurt by high transport costs due to          and between the neighborhood and leading
expensive and unreliable freight services.       world markets. Electricity, water, telephone
They have overregulated transport sectors,       lines, and Internet access all raise produc-
inefficient logistics services, oligopolistic     tivity but are severely inadequate in many
freight forwarders, as well as roadblocks        developing regions (see table 9.2). Many
and demands for bribes along international       countries could benefit by coordinating
corridors.25 Each day a product is delayed       and cooperating in infrastructure provi-
before being shipped is estimated to trans-      sion. Hydropower development launched
late into an increase in the distance to its     in 1997 by Mali, Mauritania, and Senegal
trading partners by 70 kilometers, reduc-        lowered costs and improved access, reliabil-
ing its trade volume by 1 percent.26 Land-       ity, and quality of electricity supply.29 The
locked countries, in particular, would enjoy     East Caribbean telecommunications proj-
greater exports if their neighbors improved      ect, implemented in 1998, increased access
the quality of their transport logistics and     to telecom services, reduced prices, and
customs procedures: it is estimated that a       increased employment opportunities.
one standard deviation improvement in a
landlocked country’s logistics together with
one standard deviation improvement in its
neighbors’ logistics would raise the land-       Table 9.2 Sub-Saharan Africa, South Asia, and the Middle East and North Africa are most
locked country’s exports by 74 percent.27        affected by unreliable infrastructure, East Asia the least
    Beyond-the-border institutional reforms                                                                       World regions
facilitating trade and transport in a neigh-                                          EAP        ECA       LAC        MNA      SAR        SSA      OECD
borhood can greatly increase the efficiency
                                                  Delay in obtaining an                19.4       9.3      32.9       53.7        56.3    43.8       9.7
and reliability of logistics chains. Central      electrical connection (days)
Asia and Sub-Saharan Africa, whose inter-
                                                  Number of electrical                  9.3      14.0      17.8       46.1     121.5      56.4       1.5
national competitiveness is seriously affected    outages (days)
by high transport costs, are now exploring        Value lost due to electrical          2.5       3.1       3.6        4.2         5.6     5.7       2.3
corridor approaches that have worked well         outages (% of sales)
elsewhere, as in Southeastern Europe.28           Number of water supply                3.5       7.5      14.5       41.7        12.0    37.2       0.3
    In 1998 six countries asked for World         failures (days)
Bank support in designing a regional pro-         Delay in obtaining a mainline        15.8      13.4      45.1       49.9        66.3    58.4       9.0
gram of trade and transport facilitation in       telephone connection (days)
Southeast Europe. By 2004 eight countries         Firms using the Web in               23.7      56.7      40.9       34.2        29.2    20.4      80.2
were involved: Albania, Bosnia and Herze-         interaction with clients/
govina, Bulgaria, Croatia, FYR Macedonia,         suppliers (%)
Moldova, Romania, and Serbia and Mon-            Source: World Bank ICA database.
                                                 Note: EAP = East Asia and the Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean;
tenegro. The initiative reduces transport        MNA = Middle East and North Africa; SAR = South Asia Region; SSA = Sub-Saharan Africa; OECD =
costs, fights corruption, and helps customs       Organisation for Economic Co-operation and Development.
268                                   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                          Regional infrastructure is an important        neighboring countries to the backbone
                                      part of regional integration, but it often         infrastructure and free entry by firms into
                                      requires considerable outside financial sup-        national markets. But the rapid spread of
                                      port because the upfront costs can be high.        mobile phone coverage in Africa still leaves
                                      Cross-border project preparation is com-           out many areas (see map 9.1).
                                      plex, and individual countries may not have           Mobility-enhancing regional infrastruc-
                                      local capacity to conceptualize the technical      ture. Cooperation in higher education and
                                      design and to build a consensus.30 And the         training can not only increase the endow-
                                      legal and regulatory framework to facilitate       ment of skilled workers but also enhance
                                      the provision of cross-border infrastructure       labor mobility as students from different
                                      is often lacking. All these constraints can        countries establish cross-country networks.31
                                      prevent promising regional infrastructure          French cooperation and the EU Commission
                                      projects from getting to the bankable stage.       sponsor a network of three statistical schools
                                          Three types of regional infrastructure and     in Abidjan (Ecole Nationale Supérieure
                                      related services enhance scale economies, fac-     de Statistique et d’Economie Appliquée,
                                      tor mobility, and trade between countries.         ENSEA), Dakar (Ecole Nationale d’Economie
                                          Productivity-enhancing regional infra-         Appliqué, ENEA), and Yaoundé (Institut
                                      structure. Power, mobile phones, Internet          Sous-regional de Statistique et d’Economie
                                      connectivity, and major trunk roads can all        Appliqué, ISSEA), training highly qualified
                                      generate revenue through fees. The produc-         statisticians for French-speaking African
                                      tivity increases from these infrastructure         private and public enterprises.32 Recogniz-
                                      services translate into a high willingness         ing the importance of mobility-enhancing
                                      to pay. Private firms will provide regional         regional infrastructures, a high-level panel
                                      infrastructure when it is profitable—as             of the African Development Bank has pro-
                                      with the South Atlantic 3 (SAT3) marine            posed centers of excellence in research, ter-
                                      cable connecting West Africa to the global         tiary education, and vocational training in
                                      fiber optic network, or the Regional African        collaboration with the private sector.33
                                      Satellite Communications Organization                 Trade-enhancing regional infrastruc-
                                      (RASCOM) public-private partnership to             ture. Good transport infrastructure reduces
                                      provide satellite telecommunications cov-          transport costs, which in turn increases
                                      erage in Africa. Regional cooperation can          trade flows.34 Some observers have argued
                                      provide a sound regulatory framework               that there is little potential for intraregional
                                      that, for example, permits free access of          trade within developing neighborhoods

Map 9.1 Mobile phone coverage has spread rapidly in Africa
Global System for Mobile communications network coverage

 January 1999                                    March 2002                                  September 2006
Source: Buys and others 2008.
                                                                                         Winners without Borders                                            269

because the small size of economies will not                   reason for the collapse was that El Salvador
create significant trade flows.35 If so, improv-                 gained much more from regional coopera-
ing the quality of regional roads would have                   tion because of its better infrastructure.39 In
no impact on intraregional trade. But recent                   1977 the East African Community of Kenya,
studies suggest otherwise.                                     Tanzania, and Uganda also collapsed after
   Trade models show that regional invest-                     disagreements over the benefits that would
ments to pave all the unpaved interstate                       be received from common regional services
roads would increase the intraregional trade                   such as airline, harbors, and telecommunica-
of West African countries threefold—and                        tions—as well as over ideological differenc-
boost the region’s trade with the rest of the                  es.40 Sound compensation mechanisms and
world.36 Upgrading the main highway net-                       better communication about longer-term
work in Sub-Saharan Africa could expand                        gains for all participants can reduce the risk
overland trade by about $250 billion over 15                   of failure of such initiatives.41
years, with major benefits for the rural poor,                      Consider a taxonomy that incorporates
while requiring about $20 billion for initial                  the three essential properties of public
upgrades and $1 billion annually for main-                     goods: nonrivalry, nonexcludability, and
tenance.37 In Central Asia road upgrades                       aggregated contributions (see table 9.3).42
could increase trade by half, exceeding the
expected gains from tariff reductions or
                                                               •   Nonrivalry implies that several groups or
                                                                   individuals can consume the good with-
trade facilitation programs of comparable                          out diminishing its value. Clean air and
scope. Total intraregional trade in Eastern                        water are common examples.
Europe and Central Asia could be increased
30 percent by upgrading roads in just Alba-                    •   Nonexcludability means that no one can
                                                                   be prevented from consuming the good.
nia, Hungary, and Romania.38
                                                                   There is an incentive to leave the cost of
Coordinated incentives                                             provision to a third party.
Coordinated incentives can address market                      •   Aggregated contributions relate to resource
failures and disputes between countries in a                       pooling to finance public goods. Com-
regional association. The Central American                         monly, the willingness to contribute
Common Market, created in 1960 by El Sal-                          decays over time.
vador, Guatemala, Honduras, and Nicaragua,                        Each of these properties requires a coordi-
faced periodic complaints about redistribut-                   nated response or some mechanism for equi-
ing benefits to Honduras and Nicaragua.                         tably matching benefits and costs, or else the
The agreement collapsed in 1969 following                      good will be underprovided. The quantity
conflict between El Salvador and Honduras.                      and quality of the public good both depend
Some studies suggest that the underlying                       on member contributions. In some instances,
Table 9.3 Regional “club goods” can easily be provided because costless exclusion is possible
Regional public goods, types, and examples
                                                                                                                     Impure public goods
                                                   Pure public goods (nonrival,
 Impact of aggregated contributions                nonexcludable)                        Goods for which exclusion is easy           Shared public services
 Each contribution has the same impact on          A clean lake                          Transnational park                          Preserving the rain forest
 the quality and quantity
 Countries more interested in the good can         Curbing the spread of HIV/AIDS        Power grid                                  Eliminating transnational
 contribute more                                                                                                                     terrorist threats
 Contribution of weakest member                    Implementing international financial   Airport hub-spoke network                   Preventing and mitigating
 determines the quantity and quality               standards                                                                         natural disasters
 Contributions of weaker members                   Forestalling the spread of pests      Transport infrastructure                    Providing Internet
 determines the quantity and quality                                                                                                 connectivity
 Contribution of leading countries                 Eradication of a disease              Satellite launch facility                   Regional peacekeeping
 determines the quantity and quality
 Contribution of strongest member                  Discovering an effective treatment    Biohazard facility                          Agricultural research and
 determines the quantity and quality                                                                                                 bioprospecting
Sources: Sandler 2002, adapted by the WDR 2009 team.
270   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      each member is equally important. In oth-          Development Community (SADC), for
      ers, the public good depends on the weakest        instance, promoted the Southern Africa
      or strongest member, or some combination.          Power Pool to take advantage of the dis-
      This taxonomy suggests that the nature of          tribution of power sources in the region.
      regional cooperation varies depending on           The Central American Electricity Connec-
      the goal.                                          tion System was initiated in 2005 under the
         When the regional public good is sensi-         umbrella of the Central American Com-
      tive to the performance of the weaker mem-         mon Market (CACM). So an umbrella
      bers, as in a hub-and-spoke airport network,       agreement can spawn smaller agreements,
      the challenge for the other members is to          or small agreements can be consolidated
      raise the performance of the weaker links          into umbrella agreements. The path is a
      to an acceptable standard. This can be done        tactical choice.
      through cross-country subsidies, as in the            In the same vein, there is a choice
      EU structural funds. In poor neighbor-             between starting with aggregate political
      hoods, foreign aid may be the only feasible        agreements, as in the EU enlargement, or
      way to ensure the provision of such public         starting with economic ties, as in East Asia,
      goods. If the good depends on the best-            with ASEAN+3. Both approaches have
      performing member of the neighborhood,             seen success and failure. The United Arab
      such as targeted agricultural research, the        Republic joining Egypt and Syria in 1958
      weaker members may be asked to contrib-            foundered in part because of its limited
      ute to stronger members, or foreign assis-         economic advantages. The First East Afri-
      tance can facilitate its provision.43              can Community started in 1967 as an eco-
         Trust is especially important in regional       nomic grouping, but collapsed 10 years later
      cooperation. For the waters of the Nile, the       because of political divisions between the
      Arab Republic of Egypt and Sudan, two              major countries. It has since been revived,
      countries that were culturally and politi-         but the forces for economic and political
      cally closer, built the Aswan High Dam             union remain divided.
      near their common border instead of coop-
      erating with Ethiopia, where a dam might           The geography of regional integration
      have been more efficient for the electricity        Looking at the world’s neighborhoods
      and water needs of all three countries.44          through the lens of market access highlights
      International organizations can help build         the role of the three major world markets:
      trust, as in the Aral Sea Basin rehabilita-        Europe, North America, and Northeast
      tion. Another example is the “development          Asia, rich neighborhoods where most of
      diplomacy” used to resolve the Indus River         the world GDP is clustered (see chapter 3).
      Basin dispute between India and Pakistan,          Proximity to these markets, the thickness
      with the World Bank facilitating coopera-          of borders, and the fragmentation of world
      tion. This diplomacy was recognized by the         regions reveal the potential market access
      then–World Bank President Eugene Black             of all countries (see map 9.2).48
      as “the most important thing the Bank has             Adding up the country scores for poten-
      ever done, by far.”45                              tial market access produces three broad
         Specific regional agreements can get            types of developing regions:
      things started, but they can also lead to
      multiple and at times overlapping agree-           •   Type 1 countries are in regions close to large
      ments, weakening coordination. Many                    world markets, where the market access
      developing regions need to rationalize their           score is dominated by proximity to the
      regional economic communities and clar-                densest areas in the world. They include
      ify relations with river basin or power pool           those on the periphery of the two larg-
      organizations.46 Broader regional agree-               est markets: North America and Western
      ments can foster trust, provide an institu-            Europe. The neighborhoods are Cen-
      tional framework for compensation that                 tral America and the Caribbean, Eastern
      facilitates bargaining, and allow for more             Europe, and the Middle East and North
      effective sanctions.47 The Southern African            Africa.
                                                                                                   Winners without Borders                                                    271

Map 9.2 Density, distance, and division combine to determine access to markets
Real market access, relative to the United States in 2003

                 Real market
                 access relative to the
                 United States, 2003
                      < 0.040
                      > 0.910
                      No data

Source: Mayer 2008 for this Report.
Note: To compute potential market access: Each country is assigned a score for the size of its own market (real GDP) and the size of international markets with which it can trade.
This is computed by weighting the GDP of other countries by the inverse of a measure that combines physical distance, transport costs, and barriers to trade to show how difficult
it is to access these markets. The measure, which is expressed relative to the market access of the United States, essentially combines all three spatial dimensions of density,
distance, and division into a composite of potential market access. This map is a complement to the map showing foreign market access in box 6.6.

       For these countries, the major prob-                             North America, they can serve as a con-
    lem is division between themselves and                              duit to accessing markets everywhere. In
    major markets. The main instruments                                 some regions, like those in South Asia,
    for integration will be institutional: for-                         political considerations also preclude
    mal regional trade agreements, more                                 economic integration of all the countries
    limited sector-specific agreements (on                               in the neighborhood.
    labor mobility or natural resource-shar-                               These countries have moderate
    ing), and harmonization of standards                                market access potential (see map 9.3).
    and regulations—all implemented with                                Their distance from major markets
    or without formal regional bodies.                                  holds down their overall score, but the
•   Type 2 countries are in regions with big                            presence of large developing country
    neighbors far from world markets. They                              neighbors can offset this score to some
    include the neighborhoods of the devel-                             degree. Brazil, China, Nigeria, the Rus-
    oping world’s giants—Brazil, China,                                 sian Federation, and South Africa are
    India, and South Africa. Although these                             examples of large emerging economies
    are potentially large markets, growth has                           that add considerably to the market
    not yet been sustained long enough and                              access scores of their immediate neigh-
    many domestic distortions remain.49                                 bors. For countries in these neighbor-
    Integration with them runs a risk—to                                hoods, division is compounded by
    different degrees in different parts of the                         distance. Appropriate instruments
    world—of exposing a neighbor to vola-                               include institutional and infrastruc-
    tility and of importing inefficiency from                            ture development, including regionally
    the large neighbors’ domestic structures.                           shared utilities, transport corridors
    But because their market potential is                               and hubs, and a range of other regional
    attractive to enterprises in Europe and                             public goods.
272                                     WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

Map 9.3   Potential access to major world markets distinguishes the developing world’s regions

                                                                    Regions with
                                                                         High-income countries
                                                                         Countries close to world markets
                                                                         Large countries far from world markets
                                                                         Small countries far from world markets

Source: WDR 2009 team.

                                        •   Type 3 countries are in regions far from              markets pose barriers to the beneficial flows
                                            world markets, without a big neighbor.                of people, goods, capital, and ideas.
                                            They make up the “bottom billion”                        For each of these country types, the eco-
                                            described in Collier (2007) and con-                  nomic integration strategies and priorities
                                            sist of Central Africa, Central Asia and              will differ (see table 9.4). As the potential
                                            Caucasus, East Africa, the small Pacific               for market access becomes lower, the com-
                                            Islands, and West Africa. Many of these               plexity of the integration problem becomes
                                            countries are falling behind because                  greater, and a broader range of instruments
                                            they are trapped in conflict, suffer from              is required to manage integration effec-
                                            a natural resource curse, are landlocked              tively. For each dimension of the integra-
                                            with bad neighbors, or are small with                 tion challenge, this chapter proposes an
                                            bad governance.                                       instrument for integration—“an I for a D.”
                                               A range of countries, mostly small,                   Some countries do not fit neatly into
                                            have low market access potential. Hav-                any of these three types, such as Chile and
                                            ing to contend with being far from major              Russia. Chile is a relatively small country
                                            markets, these countries face division,               far from major markets. But it has grown
                                            distance, and low economic density. In                by exporting to world markets without
                                            addition to institutional and infrastruc-             significant regional integration. Russia is
                                            ture instruments, they need coordinated               another special case because of its peculiar
                                            incentives for regional integration. The              economic geography that spans eleven time
                                            incentives include transfers from cus-                zones, connected to Europe at its most pop-
                                            toms unions and other revenue sources,                ulated and most developed western part,
                                            direct aid, and preferential market                   and connected with Northeast Asia through
                                            access, such as relaxed rules of origin.              the inhospitable and sparsely populated
                                                                                                  Siberia.50 One part of Russia, and some of
                                           All three types of countries have much                 the former Soviet republics with political
                                        lower market access potential than rich                   and economic ties, could be considered a
                                        countries, implying considerable potential                neighborhood with a big country far from
                                        for more effective economic integration. But              world markets. But given that its economic
                                        their persistent divisions from major world               center is in the western part, Russia is more
                                                                                      Winners without Borders                                           273

Table 9.4   An instrument per dimension—a simple framework for regional integration
                                                                                Region or neighborhood
                              Close to world markets              With big countries far from world markets    Small countries far from world markets
 World neighborhoods          Central America and Caribbean,      South America, Southern Africa, East Asia,   Central Africa, East Africa, West Africa,
                              North Africa, Middle East           South Asia                                   Central Asia and Caucasus, small Pacific
 Dimensions of the regional   International division (1-D)        Regional division, economic distance (2-D)   International division, economic distance,
 integration challenge                                                                                         low density (3-D)
 What policy instruments      Integration with large nearby       Regional integration                         Regional integration
 should facilitate            markets                             Regional and global connectivity             Regional and global connectivity
                                                                                                               Regional compensation mechanisms
 Priority instruments
 Institutions                 Agreements on trade and factor      Agreements on trade and factor mobility      Agreements on trade and factor mobility
                              mobility within region and with     within region and with large markets         within region
                              large markets nearby                nearby                                       Shared facilities (research, central banks,
                                                                  Regional provision of public goods           regulatory bodies)
 Infrastructure                                                   Transport corridors connecting to large      Hub-and-spoke infrastructure
                                                                  regional economy                             Regional power grids, telecoms, water
                                                                  Regional power grids, telecoms, water        management
 Incentives                                                                                                    Subsidized human development
                                                                                                               investments in lagging countries and areas
                                                                                                               Productive investments in leading
                                                                                                               countries and areas
                                                                                                               Preferential market access
Source: WDR 2009 team.

appropriately considered close to world                      Integration options for countries close
markets.                                                     to world markets
   Russia also highlights the point that the                 Market access is essential for growth,
concept of market potential is not country-                  and proximity is an asset for just-in-time
wide but more spatially specific. It is con-                  production. Many examples in car man-
venient to measure it as a single number                     ufacturing and in segments of the gar-
for all localities within a country, but many                ment industry demand short-term repeat
developing economies have areas where                        orders. Perishable goods (fresh fruits and
markets in other countries are potentially                   vegetables) are easier to export to nearby
more accessible than their own domestic                      markets. Tradable services—such as mar-
markets because of poor local infrastruc-                    keting, research, and complex information
ture. Northern areas of Pakistan are closer                  technology tasks—benefit from frequent
to Afghanistan and western China than to                     face-to-face interaction, easier if the client
the major markets in Karachi and Lahore.                     is nearby. Countries close to world markets
Medan in Indonesia is closer to Penang in                    thus have an intrinsic advantage in con-
Malaysia than it is to its own capital city.                 necting to markets, suppliers, and ideas.
The principles of economic integration in                    Conversely, for the wealthy world regions—
the real world and the use of the instru-                    Europe, North America, and Northeast
ments can be applied as readily at the sub-                  Asia—neighboring developing regions
national level as at the country level (see                  expand their growth potential as domes-
table 9.4).                                                  tic markets mature, while also delivering
                                                             lower-cost platforms for their firms. There
The framework in action                                      are mutual gains to regional cooperation
What concrete steps can countries take                       and ongoing processes to further deepen
toward regional integration to build bet-                    integration.
ter neighborhoods and increase global                            The Euro-Mediterranean Forum is a
competitiveness?                                             long-standing coordination mechanism
274   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      between Europe, the Middle East, and               and Association Agreements between the
      North Africa. The Caribbean Basin has              EU and the Balkans specify the legal and
      benefited from privileged access to the U.S.        regulatory reforms to be undertaken before
      market through various preferential trade          joining the EU. The Balkans also have
      schemes, including NAFTA, the Carib-               signed an intraregional free trade agree-
      bean Basin Initiative, and the Dominican           ment, the Central European Free Trade
      Republic–Central America Free Trade                Agreement (CEFTA), to replace the patch-
      Agreement (DR-CAFTA). China, Japan,                work of 32 bilateral agreements formerly
      and the Republic of Korea are intensifying         governing their intraregional trade. The
      their relations with Southeast Asian coun-         new agreement simplifies and harmonizes
      tries through the ASEAN+3 initiative. The          rules of origin and extends the trade and
      long-term benefits are clear to all sides, but      transport facilitation initiative launched
      the short-term risks and adjustment costs          in 2000. The region has also established a
      have to be managed.                                common power market and signed an open
         Institutional reform. The key for coun-         sky agreement with the EU that could boost
      tries close to world markets is to undertake       tourism.
      institutional reforms and improve domes-               The Balkan region is close enough to
      tic governance to fully integrate with the         the EU to permit tight integration of its
      large markets nearby. Free trade alone             companies into pan-European produc-
      does not bring the full benefits of integra-        tion networks. Governments can facilitate
      tion. Although Turkey has had a free trade         regional production chains linking their
      agreement with the EU for many years,              supply capacity to that of the EU by signing
      it did not receive significant FDI until it         mutual recognition agreements, confor-
      embarked on major institutional reforms            mity assessments, and other trade-related
      associated with membership talks. The              coordination initiatives. Besides trade pro-
      policies and governance standards in               motion, government policies can attract
      countries close to large world markets             direct investment by multinationals to
      have to converge with those in the nearby          help countries move from agriculture and
      high-income region. Indeed, multinational          basic manufacturing to higher technology
      fi rms are more likely to locate in a coun-         production. In the 1990s El Salvador and
      try if it has both institutional and physical      Costa Rica diversified their exports from
      connections to a larger market. The large          traditional products (coffee for El Salvador
      market nearby also has a strong incentive          and bananas for Costa Rica) by develop-
      to foster sound policy and governance              ing export processing zones, tax incentives,
      frameworks in nearby small markets to              and FDI promotion in high-tech activities.
      ensure the stability of its neighborhood.          They more than doubled their exports
      These two factors make the coordination            in a decade. In Costa Rica and Mexico,
      of national policies in neighborhoods close        human capital and FDI have jointly stimu-
      to large world markets both desirable and          lated knowledge-intensive manufacturing
      feasible. The prospect of joining the EU           activities.52
      has accelerated the pace of reform in Cen-             Small countries usually lack the eco-
      tral Europe. And the prospect of better            nomic and political weight to bargain
      access to the U.S. market triggered policy         with wealthier regions. But the Caribbean
      reforms in Mexico long before NAFTA                Regional Negotiating Machinery, created
      took effect.51                                     in 1997, has the goal of formulating and
         Institutional reforms include moving            implementing a joint Caribbean negotiat-
      to a sound macroeconomic environment               ing strategy in international trade forums.53
      that contains inflation and an efficient fis-         The countries now have technical special-
      cal system that does not rely on distorted         ists to deal with each area of negotiations
      trade policies for budget revenues. They           in the WTO. The machinery also facilitates
      also include establishing a sound institu-         the transition of Caribbean Community
      tional framework that limits corruption            (CARICOM) countries toward a single
      and improves governance. The Stabilization         market, with a common external tariff as
                                                                     Winners without Borders    275

the basis for a common trade policy. And it    distant regions should try to bridge the
has been involved in the negotiations of the   gap with world markets by reducing border
EPA between the EU and CARICOM.                barriers, but they suffer from late-mover
   To enter the world market for tradable      disadvantages in major markets. They can
accounting and back-office functions,          complement their global integration with
countries need an efficient telecommuni-        efforts to build a stronger regional market
cation system and a highly educated work-      centered on a large neighbor.
force. The small countries of the Caribbean        The competitive advantage of neighbor-
region have pooled resources to establish      hoods with big countries is size: large local
the Eastern Caribbean Telecommunica-           markets, abundant human capital, and
tions Authority (ECTEL) and the Carib-         substantial remittances. Economic activi-
bean Knowledge and Learning Network            ties generating scale economies—such as
(CKLN).                                        petroleum and coal products, refi neries,
   Contrast that with the lack of coordina-    pharmaceuticals, electric and electronic
tion in the Middle East and North Africa.      machinery, iron and steel, instruments,
The regional economy is based mainly           and nonelectrical machinery—benefit from
on oil revenue and cannot create enough        being concentrated in leading countries
jobs for the 4.2 million people added to       that have strong agglomeration economies
the labor force every year.54 Governments      and better market access.57 Because most
in the region have started the transition      investment in these sectors will go to those
to manufacturing and services, but the         countries, usually the largest in the region,
region’s investment climate is still weak.     this creates tensions. The challenges are to
The Pan-Arab Free Trade Area (PAFTA)           balance political and economic concerns
and the Arab Maghreb Union (AMU) have          between leading and lagging countries, to
had little impact on export performance.       ensure spillovers of direct and indirect ben-
The declining imports from the rest of the     efits to lagging countries, and to compete
world accompanying the increase in intra-      with neighborhoods close to world markets
PAFTA and intra-AMU exports suggest            and such emerging economic powers as
that the agreements have been more trade       China and Russia.
diverting than trade creating.55 The region        Meeting these challenges of division and
could take greater advantage of its prox-      distance requires institutions to ensure pol-
imity to European markets by increasing        icies and governance that promote trade,
exports of high-value agricultural prod-       factor mobility, and regional growth—
ucts, especially in the winter. But agri-      and infrastructure to connect lagging and
cultural expansion will put pressure on        leading countries, link regional economic
scarce water resources, so regional agree-     centers, and favor regional production net-
ments for water management and use are         works integrated with the global economy.
essential. 56                                      Institutional reform to improve regional
                                               integration. The provision of public goods
Integration options for countries with big     within a region depends on each member
neighbors but distant from world markets       to a differing degree according to the good
A large home market gives countries an         (see table 9.3). Although regional coopera-
advantage in attracting industrial activi-     tion is sometimes seen as a process to be led
ties. If this market is also well connected    by the strongest member economy, this is
to world markets, this advantage is rein-      valid only for certain types of regional pub-
forced. But the second group of countries      lic goods, perhaps peacekeeping, research,
is far from world markets. South America       and specialized shared infrastructure, such
is farther than Central America and the        as biohazard facilities or satellite launch
Caribbean from the U.S. market and even        sites. For other types of goods, mainly net-
farther from the EU and Northeast Asian        work related, institutional reforms depend
markets. South Asia is far from Northeast      on the contributions of the weaker mem-
Asia. Southern Africa is far from all three    bers of the region. In these cases, some
large world markets. Countries in these        assistance to build the capabilities of weaker
276   WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      member states can promote overall regional         incentives, and the growing political crisis
      integration.                                       poses risks to the effectiveness of deeper
          Countries grow faster when other coun-         regional integration.
      tries in their neighborhood are also grow-             Investments in cross-country infra-
      ing, as several studies confirm.58 For small        structure to connect regional markets. In
      countries far from world markets but close         neighborhoods with big countries distant
      to a large developing country, their best          from world markets, the costs and benefits
      prospects often lie in growth in the domi-         of cross-country infrastructure can differ
      nant economy. 59 Regional growth cen-              between large and small countries in the
      ters are one reason for regional economic          neighborhood. Where the distribution of
      groupings and for regional peer surveil-           benefits differs from the proposed sharing
      lance. What happens in one’s neighbor-             of the costs, there may be underinvestment
      hood, good or bad, is too important to one’s       in such infrastructure. One example is a
      own development prospects to ignore.               landlocked country such as Bolivia or Para-
          Economic advantage may not be the sole         guay that needs access to the coast to export
      determinant of regional integration pros-          its products. International transit agree-
      pects. Conflict in South Asia after the end of      ments guarantee this right to landlocked
      the British colonial rule in 1947 prevented        countries, but since they are not always
      the neighborhood from taking advantage             enforced, support from the international
      of its market size, more than a fifth of the        community, or from regional institutions,
      world’s people. It took four decades before        may be necessary. Another example is the
      trade volumes between India and Pakistan           potential for better infrastructure to link
      passed those of the early 1950s.60 A recent        India’s northeastern lagging regions and
      study estimates that trade between India           Bangladesh, Bhutan, and Nepal. The South
      and Pakistan would increase by 405 per-            Asia Subregional Economic Cooperation
      cent if the territorial and political disputes     (SASEC) initiative of the Asian Develop-
      were resolved.61 In 2004 the two countries         ment Bank suggests that such cross-border
      engaged in the “Composite Dialogue” on             cooperation can be beneficial for all these
      peace and security issues, including terror-       countries.
      ism and drug trafficking, confidence-build-              Several major cross-border infrastruc-
      ing, economic and commercial cooperation,          ture projects are being developed. The
      and friendly exchanges in various fields. On        Maputo Development Corridor between
      a broader regional basis, the South Asian          South Africa and Mozambique was initi-
      Association for Regional Cooperation is a          ated in 1995 to rehabilitate the primary
      forum to discuss development challenges,           infrastructure network along the corridor
      such as cooperation in energy production           (road, rail, port, and border posts), attract
      and water basin management. The burden             investment in the corridor’s catchment area,
      is on India, the largest country by far in the     and provide employment opportunities for
      neighborhood, to take the lead in promot-          disadvantaged populations (see map 9.4).
      ing the common agenda.62                           Its structure, led by South Africa, promotes
          Zimbabwe’s political instability since         fast-track design and implementation of
      1998 has dimmed growth prospects in the            bankable private investment projects and
      Southern African neighborhood. Attempts            public-private partnerships. But it risks fail-
      to mediate by the African Union and the            ing to address the social service needs of local
      SADC have brought limited results. South           communities.63 Some ongoing evaluations of
      Africa, the largest country in the Southern        the corridor show that border-crossing costs
      Africa Customs Union, has a large inter-           and delays are common impediments, pos-
      est in a stable neighborhood. But the large        sibly diverting freight to domestic corridors.
      rents from natural resources along regional        This suggests that more formal institutional
      transport corridors are realized even dur-         cooperation between the countries could
      ing confl ict, though most of the benefits           generate additional benefits.
      are not shared widely. So economic rea-                South America has been much more
      sons may be unlikely to provide enough             ambitious in its plans with the Initiative
                                                                                                                                                     Winners without Borders                         277

Map 9.4 Building regional infrastructure in Southern Africa
The Maputo Development Corridor

                                                                                                  Pilgrims Rest         Graskop          Joburg to Maputo
                                                                  Marble Hall                                                              Railway line           MOZAMBIQUE
                      AREA OF                                                              Lydenburg        Sabie
                      MAP                            Groblersdal                                                       Numbe
                                                                                Joburg-Maputo Highway                      Gate
                                                                                 PPP- BOT completed                                                                          Port of Matola/Maputo
                                                                                                                 Witrivier                             Ressano
                                           Coal-based Power Station                                                                                    Garcia                   Upgrades, PPP
                                            2 transmission lines to                                                   Nelspruit            Komatipoort
         Brits                                 Matola completed                                                                       Malelane
                                                                                                  Waterval Boven                                   Moamba
                          Tshwane                                                      Belfast Machadodorp    Barberton                                                  Maputo
                                                          Witbank                                                                  Piggs Peak                       Matola
                                                                                    Carolina                                           Tshaneni        Namaacha
   Johannesburg                                                                 Hendrina
                                               SOUTH AFRICA                                                                       Mbabane                         Al smelter 500ktpa
                                                                                               Chrissiesmeer                                                      BHPB completed
                                               Evander                                   Ermelo                                                    Mpaka
                   Liquid Fuels & Petro-
                     chemicals: Sasol                                                              Amsterdam
                 Vereeniging                                          Pande-Secunda Gas line
                                                                                                                                                      Big Bend
                                                                       PPP Sasol completed                                    SWAZILAND                                                Ponta do
                                                                 Standerton                                                                                                            Ouro
                                                                                                        Piet Retief

                       Port                                            Main railroads
                       Main roads                                      Existing gas line                                                              Golela

Source: MINTEK 2007.

for Integration of Regional Infrastructure,                                                             GDP, most among the world’s poorest,
launched in 2000 to promote the integra-                                                                and far too many prone to confl ict. These
tion and modernization of the 12 coun-                                                                  neighborhoods face divisions and barriers
tries’ physical infrastructure in the energy,                                                           to trade and factor mobility, are distant
telecommunications, and transport sec-                                                                  from major markets, and lack the density
tors, with the goal of improving global                                                                 of economic production to benefit from
competitiveness. The initiative focuses on                                                              agglomeration economies. Collier (2007)
10 hubs of economic integration across the                                                              identifies their populations as the “bot-
continent and on harmonizing regulatory                                                                 tom billion.”
frameworks. It has identified 40 megaproj-                                                                  The challenge for countries in isolated
ects and hundreds of smaller infrastruc-                                                                neighborhoods is to find ways to integrate
ture improvement projects for potential                                                                 regionally and globally. Their geographic
fi nancing, with an aggregate cost in the                                                                situation implies that the degree of integra-
tens of billions of dollars. Implementation                                                             tion rarely will be as high as in other coun-
has been slow, however.                                                                                 tries, so the prospects for manufactured
                                                                                                        trade are more limited. Conversely, their
Integration options for countries                                                                       isolation provides them with natural pro-
distant from world markets and with                                                                     tection of their home markets.
small neighbors                                                                                            Many of these economies have minerals
Central Asia has the highest proportion                                                                 and other natural resources, such as water,
of landlocked countries (see box 9.4) with                                                              that can best be exploited on a regional
many common problems that could be                                                                      basis. While there is evidence of growth
more effectively tackled through better                                                                 spillover from resource-rich countries to
regional cooperation. The small Pacific                                                                  their neighbors in Sub-Saharan Africa,64
Islands are the most geographically frag-                                                               regional integration is the key to getting
mented, making them “sealocked,” with                                                                   resource-led growth going and to spread-
limited accessibility to world markets (see                                                             ing benefits more broadly. These coun-
box 9.5). And Africa between the trop-                                                                  tries face the triple challenges of division,
ics has the largest number of landlocked                                                                distance, and density. Addressing them
countries, many small in population and                                                                 will require institutional reform, scaling
278                                       WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      B OX 9.4    Integration in Central Asia
      Central Asia has five landlocked countries:     Republic, Russia, Tajikistan, and Uzbeki-         and feedback on the design and imple-
      Kazakhstan, the Kyrgyz Republic, Tajikistan,    stan. Then there are the Commonwealth             mentation of trade and related policies.
      Turkmenistan, and Uzbekistan. The coun-         of Independent States (CIS), the Collec-             The region loses an estimated 3 per-
      tries vary in population, type of govern-       tive Security Treaty Organization (CSTO),         cent of GDP annually because of poor
      ment, and willingness to cooperate with         the Economic Cooperation Organization             water management. Agreements are also
      each other and the rest of the world. But the   (ECO), and the Special Programme for the          needed for oil and gas resources to reach
      region has established national identities      Economies of Central Asia (SPECA).                international markets. Many environ-
      and institutions, avoided violent conflicts,       The sheer number of regional agree-            mental problems remain as a legacy from
      established the foundations for market-         ments illustrate the problems that can            the Soviet era, such as radioactivity from
      based economies, and sustained an eco-          arise from a disjointed regional approach.        abandoned uranium mines and danger-
      nomic recovery since the end of the 1990s.      Regional initiatives in Central Asia can          ous remnants of biological and nuclear
         Consider many regional institutions          foster integration but add duplication and        tests. Regional organizations could be
      and initiatives. The Central Asia Coop-         complexity to reform. The ongoing WTO             rationalized around these key themes of
      eration Organization (CACO) comprises           accession for many of these countries             trade and transport facilitation, water,
      Kazakhstan, the Kyrgyz Republic, Russia,        could help, because the WTO has clear             energy, and environment management.
      Tajikistan, Turkmenistan, and Uzbekistan,       rules on regional trade agreements. Also          They could develop long-term plans for
      which merged with EURASEC (Eurasian             needed are trade and transport facilitation       these issues, bringing civil society and
      Economic Community) in 2005. The Cen-           initiatives and behind-the-border reforms         academic institutions into the fray. The
      tral Asia Regional Economic Cooperation         to improve the countries’ attractiveness          international community could facilitate
      Initiative (CAREC) comprises Azerbaijan,        to FDI and bolster their global integration.      the strengthening of institutions with
      China, Kazakhstan, the Kyrgyz Republic,         (Countries with the highest cost of busi-         clear mandates and targets.
      Mongolia, Tajikistan, and Uzbekistan. The       ness entry have lower imports, exports,
      Shanghai Cooperation Organisation (SCO)         and FDI inflows.) Regional forums for busi-       Sources: Linn and Tiomkin 2006; Broadman
      comprises China, Kazakhstan, the Kyrgyz         ness communities could offer suggestions          2005; United Nations 2005a.

      B OX 9.5    Integrating the small and distant Pacific Islands with world markets
      Small island developing states face a           Pacific Regional Trade and Economic               this preferential access to their markets.
      great risk of marginalization in the global     Cooperation Agreement (SPARTECA), a               Without significant trade preferences,
      economy because of their small size,            nonreciprocal trade agreement for which           the Pacific Islands need other ways to
      remoteness from large markets, and              Australia and New Zealand offer duty-             integrate with their large neighbors. More
      vulnerability to economic and natural           free, unrestricted, or concessional access        radical approaches, including consid-
      shocks. And with their fragile ecosystems,      for almost all products originating from          eration of greater labor mobility, could
      they are highly vulnerable to domestic          the countries of the Pacific Islands Forum.       be required. Children in island families
      pollution and rising seas. Their share in       To qualify for preferential access, goods         receiving remittances from overseas fam-
      global merchandise trade fell from 0.4          exported to Australia and New Zealand             ily members show strong improvements
      percent of world exports of goods in 1980       must meet the rules of origin set out in          in education and health outcomes, sug-
      to 0.2 percent in 2003, while their share       SPARTECA.                                         gesting labor mobility could be a power-
      of global services trade remained at 0.7           The textiles, clothing, and footwear           ful driver for longer-term development in
      percent.                                        industry has been a major beneficiary.            these countries.
        One effort to deal with the special           But Australia and New Zealand are plan-
      problems of small islands is the South          ning to adopt free trade by 2010, ending          Sources: UNCTAD 2002; SPARTECA 1996.

                                          up infrastructure investments, and tar-                    But these agreements are often poorly
                                          geted incentives to encourage regional                     implemented, their effectiveness tends to
                                          integration.                                               be low, and they overlap in responsibilities.
                                              Identifying natural neighborhoods for                  The administrative costs of participating
                                          institutional reform. Neighborhoods with                   in such agreements are high in relation to
                                          small countries distant from world mar-                    the small benefits, given the small size of
                                          kets need to focus on specific institutional                the participating economies. The African
                                          needs that drive their cooperation. There                  Union has spotlighted the inefficiencies of
                                          is no shortage of international agreements.                13 or 14 overlapping regional economic
                                                                                                     Winners without Borders   279

communities and has called for their                                    cross-border agreements. Cameroon shares
rationalization.65                                                      twin cities with West African neighbors, but
   Regional integration can be rooted in                                none in its Central African neighborhood.
the traditional economic and sociocultural                              Similarly, local integration initiatives, such
interactions within natural neighborhoods,                              as growth triangles starting in the early
as building blocks for broader integration.                             1980s in East Asia, can take advantage of
Trust can be built on a shared language.                                the economic complementarities in border-
East African countries share Swahili, which                             ing regions.
has facilitated trade in the neighborhood                                   A succession of large coastal cities along
for centuries. Free trade was established                               the Gulf of Guinea spans from Abidjan in
between Kenya and Uganda during colo-                                   Côte d’Ivoire to Douala in Cameroon, and
nial times.66 West African countries share                              includes Accra, Cotonou, Lagos, and Lomé.
the Dioula, Haoussa, and Peuhl cultures,                                When discussing “growth champions,” it
which, nurtured by Islam, developed an                                  may be worth keeping in mind the potential
impressive trade network.67                                             of such multicountry agglomerations, rather
   Interactions between neighboring areas                               than thinking of some nations as regional
or cities across countries can also provide                             growth leaders. When seen through the lens
the base for broader integration—a form of                              of economic geography, the regional integra-
transfrontier regionalism that could follow                             tion priorities change to prioritizing regional
European models.68 Sub-Saharan Africa                                   infrastructure investments in leading areas
has many pairs of large cities that are near                            that span several countries.
each other but separated by a national bor-                                 Regional trade in agricultural products
der (see map 9.5). This carries hidden eco-                             can be another entry point for broader
nomic costs that can be overcome through                                regional integration. This requires a revival

Map 9.5 Twin cities for local integration
City pairs in bordering regions within 150 kilometers and with more than 100,000 inhabitants

           Ziguinchor                                       Ndjamena
                        Sikasso   Bobodioulasso Katsina
                                                   Mubi    Maroua
   Conakry        Kissidougou Parakou Shaki
                                                Jimeta Garoua
   Freetown         Nzerekore Portonovo
            Sefadu     Man     Lomé      Lagos Calabar
                                   Cotonou        Kumba

                                                                                   Bukavu     Kigali
                                                                                     Uvira   Bujumbura
                                                Pointe-Noire      Kinshasa                   Kigoma
                                                     Cabinda                       Kalemie
                                                        Matadi Boma

                                                                                Chingola Mufulira

                                                                                         Mutare   Chimoio


Source: WDR 2009 team.
280                                                  WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

                                                     of regional trade agreements, adequate                             is the center of the cotton basin, with the
                                                     cross-country infrastructure, institutional                        most production. Rails connect Ouagadou-
                                                     reforms, and nonmarket institutions such                           gou and the port of Abidjan, and roads link
                                                     as farmer cooperatives.69 The Horn of Africa                       all three cities. And many ginneries and
                                                     could build on its livestock trade, though                         textile industries are located in the region.
                                                     security poses a problem.70 West Africa                            By upgrading and pooling infrastructure
                                                     could build on cotton, if leading agricul-                         within a regional industrial development
                                                     tural areas across several countries can be                        program, input costs could fall and cotton-
                                                     integrated into a single, efficient production                      based industries such as textile and gar-
                                                     and processing zone: the Sahelian cotton                           ments could become competitive in the
                                                     basin in the border region of Burkina Faso,                        global market. Such an initiative would
                                                     Côte d’Ivoire, and Mali (see map 9.6). This                        require a strong commitment from the
                                                     region, dominated by Dioula ethnic groups,                         participating countries and support from
                                                     is anchored by three cities—Bobodioulasso                          regional associations and the international
                                                     in Burkina Faso, Korhogo in Côte d’Ivoire,                         community.
                                                     and Sikasso in Mali.71 In 2000 the popula-                             Institutional development to increase
                                                     tion of this area was 4 million (11 percent                        scale, support labor and capital mobility,
                                                     of the total in the three countries), with an                      and improve market access. Some regions
                                                     estimated gross regional product of 1,000                          have taken concrete steps toward integra-
                                                     billion CFA francs (10 percent of aggregate                        tion. ECOWAS has signed protocols for the
                                                     national GDPs).                                                    free movement of people, abolishing visa
                                                         The areas in this region have comple-                          and entry permit requirements. In fact,
                                                     mentary economic endowments. Bobodi-                               labor mobility has always been a hallmark
                                                     oulasso has an international airport with                          of Sub-Saharan Africa, where tradition or
                                                     storage facilities. Korhogo has a regional                         colonial laws have favored circular labor
                                                     airport, a specialized university, and train-                      mobility. Nomads moved across countries
                                                     ing centers in agricultural science. Sikasso                       in response to seasonal climatic change,

Map 9.6       West Africa has potential for cotton-led industrial development

                                                                       MALI                                           NIGER
                   SENEGAL                                                                                                                                   CHAD

       Banjul                                                            BURKINA                Niamey
   THE                                             Bamako                 FASO                                                                                            SUDAN
GAMBIA                                                                    Ouagadougou
 GUINEA-                        GUINEA
                               SIERRA                     CÔTE                                            Abuja
                   Freetown                                                        TOGO
                               LEONE                    D’IVOIRE                                                  NIGERIA                                        CENTRAL
                                                                                                                                                             AFRICAN REPUBLIC
                                         LIBERIA                                        Cotonou
                              Monrovia                  Yamoussoukro
                                                                                 Tema             Porto                         CAMEROON
                                                                                         Lomé     Novo
                                                            Abidjan           Accra


                                                                                                                                                                    DEM. REP.
                                                                                                                     EQ. GUINEA
                                                                                                                                               CONGO                OF CONGO

                        Limit of cotton-producing basin:                 Means of cotton exports:                 Cotton exports through the ports:
                                  Cotton-producing basin                            Rail                                    National cotton               200
                                  Heart of the cotton basin                         Road                                    Sahelian cotton               50
                                                                                                                                              Tons (thousands)
                                  Ginning factory
Sources: Atlas on Regional Integration in West Africa. ECOWAS; Sahel and West Africa Club/OECD 2006.
                                                                       Winners without Borders    281

while sedentary farmers also moved sea-          institutional cooperation as well as spe-
sonally in search of supplementary income        cific infrastructure among countries in the
during the dry season.72 But the skills of       neighborhood.
the workforce need to improve. For higher           Providing a regional public good is less
education, technical training, and research,     complex politically if it is based on a mutu-
cooperation within the neighborhood can          ally beneficial and profitable project, as
support institutions beyond the means of         in much of energy, communications, and
individual countries. And a better local         irrigation infrastructure. But for small
business climate and new opportunities in        isolated countries, regional infrastructure
regional growth centers may induce Afri-         projects require considerable outside sup-
can migrants with technical and business         port. Traffic volumes are too small in most
know-how to return from abroad.                  parts of Africa for toll roads to be feasible.
   Invest in regional infrastructure. The        And regional infrastructure may be more
New Partnership for Africa’s Development         beneficial for one country, even though
(NEPAD) spatial development initiative           most of the investment costs are incurred
identified the Bas-Congo development cor-         in another. In addition to reinvigorating
ridor involving Angola, the Democratic           public-private partnerships in infrastruc-
Republic of Congo, and the Republic of           ture, there is a need for scaling up Inter-
Congo as a region where deep integration         national Development Association (IDA)
would have large benefits, based on enor-         contributions to regional integration,
mous hydroelectric power potential.73 Two        systematizing Aid-for-Trade initiatives74
other development corridors also have            and rationalizing the interaction between
promise in West and East Africa:                 regional development banks and global
                                                 fi nancial institutions. Less than 3 percent
•   The Gulf of Guinea development cor-
                                                 of all international development support
    ridor—linking Benin, Côte d’Ivoire,
                                                 now goes for regional programs.75
    Ghana, Liberia, Nigeria, and Togo—
                                                    Use coordinated incentives to facili-
    could integrate West African economies
                                                 tate regional integration. African coun-
    through transport and energy. It could
                                                 tries need to make a strong commitment
    also connect five large coastal cities with
                                                 to regional integration, sharing the costs
    a critical mass of economic activities and
                                                 and benefits from opening borders in natu-
    administrative service provision: Abi-
                                                 ral neighborhoods. Multilateral agencies
    djan, Accra, Cotonou, Lagos, and Lomé.
                                                 and donors need to commit to long-term
•   The Mombasa development corridor—            support of these initiatives by providing
    linking the Democratic Republic of           financial and technical assistance and bet-
    Congo, Kenya, Sudan, and Uganda—             ter access to markets. Concrete steps can
    could use established infrastructure         be sequenced, gradually ensuring the irre-
    links such as the Northern Corridor to       versibility of policy reforms in leading and
    unlock natural resources in the Demo-        lagging countries. Preferential trade agree-
    cratic Republic of Congo and southern        ments and aid flows could be tied to coop-
    Sudan.                                       eration among recipient countries, with the
   Even with more regional infrastruc-           proposed EPAs with the EU as one model
ture, better human capital, and greater          (see box 9.3). In cases in which incentives
factor mobility, these neighborhoods still       for regional cooperation are insufficient for
face being latecomers in the global mar-         some partners—such as facilitating access
ket, where other developing countries with       for a landlocked economy to a port in its
low-cost advantage dominate the market           neighboring country—conditional aid
for basic manufactures. African coun-            flows with clear performance targets may
tries need to diversify their export base to     be required.
reduce dependence on natural resources.             A key incentive for policy reform in
Many of these neighborhoods need to              Africa is temporary preferential access to
design explicit export diversification strat-     OECD markets.76 Africa cannot wait for a
egies to capture a larger share of the world     big wage difference with Asia before start-
market (see box 9.2). Success requires           ing to attract greater productive investment
282                                      WO R L D D E V E LO P M E N T R E P O RT 2 0 0 9

      B OX 9.6    A contract with Africa? The give and take of the world’s biggest development challenge
      Better understanding of the geogra-           regional role. For each of Sub-Saharan              ports, transport links, and information
      phy of development can lead to more           Africa’s regions, the contract would include        and communication technology—in
      effective development aid. This Report        specific obligations and actions that               the coastal countries, as well as corridor
      advocates different strategies for Africa’s   encourage regional development. The gov-            infrastructure to link coastal and inte-
      landlocked countries and its resource-        ernments of East, West, and Central Africa          rior markets.
      poor coastal economies. The former have       would commit to the following:                    • Preferential access for Sub-Saharan
      natural disadvantages associated with                                                             Africa’s exports, with liberalized rules of
                                                    • Establishing “Regional Economic Areas”
      geography and a large distance to market                                                          origin that encourage regional supply
                                                      that would tie the economic interests
      that reduces their potential growth by                                                            chains.
                                                      of leading and lagging countries in
      as much as half a percentage point per
                                                      Africa’s regional neighborhoods tightly            Things are already headed in this
      year. But what is unusual in Africa is that
                                                      together and provide a framework for            direction. In 2007 the Government of
      resource-poor coastal countries have
                                                      the provision of regional public goods.         the United Kingdom, through its Depart-
      underperformed. These are the types of
      countries that act as engines of growth in    • Pursuing freer movements of labor,              ment for International Development,
      other world regions. Africa’s growth poles      capital, goods, and services within             allocated $1.4 billion over the coming
      are still weak.                                 these areas.                                    decade to efforts by the governments of
         This Report argues, to exaggerate          • Maintaining and protecting access               Burundi, Kenya, Rwanda, Tanzania, and
      somewhat, that development strategies           routes between landlocked countries             Uganda and to revitalize the East African
      for leading areas should invest in places,      and outlets for trade.                          Economic Community. The European
      and strategies for lagging areas should                                                         Commission is also adopting a regional
                                                      The strategy would combine insti-               approach with its economic partnership
      invest in people. Seen through the lens of    tutional cooperation, investment in
      economic geography, the thrust of devel-                                                        agreements. But all donors could be
                                                    regional infrastructure, and coordinated          bolder in their approaches.
      opment assistance to Africa that focused      interventions that may require giving up
      on education, health, and other social                                                             The experience of Europe after World
                                                    some hard-won and jealously guarded               War II illustrates how national determina-
      infrastructure in the late 1990s seems cor-   attributes of national sovereignty.
      rect for the lagging, landlocked countries.                                                     tion to prioritize reconstruction coupled
                                                      In exchange for these actions, bilateral        with international assistance can pay off.
      But this assistance appears to focus on       and multilateral development partners
      the wrong priorities for coastal countries,                                                     Regional integration in Europe did not go
                                                    would commit to the following:                    smoothly initially. But encouraged by the
      which need physical infrastructure and
      better integration with global markets.       • A large increase in international finan-        tough terms of cooperation in the Mar-
         A better contract between donors             cial assistance for improved social             shall Plan, a process of integration that
      and countries would be to differentiate         services and other life-sustaining infra-       would have been impossible a generation
      approaches across countries depending on        structure aimed at raising living stan-         earlier, created the largest common mar-
      their potential market access. This Report      dards and creating portable human               ket for capital, labor, and ideas today.
      proposes a tailored approach, which would       capital in lagging countries.
      lay out the rights and responsibilities of    • Increased financial support for growth-         Source: WDR 2009 team.
      countries according to their potential          sustaining infrastructure—including

                                         and larger export shares, especially with                     Over the past centuries, East, Central,
                                         multilateral trade negotiations at the WTO                and West Africa have suffered a series of
                                         driving down tariffs at a fast pace. Initia-              “formative disasters” (see “Geography in
                                         tives such as the U.S. Africa Growth and                  Motion, Density, Distance, and Division in
                                         Opportunity Act and the EU Everything                     Sub-Saharan Africa”). Today, they pose an
                                         But Arms could be extended to all Sub-                    especially difficult development challenge
                                         Saharan countries, with more liberal rules                spanning the three development dimen-
                                         of origin and a longer time span. This may                sions—density, distance, and division.
                                         allow at least some of these countries to                 To reshape their economic geography, the
                                         break into world markets and could jump-                  policy response has to be commensurately
                                         start export diversification in African                   calibrated. A three-dimensional challenge
                                         neighborhoods. A “contract with Africa”                   demands employing all three instruments
                                         could be a framework for supporting such                  of integration—institutions, infrastructure,
                                         coordinated incentives (see box 9.6).                     and incentives.

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