Connecting Wagons: Why and How to Help Lagging Regions Catch Up

If it weren't for the economic performance of China, Brazil and other emerging markets, the global economic slump following the 2008 financial crisis would have been much worse. Not by chance, prospects for the global economy became gloomier this year when those economies showed signs of decreasing resilience against the downward pull from advanced countries. The emergence of those new engines of growth and their income convergence toward more advanced countries has definitely been healthy to the global economy.

Trade and productive integration into global markets have been fundamental for that emergence. Nonetheless, as pointed out by Thomas Farole in the latest edition of the World Bank's Economic Premise -- "Competitiveness and Connectivity: Integrating Lagging Regions in Global Markets" -- that process has not been spatially uniform, as integration and growth have particularly concentrated in well-located, metropolitan regions, while more peripheral regions lagged behind. Mexico is a case in point. While its northern border regions grew faster than the rest of the country following the North American Free Trade Agreement (NAFTA), much of the south remained isolated.

There are some relatively well-known reasons why windows of opportunity for acquisition of competitiveness tend to be appropriated in a geographically agglomerated manner in developing countries. Once a head-start occurs in a more favored place, firms located their benefit over time from technology and knowledge spillovers. Furthermore, a deep and skill-diversified labor supply is developed, with the same happening with the availability of inputs and access to finance. Such endogenous creation of economies of scale and scope helps local production surmount foreign competitors and compounds whatever initial advantages the region has over others.

Farole adds two additional agglomeration factors. Firstly, the availability and quality of human capital improves the operation of some institutions that matter for the investment climate. Secondly, he calls attention to aspects of location and connectivity that have been exacerbated in modern supply chains: "Firms in core regions... benefit from easier access to trade gateway infrastructure, the opportunity to benefit from logistics consolidation, and informational benefits from the opportunities for face-to-face contact."

Policies to countervail regional divergence of income within a country have been implemented since long ago, even in advanced countries. Clearly, internal population migration cannot be relied upon as a first-best solution. Therefore, infrastructure investments, wage policies, deregulation, promotion of clusters, creation of industrial parks and special economic zones and, most often, fiscal incentives have largely been used in attempts to lead to production decentralization. Results have frequently failed (for example, in Italy) or revealed to be too costly (as in Brazil).

Farole makes the case for a more pragmatic approach, offering a typology of different situations of lagging regions. "Some have greater potential to support agglomeration, others may benefit from cross-border integration, while others may have fewer realistic opportunities to integrate directly into global production networks, but can effectively serve domestic markets." In all cases, however, building local competitiveness and improving connectivity are necessary conditions to avoid policy disappointment.

After reaching a certain level, high regional disparities become a development failure, not only because poverty remains stuck in laggard regions, but also because rising political tensions can undermine national efforts. Beyond that, immobile resources rest untapped. Therefore, connecting and boosting local competitiveness of laggard regions will be essential if the developing world is to "switch over" with advanced economies and become the new growth locomotive in the global economy.

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