1. Regional disparities and policy responses. Tony Venables, DFID

2. Page 1 Issues: What do we know about spatial disparities in developing countries – Kanbur and Venables Measurement issues and tools Policy responses Equity Efficiency

3. Page 2 Policy responses: Need analysis at several levels. What is the ‘exogenous’ dynamic? Are disparities just part of a process of change or are they long run? Europe? – long run? Enlarged Europe? – a dynamic has been initiated? Developing? – dartboard development? – persistent asymmetry? What would the economic response be in a (near) perfect economy? Could involve substantial migration. What are the market failures? – cumulative processes – Increasing returns & public goods.

4. Page 3 A textbook case: 1 2 3A B 5656 Initial equilibrium at 1. Positive shock A to region S. Response? Wage gap (3 - 1) Migration (1 -› 2) Productivity response B in N. Due to? Diffusion? Public investment NB: benefit depends on response: Full migrn, {2,4,5,6} No migrn, {1, 7,5,6} Pop. in S -> <- Pop in N. 7 4 wsws wNwN

5. Page 4 Cumulative causation and increasing returns to scale Mechanisms: Thick market effects – labour matching & incentives for skill acquisition. Linkages between firms Knowledge spillovers Public goods & public finance Within or across sectors? Versus dispersion forces; Commuting costs Land rent/ house prices Congestion externalities Magnitudes Doubling city size increases productivity 3-8% Narrow spatial range – up to 45-60 minutes driving time.

6. Page 5 Increasing returns 1: 1 2 A Initial equilibrium at 1. Positive shock A to region S. Response? Wage gap (3 - 1) Migration (1 -› 2) Qualitatively as before Migration response amplifies the increase in income (previously dampened). But increasing returns need micro- foundations Pop. in S -> <- Pop in N. w s = APL s wNwN 3

7. Page 6 Increasing returns 2: cities 1 0 Each city described by average revenue schedule (AR) starting at AR(0) and attaining maximum. Existing cities expand up to the point where AR = w. If there is just 1 city, equilibrium is at point 1. (Imagine initial pre-shock situation with low AR curve and equilibrium at point 0) Pop. in cities -> <- Pop in N. AR AR(0) wNwN

8. Page 7 Increasing returns 2: cities 2 1 0 Will second city develop? AR(0) > wage at (1), therefore second city enters and starts to grow, new equilibrium at (2). Will third city develop? AR(0) < wage at (2), therefore no migration to 3 rd city Equilibrium supports 2 cities Optimum is 4 cities. Economic development fails to spread to new locations Pop. in cities -> <- Pop in N. AR AR(0) wNwN

9. Page 8 Policy issues? Importance of market failures: Two market failures: Coordination failure/ externality Externality: suggests Pigovian subsidy, but impossible to target. Coordination failure: suggests spatially concentrated commitment. Where do further cities enter? – peri-urban areas or regional secondary/ tertiary cities.

10. Page 9 Messages for PREM Data Mechanisms Analytical framework Build evidence base on what sort of interventions have worked and what have failed.