Berlin Workshop Series 2009
49319

Spatial Disparities and
Development Policy

Edited by
Gudrun Kochendörfer-Lucius
and Boris Pleskovic
Spatial Disparities and
Development Policy
Spatial Disparities and
Development Policy

Edited by
Gudrun Kochendörfer-Lucius
and Boris Pleskovic

THE WORLD BANK
Washington, D.C.
© 2009 The International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
E-mail: feedback@worldbank.org

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ISBN: 978-0-8213-7723-9
eISBN: 978-0-8213-7798-7
DOI: 10.1596/978-0-8213-7723-9

ISSN: 1813-9442
Contents

ABOUT THIS BOOK ix

INTRODUCTION 1
Gudrun Kochendörfer-Lucius and Boris Pleskovic

KEYNOTE ADDRESS 9
Indermit Gill

KEYNOTE ADDRESS
Rethinking Economic Growth in a Globalizing World:
An Economic Geography Lens 15
Anthony J. Venables

KEYNOTE ADDRESS
Africa: Rethinking Growth and Regional Integration 31
Paul Collier

Part I: Macro Trends: Spatial Patterns of Economic Activity,
Income, and Poverty
Spatial Patterns of Population and Economic Activity in
the Developing World 39
Steven Haggblade

Some Stylized Facts about Rural Poverty and Geography
and a Question for Policy 49
Peter Lanjouw

Part II: New Economic Geography and the Dynamics
of Technological Change—Implications for
Less-Developed Countries
New Economic Geography and Transportation Policies:
The Case of Brazil 61
Eduardo Haddad

v
VI | CONTENTS

Spatial Disparities of Knowledge Absorption, Technological Change, and
Prosperity:Theoretical Considerations and Empirical Evidence from China 71
Ingo Liefner

Part III: Perspectives: Rural-Urban Transformation—
Leading, Lagging, and Interlinking Places
Comparative Competitiveness of Agriculture under a
Multidimensional Disparity Development Process:
A Narrative Analysis of Rural Development Issues in China 83
Mantang Cai

Economic Growth in Cities and Urban Networks 91
Frank Van Oort and Philip McCann

Part IV: Spatial Disparity and Labor Mobility
Can Investment in Human Capital Reduce Regional Disparities?
Some Evidence for Spain 109
Ángel de la Fuente Moreno

Family Migration: A Vehicle of Child Morbidity in the Informal
Settlements of Nairobi City, Kenya? 121
Adama Konseiga

Remittances and Their Impact on the Macroeconomic Situation
of and Financial Sector Development in the Kyrgyz Republic 143
Roman Mogilevsky and Aziz Atamanov

Part V: Africa—Rethinking Growth and Regional Integration
Spatial Development Patterns and Policy Responses:
A South African Case Study 213
Hassen Mohamed

Geography and Regional Cooperation in Africa 221
Wim Naudé

Part VI: Learning from Europe’s Efforts at Integration
and Convergence
The Role and Objectives of European Cohesion Policy 229
Nicola de Michelis

Learning from Europe’s Efforts at Integration and Convergence:
Lessons for Developing Countries’ Integration Policies 233
Rolf J. Langhammer

The Geography of Inequalities in Europe 239
Philippe Martin
CONTENTS | VII

Part VII: Spatial Policy for Growth and Equity
Cohesion and Convergence: Synonyms or Two Different Notions? 259
Grzegorz Gorzelak

Regional Development as Self-Organized Converging Growth 265
Peter Nijkamp

Africans Need Not Miss Out on the Benefits of Globalization 283
Federico Bonaglia, Nicolas Pinaud, and Lucia Wegner

Part VIII: Wrap-Up Discussion and Closing Remarks
Implications for WDR 2009 289
Indermit Gill

The New World Bank Office in Berlin 291
Claudia von Monbart

Appendix 1: Program 293

Appendix 2: Participants 305
About This Book

The World Bank and InWEnt (Capacity Building International, Germany) hold a
Development Policy Forum every fall in Berlin. This meeting, known as the “Berlin
Workshop,” provides a forum for the European research community to contribute
its perspectives to early discussions in preparation of the World Bank’s annual
World Development Report. The Workshop offers new ideas and distinctive
perspectives from outside the World Bank. Participants in the Workshop come from
a range of academic, governmental, think-tank, and policy-making institutions in
Europe, the United States, and the Russian Federation, as well as from the World
Bank and the German development institutions. Conference papers are written by
the participants and are reviewed by the editors. Participants’ afﬁliations identiﬁed
in this volume are as of the time of the conference, September 30–October 2, 2007.
The planning and organization for the Workshop involved a joint effort. We
extend our special thanks to Indermit Gill, Director of the World Bank’s World
Development Report 2009. We wish to thank Aehyung Kim and Marisela Monoliu
Munoz for their advice and suggestions. We also would like to thank the confer-
ence coordinators, Marianne Donda, Klaus Krüger, Joachim Müller, and Claudia
Schäfer at InWent, and Theresa Bampoe at the World Bank, whose excellent orga-
nizational skills kept the workshop on track. Finally, we would like to thank the
editorial staff, especially Stuart Tucker and Rick Ludwick, from the Ofﬁce of the
Publisher, and Grit Schmalisch, of InWent for all of their work on this volume.

ix
Introduction
GUDRUN KOCHENDÖRFER-LUCIUS AND BORIS PLESKOVIC

The Berlin Workshop Series 2009 presents a selection of papers from meetings held
on September 30–October 2, 2007, at the tenth annual Berlin workshop, jointly
organized by InWent–Capacity Building International, Germany, and the World
Bank in preparation for the World Bank’s World Development Report (WDR)
2009. The workshop brings diverse perspectives from outside the World Bank,
providing a forum in which to exchange ideas and engage in debate relevant to
development of the WDR.
Participants at the workshop discussed challenges and successes pertaining to
spatial disparities and development policy. As a country develops, economies of
scale tend to result in increasing spatial concentration of industry and services.
Agglomeration of economic activities widens the income gap between “leading”
and “lagging” subregions within a country and creates a disparity in access to basic
public services. Over the course of seven sessions, the workshop explored the inter-
actions of government policies and economic geography in addressing spatial dis-
parities and development.

Macro Trends: Spatial Patterns of Economic Activity, Income,
and Poverty

Session I highlights questions regarding typical patterns of income disparities within
countries and regions. Steven Haggblade describes two parallel movements in
economic growth: a spatial shift of population from predominantly rural to
predominantly urban settlements and a sectoral shift from agriculture to manufac-
turing and services. Historically, humans have inhabited rural areas because of

Gudrun Kochendörfer-Lucius is Managing Director of InWEnt – Capacity Building International, Germany.
Boris Pleskovic is Research Manager, The World Bank, Washington, D.C.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

1
2 | GUDRUN KOCHENDÖRFER-LUCIUS AND BORIS PLESKOVIC

their agricultural or natural resource-based potential, and agriculture requires
physically dispersed production. Thus the spatial distribution of rural population
corresponds tightly to agroecological potential. During structural transformation,
as productivity gains in the economy drive households to diversify consumption
into nonfoods, agriculture’s share of total production falls. Because nonfarm
production normally beneﬁts from economies of scale, the sectoral shift from agri-
culture to manufacturing and services drives the spatial movement of population
from rural to urban areas. Given the strong economic links between rural areas and
the towns that serve them, rural towns frequently grow quite rapidly in prosperous
agricultural zones, while they atrophy in stagnant rural economies. As a result, both
the pace and the structure of urbanization depend, in part, on the dynamics under
way in agriculture and the rural economy.
Peter Lanjouw examines spatial patterns of rural poverty in the developing
world using detailed estimates of rural poverty at a spatially disaggregated level—
derived from an ongoing program of research on small-area estimation of poverty
and inequality—with geographically referenced information on agricultural poten-
tial and proximity to urban centers. Lanjouw examines the association between
rural poverty and “marginality,” focusing on the ﬁve developing countries of Brazil,
Cambodia, Ecuador, Kenya, and Thailand. “Marginal areas” are deﬁned as arising
through a combination of low agricultural potential and remoteness. The paper
brings together a set of tentative stylized facts about rural poverty and location to
pose a question for policy concerning the desirability of crafting an explicit strategy
of urban development that focuses on small towns.

New Economic Geography and the Dynamics of Technological
Change: Implications for Less Developed Countries

Session II debates the pattern of urbanization and economic activity between and
within countries and its implications for development policy. Eduardo Haddad
presents experimental results derived from a spatial computable general equilib-
rium model for the Brazilian economy. In the Brazilian case, ﬁrms can exploit
increasing returns to scale without serving a national market due to market imper-
fections associated with transportation costs that essentially serve to segment
markets. Furthermore, the asymmetries in the distribution network due to the
primacy of São Paulo serve to strengthen existing competitive advantages. Haddad
argues that research on the new economic geography in recent years has identiﬁed
some important theoretical inconsistencies between competitive regimes, conceptu-
alized by space-less and spatial economies. The challenges to competitive equilib-
rium in the spatial economy presented by the new economic geography remain
largely untested. He offers one approach to narrow the gap between theory and
empirical application. The Brazilian economy, sharing features of both developed
INTRODUCTION | 3

and developing countries, presents a further challenge: the lack of uniformity of
the spatial distribution of resources and population, the glaring disparities in
welfare across states and regions, and the presence of a hegemonic economy, in
São Paulo, that renders traditional computable general equilibrium modeling of
limited value.
Ingo Liefner argues that the diffusion of technology has never leveled the spatial
concentration of knowledge and that applying complex technologies requires a pro-
found and often subject-related knowledge. The cumulative character of certain tech-
nologies fosters spatial differentiation between leading and lagging regions with
respect to technology. Knowledge disparities and related economic disparities widen
most quickly in developing countries that open up for trade, foreign direct investment
(FDI), and related technology transfer. During phases of fast technological catch-up,
the absorption of technology in the technologically leading regions within newly
industrialized countries is more powerful and faster than the trickle down of technol-
ogy into lagging regions. For example, China’s spatial economy illustrates that fast
technological catch-up depends on and produces spatial concentration of human cap-
ital, technology, and FDI. If developing countries wish to beneﬁt from technology that
is accessible through inward FDI, it is crucial to help the leading urban regions to
create an economic environment suitable for learning. As a complement, developing
countries have to accept that many other urban areas will have to concentrate on less
technology-oriented industries, such as labor-intensive manufacturing.

Perspectives: Rural-Urban Transformation: Leading, Lagging, and
Interlinking Places

Session III covers urbanization processes and resulting challenges for lagging
regions. Mantang Cai presents China’s success in its economic reform over the last
30 years, starting with reforming the agricultural sector and then opening up
coastal areas. He argues that agricultural reform contributed a great deal to
improving the general livelihood of the rural population despite its marginal
contribution to gross domestic product (GDP) growth. However, under the
GDP-focused development process, China’s economic reform policy quickly shifted
its focus to urban-based industrial development, particularly in the coastal areas.
This development process has resulted in an increasing disparity in multiple
dimensions, particularly between urban and rural areas and between the east and
the west. At the same time, farmers’ income growth slowed down after the 1990s,
with a widening income gap between rural and urban areas. In recent years, the
Chinese government has recognized the disparities and initiated several new
development policies, including new development plans for the western, northeast,
and middle regions. At the same time, rural development has again become a focus
of the government’s development policy, generally understood as the San Nong
issues (three rural development issues, that is, agriculture, countryside, and
farmers). Under the new development policy, a great deal of government investment
4 | GUDRUN KOCHENDÖRFER-LUCIUS AND BORIS PLESKOVIC

has been directed to support rural development through various programs, and
development policy in general has shifted from “GDP-illustrated” development to
the “construction of a harmonious society.” In this context, Cai lays out key issues
facing rural development policy.
Frank van Oort and Philip McCann view urbanization as being inﬂuenced pre-
dominantly by regional disparities in potential economic growth. In explaining this,
they note an increase in the use of geographic models in economic analyses, given
the failure of orthodox economics to explain adequately the variation in the wealth
and poverty of areas. However, questions remain concerning why ﬁrms decide to
locate in particular areas and which kind of agglomeration is needed to foster local-
ized growth. Rooted in the new growth theory, this “rediscovery” of space in eco-
nomics has led to an extensive empirical literature on which spatial circumstances
give rise to agglomeration externalities that endogenously induce economic growth.
Van Oort and McCann emphasize the importance of economic complementarities,
as these can stimulate growth in a system (network) of cities—that is, the sum is
more than its parts. Local specializations in urban networks might help cities in
developing countries to integrate functionally with their regions.

Spatial Disparity and Labor Mobility

Session IV focuses on migration processes and their consequences for regional
development. Ángel de la Fuente Moreno examines the case for using education as
a regional policy tool in Spain. Drawing on the results of some recent work in
collaboration with Rafael Doménech, de la Fuente Moreno examines the evolution
of regional educational disparities in Spain during the last four decades and the
prospects for further educational convergence in the future. He also analyzes the
determinants of regional productivity in Spain, paying special attention to the role
of human capital. He ﬁnds that education is an important source of regional income
disparities. He estimates the social return to investment in different types of produc-
tive assets in each territory and draws some tentative conclusions regarding the
changes in our pattern of investment that may help to speed up the growth of the
country as a whole and to reduce internal inequality.
Adama Konseiga argues that parental migration is often found to be negatively
correlated with child health in Africa, although the causal mechanisms are poorly
understood as a result of limited data. Konseiga uses a data set that provides infor-
mation from the respondent parent on child morbidity in both rural and urban set-
tings and addresses the analytical weakness of previous studies assuming that the
health environment is exogenous. He ﬁnds that households ﬁrst endogenously
determine whether they will gain from participating in migration and, if they will,
decide whether to leave the children behind or not. The ﬁnal choice is made to
INTRODUCTION | 5

ensure the optimal survival chances for the child. Konseiga highlights the impor-
tance of understanding the health consequences of raising children in the context of
slums and increasing urban poverty in Nairobi, Kenya. His ﬁndings indicate that
households in the slums of Nairobi who migrated together with their children
experienced higher child morbidity than households who adopted the split-migra-
tion strategy, leaving children in their up-country home. Even though children of
migrants are safer up-country, not all households can afford this strategy. House-
holds are able to choose this strategy only if they have a strong social support net-
work in their community of origin or a large number of household members. This
is an important ﬁnding in targeting the Millennium Development Goals (MDGs)
because the split strategy involves policies that facilitate the costly monitoring of
family members left up-country.
Roman Mogilevsky and Aziz Atamanov present the framework of the Asian
Development Bank study on remittances and poverty in Central Asia and the South
Caucasus, which analyzes the impact of remittances on the macroeconomic situation
and ﬁnancial sector development in the Kyrgyz Republic. The analysis is based on
surveys of representative households and remittance recipients as well as on a data-
base of international monetary transfers created by the National Bank of the Kyrgyz
Republic. Analysis of the data reveals methodological problems with measuring
remittances in the Kyrgyz Republic and allows the identiﬁcation of remittance-send-
ing patterns, including the countries of origin for remittances and the typology of
senders and recipients, among others. The results of the analysis indicate that Kyrgyz
migrants’ remittances become an increasingly important force driving development
of the country’s economy and, in particular, its ﬁnancial sector.

Africa: Rethinking Growth and Regional Integration

Session V refers to the distinct patterns of spatial development in select African
countries, combining agglomeration without noticeable economic growth. The
session discusses which elements of economic development strategies could be
implemented. Hassen Mohamed explains that South Africa’s spatial economy is
characterized by social and economic disparities that have evolved historically over
a long period of time. The unevenness in spatial development is unique, however, in
that it is the product of both established patterns of growth that have persisted
since the early twentieth century as well as the oppressive system of apartheid. In
2003 the South African government adopted the National Spatial Development
Perspective (NSDP). The NSDP was updated in 2006 and serves as an overarching
framework in which to coordinate infrastructure investment across government. It
provides guidelines to enable government to ensure that the infrastructure invest-
ment and development programs achieve spatial outcomes consistent with the
objectives of fostering economic growth, addressing poverty, and promoting social
cohesion. Mohamed reviews the purpose and rationale of the NSDP as a distinctive
6 | GUDRUN KOCHENDÖRFER-LUCIUS AND BORIS PLESKOVIC

policy response of government to the stark social and economic dualism evident in
South Africa’s spatial landscape.
Wim Naudé argues that, to overcome disadvantages due to unfavorable geography,
four issues need to be prioritized in regional cooperation in Africa: transport infrastruc-
ture, trade facilitation, decentralization and local economic development, and migration.
Efforts to improve the credibility of regional agreements on transport infrastructure
could be included in World Trade Organization (WTO) binding rules on trade facilita-
tion, and attention could be given to the development of transport corridors. In support,
the international community could focus on linked aid, ensuring adherence to the inter-
national rights of landlocked countries, provide trade preferences to Africa, and align
those trade preferences with current African regional integration initiatives.

Learning from Europe’s Efforts at Integration and Convergence

Session VI is devoted to lessons learned from European experiences with special
reference to select instruments of the European Union’s regional policy. Nicola de
Michelis examines the role and objectives of European cohesion policy. He argues
that the policy has accompanied the construction of the single market and has func-
tioned as a regulatory mechanism to accompany the structural adjustment of
weaker economies. He explains that European cohesion policy has multiple objec-
tives linked to redistribution, allocation of resources, and political legitimacy.
However, debate tends to concentrate on the ﬁrst of these objectives, although the
others are equally important. Paradoxically, de Michelis observes, cohesion policy
is receiving more interest outside the European Union than within. Indeed, as recent
formal agreements with many third countries suggest, European cohesion policy is
perceived as a unique experiment in governing a regional integration zone. Despite
its successes, the policy needs to evolve, and many difﬁcult questions remain, in
particular related to the issue raised by the recent Organisation for Economic
Co-operation and Development (OECD) report on the European Union: how can
the policy become more performance based?
Rolf J. Langhammer summarizes the experiences with European convergence
funds and examines whether lessons can be drawn for similar endeavors in African
integration schemes. Empirical evidence on the European Union (EU) experience
shows a large variance with respect to the effects of funds on economic growth in
Europe. Side conditions such as “good policy conditions” are found to be neces-
sary, but not sufﬁcient, for success. Similarities to the debate on aid effectiveness
are striking, pointing to the importance of diminishing returns to scale, endogene-
ity, and reverse causality. EU experiences are not easily transferred to African inte-
gration schemes because the uniqueness of “deep integration” and a strong
regulatory framework in Europe prevents easy copying or even adaptation. Rather
INTRODUCTION | 7

than redistributing African taxes between the members of integration schemes that,
in most cases, did not work well in the past, Langhammer suggests considering
ﬁnancing convergence funds from the EU side in the European Partnership Agree-
ments as a way to balance efﬁciency and equity, the latter being so important for
African integration to succeed.
Philippe Martin analyzes some of the theoretical and empirical arguments that
serve to legitimate regional policies in Europe. He reviews the existing evidence that
European integration has led to a process of convergence between countries but not
between regions within countries and suggests mechanisms through which this may
have occurred. Taking the example of France, Martin shows that, in the past 20
years, regional divergence in production has indeed increased. However, the
geography of incomes has, during the same period, become more equal, producing
a “scissors effect” between the geographies of production and income. This suggests
that transfers, which have nothing to do with regional policies, have, at least in
France, more than compensated the increase in production inequality. Hence,
“regional convergence” is not a synonym of “regional cohesion,” at least at the
national level. Martin also reviews evidence on a possible trade-off between growth
and regional inequalities to suggest that regional policies are difﬁcult to defend on
grounds of efﬁciency. Both evidence and theory suggest that regional concentration
leads to efﬁciency gains. This also implies that the EU is faced with a choice it has
tried to avoid until now. Either it puts its effort in slowing or even reversing the
process of spatial economic concentration at the national level, or it concentrates
on policies to speed up the convergence between poor and rich countries. Finally,
Martin analyzes the relation between spatial and social inequalities. He reports
empirical evidence for Europe that suggests a strong empirical relation between the
two: even after controlling for transfers and other possible determinants of
individual inequalities, he ﬁnds that countries with more regional inequalities also
have more individual inequalities.

Spatial Policy for Growth and Equity

Session VII explores regional policy options from the perspective of economic and
social development and addresses current development challenges and issues of
multicountry strategies for regional cooperation. Grzegorz Gorzelak explains that
the meaning of cohesion—a term crucial for the policies of the European
Union—has recently been broadened to embrace its territorial dimension, supple-
menting the two traditional ones: economic and social. This creates grounds for
discussing the meaning of territorial cohesion.
Traditionally, territorial cohesion has been attached to convergence—that is, to
equalization of the levels of development of the territorial systems. However, that
8 | GUDRUN KOCHENDÖRFER-LUCIUS AND BORIS PLESKOVIC

convergence is very difﬁcult to achieve in practice. In the EU there has been conver-
gence between the member states, but more divergence between regions. Gorzelak
asks whether policy should aim to reach a goal of regional convergence that is not
achievable. Moreover, directing limited resources to a convergence-driven cohesion
policy may weaken the global competitiveness of the EU. Gorzelak contemplates
disconnecting cohesion from convergence and suggests attaching convergence to a
functional meaning of cohesion. Territorial cohesion would then mean an arrange-
ment of the EU space that would allow for more economic and social cohesion that
relies on cooperation and linkages among ﬁrms, institutions, territorial communi-
ties, and individuals across the EU territory.
Peter Nijkamp argues that spatial disparities reﬂect differences in regional growth
and productivity and calls for a profound analysis of their driving forces. He offers a
concise and selective overview of various elements of regional development theories.
Starting from traditional regional growth theory, Nijkamp introduces ﬁndings from
location and agglomeration theory, including infrastructure and network modeling,
with a particular emphasis on spatial accessibility. Next, innovation, entrepreneur-
ship, and knowledge are addressed and interpreted as critical conditions for success-
ful regional development. Elements from endogenous growth theory and the new
economic geography are introduced as well. Nijkamp highlights signiﬁcant contribu-
tions from the social capital school, as they may be particularly relevant for enhanc-
ing regional productivity. Finally, he pays attention to the regional convergence
debate, concluding with some prospective views on spatial disparity analysis.
Federico Bonaglia, Nicolas Pinaud, and Lucia Wegner note that strong commod-
ity prices are driving Africa’s growth, which should be about 6 percent in 2007 and
2008. Nevertheless, commodities are only part of the story, and oil-importing coun-
tries have registered record growth thanks to better macroeconomic policies,
improved political stability, and favorable harvests. The challenge for oil-exporting
countries will be to ensure that a large proportion of the proceeds from the miner-
als sector is invested in infrastructure and human capital development in order to
support medium- and long-term needs for diversiﬁcation. Oil-importing countries
will need to contain inﬂationary pressures now running into double digits as a
result of oil price increases and to ﬁnance or contain increases in their current
account deﬁcits. Globalization—the deepening of ﬁnancial and trade integration
associated with technological progress and multilateral liberalization—is creating
unprecedented opportunities for developing countries to accelerate growth and lift
millions of people out of poverty. African countries need to be among the beneﬁcia-
ries. The rapid growth of the Asian emerging economies can offer this opportunity,
as it is creating demand for Africa’s commodities (oil, metals, and precious stones)
and resulting in improved terms of trade. There are still risks and uncertainties, but
they can be reduced by strengthening the internal capacities of African countries
and nurturing the private sector in order to realize fully the opportunities that
globalization creates, while adequately coping with the risks.
Keynote Address
INDERMIT GILL

The organizers of this workshop plan to serve up a feast of ideas over the next two
days. I provide just a small appetizer. First I summarize the motivation for the
World Development Report (WDR) and its likely messages, and then I brieﬂy
discuss the contents and structure for the report.
The motivation for the report comes from two stylized facts:
• As countries develop, economic activities become more spatially concentrated.
That is, economic activity is packed geographically more tightly in developed
than in developing countries. Coastal regions account for 20 percent of China’s
land mass, but 50 percent of its economic output. Tokyo has 4 percent of Japan’s
land area but generates 40 percent of its output. The area around Paris constitutes
only about 2 percent of France’s land mass but accounts for 30 percent of its
economic output.
• Spatial disparities in welfare levels, such as household income, consumption, and
poverty, and in standards of education and health are much smaller in developed
than in developing countries. For example, while otherwise similar households
have consumption levels that are, on average, more than 75 percent higher in
leading than in lagging regions in developing countries, this ratio falls to less than
25 percent in developed countries such as Canada, Japan, and the United States.
The main point is that spatial concentration of economic activities and spatial
disparities in welfare levels are not the same thing: one goes up with development,
while the other goes down. These two stylized facts raise several questions:
• The first is whether, as countries grow, market forces automatically bring about
both of these changes: rising concentration of economic mass and falling spatial
disparities in living standards.

Indermit Gill is Director, World Development Report 2009. The World Bank, Washington D.C.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

9
10 | INDERMIT GILL

• A related question is whether these patterns are linear or not linear, monotonic
or not monotonic. That is, do spatial disparities first rise and then fall, or do they
fall monotonically? Does concentration keep rising monotonically, or does it first
rise and then fall?
• A third question is whether governments have helped or hindered these spatial
transformations. More positively, what should governments in developing coun-
tries do to shape them?
Let me tell you what might be the overall message of the WDR, although we are
still at an early stage in our work, and we still have lots to do. At this point, the
main message of the report could be something like this:
• First, economic concentration is generally good for development and should not
be resisted by governments; in some cases, it should even be encouraged.
• Second, large, growing, or persistent spatial disparities in economic well-being are
not good for development and should not be ignored by policy makers.
• Third, the general principle for getting both the economic benefits of concentra-
tion and the social benefits of equity is integration: integration of urban and rural
areas within countries, integration of leading and lagging regions within countries,
and integration of well-connected and isolated countries within world regions.
Just as researchers often start with working hypotheses and then reﬁne or change
them as the research results come in, at the World Bank we often start with “tenta-
tive overall messages” and then reﬁne or change them as the work progresses.
Think of this as the policy equivalent of a working hypothesis. Workshops like this
one are critical in getting the focus right.
Presuming for now that this message is indeed the one that we would like to
convey to readers of the WDR, how do we propose to convey these messages in the
report? Essentially, we aim to do three things:
• Characterize in a simple, easily remembered way the spatial transformations that
come with development and that are necessary for economies to develop. We
intend to do this by examining changes in three spatial dimensions: rising density,
falling distance, and persisting division.
• Identify the main drivers of these spatial transformations. We intend to do this by
looking at the interplay of economies of scale, mobility of productive factors, and
costs of transport and trade. This interplay has been identified in the academic and
policy work as key for understanding both spatial concentration and equalization.
• Assess whether and how governments have exploited these insights, or how they
can exploit them to better integrate markets, taking into account the role of
natural endowments, social and cultural factors, and political structures. Here
we intend to address three policy debates: the debate on the role of urban versus
rural development in speeding growth and poverty reduction, the debate on how
KEYNOTE ADDRESS | 11

best to help lagging regions within countries, and the debate on regional versus
global integration.
The report will accordingly have three parts, each describing, explaining, or
drawing lessons from the spatial transformations that have been observed in both
developed and developing countries.
The ﬁrst section of the report will be factual and present the stylized facts on
economic concentration and welfare disparities, for both developing and devel-
oped countries, over the last two centuries. It will have three chapters. The ﬁrst
chapter will document the increase in density through the rising concentration of
economic activities in cities. It will survey the evolution of disparities between
rural and urban areas and within urban areas. The second chapter will document
the decline of distance as ﬁrms and people move closer to domestic and interna-
tional markets. In particular, it will examine the evolution of lagging and leading
regions within countries, both in terms of concentration and in terms of differen-
tials in living standards. The third chapter will document the persistence of divi-
sion between countries, which can hinder increased concentration and the
movement of labor, capital, goods, and services. In particular, it will document the
concentration of economic activities in some regions of the world and assess
whether these regions have seen greater international convergence in living
standards than other world regions.
The second part of the report will identify the main drivers of these changes,
distilling the insights provided by the advances in economic thought over the last
two decades. In essence, the objective is to exploit these insights to identify the
sharpest instruments for getting both good concentration and sustainable differ-
ences in living standards. It will have three chapters, one on each of the factors
identiﬁed as critical in analyses that formally recognize the importance of increas-
ing returns: economies of scale that are associated with people and places, mobil-
ity of capital and labor, and costs of transporting goods and services. Put another
way, these chapters will each focus on a facet in the interactions between the
forces of agglomeration, migration, and specialization.
The ﬁrst chapter will exploit the insight that comes from the new economic
geography literature: for scale economies, it is not the size of the city that matters,
but the composition of activities that are located in the city. It will provide evidence
on the size and sources of these scale economies, for both developing and developed
countries, and try to identify the policy implications of these ﬁndings. The second
will exploit the insight that comes from the new economic growth, which highlights
another aspect of scale economies: other factors move to where they are scarce,
while human capital moves to where it is plentiful. That is, unlike other factors,
human capital reaps a higher reward in places where it is abundant. The third
chapter will exploit the fundamental insight that comes from the new international
trade literature: a decline in transport costs increases trade with neighboring
countries more than it increases trade with distant countries.
The third section of the report will discuss the policy implications, in essence
identifying the public policy priorities that help countries to realize the immediate
12 | INDERMIT GILL

economic beneﬁts of greater concentration and the social and long-term economic
beneﬁts of moderate spatial disparities. These chapters will emphasize the
importance of integrating places where economic mass is concentrated with places
where it is not. All three of the policy chapters will be “two-handed chapters.”
The ﬁrst will look at the urban and rural prerequisites for sound urbanization
strategies. In terms of factors of production, land will ﬁgure prominently, as the
rural-urban transformation depends critically on land improvements, land use regu-
lations, and property rights. The second will examine the priorities for both lagging
and leading regions for achieving successful territorial development. In terms of fac-
tors of production, labor will ﬁgure prominently. Policies to increase the mobility of
labor, or second-best policies for regions where labor is not mobile, should ﬁgure
prominently in this chapter. The third will identify the priorities for connected and
isolated countries to achieve successful facilitation of regional trade, so that even
small, poor countries can exploit the beneﬁts of concentration and share the gains
from trade. In terms of factors of production, intermediate inputs should ﬁgure
prominently in this chapter.
Put another way, the ﬁrst part of the report will examine and contrast the expe-
rience of developed and developing countries. For example, let us say that, based
on a cross-sectional comparison of countries at different stages of development, the
report shows a rising spatial concentration of economic activities, but a conver-
gence in living standards between places where economic activity is concentrated
and places where it is not. That is, it may ﬁnd that living standards are not as dif-
ferent between the northeastern and southern parts of the United States as they are
between the northeastern and southern parts of Brazil or between the coastal and
interior regions of China. Or it may ﬁnd that differences in living standards between
Delhi and rural northwestern India are much greater than those between Paris and
its surrounding rural areas.
Let us also say that the report ﬁnds that concentration is increasing in China
or in India, but that rural-urban or regional disparities are also increasing. That
is, a time-series analysis yields concentration and divergence, while a cross-
sectional analysis shows concentration and convergence. This contrast should lead
to three questions:
• Is this a normal phase that developed countries also experienced?
• Is the phase occurring because this is a different era than the one during which
today’s industrial countries developed?
• Is the phase occurring because today’s developing countries are missing policies
that are present in today’s developed countries?
The structure of the report is well suited for answering these three questions:
• Part I should help to answer the first question; that is, did spatial disparities first
rise and then fall in today’s developed countries?
KEYNOTE ADDRESS | 13

• Part II should help to answer the second: can theory developed over the last
two decades help us to understand how things are different now? Technologi-
cal advances have made it possible to exploit scale economies more today than
earlier. Capital is more mobile today, and so is human capital, but the potential
for international migration is much lower today for unskilled workers than it was
when today’s developed countries were poorer. And the costs of communication
and transport have fallen, more for the former than for the latter. Not coinciden-
tally, these are the “second-nature geography” factors that the theory identifies as
important for understanding the spatial transformation of economies.
• Part III should ideally answer the third question: if this is not a normal phase,
are today’s developing countries not doing something that developed countries
did? Or, if it is a normal phase, but it is also a different era, do today’s devel-
oping countries have to do less or more or something different?
In essence, the report will emphasize that neighborhoods are important for devel-
opment. This is true for cities, for regions, and for countries: it is difﬁcult for a city
to prosper in the middle of a squalid countryside, it is difﬁcult for a province to
prosper rapidly when other provinces in the country are squalid, and it is difﬁcult
for a country to prosper for long when the countries around it are mired in squalor.
The report will propose that the solution for cities, regions, and countries is
to invest in neighborhoods. The principle is to deepen integration and not to
attempt isolation.
Keynote Address
Rethinking Economic Growth
in a Globalizing World:
An Economic Geography Lens
ANTHONY J. VENABLES

Recent work in trade and economic geography provides a lens through which to
assess trade, globalization, and economic growth. This strand of research investi-
gates the way in which globalization shapes countries’ growth prospects and draws
out policy implications. Analysis is based on three facts about the technology of
trade and modern sector production. The ﬁrst is that modern sector activity is
surrounded by increasing returns to scale deriving from many sources, including
social, political, and economic. The second is that space still matters, both in
deﬁning the geographic scope of these increasing returns and in shaping economic
relationships more broadly. The third is that globalization is changing the nature of
international trade, in particular, by facilitating the fragmentation of production.
These facts support a view of the world different from that offered by standard
trade or growth theory, although consistent with the evidence. In particular, there
are equilibrium disparities between regions of the world and between subregions
within countries. Rapid economic growth can occur and is likely to be associated
with growth in the modern export sector. It will typically be “lumpy” in three
senses. First, in geographic space growth will be uneven, being concentrated in
some countries, regions, or cities. Second, in product space these regions are likely
to be narrowly specialized, perhaps even specializing in a few tasks rather than in
the production of integrated products. Third, temporally, growth will be rapid, but
only once some threshold level of capabilities has been reached. Growth will tend
to be sequential rather than parallel, with certain regions growing very fast, while
others lag behind. Both middle-income and very low-income regions will tend to be
left behind in this process.
This is a world in which there are many market failures and associated policy
questions. Given the importance of increasing returns to scale, how can countries
or regions reach the threshold at which they become attractive as export bases for

Anthony Venables is Professor of Economics at the University of Oxford and Chief Economist in the Department for
International Development (DFID) in the United Kingdom.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

15
16 | ANTHONY J. VENABLES

manufacturing and at which they start to beneﬁt from increasing returns? How
should we understand the economic relationship between regions or countries? Do
developments in one region complement or compete with developments in another?
The discussion of these issues starts by laying out the facts and then draws out
implications and some policy messages.

Modern Trade and Production

Three facts about the technology of modern trade underlie our thinking.

Increasing Returns
Increasing returns are inherent to much modern sector activity.1 They arise through
a wide variety of mechanisms, some narrowly technical and others to do with wider
socioeconomic feedbacks. Increasing returns may be internal to the ﬁrm—average
costs fall with the length of the production run—but their implications for the
performance of the economy are greatest if they are external, between rather than
within economic units. What are the sources of such external economies of scale?
One category is technological externalities, such as knowledge spillovers when
one ﬁrm beneﬁts from the knowledge capital of another. The mechanism through
which knowledge transfer occurs may be labor mobility, face-to-face social contact
between workers, or observation of the practices of other ﬁrms. Such effects are
particularly important in innovation-intensive activities, and a large literature
points to the spatial concentration of innovative activities (for example, Audretsch
and Feldman 2004). Location-speciﬁc knowledge spillovers also arise if ﬁrms learn
about the characteristics (such as the productivity) of the location and are unable to
keep their knowledge private, as in the “self-discovery” story of Hausmann and
Rodrik (2003). This may be a story of learning about the real characteristics of
locations or simply a story of “herding,” as ﬁrms choose to copy the location deci-
sions of other (successful) ﬁrms.
Possibly more important than technological externalities are pecuniary externali-
ties. In an imperfectly competitive market there are allocative inefﬁciencies, and
these inefﬁciencies may depend on the size of the market. Increasing returns arise if
increasing the size of the market brings about a reduction in these inefﬁciencies. For
example, in goods markets, there is a trade-off between having ﬁrms large enough
to achieve internal economies of scale without becoming monopolists. Increasing
market size shifts this trade-off, allowing the beneﬁts of both large scale and more
intense competition; as a consequence, ﬁrms will be larger, operating at lower unit
costs and setting lower prices. If ﬁrms have different levels of productivity, then a
larger market and the associated increase in competition will cause ﬁrms with high
productivity to grow and ﬁrms with low productivity to exit. This argument sup-
ports the empirical ﬁnding that much of the gain from trade liberalization is due to
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 17

a change in the mix of ﬁrms within each sector, favoring high-productivity ﬁrms at
the expense of low-productivity ﬁrms. A larger market will also support a greater
variety of products. These price and variety effects beneﬁt consumers and also, if
the goods are intermediates, beneﬁt ﬁrms in downstream sectors. For example, a
larger market will support a greater variety of specialized input producers, tailoring
their products to the needs of other ﬁrms. Downstream ﬁrms beneﬁt from this vari-
ety, while upstream ﬁrms beneﬁt from the large number of downstream ﬁrms. This
is simply a modern restatement of old ideas of forward and backward linkages—
that is, ﬁrms beneﬁt from the proximity of both suppliers and customers (see Fujita,
Krugman, and Venables 1999).
In addition to efﬁciency gains deriving from the size of the goods market, there
are also gains from operating in a large labor market. The larger the pool of work-
ers that a ﬁrm can access, the more likely it is that the ﬁrm will ﬁnd the exact skills
that suit its needs (see Amiti and Pissarides 2005). If ﬁrms are subject to idiosyn-
cratic shocks, then a larger labor market will expose workers to less risk, increasing
the probability of reemployment if they are made redundant. A large labor market
will increase the incentives for workers to undertake training. This argument, like
some of those in the product market, turns on increased intensity of competition. In
a small market, workers who acquire specialist skills may be “held up” by monop-
sonistic employers, so there is no incentive for them to invest in skills. The presence
of a large number of potential employers removes this threat of opportunistic
behavior and thereby increases the incentives to undertake training (Matouschek
and Robert-Nicoud 2005).
A further set of arguments, relating to density of activity as much as to scale of
activity, has to do with communication between workers. In many activities, face-
to-face communication is important (Storper and Venables 2004). Face-to-face con-
tact enables higher-frequency interchange of ideas than is possible by e-mail, phone,
or video conference. Brainstorming is hard to do without the ability to interrupt
and use parallel means of communication—oral, visual, and body language. Face-
to-face communication is also important for building trust, once again by enabling
one to observe the body language and a wide range of other characteristics of one’s
interlocutor. By breaking down anonymity, face-to-face contact enables networks of
the most productive workers to develop and promotes partnerships and joint proj-
ects between these workers. All of these considerations enhance productivity.
Increasing returns are also common in the provision of public sector goods and
services, and again there are several mechanisms. The simple one is technological:
many publicly provided services are also public goods and so (by deﬁnition) have
declining average cost. An important twist on this is that many inputs, including
public services and utilities, have a complementary relationship when used in pro-
duction (see Kremer 1993). Efﬁciency in the production of goods requires a contin-
uous supply of electricity and water and roads and security. If any (or all) of these
inputs is subject to increasing returns, then returns to scale for the package as a
whole are ampliﬁed.
18 | ANTHONY J. VENABLES

Increasing returns in the provision of public sector goods, services, and institu-
tions are also based on a much broader argument. There is often suboptimal provi-
sion of fundamental governance services, such as the protection of property rights
and the maintenance of economic and personal security and the rule of law. One
factor determining the quality of the institutional environment for doing business is
the ﬁrm-level demand for a high-quality environment, which creates a positive feed-
back. The larger is the business sector, the greater is the demand for a good busi-
ness environment, the greater is the political payoff from providing these governance
services, and the better is the ensuing business environment. If the initial position
was suboptimal, then this feedback is a source of increasing returns: the larger the
sector, the closer provision will be to the optimal level.

Spatial Frictions and Economic Geography
The second fact about modern trade and globalization is that distance still matters.
This can be seen most clearly by thinking through the externalities discussed in the
previous subsection, almost all of which are spatially limited. Knowledge spillovers
occur within very concentrated economic regions: clusters and districts within cities.
“Self-discovery” is, by deﬁnition, discovery of the characteristics of a particular loca-
tion. Labor market effects operate within a travel-to-work area. Public goods and
utilities (such as water supply and security) are hard to trade across space. Institu-
tional effects may be national or subnational, operating at the level of provinces,
cities, or just within special economic zones. The key element of “distance” is slightly
different in each of these and other contexts. Distance matters, as it raises the mone-
tary and time cost of trading goods, of moving workers, or of spreading ideas. It also
underlies jurisdictions and hence man-made barriers to mobility.
Globalization has had its greatest impact in the product market, although even
here distance matters. Firms can use small trade frictions as a way to soften compe-
tition, as witnessed by the long-running struggle to turn the European Union (EU)
into a truly integrated market. Distance has a large effect in choking off trade ﬂows,
and gravity models of trade suggest that the full costs of trade are far higher than
suggested by simply looking at tariffs or transport costs (see Anderson and van
Wincoop 2004). Part of the cost is associated with time-in-transit, and “just-in-
time” management techniques have increased the cost of slow or uncertain delivery
times. Hummels (2001) estimates the cost of time-in-transit for manufactures to be
nearly 1 percent of the value of goods shipped per day.
The spatial dimension provides a way of estimating the quantitative importance
of increasing returns, and a well-established literature measures the productivity
advantages of large-scale urban centers. A recent survey of the literature reports a
consensus view that, over a wide range of sizes, doubling city size is associated with
a productivity increase of some 3–8 percent (Rosenthal and Strange 2004). This is a
large effect—moving from a city of 50,000 inhabitants to one of 5 million is pre-
dicted to increase productivity by more than 50 percent. Analysis of the spatial
scale of these effects indicates that they are quite concentrated. Work on the United
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 19

Kingdom suggests that they attenuate rapidly beyond 45 minutes of driving time
(Rice, Venables, and Pattachini 2006). Effects also vary across sectors, generally
being larger in higher-technology sectors of activity.

Fragmentation
The third characteristic of globalized trade is fragmentation—otherwise known as
unbundling or splitting the value chain. It refers to the fact that different stages
involved in producing a particular ﬁnal good are often performed in different coun-
tries. Particular “tasks” may be outsourced (or offshored) and can be undertaken
in different places. This occurs in response to productivity or factor price differ-
ences and may take place within a single multinational ﬁrm or through production
networks of supplier ﬁrms.2 Although widely reported, solid evidence on the extent
of fragmentation is quite hard to obtain. It is estimated that just 37 percent of the
production value of a typical U.S. car is generated in the United States. Grossman
and Rossi-Hansberg (2006) report that the share of imports in inputs to U.S. goods
manufacturing has doubled to 18 percent over a 20-year period. In China, it is esti-
mated that domestic value added amounts to around 60 percent of the value of
goods exported, falling to less than 30 percent in equipment—electrical, communi-
cations, and transport—sectors (see Cuihong and Jianuo 2007). Up to 78 percent
of East Asian trade is in intermediate goods.
Fragmentation means that comparative advantage now resides in quite narrowly
deﬁned tasks. This is highly beneﬁcial for developing countries, particularly when
accompanied by learning effects and increasing returns to scale. It means that coun-
tries do not have to acquire capability in all stages of an integrated production pro-
cess; instead they can specialize in a narrow range of tasks, which entails a much
easier learning process.

Implications for Growth and Development

What are the implications of these facts for the world economy and for growth?
There are several important points.

Equilibrium Disparities
Diminishing returns to scale are a force for convergence. A city or country that
offers high returns to ﬁrms or workers will attract inﬂows of these factors, thus
reducing their returns and giving convergence to equilibrium. A consequence of this
is that an economic model dominated by diminishing returns offers no theory of
international or spatial inequality. Regions may differ because of exogenous factors,
but economic processes tend to reduce these differences.
20 | ANTHONY J. VENABLES

Spatially concentrated increasing returns offer a very different view. If a city or
country offers high returns to ﬁrms or workers, then they are attracted to the area,
which increases their returns further and ampliﬁes any initial differences. The pro-
cess may be unbounded: some regions may empty out, or all of world production
of some good may occur in a single place. Or the process may be bounded, as
when, beyond some point, diminishing returns come to dominate scale effects. Thus
cities eventually run into diminishing returns because of congestion costs. Produc-
tion of a good occurs in several places because of transport costs (or time differ-
ences) in supplying world demand from one location. The most important source
of diminishing returns to concentration of activity is that the prices of immobile
factors are bid up, which reduces the return to mobile factors. In the urban context,
land prices increase, making the city less attractive to mobile workers. In the inter-
national context, wages rise, making a country less attractive to mobile ﬁrms.
But whether bounded or unbounded, the point is that increasing returns create a
force for divergence. Locations may be identical in their underlying characteristics,
but economic forces make them different as the economy “self organizes” into clus-
ters. Differences in the prices of immobile factors and in income levels are then an
equilibrium outcome, not a transient consequence of some initial difference.

Wage Gradients
The fact that the beneﬁts of increasing returns to scale and access to large markets
depend on proximity to centers of activity means that we should expect to observe
wage or income gradients as we move from central to peripheral locations. Redding
and Venables (2004) investigate this at the international level. They use interna-
tional trade data and a gravity model to get a measure of each country’s access to
foreign markets and then investigate the relationship between per capita income
and this measure of market access. The work shows strong evidence of a “wage
gradient,” where countries with good market access have, conditional on other
factors, signiﬁcantly higher wages. The ﬁnding that proximity to foreign markets is
a statistically signiﬁcant and quantitatively important determinant of income levels
is consistent with the work of Frankel and Romer (1999), who use geography as an
instrument for the effect of trade on income.

Lumpy Growth
What does economic growth look like in this world? It has three characteristics,
each of which is a sort of “lumpiness.”
The ﬁrst aspect is that growth is lumpy or uneven across space. Instead of all
regions growing in parallel, they have a tendency to grow in sequence. Some
countries or regions grow rapidly as increasing returns cut in, and they transit
from one “convergence club” to another. Other countries are left out of the pro-
cess. To see the logic behind this, suppose that the world is divided between high-
income countries that have manufacturing activity and low-income countries that
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 21

do not. This is an equilibrium, as wages in the former group are matched by the
high productivity associated with scale, so there is no incentive for any ﬁrm to
relocate. Now suppose that some growth process occurring in the world economy
as a whole—such as technical progress—is raising income and hence demand for
manufactures. This increases employment and raises wages in the manufacturing
regions until a point is reached at which the productivity advantage of being in
an existing cluster is outweighed by the higher wages in the cluster. It then
becomes proﬁtable for some ﬁrms to relocate, but where do they go? Spatially
concentrated increasing returns mean that ﬁrms tend to cluster in a single newly
emergent manufacturing location. A situation in which all countries gain a little
manufacturing is unstable; a country that gets ahead even slightly has the advan-
tage, attracting further ﬁrms. As this process runs through time, countries join the
group of high-income nations in sequence. Each country grows quickly, as it joins
the club, and is then followed by another country, and so on.
Of course, the strict sequence of countries should not be taken literally. The key
insight is that the growth mechanism does not imply more-or-less-uniform conver-
gence of countries, as some economic growth theorists argue (see, for example,
Lucas 2000). Instead, growth is sequential, not parallel, as manufacturing spreads
across countries and regions. Which countries go ﬁrst, and the order in which coun-
tries join the high-income club, is determined by a range of factors to do with
endowments, institutions, and geography. Proximity to existing centers may be an
important positive factor, as with development in Eastern Europe and regions of
Mexico, East Asia, and China.3 Institutional failure, bad macroeconomic policy,
and conﬂict are powerful negative factors.
The second aspect of lumpiness is that growth is uneven in time. Small initial dif-
ferences between countries may mean that some countries get ahead, while others
are left behind for a long period of time. Countries that fall below some thresh-
old—in terms of investment climate and institutional quality—do not participate in
the process.
The third feature is that growth may be lumpy across products, as it is likely to
be concentrated in particular sectors. This occurs as many of the sources of increas-
ing returns are sector speciﬁc—that is, the acquisition of skills and capacity occurs
in quite narrowly deﬁned sets of products or tasks. A corollary of narrow special-
ization is, of course, that growth is highly export dependent. This is consistent with
the Asian experience and with empirical work on growth accelerations (see, for
example, Hausmann, Pritchett, and Rodrik 2005). Direct measures of the sectoral
concentration of exports are given by Hausmann and Rodrik (2003), who conclude
that “for all economies except possibly the most sophisticated, industrial success
entails concentration in a relatively narrow range of high-productivity activities.”4

Initial Difference: Who Gains and Who Is Left Behind?
In the preceding argument we emphasize that inequalities could emerge even
between similar (or ex ante identical) countries. But given that there are underlying
22 | ANTHONY J. VENABLES

differences between countries, what sort of countries might expect to do well, and
what countries might expect to do badly as a result of globalization? We make just
two points.
The ﬁrst is that some countries have failed to meet the necessary conditions to
achieve full integration in the global economy and inclusion in production net-
works. The obvious comparison is between the performance of much of Asia and
of Africa. Asian manufacturing has crossed the threshold, and diversiﬁcation into
exports of manufactures has raised wages and been contagious across the region. In
Africa this process has yet to start. Africa has lagged behind partly because its eco-
nomic reforms have lagged those of Asia: in the 1980s when Asia ﬁrst broke into
global markets, no mainland African country provided a comparable investment
climate. “Lumpiness” in the development process means that these initial differ-
ences translate into very large differences in outcomes and may create long lags
before Africa can attract modern sector activity. Several African cities now offer
investment climates as good as those offered earlier in Asia. However, these cities
now face the obstacle that Asia has a head start and is beneﬁting from clusters of
shared knowledge, availability of specialist inputs, and pools of experienced labor.
Africa’s potential export locations do not have these advantages and so face an
entry threshold or “chicken-and-egg” problem. Until clusters are established, costs
will be above those of Asian competitors, but because costs are currently higher,
individual ﬁrms have no incentive to relocate.
A second point is that globalization tends to beneﬁt the extremes and squeeze
the middle. It permits a ﬁner division of labor, enabling the highest-skilled countries
to concentrate on skill-intensive tasks and the lowest-skilled countries to concen-
trate on low-skill tasks, subject to crossing a capability threshold. What happens to
middle-income countries during this process? They do not have an “extreme” com-
parative advantage to exploit and, at the same time, are faced with changing terms
of trade, due largely to increased supply from Asia. Price changes of this magnitude
have brought gains to consumers worldwide, but they also have placed producers
under pressure. The pressure has not fallen primarily on producers in high-income
countries but instead has been felt in middle-income countries, which are producing
goods that are technologically relatively unsophisticated. This is one of the reasons
why globalization appears not to have beneﬁted many middle-income countries (see
also Summers 2006).

Policy Issues: Threshold Effects and Coordination Failures

What are the policy implications of the economic environment we have described?
There are multiple market failures and plenty of arguments for policy intervention,
yet at the same time spatial policy—regional policy in particular—has generally
been a failure. Researchers in new economic geography have been hesitant to make
policy recommendations.
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 23

In thinking about policy, there are (at least) two difﬁcult sets of issues that need
to be understood. The ﬁrst set concerns the threshold effects and coordination fail-
ures that arise in the presence of external economies of scale, and we discuss them
in this section. The second set concerns linkages and spillover effects: how do
changes in one country or region have an impact on other countries and neighbor-
ing regions? We discuss this issue later.
The world we have described is one of lumpiness and extreme specialization. A
corollary is that it is difﬁcult to get started in a new industry or location, although
the activity is viable once scale economies have been attained. There are several pol-
icy responses. The ﬁrst is to increase the conﬁdence with which investors see future
beneﬁts and also increase the ability to borrow against future returns. The second is
to internalize any external beneﬁts that new entrants create. The third is to offer
temporary support through some form of industrial policy. We discuss these options
through two examples: the growth of new cities and the prospects for African
export diversiﬁcation.

Threshold Effects: Creating an Urban Structure
Cities are areas of high productivity and, in many developing countries, rapid
economic growth. But economies of scale are balanced against diseconomies of
urban congestion and pollution, suggesting that there is an optimal urban size. We
know little about what this size is; it will vary according to the geography, indus-
trial structure, and governance of each city (see Au and Henderson 2004).
Threshold effects do, however, suggest that there may be a tendency for cities to
become larger than is optimal. The reason is that external economies of scale make
it hard to start new cities. Small cities do not beneﬁt from urban-scale economies
and so are unattractive to ﬁrms; as a consequence, they fail to grow into large cities.
Since new urban centers are hard to establish, existing cities grow well beyond their
optimum scale, possibly to the point where, at the margin, diseconomies such as
congestion outweigh positive economies of scale. Such an outcome is clearly inefﬁ-
cient, and the policy challenge is to determine how to promote the growth of new
cities or the deconcentration of existing ones.
There are likely to be two distinct market failures. One is that increasing returns
to scale give rise to externalities, so that the beneﬁts created by a single economic
agent (a migrant to the city or a relocating ﬁrm) are not internalized. The other is
that the beneﬁts received by a single economic agent (reciprocal externalities, so
ﬁrms and migrants receive as well as transmit beneﬁts) accrue over time, and their
future development will be highly uncertain. These two issues require different pol-
icy responses. We address the second one ﬁrst.
When does it become worthwhile for a single “small” ﬁrm or individual to
decide to invest in a new city? (This section draws on Henderson and Venables
2008.) It will be sooner the more conﬁdent the investor is in the future development
of the city and the greater is his or her ability to capture the future economic bene-
ﬁts, most obviously by having secure property rights to the land on which the
24 | ANTHONY J. VENABLES

investment takes place. It will also be sooner the easier it is for the individual to
borrow against these future beneﬁts. Policy can have a direct and important impact
in all of these areas. The ﬁrst may require government investment, playing the dual
role of constructing the new urban infrastructure and also signaling to investors
that this particular city (as compared to the numerous other potential city sites) is
one in which there is commitment to growth. Given this, long-term property rights
in urban land and access to credit are then standard prescriptions for making
markets work.
Adopting these measures increases the incentives to be an early mover from an
existing mega city to a new secondary city, but it does not move the economy to a
“ﬁrst-best optimum.” Investors are investing in the expectation of receiving the
external beneﬁts of a dynamic growing city, but they are not capturing the beneﬁts
of the externalities that they are themselves creating. There are two textbook solu-
tions to this problem. One is to internalize these beneﬁts, by having “large devel-
opers” buy up land in the city, attract ﬁrms and immigrants, and then take all the
land rents. The other is for the public sector to subsidize the creation of external
beneﬁts. In practice, neither of these solutions is likely to be satisfactory. Develop-
ers play this role in shopping malls and ofﬁce developments, but they are unlikely
to be large enough to capture more than a fraction of the beneﬁts of a city. Public
subsidies to the myriad externalities created by urban activity are expensive, difﬁ-
cult to target, subject to abuse, and consequently difﬁcult to recommend.
The important point to take away from this discussion is that, even without
compensating for the externalities, policy can move a large part of the way
toward efﬁciency just by the ﬁrst set of policy measures. Creating conﬁdence that
a particular urban site will develop and having property rights such that for-
ward-looking individuals will be induced to invest in the site solve the coordina-
tion failure, even if doing so does not internalize the externality.

Threshold Effects: Can Africa Export Manufactures?
Threshold effects matter for countries as well as for cities. As we argue above,
Africa has, at least until recently, been below the threshold required to be an attrac-
tive location from which to source imports.
What is the role for policy? Several observations follow by analogy with this dis-
cussion of cities. Provision of a good business environment and appropriate infra-
structure has direct beneﬁts and may also signal the government’s commitment to
development. Government may reinforce its commitment by high-level engage-
ment—the idea of a “developmental state.” Delivering these things in a particular
location—perhaps a special economic zone—has two advantages. The ﬁrst is that
provision of a full set of high-quality complementary inputs and utilities is relatively
cost-effective; complementarity means, roughly put, that it is better to provide
inputs well in one place than half as well in two places. The second advantage of a
special economic zone relates to our discussion of urbanization. In the long run,
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 25

there are efﬁciency gains from clustering activity, and in the short run it is impor-
tant to signal this by committing to a particular location.
Active industrial policy going beyond these measures is controversial. There are
multiple market failures in the environment we have described and hence a case for
intervention to reduce coordination failure and internalize externalities. But direct
interventions are hard to target, difﬁcult to withdraw, and subject to political
economy manipulation. Trade preferences are an alternative policy instrument that
merits consideration (see Collier and Venables 2007). Unlike other forms of
industrial policy, trade preferences in Organisation for Economic Co-operation and
Development (OECD) markets are under the control of OECD governments. This
gives them major advantages over the policies that are available to African
governments to provide the (temporary) advantage needed to form clusters. First,
they are relatively immune from recipient-country political economy problems,
because they are set by foreign, not domestic, government. Thus there is no way the
level of trade preferences can be escalated in support of failing ﬁrms. Second,
because trade preferences support exports, they offer a performance-based incentive:
ﬁrms beneﬁt only if they export. Firms therefore face the discipline—on quality as
well as on price—imposed by international competition. Rodrik (2004) argues that
this discipline was an important positive factor underlying the success of export-
oriented strategies, as compared to import substitution. Finally, they are ﬁscally
costless to African governments and virtually costless to OECD governments and
so compete with neither government spending on social needs nor aid.
Current practice with trade preferences is not particularly successful in promot-
ing the growth of manufacturing export clusters. However, current practices
typically set conditions at variance with some of the characteristics of modern inter-
national trade that we noted above. As we saw, much world trade now takes the
form of trade in tasks, with production fragmented between many countries and
high levels of intermediate trade. This fragmentation is potentially beneﬁcial for
Sub-Saharan Africa because it is much easier to develop capabilities and grow econ-
omies of scale in a narrow range of tasks than in integrated production of an entire
product. However, most preferential trading schemes have rules of origin that
prohibit this sort of trade, insisting that a high proportion of value added (or trans-
formation) is performed within the country or region and ruling out sourcing inter-
mediate inputs from the lowest-cost source (often China). The implication for
preferential trading schemes is that rules of origin must be liberal enough not to
exclude countries from participating in such production networks.
The second point is that preferences should be open to countries that are close
to the threshold of developing globally competitive clusters of activity. Preference
schemes that favor only the least-developed countries have the effect of excluding
countries such as Kenya and Ghana, which have just arrived at the threshold and
are manifestly more likely to develop manufacturing exports than are Liberia and
Somalia. The effect of concentrating on the least-developed countries is therefore
to exclude precisely those African countries best placed to take advantage of
preferences for export diversiﬁcation.
26 | ANTHONY J. VENABLES

In practice, if preferences are offered with rules of origin allowing specialization in
tasks and open to members beyond the least-developed countries, will export diversi-
ﬁcation occur in response? These conditions are offered by one policy regime—the
special rule for apparel contained in the U.S. African Growth and Opportunity Act—
and the evidence is of a strong export response, with apparel exports from Kenya,
Lesotho, Madagascar, and other areas of Southern Africa soaring from around US$300
million to US$1.5 billion a year (Collier and Venables 2007).

Policy Issues: Spatial Linkages and Spillovers

Some countries stand little chance of breaking directly into world manufacturing
export markets, perhaps because of very low starting positions or perhaps because
of natural geography, such as being landlocked. These economies are relatively
dependent on the performance of their neighbors. This is an aspect of a larger
question: what are the economic linkages between spatially proximate cities,
regions, or countries? At one level this is a straightforward question of compara-
tive statics. How do the effects of some exogenous or policy change spread out
across regions? Yet it is a question about which we do not yet have all the answers.
This is partly because the speciﬁcation of the policy shock often needs clearer
thinking. Is it contained within one region, does it affect many, or is it an “integra-
tive shock,” affecting regions only via its effect on the links between them? But
even given the speciﬁcation of the policy shock, the presence of increasing returns
means that comparative statics is difﬁcult, and effects can be qualitatively ambig-
uous depending in a delicate way on characteristics of the regions and the linkages
between them.

Spatial Linkages: Complementary or Competing Regions?
How does change in one region affect neighboring regions? Overman, Rice, and
Venables (2008) develop a simple diagrammatic structure to address this question.
The structure is based on three key relationships that shape interregional linkages.
The ﬁrst is the relationship between employment and earnings, a within-region rela-
tionship relating earnings in a region to the size of its labor force; the relationship
may be increasing or decreasing, depending on returns to scale. The second is the
relationship between employment and cost of living; within a region, how does
additional population change the cost of living? Some factors make this relation-
ship negative (more intense competition and more varieties of nontraded goods
meaning an economically large region has a lower cost of living), and others make
it positive (commuting costs and the price of land and houses). The third relation-
ship is migration: an interregional relationship measuring the responsiveness of
population to differences in real earnings.
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 27

Depending on the shape of these relationships, equilibrium could be stable or
unstable. Concentrating, for obvious reasons, on stable equilibria, regions may be
in either a “complementary” or a “competing” relationship with each other. When
regions are complementary, the effects of a positive shock that originates in one
region are spread across other regions. Thus an increase in productivity in one
region will trigger in-migration, which tends to dampen the productivity increase in
this region, while increasing productivity in others. But when regions are compet-
ing, economic adjustment has the opposite effect, amplifying the impact of a pro-
ductivity shock in one region, while causing productivity in other regions to fall.
This might arise because increasing returns mean that an increase in the labor force
is associated with higher productivity, and equilibrium is restored only by large
changes in population and regional living costs. Understanding whether parameters
are such that regions are “complementary” or “competing” is fundamental for
evaluating policy. For example, the U.K. government has launched debate on
whether to relax planning regulations to allow more houses to be built in the boom-
ing southeast of England. If regions are in a competing relationship, the effect of
this will be to increase house prices in the region and amplify regional differentials.
The mechanism is population inﬂow combined with increasing returns to scale to
generate higher earnings, which induces further inﬂow of population until it is
choked off by higher house prices.
While this example may not be directly relevant to developing countries, it con-
tains several lessons. First, it is possible to synthesize key relationships from many
theoretical models in a simple “reduced-form” manner and to study the interaction
between these relationships in a straightforward way. Second, these relationships
are amenable to empirical investigation: by looking at both the separate relation-
ships and the behavior of the system as a whole, it is possible to determine whether
regions are competing or complementary. And third, doing this is a necessary input
for undertaking regional policy; without it, even the sign of response to policy
change is unknown. These approaches need to be applied to developing countries,
for example, to analyze the problem of lagging regions in a fast-growing economy.
To do this requires both analytical work on the main channels through which
regions are interlinked and empirical work establishing whether regions are
complementary or competing.

Integrative Shocks: A Force for Convergence or Divergence?
Much spatial policy deals not with shocks within a region, but with shocks aimed
at changing the relationship between regions—for example, trade policy or road
and communications improvements. What do we know about the effects of such
integrative shocks?
Here too there are ambiguities. Under some circumstances a reduction in trade
costs between two regions will reduce disparities, while under other circumstances
it may increase them. The mechanisms essentially derive from the interplay
between product markets and factor markets. The product market mechanism is
28 | ANTHONY J. VENABLES

that ﬁrms want to locate where there is good market access. If one region is
slightly larger than the other, then reducing trade costs will cause ﬁrms to move to
the larger location and export to the smaller one, amplifying differences between
regions. The factor market mechanism is that ﬁrms relocate in response to wage
differences and are more likely to relocate to a low-wage region the lower are
trade costs. Putting these effects together in a general equilibrium framework (in
which both the location of demand and wage rates may be endogenous) typically
yields an inverse U–shaped relationship between trade costs and regional dispari-
ties. Reducing trade costs from a high to an intermediate level tends to increase
dispersion. But reducing them from an intermediate to a low level will reverse
this, leading to convergence.
What is the evidence? Some work on this has been done in the European Union.
There has been a continuing worry that the centripetal forces will dominate, draw-
ing activity into the center of the EU at the expense of peripheral regions. However,
most recent research suggests that trade costs are low enough for further reductions
to have the effect of reducing rather than increasing disparities. This EU-based
work leaves issues open for developing countries. Once again these are perfectly
researchable issues that need to be studied as input to policy formation.

Conclusions

There are many reasons for variation in the prosperity of countries and regions.
Some factors are truly exogenous—such as ﬁrst-nature geography—and others are
a function of political and institutional history. On top of these exogenous factors,
we need to place a theory of the location of economic activity. International trade
theory gets us part of the way, and the new economic geography approach broadens
this out to capture (in a micro-founded and evidence-based way) endogenous varia-
tions in productivity. The approach offers an explanation for the emergence of
disparities between countries and regions and their persistence. It suggests that even
as globalization causes dispersion of activity, so economic development will be in
sequence, not in parallel; some countries will experience rapid growth, while others
will be left behind. At the micro level, it points to the importance of overcoming
coordination failures and threshold effects in building new cities and establishing
new industries in developing economies.
This literature provides a basis for new and innovative thinking about policy, but
a note of caution is essential. Policy is difﬁcult because there are multiple market
failures. Even in the simple world of theory, policy does not map continuously (and
perhaps not even uniquely) into outcomes, because there is rapid change and there
may also be multiple equilibria. Comparative statics may depend in a delicate way
on characteristics of the economy. But the fact that policy is not straightforward is
not surprising to researchers on growth and development, and the lens of economic
geography provides further insights for grappling with these problems.
RETHINKING ECONOMIC GROWTH IN A GLOBALIZING WORLD | 29

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Notes

1. Of course, there is an enormous body of work looking at increasing returns, from (at least)
the work of Young (1928) onward.
2. See Arndt and Kierzkowski (2001) for discussion of fragmentation; for more recent treat-
ments, see Grossman and Rossi-Hansberg (2006); Markusen and Venables (2007).
3. The implications of market size and trade barriers are investigated by Puga and Venables
(1999), who assess the alternatives of export-oriented versus import-substituting manu-
facturing development. See also Kremer and de Carvalho Chamon (2006) for a model of
a “development queue.”
4. Imbs and Wacziarg (2003) point to the fact that the degree of diversiﬁcation increases in
the earlier stages of diversiﬁcation before declining.
Keynote Address
Africa: Rethinking Growth
and Regional Integration
PAUL COLLIER

Geography is an enormously important lens through which to see Africa. As a
prelude, one can ﬁrst think of Jared Diamond’s east-west and north-south
continental axes, which give you some insight on why Africa was so much slower
to take off agriculturally than other continents (Diamond 1997). Second, one can
think of Jeffrey Sachs’s work on health and William Masters’s work on frosts (see
Gallup and Sachs 2000; Masters and Sachs 2001; Masters and Weibe 2000). The
importance of frosts is not widely recognized, yet frosts are nature’s disinfectant.
Third, one can think of security. For example, Azar Gat’s book, War in Human
Civilisation, is an economic geography of warfare going back about 40,000 years
(Gat 2006). Gat’s analysis shows that, at an early stage of development, Africa
was not able to form political units capable of defending territory, which explains
why it has had so much more slavery than anywhere else and suffered so much
more from it. Because security is one of the scale-economy activities, it is a
recurring theme.
The typology I use for Africa is a geographic typology. On the one hand, it is a
physical geography typology, and, on the other, it is a human geography typology.
The physical geography typology is fairly well known. In this context, the key
cleavage is between resource-rich countries and resource-scarce countries, and there
are two reasons why the cleavage is so important. The ﬁrst one is economic and
related to the so-called Dutch disease, which I think is overplayed. The second is
related to the political economy: where there are resource rents, a large ﬂow of
money comes to the government without a tax base, that is, without the govern-
ment having to tax citizens. This offers an enormously powerful opportunity to dis-
tort the political process. It also means that countries with a lot of resource rents
almost inevitably have a large state, meaning large public revenues relative to gross
domestic product (GDP), and so the key economic challenge is to run a big state

Paul Collier is Professor of Economics in the Department of Economics at Oxford University, and Director, Centre for
the Study of African Economies in the United Kingdom.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

31
32 | PAUL COLLIER

effectively. The growth story in those countries revolves around whether govern-
ments can spend public money effectively. This creates a paradox because, in all
these countries, the ﬁrst-order issue is spending money effectively, but, because the
governments do not tax citizens (and should not tax them given that government
already has a lot of revenue), they have low accountability, which implies that large
volumes of public spending meet low accountability of public spending. There are
radical solutions, such as the Rajan and Subramanian (2007) approach, which is to
give the money to citizens and then tax it back. However, this is possible in theory,
but not in reality.
Among the resource-scarce countries, the next fundamental cleavage is whether
the country is coastal or landlocked. A well-known statistic says that, outside of
Africa, resource-scarce, landlocked areas account for only 1 percent of a developing
country’s population; in Africa, they account for about a third of the population.
Another way of stating this is that, outside of Africa, landlocked and resource
scarce countries have not become countries, but rather parts of more fortunately
endowed countries. This is very sensible, but, unfortunately, in Africa they are
countries. From a historical point of view, there has not been a plan to take the
resource-scarce, landlocked countries even to the middling level, other than by pig-
gy-backing on the opportunities of their more fortunately endowed neighbors. Yet
such piggy-backing depends on two things. First, the more fortunately endowed
neighbors have to take advantage of their opportunities, which in Africa has not
happened, and, second, they have to run the regional economy in such a way as to
maximize spillovers, which means good transport, low transport costs, and open
trade policies regarding your neighbors, none of which has occurred in Africa. So
far, that has not mattered because there has been little growth to spill over. As it
were, the sequence for growth in resource-scarce, landlocked countries is, ﬁrst, to
ﬁx the more fortunate neighbors and, second, to integrate with the more fortunate
neighbors. In brutally concrete terms, the only hope for Niger is growth in Nigeria.
This leaves us with the coastal, resource-scarce countries, which economists
understand because their models are all about integrating and harnessing labor
abundance in the global economy, which is what Asia has done with success. We
understand this kind of economic model in theory, and it works in practice, because
it takes countries rapidly to middle-income levels. However, this has not occurred
in Africa, a subject to which we return later.
The human geography typology has two considerations. First, Africa is much
more ethnically diverse than any other region on earth. Ethnic diversity has various
implications, of which the most important one—probably the empirically best
established one—is that ethnic diversity reduces the capacity to cooperate. It
reduces the level of communal trust and makes cooperation in the public sphere
harder, thus reducing the capacity to supply public goods. There may well be offset-
ting advantages to ethnic diversity, such as the creation of networks of information
(and trust) used by ethnically integrated entrepreneurs: ethnically diverse societies
have an absolute disadvantage in public goods, but an absolute advantage in pri-
vate activities. In this case, one would expect an ethnically diverse society to have a
AFRICA: RETHINKING GROWTH AND REGIONAL INTEGRATION | 33

smaller public sphere and a larger private sphere. Ethnically diverse societies would
look like America, and ethnically more integrated societies would look like Europe.
Bearing this in mind and the fact that Africa is even more ethnically diverse than
the United States, one could argue that part of Africa’s disastrous history is that,
after becoming free of Europe in the 1950s, Africa has spent ﬁve decades trying to
look like Europe in the 1950s, which implies an intensive effort to build public
goods. Africa did not model itself on America.
The second consideration is that, despite having a lot of ethnic diversity, Africa
has an enormous number of countries. For instance, while Africa has got fewer
people than India by far, it is split up into 53 countries. Small country size has many
consequences. One of these is what I refer to as scale economies in security. Build-
ing on my own model of civil war, I show that there are powerful scale economies
in security, more precisely, in internal security. If one were to split India up into 53
countries, one would enormously increase the incidence of civil war within the ter-
ritory of India. Another consequence that is revealed in my empirical work is that
being small slows the pace of reform out of very bad economic policies and gover-
nance. Since reform is about a society’s capacity to generate a public critique of
what has gone wrong, devise a strategy for change, and implement it, one can argue
that reform is about knowledge. However, just as securities are a scale-economies
activity, knowledge is also a scale-economies activity. Thus if knowledge has these
scale economies, then very small societies will be slower to reform, which is what I
ﬁnd globally. Related to the scale-economies argument, it is signiﬁcant that nearly
all of our evidence on scale economies comes from developed countries, and yet we
are dealing with what in economic terms can be referred to as micro states. Thus
there are potentially powerful economies of scale in many other activities, which
implies that more research is needed using data from economic micro states.
These two typologies—(a) the physical geography split between the resource-
rich countries and (b) the landlocked and the coastal countries and the human
geography features of Africa (that is, ethnic diversity and very small country size)—
then come together in three interactions. The interaction of resource-rich countries
with a lot of ethnic diversity produces a dismal conundrum, which is that the
resource-rich societies almost inevitably need to have big states. Resource-rich soci-
eties have big governments, because they have a lot of revenue to spend. These
societies have the normal problems of low accountability because of low taxation,
but also the problems of ethnic diversity, which make cooperation politically difﬁ-
cult. This explains why a big state is inefﬁcient: low accountability plus inability to
cooperate. This is the heart of the dilemma facing the third of Africa that is deﬁned
by resource riches: how to get around the very high costs of cooperation and the
very low impetus for scrutiny. A political technology is needed to overcome those
impediments, and it is not clear what it would be, yet there are no alternatives to
developing it.
The second dilemma is that resource richness interacts with ethnic diversity and
small states to produce a high incidence of violence. Ethnic diversity tends to
foment rebellion, which, when combined with small states that do not reach econo-
34 | PAUL COLLIER

mies of scale in security and with resource riches that increase the propensity to
internal violence, produces a high risk of civil war. This, of course, has been seen.
The ﬁnal interaction is between resource scarce and small coastal countries,
which leads to slow reform. Thus one can argue that it is due to their small size
that Africa’s coastal resource-scarce countries have missed the boat vis-à-vis Asia
in breaking into global markets. At the time when Asia had just got some of its
economies sufﬁciently together to be able to break into global markets and manu-
facturing, coastal Africa was still mired in various policy impediments. Although
those policy impediments have been resolved, Africa is stuck because Asia got into
that activity ﬁrst. A depressing thesis, which could be possible, is that the world
may have enough manufacturing sites given the share of manufacturing consump-
tion in global consumption. This would exclude Africa from the production of
these goods. It would also mean that trying to push Africa in this direction might
not work anymore. However, even though there are no guarantees for success, try-
ing to push Africa in this direction and failing have virtually no costs, because
there is a huge asymmetry in the costs of failure relative to the payoff to success. If
Africa is given trade preferences, builds export platforms, and yet does not break
into global markets and manufacturing production, nothing happens because the
costs incurred are minimal. However, if the effort does succeed and some countries
take off, they will enter a phase of falling costs and long-term expansion. Thus a
cost-beneﬁt analysis of the distribution of risk would show that what is called for
is not further research, but action. By the time we have nailed the research, the
window of opportunity will be over, because the world is moving away from trade
protectionism and, in 10 years time, there will be no scope for letting Africa into
global markets.
Another important point when discussing resource-scarce coastal economies is
that these countries desperately need well-functioning ports. Ports are the key trans-
port infrastructure if a country is located on the coast. However, ports supply a
public good, and thus we return to the point that, because Africa is ethnically
diverse, it is particularly inefﬁcient at supplying public goods. More generally, if
transport costs matter, as they unfortunately do, a key determinant of transport
costs is public spending—that is, public spending on the capital cost of ports, the
capital cost of roads, and the maintenance and management of this infrastructure.
One reason Africa faces high transport costs is a corollary of the fact that it is inef-
ﬁcient at supplying public goods. In other words, while we usually work from the
cost of transport to the need for public policy, we might work the other way around
and argue that the political economy is such that the provision of public goods is
going to be deﬁcient and, therefore, Africa is going to have geographic problems
because transport is going to be poor in these various dimensions.
I now turn to a few additional points regarding landlocked countries. Just as
ports are key for resource-scarce coastal countries, for resource-scarce landlocked
countries, the key is to create transport corridors to the coast. These are, in some
sense, regional public goods, which, in my opinion, is a misleading way of describ-
ing them. The key feature of these transport corridors to the coast is an asymmetry
AFRICA: RETHINKING GROWTH AND REGIONAL INTEGRATION | 35

of power between the landlocked and the coastal neighbors. The coastal neighbor
does not internalize the beneﬁts, because the beneﬁts accrue to the landlocked
neighbor. Thus the coastal neighbor systematically underinvests in transport, even
if it does not actively use poor transport as a control device and an arm of foreign
policy against its neighbor, although this has happened in a lot of Africa. The rea-
son this power asymmetry is important is because it matters for donors. Over the
last 10 years there has been a massive move among the donor community toward
this so-called “country ownership,” which means decentralizing aid budgets and
giving governments of countries the right to determine how their own aid budget is
spent. However, in this sphere, this is a big mistake. If so much aid goes to Uganda,
which Uganda controls, and so much aid goes to Kenya, which Kenya controls,
then Kenya will underspend on the transport that Uganda needs. The donor com-
munity—in particular, the World Bank—has tried to address this problem ineffec-
tively by deﬁning transport corridors as regional public goods and by creating a
pan-Africa regional public goods fund. This is inefﬁcient because, for example, a
transport corridor between Uganda and Kenya is not a public good for the whole
of Africa, which leads to a free-rider problem. What is needed instead is to take a
slice of aid to Uganda and Kenya before the governments of Uganda and Kenya get
any of it and assign that to a transport corridor. In other words, there needs to be
conditionality for those transport corridors. One can appreciate the beneﬁts of this
approach intellectually, but this has not happened over the last 40 years, which is
why there are no transport corridors worth mentioning.
What also matters for the landlocked, resource-scarce countries is air transport
and e-transport, but they are still somewhat underplayed. The sheer organization of
air transport, which is about a quarter of African exports by value, is a very impor-
tant matter for Africa. On the other hand, e-transport is a matter of telecommuni-
cations regulation and pricing, which, again, is a rather neglected area. One of the
enormously important questions to research for the landlocked countries is why
landlocked Africa has not established call centers, when these are being shifted
from India to the Philippines. A huge opportunity is being missed, and the explana-
tion probably has to do with telecommunications regulation. More research is
clearly necessary.
A ﬁnal suggestion regarding the resource-rich countries is that an element of eco-
nomic geography is missing, which is the economic geography of natural resource
extraction. In Africa, there is a whole crescent of massively valuable minerals
around the sort of arc on the northern fringes of the Democratic Republic of the
Congo. Different minerals are available, and new reﬁning technology means that it
is economic, in principle, to extract ores, even if the amount of mineral in the ore is
very low. However, since these minerals are a long way from the coast and very
heavy, there potentially is an economics of ﬁnding a local source of energy, reﬁning
the mineral locally, and transporting the reﬁned, lighter mineral to the coast. So far,
there is only one player thinking of combining energy and mineral extraction, reﬁn-
ing the mineral locally, and creating a transport corridor to take the reﬁned mate-
rial to the coast. That player is China. If China is the only player thinking in those
36 | PAUL COLLIER

terms, it will realize the enormous rents. Ideally, it would be better for these things
to become public knowledge and then auctioned as packages, so that the rents
accrue to the national governments rather than to China.
Finally, something more controversial is the fact that more than half of the costs
related to adverse spillovers coming from civil war and badly managed states accrue
to neighbors. This, in my opinion, calls into question the whole basis of national
sovereignty. What is more desirable is a political economy that maps Africa’s eco-
nomic problems more properly, for instance, with some degree of neighborhood
sharing of sovereignty. We do not observe this, but rather the attempt to create an
African Union, which, because Africa has got so many countries, has overwhelming
free-rider problems. Instead, the right political geography for Africa would be sub-
regional groupings.

References

Diamond, Jared. 1997. Guns, Germs, and Steel: The Fates of Human Societies. New York:
W. W. Norton.
Gallup, John L., and Jeffrey D. Sachs. 2000. “The Economic Burden of Malaria.” CID
Working Paper 52, Center for International Development, Harvard University,
Cambridge, MA.
Gat, Azar. 2006. War in Human Civilisation. New York: Oxford University Press.
Masters, William, and Jeffrey D. Sachs. 2001. “Climate and Development.” Department of
Agricultural Economics, Purdue University.
Masters, William, and K. D. Weibe. 2000. “Climate and Agricultural Productivity.”
Department of Agricultural Economics, Purdue University.
Rajan, Raghuram, and Arvind Subramanian. 2007. “Does Aid Affect Governance?”
American Economic Review 97 (2): 322–27.
Part I: Macro Trends: Spatial
Patterns of Economic Activity,
Income, and Poverty
Spatial Patterns of Population
and Economic Activity in the
Developing World
STEVEN HAGGBLADE

Human population is becoming increasingly concentrated in cities. Worldwide over
the past 200 years, the urban share of population has increased from 11 percent to
roughly 50 percent today (Bairoch 1988; United Nations 2007). In developing
countries over that same interval, the urban share of population grew from 9 to
44 percent (see ﬁgure 1).

FIGURE 1. Spatial Concentration of Population in Developing Countries, 1800–2005

Billion persons
6

0
1800 1900 1960 2005a 2005b

rural towns large cities

Source: Bairoch 1988; United Nations 2007; World Bank 2008.
a United Nations.
b WDR (World Development Report).

Steve Haggblade is Professor of International Development in the Department of Agricultural Economics at Michigan
State University in the United States.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

39
40 | STEVEN HAGGBLADE

In parallel with this growing concentration of human population, economic
activity has undergone a structural shift, as the share of agriculture in national
income has fallen, while that of services and manufacturing has risen. This struc-
tural transformation is a widely observed process in which broad-based productiv-
ity growth drives a shift in the sectoral composition of economic activity (see ﬁgure
2). Productivity gains—whatever their source—raise incomes. As incomes rise,
Engel’s Law observes that people spend a decreasing proportion of their income on
food. Because of the ﬁnite capacity of the human stomach, consumer spending
increasingly shifts from food to manufactured goods and services. This shift in
demand triggers a corresponding shift in the sectoral structure of economic produc-
tion. Agriculture’s share of total production falls, and transfers of labor and capital
out of agriculture help to fuel a corresponding rise in manufacturing and services.
Thus economic growth typically involves two parallel movements: a spatial shift
of population from predominantly rural to predominantly urban settlements and a
sectoral shift out of agriculture and into manufacturing and services. These two
transitions are tightly linked. Because agriculture involves spatially dispersed
production, the initial settlement of rural areas typically depends on the dispersion
of agricultural land or other natural resource potential. Yet manufacturing and
services beneﬁt from spatial concentration and the resulting economies of scale and
agglomeration. Hence industrial and service enterprises tend to be most competitive
when clustered together, usually near transport and energy sources. During
structural transformation, as agriculture’s share of total production falls, so too
does the rural share of total population. As a result, the sectoral shift from

FIGURE 2. Structural Transformation of Economic Activity, 1986

0.6

0.5

0.4

0.3

0.2

0.1

0
300 600 1,200 2,400 4,500 9,000
GDP per capita (US$)
agriculture manufacturing services

Source: Chenery and Syrquin 1986.
SPATIAL PATTERNS OF POPULATION AND ECONOMIC ACTIVITY | 41

agriculture to manufacturing and services drives the spatial movement of
population from rural areas to cities.
Cross-sectional data suggest a strong correlation between urbanization and eco-
nomic growth (see table 1). In part, urbanization is a consequence of economic
growth and structural transformation. In turn, the increasing concentration of eco-
nomic activity in intermediate towns and large cities serves as an accelerator, con-
tributing to faster rates of economic growth through economies of agglomeration
and lower transaction costs.
Today in the developing world, more than 50 percent of the population and
75 percent of the poor live in rural areas (United Nations 2007; World Bank 2007).
Therefore, efforts to eradicate poverty will need to pay careful attention to spatial
processes under way in rural areas.
Historically, humans have inhabited rural areas because of their agricultural or
natural resource-based potential. Indeed, spatial patterns of rural population corre-
spond tightly to agroecological potential. In Africa, the Sahara and Namib deserts
remain largely uninhabited, while the well-watered and fertile East African high-
lands, the Niger and Nile river deltas, and the North African coast are densely popu-
lated agricultural zones. Similarly, South Asia’s most fertile agricultural areas—the
Punjab and the Ganges River valley and delta—remain the most densely populated
rural areas in the subcontinent.
Although rural populations typically follow agriculture, rural economies are not
solely agricultural. Considerable nonfarm activity takes place, even in rural areas.
Cross-sectional data from a wide array of developing countries suggest that non-
farm earnings typically account for one-third to half of total rural income (see
table 2).
Reviews of the rural nonfarm economy suggest that, in the early stages of eco-
nomic development, agriculture drives growth and development of the rural non-
farm economy, through a variety of economic linkages (Haggblade, Hazell, and
Dorosh 2007). Demand from rural farm households for consumer goods and for
personal, processing, and transport services drives growth of a large rural nonfarm
economy. Growth linkage studies suggest that every dollar of agricultural income

TABLE 1. Spatial Distribution of Population, by Region, 2005 (by percentage)
Urban
Region Rural Intermediate Largea
World 51 25 24
Developed countries 26 40 35
Developing countries 57 22 21
Least developed countries 73 16 11

Latin America and the Caribbean 23 37 40
Southeastern Asia 56 29 15
Sub-Saharan Africa 65 20 15
Source: United Nations 2007.
a Cities with population of 500,000 or more.
42 | STEVEN HAGGBLADE

TABLE 2. Nonfarm Share of Rural Income, by Region (by percentage)
Region Nonfarm share
Africa 38
Asia 51
Latin America 47
Source: Haggblade, Hazell, and Reardon 2007: table 1.1. Figures represent the average of available rural income
studies for the 1990s and 2000s: 23 studies from Africa, 14 from Asia, and 17 from Latin America.

increases demand for rural nonfarm goods and services by an additional US$0.25
to US$0.64 (see table 3). Because demand for services—construction, health care,
education, transport, prepared foods, milling, agricultural equipment repair, and
personal services—dominates incremental consumer spending, services typically
dominate the rural nonfarm economy (see table 4).
Agricultural wage rates and work calendars likewise inﬂuence the opportunity
cost of rural labor as well as the opportunities for seasonal migration. In
agriculturally prosperous regions, where agricultural wage rates rise, so too does
the opportunity cost of labor in rural nonfarm pursuits. Through these labor
market linkages, rising agricultural productivity stimulates rising rural wage rates
and triggers a clear shift out of low-return, last-resort nonfarm activities and into
increasingly remunerative nonfarm businesses (see table 5). In contrast, where

TABLE 3. Agricultural Demand Linkages, by Region (by percentage)
Linkage Asia Africa Latin America
Initial agricultural income growth 1.00 1.00 1.00

Additional income growth
Other agricultural 0.06 0.17 0.05
Nonfarm 0.58 0.30 0.21
Total 0.64 0.47 0.26

Source of linkages
Consumption 81 87 42
Production 19 13 58
Source: Haggblade and Hazell 1989.

TABLE 4. Sectoral Share of Rural Nonfarm Employment, by Region (by percentage)
Sector Africa Asia Latin America
Manufacturing 21 22 23
Trade 31 29 22
Services 36 34 35
Construction 12 15 20

Total 100 100 100
Source: Haggblade, Hazell, and Reardon 2007: table 1.2.
SPATIAL PATTERNS OF POPULATION AND ECONOMIC ACTIVITY | 43

agricultural productivity remains stagnant in the face of demographic pressure, per
capita incomes and agricultural wage rates fall, inducing a corresponding fall in the
volume and productivity of nonfarm activity. Agriculture thus inﬂuences both the
scale and the composition of rural nonfarm activity.
Many of these nonfarm services cluster in rural towns where businesses enjoy
access to power, communications, and transport links. Even in rural areas, nonfarm
businesses beneﬁt from economies of agglomeration. As a result, empirical studies
observe frequent clustering of nonfarm businesses, in both rural areas and rural
towns. Silk-weaving factories in Thailand have concentrated in northeastern Thai-
land, particularly around the town of Pak Ton Chai, while many villages in the
region specialize in silk yarn production (Haggblade and Ritchie 1992). In Indone-
sia, rural production of textiles and rooﬁng tiles tends to cluster geographically
(Weijland 1999). Some towns in Pakistan specialize in the production of soccer
balls, while some towns in India specialize in the production of plastic jewelry (Pap-
ola 1987), and still others concentrate on more specialized services such as snake
charming (International Herald Tribune 1989). Tanning, shoe production, sawmill-
ing, and metal working likewise often cluster together in speciﬁc locations (Burger,
Kameo, and Sandee 2001; Freeman and Norcliffe 1985; Kennedy 1999; Schmitz
1999; Schmitz and Nadvi 1999).
In later stages of economic growth, as urbanization proceeds and the costs of
urban labor and land rise, many countries witness a phase of urban-led urban-to-
rural subcontracting that becomes increasingly important in driving rural nonfarm

TABLE 5. Labor Market Linkages between Agriculture and the
Rural Nonfarm Economy in Bangladesh
Income per hour in Percent by which agriculturally developed
agriculturally regions exceed underdeveloped areasa
underdeveloped Employment
regions (taka Income (hours per Income per
Sector per hour) per hourb week) household
Agriculture 5.1 29 8 40

Nonagriculture
Services 11.4 4 30 35
Cottage industry 4.4 90 −81 −63
Wage laborc 2.8 6 −41 −38
Trade 2.3 195 −28 113
Total 4.4 59 −29 12
Source: Hossain 1988: 95, 120.
a Hossain distinguishes agriculturally “developed” and “underdeveloped” regions by various criteria: access to

irrigation, use of modern rice varieties, and fertilizer consumption, among others. In the agriculturally developed
regions, modern varieties cover 60 percent of cropped area compared with only 5 percent in the underdeveloped
areas.
b Calculated from Hossain (1988: tables 48, 64).
c Nonfarm wage labor includes earth-hauling, construction, transport, and “other” employment.
44 | STEVEN HAGGBLADE

growth, particularly in close proximity to urban centers and along transport corri-
dors (Otsuka 2007).
Rural towns stimulate nonfarm activity as well as agricultural activity in sur-
rounding areas. They provide key productive infrastructure for nonfarm businesses,
while at the same time creating new markets for agricultural producers. Recent
decades have seen an explosion in urban demand for high-value agricultural prod-
ucts such as milk, meat, vegetables, and fruits. Rural towns further stimulate agri-
cultural productivity by improving the range, quality, and availability of farm
inputs, ﬁnancial services, agricultural markets, and processing services (Evans 1992;
Rondinelli 1986; Tacoli 1998, 2003; Tacoli and Satterthwaite 2003). As a result,
intermediate cities constitute key elements of the spatial hierarchy, linking rural
producers with large cities and export markets (see tables 6 and 7).
Because of the strong links between rural areas and the towns that serve them,
rural towns frequently grow quite rapidly in prosperous agricultural zones (Hardoy
and Satterthwaite 1986; Rondinelli 1987a, 1987b; Tacoli and Satterthwaite 2003).
Rising rural wage rates in these areas favor the emergence of mechanization and
other investments in worker productivity. Conversely, stagnant rural economies give
rise to feeble demand linkages, limited commercial exchange, and stagnant rural

TABLE 6. Share of Employment, by Activity and Size of Locality
(% unless otherwise noted)
Personal,
Commerce ﬁnancial, and Construction,
Total Total and community utilities, and
Country and year labor Agriculture nonfarm Manufacturing transport services mining
ISIC code 1 2–9 3 6, 7 8, 9 2, 4, 5

Bangladesh
Rural 100 58 42 10 17 12 3
Intermediate
Urban 100 16 84 27 28 23 6
Chittagong and
Dhak 100 8 92 26 29 32 5

Chile, 1984
Rural 100 65 35 5 9 17 4
Intermediate
Urban 100 7 98 14 29 41 9
Santiago 100 1 99 20 26 46 7

Zambia, 2000
Rural 100 90 10 1 2 7 1
Intermediate
Urban 100 22 78 7 31 30 10
Lusaka 100 0 100 14 22 54 10
Source: Haggblade, Hazell, and Reardon 2007: table 1.6.
SPATIAL PATTERNS OF POPULATION AND ECONOMIC ACTIVITY | 45

TABLE 7. Spatial Distribution of Population and Economic Activity in the Developing
World, 2005 (% unless otherwise noted)
Urban
Indicator Rural Intermediate Largea Total
Population share
UN deﬁnition 57 22 21 100
WDR deﬁnition 56 24 20 100

Relative income
Estimated ratio 1.0 1.5 2.0 0.0
Per capita income (US$) 448 671 895 592

Income share
Agriculture 91 6 3 100
Manufacturing 27 35 39 100
Services 27 33 40 100
Source: Population share is from United Nations 2007; World Bank 2008. Per capita income is from World Bank,
World Development Indicators. Income share by locality size is estimated from Haggblade, Hazell, and Reardon
2007.
a Cities with populations 500,000 and above.

wage rates, triggering an exodus of unskilled rural workers seeking employment in
other agricultural zones or in cities and towns.
These differences suggest that the health of the rural economy inﬂuences the
vibrancy of the intermediate cities that serve them. As a result, both the pace and
the structure of urbanization will depend, at least in part, on the dynamics under
way in agriculture and in the rural economy.

References

Bairoch, Paul. 1988. Cities and Economic Development from the Dawn of History to the
Present. Chicago: University of Chicago Press.
Burger, Kees, Daniel Kameo, and Henry Sandee. 2001. “Clustering of Small Agro-Processing
Firms in Indonesia.” International Food and Agribusiness Management Review 2 (3-4):
289–99.
Chenery, Hollis, and Moshe Syrquin. 1986. “Typical Patterns of Transformation.” In
Industrialization and Growth, ed. Hollis Chenery, Sherman Robinson, and Moshe
Syrquin. New York: Oxford University Press.
Evans, Hugh E. 1992. “A Virtuous Circle Model of Rural-Urban Development: Evidence
from Kenya.” Journal of Development Studies 28 (4): 640–67.
Freeman, Donald B., and Glen B. Norcliffe. 1985. “Rural Enterprise in Kenya: Development
and Spatial Organization of the Nonfarm Sector.” Research Paper 214, Department of
Geography, University of Chicago.
Haggblade, Steven, and Peter Hazell. 1989. “Agricultural Technology and Farm-Nonfarm
Growth Linkages.” Agricultural Economics 3 (4): 345–64.
46 | STEVEN HAGGBLADE

Haggblade, Steven, Peter Hazell, and Paul A. Dorosh. 2007. “Sectoral Growth Linkages
between Agriculture and the Rural Nonfarm Economy.” In Transforming the Rural
Nonfarm Economy, ed. Steven Haggblade, Peter Hazell, and Thomas Reardon, ch. 7.
Baltimore, MD: Johns Hopkins University Press.
Haggblade, Steven, Peter Hazell, and Thomas Reardon, eds. 2007. Transforming the Rural
Nonfarm Economy: Opportunities and Threats in the Developing World. Baltimore,
MD: Johns Hopkins University Press.
Haggblade, Steven, and Nick Ritchie. 1992. “Opportunities for Intervention in Thailand’s
Silk Subsector.” GEMINI Working Paper 27, Development Alternatives, Bethesda, MD.
Hardoy, Jorge E., and David Satterthwaite. 1986. Small and Intermediate Urban Centres:
Their Role in National and Regional Development in the Third World. Boulder, CO:
Westview.
Hossain, Mahabub. 1988. Nature and Impact of the Green Revolution in Bangladesh.
Research Report 67. Washington, DC: International Food Policy Research Institute.
International Herald Tribune. 1989. “In India, Hard Times Beset a Charming Village.”
International Herald Tribune, December 28, p. 3.
Kennedy, Loraine. 1999. “Cooperating for Survival: Tannery Pollution and Joint Action in
the Palar Valley (India).” World Development 27 (9): 1673–92.
Otsuka, Keijiro. 2007. “The Rural Industrial Transition in East Asia: Inﬂuences and
Implications.” In Transforming the Rural Nonfarm Economy, ed. Steven Haggblade,
Peter Hazell, and Thomas Reardon, ch. 10. Baltimore, MD: Johns Hopkins University
Press.
Papola, T. S. 1987. “Rural Industrialization and Agricultural Growth: A Case Study on
India.” In Off-Farm Employment in the Development of Rural Asia, ed. R. T. Shand,
vol. 1. Canberra: Australian National University.
Rondinelli, Dennis. 1986. “The Urban Transition and Agricultural Development:
Implications for International Assistance Policy.” Development and Change 17 (2):
231–63.
———. 1987a. “Cities as Agricultural Markets.” Geographical Review 77 (4): 408–20.
———. 1987b. “Roles of Towns and Cities in the Development of Rural Regions.” In
Patterns of Change in Developing Rural Regions, ed. Raphael Bar-El, Avrom
Bendavid-Val, and Gerald J. Karaska. Boulder, CO: Westview.
Schmitz, Hubert. 1999. “Global Competition and Local Cooperation: Success and Failure in
the Sinos Valley, Brazil.” World Development 27 (2): 1627–50.
Schmitz, Hubert, and Khalid Nadvi. 1999. “Industrial Clusters in Developing Countries.”
World Development 27 (9): 1503–14.
Tacoli, Cecilia. 1998. “Rural-Urban Interactions: A Guide to the Literature.” Environment
and Urbanization 10 (1): 147–66.
———. 2003. “The Links between Urban and Rural Development.” Environment and
Urbanization 15 (1): 3–12.
Tacoli, Cecilia, and David Satterthwaite. 2003. “The Urban Part of Rural Development: The
Role of Small and Intermediate Urban Centres in Rural and Regional Development and
Poverty Reduction.” Rural-Urban Interactions and Livelihood Strategies Working Paper
9, International Institute for Environment and Development, London.
United Nations. 2007. World Population Prospects: The 2004 Revision and World Urban-
ization Prospects: The 2005 Revision. New York: Population Division, Department of
Economic and Social Affairs, United Nations Secretariat. http://esa.un.org/unup.
Weijland, Hermine. 1999. “Microenterprise Clusters in Rural Indonesia: Industrial Seedbed
and Policy Target.” World Development 27 (9): 1515–30.
World Bank. 2007. World Development Report 2007: Development and the Next
Generation. New York: Oxford University Press.
———. 2008. World Development Report 2008: Agriculture for Development. New York:
Oxford University Press.
SPATIAL PATTERNS OF POPULATION AND ECONOMIC ACTIVITY | 47

Notes

1. Deﬁnitions of “rural” vary widely across countries. The United Nations data collection
system, which reports data for individual countries according to their own speciﬁc rural
cutoffs, projects a rural population of 57 percent in the developing world in 2005. The
World Bank’s World Development Report (WDR) team has developed a more standardized
cutoff to aid in cross-country comparisons. Under the WDR deﬁnition, rural areas
accounted for 56 percent of total population in the developing world in 2005.
Some Stylized Facts about
Rural Poverty and Geography
and a Question for Policy
PETER LANJOUW

This paper summarizes the ﬁndings emerging from an ongoing research project on
the spatial patterns of rural poverty in the developing world (Buys and others 2007
provide an early summary). The project is assembling data from a group of coun-
tries in order to explore the extent to which rural poverty is concentrated in
marginal areas. Detailed estimates of rural poverty at a spatially disaggregated
level, coming from an ongoing program of research on small-area estimation of
poverty and inequality, are combined with geographically referenced information
on agricultural potential and proximity to urban centers. Attention is initially
focused on ﬁve developing countries: Brazil, Cambodia, Ecuador, Kenya, and Thai-
land. “Marginal areas” are deﬁned as arising through a combination of low agri-
cultural potential and remoteness.
The analysis points tentatively to six stylized facts.
First, extreme rural poverty and vulnerability are generally most evident in mar-
ginal areas, but these patterns are observed most clearly in countries that are urban-
izing more rapidly and transitioning out of agriculture. In the ﬁve countries
considered here, there is some evidence that the headcount rate is higher in those
areas that can be considered as “unfavorable” in terms of agricultural productivity
and, particularly, in terms of accessibility (see ﬁgure 1). However, this pattern is
most evident in the three countries (Brazil, Ecuador, and Thailand) that are transi-
tioning out of agriculture. In Cambodia and Kenya, where traditional agriculture is
still the dominant economic sector, the evidence of higher poverty in areas with low
agricultural potential and low access is weaker. Poverty rates are very high through-
out those two countries, and the poor seem to be spread evenly around rural areas.
Second, the spatial distribution of poor people is also of policy interest. The gen-
eral pattern is that the bulk of the rural poor are located in readily accessible and
more productive localities. The geographic distribution of population in most

Peter Lanjouw is Lead Economist of the Development Research Group (DECRG) at The World Bank in Washington, D.C.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

49
50 | PETER LANJOUW

FIGURE 1. Incidence of Poverty and Geographic Characteristics in Select Countries

A. Brazil
% of population that is poor
0.52
0.51
0.50
0.49
0.48
0.47
0.46
0.45
0.44
0.43
0.42
0.41
0.40
0.39
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

B. Thailand
% of population that is poor
0.23
0.22
0.21
0.20
0.19
0.18
0.17
0.16
0.15
0.14
0.13
0.12
0.11
0.10
0.09
Good access Moderate access Low access

high agropotential low agropotential medium agropotential
SOME STYLIZED FACTS ABOUT RURAL POVERTY AND GEOGRAPHY | 51

FIGURE 1. (continued)

C. Cambodia
% of population that is poor
0.82
0.80
0.78
0.76
0.74
0.72
0.70
0.68
0.66
0.64
0.62
0.60
0.58
0.56
0.54
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

D. Kenya
% of population that is poor
0.60
0.59
0.58
0.57
0.56
0.55
0.54
0.53
0.52
0.51
0.50
0.49

Good access Moderate access Low access

high agropotential low agropotential medium agropotential
52 | PETER LANJOUW

FIGURE 1. (continued)

E. Ecuador (1991)
% of population that is poor
0.54
0.52
0.50
0.48
0.46
0.44
0.42
0.40
0.38
0.36

Good access Moderate access Low access

high agropotential low agropotential medium agropotential

E. Ecuador (2001)
% of population that is poor
0.62
0.60
0.58
0.56
0.54
0.52
0.50
0.48
0.46
0.44

Good access Moderate access Low access

high agropotential low agropotential medium agropotential
SOME STYLIZED FACTS ABOUT RURAL POVERTY AND GEOGRAPHY | 53

countries is far from uniform. Even though population density is particularly high
in areas with low poverty rates, the absolute number of poor people in those locali-
ties may still be very high. Indeed, in the ﬁve countries considered by Buys and his
coauthors, the bulk of the rural poor generally are located in readily accessible and
more productive localities.
Third, national patterns often obscure more clearly discernible patterns at the
subnational level. In the center-west, north, and northeast of Brazil, poverty is
associated much more clearly with remoteness and low agricultural potential than
is observed at the national level. In the wealthier southeastern and southern
regions, the association between rural poverty and geography is less marked. In
Thailand, too, the association is particularly strong in the north. Even in Kenya,
where there seems to be little association between poverty and geography at the
national level, the link between poverty, on the one hand, and remoteness and agri-
cultural potential, on the other, is readily discernable in the western region of the
country (see ﬁgure 2).
Fourth, internal migration accounts, at least in part, for the observation that
poverty rates and poverty densities do not coincide. The paper by Buys and his
coauthors examines rural poverty maps for Ecuador in 1990 and 2001. Between
these two years, the economy experienced major macroeconomic upheaval and cri-
sis. In both years, the estimated incidence of poverty in a locality was signiﬁcantly
higher in localities that were remote and also had low agricultural potential. Analy-
sis of changes in poverty between 1990 and 2001, however, reveals that the inci-
dence of poverty increased sharply in those localities that also saw the sharpest rise
in their population. Rural areas with positive population growth were located close
to urban centers, while population declined in remote and low-productivity areas.
Indeed, poverty rates actually declined in those localities with a high share of land
designated as of moderate accessibility and low agricultural potential. These pat-
terns are consistent with a process of distress-induced migration of poor people to
those areas that, in each year, were less poor (see ﬁgures 3 and 4).
Fifth, the pattern of greater rural poverty in areas that are remote from urban
centers is not necessarily conﬁned to large urban centers. In Brazil, 60 percent of
the urban population resides in towns and cities with populations of 500,000 or
less, while 30 percent of the urban population resides in centers with 100,000 peo-
ple or less. Small towns and cities thus account for a very large fraction of the
urban population. Analysis that distinguishes between urban areas in terms of pop-
ulation in Brazil ﬁnds the same pattern: rural poverty is generally lower in localities
closer to urban centers, even when those centers are small (see table 1).
Sixth, there is an association between urban poverty and both rural poverty and
rural nonfarm diversiﬁcation. A study by Ferré, Ferreira, and Lanjouw (2008) indi-
cates that, while 30 percent of the urban population in Brazil resides in towns of
100,000 or less, these centers account for as many as 40 percent of the urban poor.
(Nearly 60 percent of the urban poor reside in cities of 500,000 inhabitants or less.)
Similar patterns are observed in several other developing countries (Ferré, Ferreira,
and Lanjouw 2008). Buys and others (2007) indicate that, in Brazil, the gradient
54 | PETER LANJOUW

FIGURE 2. Poverty Incidence and Geographic Characteristics in Select Regions

A. Brazil (North)
% of population that is poor
0.56
0.54
0.52
0.50
0.48
0.46
0.44
0.42
0.40
0.38
0.36
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

B. Thailand (North)
% of population that is poor
0.28
0.26
0.24
0.22
0.20
0.18
0.16
0.14
0.12
0.10
0.08
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

Source: Buys and others (2007).
SOME STYLIZED FACTS ABOUT RURAL POVERTY AND GEOGRAPHY | 55

FIGURE 2. (continued)

C. Brazil (Northeast)
% of population that is poor
0.600
0.595
0.590
0.585
0.580
0.575
0.570
0.565
0.560
0.555
0.550
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

D. Kenya (West)
% of population that is poor
0.52
0.50
0.48
0.46
0.44
0.42
0.40
0.38
0.36
0.34
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

Source: Buys and others (2007).
56 | PETER LANJOUW

TABLE 1. Rural Poverty in Brazil and Proximity to, and Poverty in, Nearest Town,
by Size of Town (travel time to nearest town)
Size of nearest town and urban <= 6 15 30
headcount (%) minutes minutes minutes 1 hour 1.5 hours 2+hours
Nearest town of 25,000–100,000
0–5 0.02 0.06 0.09 0.13 0.15 0.16
5–10 0.14 0.17 0.21 0.24 0.26 0.27
10–20 0.33 0.36 0.39 0.42 0.43 0.44
20–30 0.47 0.49 0.52 0.54 0.55 0.55
30–40 0.54 0.57 0.58 0.59 0.60 0.60
45+ 0.56 0.58 0.59 0.60 0.60 0.60
Nearest town of 100,000–500,000
–5 0.08 0.13 0.15 0.16 0.16 0.17
5–10 0.21 0.26 0.28 0.29 0.29 0.30
10–20 0.40 0.46 0.48 0.48 0.49 0.49
20–30 0.52 0.57 0.59 0.59 0.58 0.58
30–40 0.56 0.61 0.61 0.60 0.59 0.57
45+ 0.55 0.58 0.58 0.57 0.56 0.53
Source: Buys and others 2007.

between rural poverty and distance from an urban center is much sharper the lower
is the poverty rate within that urban center. Similarly, the lower poverty is in the
urban center, the greater is the amount of nonfarm diversiﬁcation in surrounding
rural areas. These patterns hold irrespective of city size (table 1).

Discussion

Spatial variation in rural population densities and in rural poverty levels can be
understood in light of urbanization patterns. Rural poverty is generally more accen-
tuated where urban areas are distant. At the same time, rural populations (and
therefore rural poverty densities) are generally located closer to urban centers.
Population movements are likely to account for these patterns: in times of economic
stress, remote areas with low agricultural potential see outmigration either as
outright rural-urban migration or as migration toward rural areas surrounding
cities. It is important to recognize that urban areas are heterogeneous—in size and
in poverty levels. Emerging evidence suggests that a sizable majority of the devel-
oping world’s urban population resides in small towns and cities, as opposed to the
mega cities and large metropolitan areas that receive so much popular attention.
The correlation between rural well-being and proximity to urban centers is not
necessarily weaker for small towns, but the correlation is attenuated when poverty
in those towns is high. The evidence shows, for example, that rural nonfarm diver-
siﬁcation is positively associated with proximity to small urban centers, but nega-
tively associated with poverty in those centers. Ferré, Ferreira, and Lanjouw (2008)
SOME STYLIZED FACTS ABOUT RURAL POVERTY AND GEOGRAPHY | 57

FIGURE 3. Change in Share of Rural Population in Ecuador, by Access to City and
Agricultural Potential, 1991–2001

Change in % of rural population
0.03

0.02

0.01

0.00

20.01

20.02

20.03

20.04
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

Source: Buys and others (2007).

FIGURE 4. Change in Share of Poor Population in Ecuador, by Access to City and
Agricultural Potential, 1991–2001

Change in % of poor population
0.03

0.02

0.01

0.00

20.01

20.02

20.03

20.04
Good access Moderate access Low access

high agropotential low agropotential medium agropotential

Source: Buys and others (2007).
58 | PETER LANJOUW

ﬁnd that poverty rates in small towns are generally higher than in large cities and
indicate that, relative to large cities, small towns are generally poorly served by
infrastructure services and other amenities.

A Policy Question

This discussion prompts the following question. Would stimulating economic devel-
opment in small urban areas via, for example, local infrastructure provision (elec-
tricity, telecommunications) or improved connectivity to the national economy via
transport infrastructure investments, help not only to address an important urban
poverty concern but also to dampen rural poverty?
• To what extent can greater infrastructure provisioning (or other policy interven-
tions) galvanize activity levels in small towns and reduce poverty rates in such
areas?
• To what extent will increased economic activity in small urban areas translate to
greater nonfarm diversification (or rising agricultural productivity) in surrounding
rural areas?
Answers to these policy questions are not presently available. It is not even clear,
for example, whether the transmission path that connects rural welfare with prox-
imity and incomes in small urban centers ﬂows from towns to rural areas. One can-
not rule out the opposite direction of causality: perhaps small towns emerge and
grow as a response to growth and diversiﬁcation in the rural economy. A great deal
of additional analysis is needed. This paper is intended to stimulate such efforts.

References

Buys, Piet, Celine Ferré, Peter Lanjouw, and Timothy Thomas. 2007. “Rural Poverty and
Geography: Towards Some Stylized Facts in the Developing World.” Unpublished paper,
Development Economics Research Group, World Bank, Washington, DC.
Ferré, Celine, Francisco Ferreira, and Peter Lanjouw. 2008. “Is There a Metropolitan
Bias? Urban Poverty and Access to Services by City Size in Six Developing Countries.”
Unpublished paper, Development Economics Research Group, World Bank,
Washington, DC.
Part II: New Economic
Geography and the
Dynamics of Technological
Change—Implications for
Less-Developed Countries
New Economic Geography and
Transportation Policies:
The Case of Brazil
EDUARDO HADDAD

This paper reports on some experimental results derived from a spatial computable
general equilibrium (SCGE) model for the Brazilian economy. While it addresses
some of the theoretical developments derived from the new economic geography, it
provides some intermediate perspectives between a core-periphery model, on the
one hand, and a perfectly competitive, homogeneous space model, on the other. In
the Brazilian case, ﬁrms can exploit increasing returns to scale without serving a
national market; in large part, market imperfections derive from transportation
costs that essentially serve to segment markets. Further, asymmetries in the distribu-
tion of productive activity, with the primacy of São Paulo, serve to strengthen
existing competitive advantages.
The new economic geography has revisited the issues associated with the appli-
cation of various competitive market structures to the spatial economy. Research
in the last decade has identiﬁed some important theoretical inconsistencies
between competitive regimes conceptualized in space-less and spatial economies
(see Fujita, Krugman, and Venables 1999; Fujita and Thisse 2002). However, even
the new economic geography theory does not seem able to cover the notion of
some intermediate form of space between homogeneous and not homogeneous
that would essentially give rise to the Brazilian case.
Domingues and Ruiz (2005: 11–12) identify spatial industrial agglomerations
(SIAs) in Brazil.1 According to the study, there are 15 SIAs in Brazil, in a restricted
group of 254 out of 5,507 Brazilian municipalities, accounting for 75 percent of
the industrial production of companies operating in the country. The spatial distri-
bution of SIAs is notably concentrated in Brazil, particularly in clearly delimited
industrial corridors across the south and southeast regions. The northeast region
has SIAs that are conﬁned within metropolitan areas of major state capitals, and no

Eduardo Haddad is Associate Professor of the Faculty of Economics Administration and Accounting at the University
of São Paulo in Brazil.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

The ideas presented in this article draw on Haddad and Hewings (2005) and Haddad and others (2007).

61
62 | EDUARDO HADDAD

SIA was identiﬁed in the northern region, despite the signiﬁcant contribution of the
Manaus Free Trade Zone to national industrial production. In turn, the absence of
SIAs in the central region reveals that intense expansion of agribusiness over the
last two decades has not been sufﬁcient to build the industrial density needed to
produce spillover and industrial effects over the space.
While appeal to core-periphery outcomes could be made, it seems that, with high
transportation costs, ﬁrms can exploit increasing returns to scale within less-than-
complete national markets. The very size of São Paulo provides opportunities that
could not be realized by similar ﬁrms located within the northeast of Brazil; further,
certain asymmetries exist in competitive advantage. With improvements in trans-
portation, the São Paulo ﬁrms, already further down the range of increasing returns
to scale, possess a competitive advantage to exploit scale economies further by
reducing transportation costs, thereby exacerbating the welfare differentials
between regions. One of the main reasons for their competitive advantage is their
central position, not geographically central, but central in terms of the locus of pro-
ductive activity or purchasing power (see Haddad and Azzoni 2001). However, the
presence of other relevant industrial areas outside São Paulo provides some inter-
mediate perspectives with a core-periphery model.
The Brazilian case has been complicated further by a transportation infrastruc-
ture that until recently was regulated and biased toward investment in highways to
the exclusion of water and railroad modes of transportation. Efﬁciency gains from
investments apparently have not been considered from a broader perspective, such
as enhancing interregional cohesion, but instead have been oriented toward sup-
porting increased exports. How are these investments to be estimated, and can
some method be found to simulate the effects of transportation policies, through a
process of increased competition that reduces the costs of spatial transfer?
In what follows, we explore results from the use of computable general equilib-
rium models applied to multiregional conﬁgurations of the Brazilian economy in a
way that reﬂects some of the current market imperfections. Some of these imperfec-
tions arise from historical investment decisions, some from Brazil’s geography, and
some from a combination of many factors, including Brazil’s recent decision to
open its markets.
Moreover, the models used adopt an explicit speciﬁcation of transportation
costs, avoiding some of the difﬁculties of iceberg formulations ably discussed by
McCann (2005). The objective is to identify the efﬁciency gains from investments
in a broader perspective, such as enhancing interregional cohesion, as well as to
explore possible asymmetries in the welfare effects as transportation costs between
pairs of regions are reduced.
Modeling issues associated with the treatment of nonconstant returns and trans-
portation costs are discussed. As mentioned, recent theoretical developments in new
economic geography bring new challenges to regional scientists and spatial econo-
mists, in general, and to interregional CGE modelers, in particular. Experimenta-
tion with the introduction of scale economies, market imperfections, and
transportation costs should provide innovative ways of dealing explicitly with theo-
retical issues related to integrated regional systems. An attempt to address these
issues is also discussed.
NEW ECONOMIC GEOGRAPHY AND TRANSPORTATION POLICIES | 63

Transportation Infrastructure in Brazil

Brazilian transport infrastructure is deteriorating rapidly from lack of investment
and maintenance, showing a larger number of critical points, or bottlenecks, in
most of the corridors. Decay in the transportation system curtails economic growth,
hampering competitiveness in both the internal and external markets. Deterioration
of Brazil’s transportation network has contributed to high operational costs,
obstructing the competitive integration of the country.
The lack of well-developed multimodal transport in Brazil, in addition to the
low quality of road infrastructure, has had negative effects on the competitiveness
of the country. A summary breakdown of soybean production and export costs
shows that Brazil loses its production cost advantage over U.S. production due to
higher transport and export costs (including customs administration).
As shown in table 1, while U.S. costs of transporting soybeans from the place of
production to export ports represent about 7.7 to 12.8 percent of ﬁnal costs, the
comparative ﬁgure for Brazil is 15.5 and 30.1 percent, respectively. As a result, Bra-
zil loses its cost advantage, mostly due to domestic transport costs. Put another
way, Brazilian domestic transport costs from the farm gate to port are 122–274 per-
cent of the same costs in the United States, while freight costs are 140–197 percent
of U.S. costs.

TABLE 1. Estimated Export Costs of Soybeans, by Destination and Origin,
First Quarter 2006 (US$ per metric ton)
From From Brazil to U.S.
Destination Brazila United Statesb cost ratio
Germany (Hamburg)
Production cost 157.86 204.78 0.77
Transport cost to export port 84.65 30.84 2.74
Freight cost to Hamburg 38.51 19.53 1.97
Final cost in Hamburg 281.02 255.15 1.10

China (Shanghai)
Production cost 180.71 202.34 0.89
Transport cost to export port 42.49 34.80 1.22
Freight cost to Shanghai 50.13 35.71 1.40
Final cost in Shanghai 273.33 272.85 1.002
Source: U.S. Department of Agriculture, Brazil Soybean Transportation, August 2006 (World Bank 2008).
a From Mato Grosso to Hamburg and from Goias to Shanghai.
b From Iowa to Hamburg and from Minneapolis to Shanghai.

Recent government initiatives in Brazil to promote investments in infrastructure
include the Programa de Aceleração do Crescimento (PAC, the Growth Accelera-
tion Program), unveiled at the end of January 2007.2 Investments in logistic infra-
structure are an estimated US$58.3 billion in the four-year period from 2007 to
2010, US$33.4 billion (57.3 percent of the total) in road infrastructure alone.3
64 | EDUARDO HADDAD

Concomitant with the four-year program (PAC), the federal government has
also signaled its intention to revive long-term planning in transportation in the
country. The design of an ambitious Plano Nacional de Logística e Transportes
(PNLT, National Plan of Logistics and Transportation) has been initiated, involv-
ing different stakeholders. It aims to support decision makers in attaining eco-
nomic objectives through policy initiatives related to both public and private
infrastructure and organization of the transportation sector.4
At the state level, few initiatives have taken place in the realm of transport plan-
ning. States such as Bahia, Minas Gerais, and Rio Grande do Sul have all developed
thorough diagnostics of the sector, including forward-looking exercises with a long-
term view of the possible policy interventions within the respective state borders.5
In the next two sections, we present results from simulations using a fully opera-
tional SCGE model implemented for the Brazilian economy, based on previous
work by Haddad and Hewings (2005), in order to assess the likely economic effects
of recent changes in road transportation policy in Brazil.6
Among the features embedded in this framework, modeling of external scale
economies and transportation costs provides an innovative way of dealing explic-
itly with theoretical issues related to integrated regional systems. The explicit mod-
eling of transportation costs is built into the interregional CGE model, based on
origin-destination ﬂows, which takes into account the spatial structure of the Bra-
zilian economy. This creates the capability of integrating the interstate CGE model
with a geographically coded transportation network model, enhancing the potential
of the framework to aid in understanding the role of infrastructure in regional
development. The transportation model used is the so-called Highway Develop-
ment and Management Model, developed by the World Bank and implemented
using the software TransCAD. Further extensions of the current model should be
considered that integrate other features of transport planning in a continental
industrializing country like Brazil, with the goal of building a bridge between con-
ventional transport planning practices and the innovative use of CGE models.
In order to illustrate the analytical power of the integrated system, I present a set
of simulations, which evaluate the economic impacts of physical and qualitative
changes in the Brazilian road network (such as a highway improvement), in accor-
dance with recent policy developments in Brazil. Rather than providing a critical
evaluation of this debate, I emphasize the likely structural impacts of such policies.
I expect that the results will reinforce the need to specify spatial interactions in
SCGE models better. I look ﬁrst at two projects that have a key role in the national
integration of markets and then revisit the efﬁciency-equity issue, from a spatial
perspective, to look at 75 transportation infrastructure projects.
NEW ECONOMIC GEOGRAPHY AND TRANSPORTATION POLICIES | 65

Case Study 1: Integration Axes

This section illustrates the analytical capability of the uniﬁed framework in the
evaluation of speciﬁc transportation projects contemplated in the PAC program.
The case study under consideration refers to two projects to improve federal
highways—BR-262 and BR-381—in the state of Minas Gerais.
The guidelines that have been used to justify the choice of the speciﬁc tracks of
the BR-262 and BR-381 highways to be improved are based on the strategic
location of these network links in the national transportation system, which
constitute two of the main corridors related to the more dynamic regions of the
country. Moreover, it is hoped that such improvements will foster regional
development in Minas Gerais, one of the leading economies of the country.
With a total length of 441 kilometers between Betim and Uberaba, the BR-262
project is duplicating the existing road link between Betim and Nova Serrana and
constructing climbing and passing lanes between Nova Serrana and Araxá. The
project will cost an estimated BRL 554 million.7
The BR-381 project is duplicating the track between Belo Horizonte and
Governador Valadares, a total length of 304 kilometers. The total cost of
implementation is an estimated BRL 1.395 billion.
The distinction between the two projects lies in the role they play in the
integration of Brazilian regions. While the BR-262 project constitutes a major
improvement on the east-west integration of the country, linking the coast of the
southeast to the more agricultural areas of the midwest, the BR-381 has a strategic
role in integrating the northeast with the southeast and south of the country. These
distinct axes of integration play different roles in the interregional Brazilian system,
as spatial competition occurs to a lesser degree in the case of the BR-262 than in
the case of the BR-381 link. In the latter case, denser economic spaces are involved
directly in the spatial process, while in the former, more specialized spaces have
more prominent roles.
The spatial effects on gross domestic product (GDP) reveal, both in the short run
and in the long run, positive impacts in regions inﬂuenced directly by the BR-262
as well as in the country as a whole. Noteworthy is that these positive impacts are
spread over space in the long run. Moreover, relocation effects tend to be directed
to the agriculture-producing regions in the west as well as to the areas linked
directly to the project itself, within the borders of Minas Gerais.
In the case of the BR-381, spatial competition clearly plays a prominent role.
Given the favorable scenario for relative costs of production in the northeast, in a
context of systemic low quality of transport infrastructure, the northeast increases
its spatial market area, while the richer southeast suffers from the network
(congestion) effects. Lower growth with decreasing regional inequality is the main
long-run macro result (see localized spillover models—Baldwin and others 2003—
for a theoretical view).
66 | EDUARDO HADDAD

Case Study 2: Efficiency versus Equity

This section takes a closer look at a portfolio of multimodal infrastructure projects
within the borders of the Brazilian state of Minas Gerais. Following work by
Almeida and others (forthcoming), the objective is to reveal that, methodological
differences aside, the evidence about the nature of the relationship between the
provision of transport infrastructure and regional equity is controversial, due to a
fundamental characteristic associated with this issue. In other words, even with the
same theory or model, method, and its speciﬁcation, one may continue to obtain
different results about this relationship. This outcome arises because this
relationship crucially depends on where the transport infrastructure is located. In
addition to methodological considerations, there seem to exist authentic spatial
reasons that might yield controversial results. Indeed, transport infrastructure is
strongly region-dependent. The spatial structure of the provision of transport
infrastructure matters in this question, playing a fundamental role in determining
its effects on the economic system (Almeida and others forthcoming: 2–3).
According to Almeida and others (forthcoming), demonstrating empirically the
relationship between transport and regional equity is very difﬁcult. In the literature,
the evidence about this relationship is often contradictory, although most of the
problems seem to stem from methodological discrepancies. In what follows, an
alternative approach was followed, by adopting an SCGE model with new economic
geography features. The theoretical model, the method of investigation, as well as
its speciﬁcation were kept constant; only the spatial structure of the provision of
transport infrastructure (captured through reductions in transportation costs) was
changed. Seventy-ﬁve projects (simulations), considered in the recently concluded
Plano Estadual de Logística e Transportes (PELT Minas), were analyzed with a view
to the efﬁciency-equity trade-off associated with investments in transportation
infrastructure. Among the 75 projects, 3 are investments in waterways, 5 in
railways, 3 in pipelines, and 64 in roads.
Figure 1 summarizes the results for the effects on efﬁciency (measured in terms
of real gross regional product growth) and regional disparity (measured in terms of
the relative growth of the poor regions in the north of the state and the state as a
whole; a negative value indicates that the poor region is growing at a slower pace).
The results reﬂect a long-run environment, in the new economic geography
tradition, in which the equilibrating mechanisms draw heavily on the balance of
real wage differentials through labor mobility. There is a clear trade-off between
efﬁciency and regional equity. Projects that produce higher impacts on GDP growth
also contribute more to regional concentration.
NEW ECONOMIC GEOGRAPHY AND TRANSPORTATION POLICIES | 67

FIGURE 1. Regional Equity-Efﬁciency Trade-off of Transportation Infrastructure
Investments in Minas Gerais, Brazil

0.005

0.000

–0.005

–0.010

–0.015

–0.020

20.025
–0.005 0.000 0.005 0.010 0.015 0.020 0.025 0.030
efﬁciency (GDP growth)

Source: Elaborated by the author.

Final Remarks

Appropriate tools are needed to assess the economic impacts of transportation
infrastructure policies. This paper has attempted to tackle this issue. It has been
suggested that SCGE models can potentially be used to analyze transport planning
policies. This paper has illustrated ways in which this potential has been imple-
mented. However, this tool is not yet a recurrent part of the transport planning
process. To do so, further amendments are needed, in order to cope with method-
ological advances both in economic and in transport modeling.
However, the results provided are encouraging in the sense that the issues, while
difﬁcult, are not insurmountable. The challenges to competitive equilibrium in the
spatial economy presented by the new economic geography remain largely untested.
This paper offers one approach to narrowing the gap between theory and empirical
application. The Brazilian economy, sharing features of both developed and devel-
oping countries, presents a further challenge: the lack of uniformity of the spatial
distribution of resources and population, the glaring disparities in welfare across
states and regions, and the presence of a hegemonic economy, in São Paulo, that
renders traditional computable general equilibrium modeling of limited value.
The results reveal that it is possible to handle increasing returns to scale, to
address issues of asymmetric impacts of transportation investment, and to approach
68 | EDUARDO HADDAD

the problems of more ﬂexible functional forms, uncertainties about data, and
parameter estimates in ways that are tractable and theoretically defensible. There is
a need, perhaps, to pause and take stock of the current state of the art in comput-
able general equilibrium modeling for multiregional (spatial) economies and to pur-
sue some of the lines of inquiry initiated by this work.

References

Almeida, Eduardo S., Eduardo A. Haddad, and Geoffrey J. D. Hewings. Forthcoming. “The
Transport-Regional Equity Issue Revisited.” Regional Studies.
Baldwin, Richard, Rikard Forslid, Philippe Martin, Gianmarco Ottaviano, and Frédéric
Robert-Nicoud. 2003. Economic Geography and Public Policy. Princeton, NJ: Princeton
University Press.
Domingues, Edson P., and Ricardo M. Ruiz. 2005. “Industrial Cores and Peripheries in
Brazil.” Discussion Paper 261, Centro de Desenvolvimento e Planejamento Regional,
Universidade Federal de Minais Gerais, Belo Horizonte.
EIU (Economist Intelligence Unit). 2007. “Brazil: Country Report.” EIU, London, February.
Fujita, Masahisa, Paul Krugman, and Anthony J. Venables. 1999. The Spatial Economy:
Cities, Regions, and International Trade. Cambridge, MA: MIT Press.
Fujita, Masahisa, and Jacques-François Thisse. 2002. Economics of Agglomeration.
Cambridge, U.K.: Cambridge University Press.
Haddad, Eduardo A., and C. R. Azzoni. 2001. “Trade Liberalization and Location:
Geographical Shifts in the Brazilian Economic Structure.” In Structure and Structural
Change in the Brazilian Economy, ed. Joaquim J. M. Guilhoto and Geoffrey J. D.
Hewings. London: Ashgate.
Haddad, Eduardo A., and Geoffrey J. D. Hewings. 2005. “Market Imperfections in a Spatial
Economy: Some Experimental Results.” Quarterly Review of Economics and Finance 45
(2): 476–96.
Haddad, Eduardo A., Fernando S. Perobelli, Edson P. Domingues, and Mauricio Aguiar.
2007. “Assessing the Economic Impacts of Transportation Infrastructure Policies in
Brazil.” Unpublished paper, University of São Paulo.
McCann, Philip. 2005. “Transport Costs and the New Economic Geography.” Journal of
Economic Geography 5 (3): 305–18.
World Bank. 2008. “Brazil: Evaluating the Macroeconomic and Distributional Impacts of
Lowering Transportation Costs.” Report 40020-BR. World Bank, Washington, DC, July.
NEW ECONOMIC GEOGRAPHY AND TRANSPORTATION POLICIES | 69

Notes

1. Domingues and Ruiz (2005: 11) estimate the correlation of the industrial value added of
each Brazilian municipality in relation to that of its m − 1 neighbors, in a given set of m
contiguous municipalities, allowing the identiﬁcation of industrial agglomerations in
Brazil without necessarily taking into account its political and administrative division.
The incidence of these agglomerations depends ﬁrst on the statistical signiﬁcance of the
spatial autocorrelation test (set at 10 percent), as it may limit the number of agglomera-
tions within the territory and exclude existing agglomerations that are not statistically
signiﬁcant. For this reason, they name the existing signiﬁcant agglomerations as spatial
industrial agglomerations, which are more restricted than those industrial agglomerations
identiﬁed in other studies in Brazil.
2. The PAC will aim to raise average annual GDP growth to 5 percent a year (almost double
the country’s long-term average), principally through increased investment in infrastruc-
ture, which will be fostered in part through targeted tax breaks (EIU 2007).
3. www.brasil.gov.br (Programa de Aceleração do Crescimento 2007–10).
4. www.centran.eb.br (Programa Nacional de Logística e Transportes).
5. In the Minas Gerais case, the PELT Minas was based on the use of state-of-the-art meth-
odological approaches to deal explicitly with the interface between transport and
economy, from diagnostics to evaluation of transport projects.
6. The simulations were carried out for supporting the government of Minas Gerais to
prepare the PELT Minas.
7. Values as of December 2006.
Spatial Disparities of Knowledge
Absorption, Technological
Change, and Prosperity:
Theoretical Considerations and
Empirical Evidence from China
INGO LIEFNER

This paper aims to highlight some basic connections between technological change
and the emergence and development of spatial disparities in developing and newly
industrializing countries. It uses the example of China to illustrate key arguments.
The ﬁrst section refers to a number of well-established theoretical concepts
focusing on the implications of these theories for spatial developments. Empirical
evidence of the spatial economic effects of technological change is abundant when
it comes to analyzing disparities between countries using secondary data. The
connections between technological change and spatial developments on a subna-
tional scale are much harder to depict because of missing data. Thus the paper
draws on both secondary and primary data, acknowledging the difﬁculties
regarding generalizability. Still, some cautious conclusions can be derived
concerning the relation between spatial structures and technological change in
developing countries. This leads to policy recommendations that allow exploiting
the technology-related growth opportunities brought about by globalization and
international knowledge ﬂows.

Technology and Spatial Disparities on the Subnational Level

New technology (or technological knowledge) is and always has been spatially
concentrated, mirroring the location of higher education institutions, research and
development (R&D) potential, and technology-intensive industries. This holds true
on all spatial scales, from the global pattern down to the subnational level. In
contrast to this, market forces, private returns to technology investment, and

Ingo Liefner is Professor of Economic Geography at the University of Giessen in Germany.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

The author would like to thank the German Research Foundation (DFG) and the Volkswagen Foundation for sponsor-
ing the research referred to in the third section of this paper. He would also like to thank the many colleagues in China,
notably Gang Zeng (Shanghai) and Jie Fan (Beijing), for their cooperation.

71
72 | INGO LIEFNER

consumer preferences in particular lead to spatial diffusion of technology. Tech-
nology diffusion has been greatly enabled by the rise of digital information and
communication technologies and the decline in transport costs. Such technology
diffusion, however, has never leveled the spatial concentration of knowledge. There
are various reasons for this (for example, Bell and Pavitt 1997; Howells 2002;
Meusburger 2001; Oinas 1999). First, understanding and applying complex tech-
nologies requires a profound and often subject-related knowledge. Thus only
people, ﬁrms, or regions that possess the relevant stock of knowledge can generate
or acquire new knowledge in that particular ﬁeld. The cumulative character of
certain technologies fosters the spatial differentiation between leading and lagging
regions with respect to technology. Second, the speed of technology transfer and
diffusion depends on the character of the underlying knowledge. The diffusion of
knowledge that is so immature that it cannot be expressed verbally, mathematically,
or graphically (tacit knowledge) depends on face-to-face contacts. Thus the pace of
its diffusion is very slow.
The counteracting forces that favor either the concentration of knowledge or its
diffusion lead to a complex and dynamic spatial pattern of rising and falling tech-
nology-intensive regions complemented by a knowledge periphery (for a sector
model, see, for example, Gomulka 1990). These technology-intensive regions com-
prise companies, universities, and R&D organizations related to one another in a
regionally conﬁned setting (for a synopsis of concepts, see Moulaert and Sekia
2003). They represent regional clusters. In times of fast technological progress,
which involves specialized and tacit knowledge, the cumulative process of learning
seems to dominate and outpace the diffusion of technology. Thus knowledge dis-
parities increase.
As soon as new technology is turned into products, it creates temporary monopo-
lies on the new commodities or services and fosters proﬁts and economic develop-
ment. Thus spatial disparities in technology affect spatial disparities in growth rates
and wealth. Economic disparities, however, are not as marked as technological dis-
parities, because counterbalancing forces, such as the relocation of labor-intensive
industries away from technology-intensive regions, limit spatial-economic divergence.
In industrial countries these effects can be viewed on the subnational scale, for
example, when comparing high-tech regions with lagging regions. But in develop-
ing and newly industrializing countries, the processes leading to spatial concentra-
tion of technology are magniﬁed by additional forces. Developing countries that
open their economies to international trade and factor mobility beneﬁt from
inward foreign direct investment (FDI) and other forms of cooperation, such as
technology transfer under the original equipment manufacturer system (Ernst
2002; Hobday 2000; Lall 2002; Mowery and Oxley 1995). These forms of coop-
eration—and inward FDI in particular—induce an enormous inﬂow of technology.
This technology may be regarded as mature from the angle of industrial countries,
but it is new for developing countries. The availability of new technology relative
to the existing stock of knowledge is thus much higher in developing than in indus-
trial countries. The absorption of technologies of ever higher standards accelerates
SPATIAL DISPARITI ES OF KNOWLEDGE ABSORPTION | 73

cumulative learning processes (Mathews 2001; Viotti 2002). But this absorption
takes place only in a few regions with the largest existing stock of knowledge
(Asheim and Vang 2006). Hence the process of technology-induced spatial differ-
entiation is very pronounced in developing countries. Knowledge and related eco-
nomic disparities widen most quickly in developing countries that open up for
trade relations and FDI.
During phases of fast technological catch-up, the process of technology absorp-
tion in the technologically leading regions within the newly industrializing countries
is more powerful and faster than the trickle down of technology into lagging
regions. In other words, technology diffusion is rapid on the global scale, but slow
at the subnational level.
To allow some regions within developing countries to develop the preconditions
for cumulative learning and quick absorption of knowledge (these are a relatively
strong base of human capital, investment in education and in science and technol-
ogy infrastructure, and the basic conditions for attracting FDI) is essential for fast
technological catch-up, economic restructuring, and sustained growth. Thus
increasing spatial disparities are both an outcome of technological progress and a
precondition for knowledge absorption and future technology-oriented growth.
Spatial disparities in developing countries are not only rural-urban disparities.
Economic differences between (city) regions, reﬂecting differences in the ability to
generate and absorb technology, add up to a pattern of rural-urban disparities.

Technology and Urban Economies in China

This section discusses empirical evidence from China, the single most important
developing country regarding technology absorption following a huge inﬂow of
FDI and related technology. Moreover, the country has made public and private
efforts to boost the level of education as well as the quality and quantity of
domestic R&D (Schwaag Serger and Breidne 2007). These efforts create conditions
favorable for technology absorption and learning. Table 1 is based on data
published by the National Bureau of Statistics, Beijing. All other tables and ﬁgures
are based on surveys and research projects carried out by the Department of
Economic Geography, University of Hannover, and various Chinese partners
(Beijing ZGC Innovation Survey, Shanghai ZJ Innovation Survey). The projects
were sponsored by the German Research Association (DFG) and the Volkswagen
Foundation and were carried out between 2003 and 2005.
China’s spatial economy is characterized by the dominant position of leading
agglomerations in coastal provinces (Beijing, Guangzhou, Shanghai). These
provinces are the hub of investment in education and R&D in terms of quality and
quantity. For example, they host the country’s leading universities and research
institutes and attract the most talented students. They host the most skilled
workforce and the most technology-intensive domestic companies. They also attract
the bulk of FDI and related technology (Grewal and Sun 2002; Taubmann 2001;
74 | INGO LIEFNER

TABLE 1. Spatial Disparities in China
Number of
postgraduate
students in
higher
education
institutions Total R&D
per 1,000 expenditures FDI stock GDP Annual GDP
inhabitants, per capita, per capita, per capita, growth,
Location 2002a 2005 (yuan) 2005 (US$) 2005 (yuan) 2001–05 (%)b
Coast
Shanghai (City) 0.62 1,172 4,805 51,486 15.13
Beijing (City) 1.54 2,484 1,549 44,774 16.72
Tianjin (City) 0.32 696 2,575 35,452 17.82
Zhejiang 0.08 333 846 27,435 18.14
Jiangsu 0.12 361 1,504 24,489 17.95
Guangdong 0.06 265 1,487 24,327 16.75
Shandong 0.04 211 366 20,023 19.13
Liaoning 0.13 295 857 18,947 12.31
Fujian 0.05 152 1,069 18,583 12.69
Hebei 0.03 86 120 14,737 16.31
Hainan 0.01 19 547 10,804 12.50
Guangxi 0.02 31 131 8,746 15.64

Central
Nei Mengu 0.03 49 171 16,327 22.79
Heilongjiang 0.10 128 117 14,428 12.92
Jilin 0.16 145 174 13,329 14.31
Shanxi 0.04 78 69 12,458 19.79
Hubei 0.15 131 175 11,419 13.85
Henan 0.02 59 80 11,287 17.61
Hunan 0.05 70 112 10,293 14.17
Jiangxi 0.02 66 215 9,410 16.85
Anhui 0.03 75 97 8,783 13.43

West
Xinjiang 0.03 32 37 12,956 14.95
Chongqing 0.09 114 102 10,974 14.83
Ningxia 0.02 53 258 10,169 15.77
Qinghai 0.01 54 50 10,006 15.99
Shaanxi 0.18 249 150 9,881 16.28
Tibet 0.01 13 72 9,069 14.52
Sichuan 0.06 118 81 8,993 14.52
Yunnan 0.03 48 65 7,804 12.89
Gansu 0.05 76 53 7,456 14.50
Guizhou 0.01 30 28 5,306 14.96

China average 0.09 192 495 15,511 16.18
Gini 0.546 0.510 0.629 0.271
Correlation
coefﬁcient (Pearson)
with GDP
per capita 0.744 0.827 0.897 1.000 0.247
Source: NBS 2002a, 2002b, 2004, 2006.
a Excluding students at specialized colleges and research institutes.
b Nominal data, not controlled for inﬂation.
SPATIAL DISPARITI ES OF KNOWLEDGE ABSORPTION | 75

Zhao and Tong 2000; see also Sun and Parikh 2001). The economic success of
these provinces is evident despite the weaknesses of ofﬁcial data. The Gini
coefﬁcient for interprovincial disparities of per capita income seems to have grown
during the last two decades, from 0.222 in 1985 to 0.253 in 1995 and to 0.271 in
2005. This increase in spatial disparities has been accepted by the Chinese
government as an integral part of and a precondition for the chosen reform process
under the label “Let some get rich ﬁrst.” From the late 1970s onward, the Chinese
way of technological change and economic development sought to attract FDI to
the coastal provinces. Differing levels of wealth were seen as unavoidable (Long
and Ng 2001; Wei 1999). After nearly 30 years of promoting the coastal regions,
ofﬁcial documents and speeches have begun to acknowledge the arguments for a
more spatially balanced growth.
Data from the segment of high-tech companies of two of the country’s most
technologically successful regions—Zhongguancun Science Park (Beijing) and
Zhangjiang Hightech-Park (Shanghai)—give insight into the fundamental pro-
cesses underlying these developments. Knowledge absorption affects product
innovation and productivity and thus fosters economic success.
Taking the introduction of new products as an indicator of successful absorption
(or generation) of knowledge allows us to depict the rates of technology acquisition
(see table 2). The comparison of high-tech companies in Beijing and Shanghai with
ﬁrms from other successful Asian metropolises (Bangkok, Penang, Singapore),
which were surveyed with a comparable method, shows the tremendous speed of
technological development in China’s technologically leading regions (Revilla Diez
and Berger 2005; Revilla Diez and Kiese 2006).

TABLE 2. Indicators of Innovation in Asia (% of ﬁrms)
Innovatingc Innovatived
Region R&Da Patentsb Total Product Process Total Product Process
Beijing, China 55.5 48.3 64.3 60.8 47.6 44.0 38.0 29.4
Shanghai, China 56.3 47.6 89.7 82.9 74.6 69.0 58.3 51.0
Singapore 29.7 7.8 39.0 30.2 29.4 19.5 12.3 15.7
Penang, Malaysia 26.6 5.8 42.4 34.6 38.7 20.9 12.6 16.2
Bangkok, Thailand 15.1 — 17.8 13.9 12.8 7.5 4.7 5.6
Sources: Beijing ZGC Innovation Survey 2003; Shanghai ZJ Innovation Survey 2003; EDB/NUS-CMIT National
Innovation Survey Singapore 2000; Penang State Innovation Survey 2000; Thailand R&D/Innovation Survey 2000;
see Hennemann and Liefner 2006.
— Not available.
a Share of companies carrying out R&D.
b Share of companies holding patents.
c Share of companies introducing new products or processes within the last three years.
d Share of companies making more than 25 percent of their turnover with new products or processes.

On the level of individual companies, the key factors of technical progress and
innovation become clear. Within the segments of Beijing’s and Shanghai’s high-tech
industries, innovation depends on the absorption of knowledge from universities
76 | INGO LIEFNER

and public research organizations, from foreign-invested companies, or—the most
promising constellation—from both sources (Liefner and Hennemann 2008;
Liefner, Hennemann, and Lu 2006). Absorption itself is enabled by the companies’
base of human capital, internal R&D activities, and managerial capacity to build
up strong connections with knowledge sources (Cohen and Levinthal 1989). Close
cooperation with technology-providing partners abroad drives product innovation
and productivity (Blomström and Kokko 2001).
Moreover, cooperation with foreign partners affects the efﬁciency of internal
R&D efforts (see table 3). The impact of foreign technology absorption is signiﬁ-
cant even within the quite homogeneous segment of high-tech companies. For coop-
erating ﬁrms, the share of internal R&D expenses correlates signiﬁcantly with the
share of new products (rxy: 0,335; p < 0.01). Correlations between other indica-
tors—for example, the share of R&D personnel and the introduction of new pro-
cesses—are signiﬁcant, too. However, for ﬁrms that do not cooperate with foreign
companies, these correlations are all weak and insigniﬁcant (Liefner 2006: 149).
Thus foreign knowledge is the main driver behind successful innovation in Chinese
high-tech companies, and successful innovation (learning) depends on initial invest-
ment in absorptive capacity and absorption. It is a cumulative process.
It is very difﬁcult to trace the path of technology diffusion. However, analyzing
the spatial scope of the innovation-related linkages of technology-absorbing com-
panies in Shanghai and Beijing and companies in neighboring provinces offers some
insight. Less than 20 percent of the innovating companies surveyed reported that
they closely cooperate with ﬁrms in neighboring provinces. Most of the innovation-
related contacts are within the two agglomerations or are directed toward distant
agglomerations in China or other countries. Technology stays largely within urban
settings. This spatial pattern is similar to that of supplier-customer linkages (Liefner
2006: 186–91; Young and Lan 1997).
Structural differences regarding knowledge between urban regions of compara-
ble size have been shown to turn into economic differences. The cases of Beijing
and Wuhan are illustrative. Both cities are comparably large and have a profound
base of human capital as well as an established industrial core. But clear differences
exist regarding FDI inﬂow, the technological level of the economy, the ﬂexibility of
the political-institutional system, and location. These differences affect, for exam-
ple, the commercialization of university-generated knowledge. Beijing is the core of
the northern coastal region, whereas Wuhan is located in central China. The urban
region of Wuhan—lacking a sufﬁcient stock of administrative and techno-economic
knowledge—seems unable to turn new knowledge generated in the university sys-
tem into commercial success. For Beijing the opposite holds true: the formation of
university spin-offs—the main way to commercialize technology in China through-
out the 1990s and early 2000s—expanded much more rapidly in Beijing and was
apparently hampered by an inﬂexible political system in Wuhan (Kroll and Liefner
2008). Other forms of knowledge, such as administrative ﬂexibility and innovative-
ness, openness to FDI, and new, market-oriented policies, add up to the technologi-
SPATIAL DISPARITI ES OF KNOWLEDGE ABSORPTION | 77

TABLE 3. Effects of Cooperation with Foreign Companies
Indicators Cooperating ﬁrms Noncooperating ﬁrms
Share of new products (percent) 41.3 26.3
Productivity (turnover per employee, yuan) 945,798 526,689
Source: Shanghai ZJ Innovation Survey.

cal differences between city regions. The outcome, again, is increasing disparities
between leading and lagging urban agglomerations.
These ﬁndings illustrate the statements based on theoretical considerations in the
last section. Fast technological catch-up depends on and produces spatial concen-
tration of human capital, technology, and FDI. Under circumstances of rapid tech-
nological development, for developing countries this means rapid inﬂow of
technology and spatial-economic concentration that increases and fuels both eco-
nomic growth and spatial disparities, both urban-rural and urban-urban.

Policy Options

These ﬁndings can be turned into development strategies. If developing countries
wish to beneﬁt from technology that is accessible through inward FDI and use that
technology for accelerated economic development, it is crucial to help those urban
regions that seem to attract FDI and related technology inﬂow to create an
economic environment suitable for learning. Higher education institutions as well
as R&D organizations should be set up, in-migration of talented students and
skilled personnel from lagging areas should be promoted, and public policy should
encourage inward FDI, including offshore innovation. All policies designed to
achieve this kind of spatial concentration or clustering are favorable.
As a strategic complement, developing countries have to accept that many other
urban areas will have to concentrate on less technology-oriented industries, such as
tourism, the exploitation and processing of natural resources, and labor-intensive
manufacturing. Only in the long run will rural areas beneﬁt from overall economic
growth, remittances, and trickle-down effects.

Conclusions

This paper has emphasized the role of knowledge in the globalizing world, stressing
the hypothesis that, in order to reap the beneﬁts of globalization, developing coun-
tries have to accept and sometimes foster spatial disparities. And that goes beyond
the rural-urban dichotomy: the cumulative nature of learning leads to a differentia-
tion between technology-oriented and less technology-oriented cities. The former
ones absorb and integrate knowledge for the national economy.
78 | INGO LIEFNER

Of course, this view may be challenged from different perspectives. Some
developing countries still have restrictive trade policies. Others are dominated by
elites that distract foreign investors. Still others cannot secure fundamental
preconditions for investment and growth, such as a stable, functioning legal
system. These countries will not be able to follow the path outlined here. Not all
countries may be ready to accept increasing spatial disparities for various reasons.
Important considerations in this respect may be escalating social tensions between
the residents of prosperous and less prosperous regions, tensions created through
migration, and environmental problems stemming from economic concentration.
Not all countries may be able to concentrate spatially enough human capital and
attract enough foreign investment to stimulate cumulative learning and self-
sustaining growth (attain critical mass). This ability clearly depends on the size of
the country, its initial income level, the general level of education, and its
attractiveness for foreign investors.
The latter point needs to be considered in the context of efforts to replicate the
Chinese success in other developing countries. Large African countries may be big
enough to create sufﬁcient spatial concentration on their own, but many African
countries lack other preconditions for attracting inward FDI. Smaller countries,
moreover, might have to rely on cross-national migration and cooperation if they
want to establish visible technology-absorbing agglomerations. In turn, other coun-
tries may have to function mainly as peripheries for a few growing agglomerations
in certain countries. Few agglomerations seem to have such growth potential (Cape
Town, Johannesburg, or other South African cities, Cairo, maybe Nairobi, Lagos,
or Accra). Obviously, some of these cities still lack basic institutional factors allow-
ing for massive inﬂow of FDI. Many countries and agglomerations in Latin Amer-
ica, South Asia, and Southeast Asia seem to be in a much more advantageous
position. Still, it seems worthwhile to try to use the forces of global capital and
technology ﬂows as China did.

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Part III: Perspectives:
Rural-Urban Transformation—
Leading, Lagging, and
Interlinking Places
Comparative Competitiveness of
Agriculture under a Multidimensional
Disparity Development Process:
A Narrative Analysis of Rural
Development Issues in China
MANTANG CAI

China achieved great success in its economic reform over the last 30 years. The
reform started with successful reform of the agricultural sector, followed by opening
up of the coastal area. The agricultural reform contributed a great deal toward
improving the general livelihood of the rural population but little toward stimu-
lating gross domestic product (GDP) growth, which was the main goal of the
economic reform for a long period of time. Under the so-called GDP-illustrated
development process, China’s economic reform policy quickly shifted its focus to
urban-based industrial development, particularly in the coastal areas. This shift
resulted in increasing disparity, particularly between urban and rural areas and
between the east and the west. Furthermore, farmers’ income growth slowed during
the 1990s, and the gap between urban and rural areas widened quickly. After
entering the twenty-ﬁrst century, the Chinese government recognized the growing
disparities and initiated several new development policies, including new develop-
ment plans for the western, northeast, and middle regions. At the same time, rural
development once again became a focus of the government’s development policy,
generally understood as the San Nong issues (meaning three rural development
issues, that is, agriculture, countryside, and farmers). Under the new development
policy, government is directing a great deal of investment to rural development
through various programs and is shifting general development policy from
GDP-illustrated development to the “construction of a harmonious society.” This
paper reviews the rural development process in China over the last 30 years in an
effort to improve our understanding of the key issues facing rural development policy.

Mantang Cai is Deputy Director and Associate Professor of Beijing Development Institute at Peking University in the
People’s Republic of China.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

83
84 | MANTANG CAI

Review of China’s Rural Development Process

China launched its economic reform in the late 1970s, and agricultural reform
played an important role in the overall economic reform process, particularly in the
early stages. These 30 years of agricultural development can be divided into three
periods: 1978–88, 1988–98, and 1998 to the present.

1978–88
In the ﬁrst 10 years, agricultural development played an important role in the
overall economic reform of China. Up to 1983, more than 99 percent of rural
China completed the transition from the commune system to the household respon-
sibility system. This was a critical step in China’s agricultural reform and increased
the productivity of farm work and improved farmers’ living conditions. From 1982
to 1987, the Chinese government launched reform of the governing system in rural
China, transforming it from the commune system to township government. The
government also encouraged the transformation of agricultural production from a
more subsistence to a more market-oriented system. From 1978 to 1984, produc-
tion increased from 300 million tons of grain to 400 million tons, the total value of
production output increased 68 percent, and farmers’ income increased 166 percent.
At the same time, the newly developed township industries also created a total
output value of Y200 billion and provided opportunities for 60 million rural
laborers to earn off-farm income. However, the economic reform only addressed
the microeconomic issues affecting rural China, not the macroeconomic issues. In
particular, the government did not allow full ownership of the land that farmers
were initially allocated during the land reform of the 1950s. In fact, the new house-
hold responsibility system had limited impact. Total agricultural production
increased 42.2 percent from 1978 to 1984; of this, the new tenure system contrib-
uted 46.9 percent, the increased application of chemical fertilizers contributed
32.2 percent, higher prices for agricultural products contributed 16 percent, and
other reform policies contributed the remainder. The limited impact of the new land
tenure system gradually disappeared. In fact, from 1984 to 1988, the per capita
production of grain declined from 400 to 364 kilograms. At the same time, due to
lack of full ownership, land was converted to urban purposes quickly at very low
cost. More than 250,000 hectares of arable land were converted for urban purposes
every year, making a total loss of 6.6 million hectares of arable land for the ﬁrst 25
years after reform. The farmers received only about Y500 billion from the land
conversion allowance, but the government and commercial entities generated
capital resources up to Y9 trillion. As a result, more than 45 million farmers were
without land.
COMPARATIVE COMPETITIVENESS OF AGRICULTURE | 85

1988–98
Agricultural development slowed down, following the rapid growth of the ﬁrst 10
years. The main reason was that the macroenvironment for development was “reas-
sessed” and partially inﬂuenced by the increased “collective components” in the
rural production system. For example, Henan Province launched 59,342 collective
projects in its 47,678 villages, with an ofﬁcial production value of Y13.7 billion
and 1.63 million jobs for farmers. However, most of these projects failed. The
economic reform policy was “resumed” after 1992, when Deng Xiaoping visited
the coastal areas and called for a more open policy.
However, new obstacles arose in agricultural development: (a) the economic bur-
den of farmers increased; (b) the grain production–dominated agricultural develop-
ment policy created a situation of “cannot be consumed, cannot be stored, and
cannot be sold”; and (c) ﬁnancial support from the central government declined as
development priority was shifted to urban areas. From 1985 to 2000, centrally
ﬁnanced agricultural investment declined from 18 to 8 percent, and total invest-
ment in rural infrastructure was Y170.4 billion, accounting for just 2 percent of the
country’s total infrastructure investment. The income of the rural population
declined steadily: 4.6, 4.3, 3.8, and 2.1 percent each year from 1997 to 2000.

1998–Present
After placing so much emphasis on urban and industrial development, the govern-
ment reassessed the development process and reafﬁrmed that the three rural
issues—agriculture, countryside, and farmers—are key issues inﬂuencing the overall
process of economic reform and modernization. A new round of discussions on
agricultural development was held, including policies related to improving the coor-
dination between urban and rural areas and between industries and agriculture.
The government also launched various taxation reform and ﬁnancial support poli-
cies for the rural areas, including a pilot taxation reform starting in 2003 and a
people-centered development model in 2004, among others. The total agricultural
investment from the central government reached Y262.6 billion in 2004, three
times that in 1977, and Y300 billion in 2005. Starting in 2006, all agricultural
taxes were waived, reducing farmers’ agricultural taxes Y120 billion a year.

Agricultural Competitiveness and Disparities

In reviewing China’s rural reform process and policy, the government made great
efforts to help the rural population to improve their livelihood. As a national social
development policy, the reform was a success. However, the context has been changing
over the last 15 years, particularly after China became a member of the World Trade
Organization (WTO). China’s agriculture is not a simple issue of “producing enough
food to feed the nation,” and China’s agricultural sector faces new challenges.
86 | MANTANG CAI

As indicated, China’s agricultural development was largely the result of two fac-
tors: (a) the new land tenure system and (b) the application of new technologies
(particularly increased application of fertilizers). However, the impacts of both fac-
tors are limited.
The new land tenure system has been constraining commercial production that
is globally competitive due largely to the small scale of production. The application
of chemical fertilizers has caused severe land degradation and become an obstacle
to further development of agriculture.
As a result, under China’s rapid urbanization and industrialization, agriculture is
lagging far behind other sectors. Figure 1 demonstrates income per capita of the
urban and rural populations. The gap between them is expanding very quickly, and
the ratio of urban to rural income has increased from about 2:1 at the beginning of
the economic reform to the current 3:1.
Agriculture relies largely on natural resources. For this reason, there is also a
large disparity in income among regions, as shown in ﬁgure 2. The regional dispar-
ity is a function of both natural conditions and distance, or accessibility, to market.
The eastern part of China is located along the coast; it was the ﬁrst focus of eco-
nomic reform, and the economic system is relatively advanced. The west is far
behind the coast in this respect.
In order to improve the competitiveness of agriculture, it is important to con-
sider the following factors in an integrated way: division of labor, economy of scale,
investment, and regional disparity.

FIGURE 1. Income per Capita in Rural and Urban Areas of China, 1983–2004

Per capita income (yuan)
12,000

10,000

8,000

6,000

4,000

2,000

0
78

93
83

05
19

rural per capita net income urban per capita disposable income
COMPARATIVE COMPETITIVENESS OF AGRICULTURE | 87

Division of Labor
China is a big country with a large surplus of rural laborers. There is only about
0.28 (1983) to 0.24 (2005) hectare of arable land per laborer. At the beginning of
the economic reform, more than 90 percent of rural workers generated their income
from agricultural production; in 2005 the ﬁgure was only about 60 percent. The
labor productivity of China’s agricultural production is about three to four times
lower than that in developed countries. As the principal rural development policy
still focuses on a land-bound approach, it limits the mobility of labor and the divi-
sion of labor. In reality, at least half of rural workers seek off-farm income. Younger
male workers usually spend all or part of their time in off-farm work, but they
cannot leave the land because of the hukou system, which prohibits them from
leaving their place of registration, in this case the rural community. The real farmers
in rural communities are disadvantaged groups such as elders, women, and the
disabled, who have difﬁculty bringing the land into full production.

Economy of Scale
At present, China’s rural lands are managed by households, who operate on a very
small scale, in most cases too small for commercial production. The government
has not been inclined to change its land policy, which is a hallmark of the current
regime. However, government is encouraging the “industrialization of agriculture”
or the “integration of agriculture.” Among central ﬁnancial support to agriculture,
a large proportion of the investment is being allocated to agro-processing indus-
tries, so-called “development of dragon head agro-processing industries.” This

FIGURE 2. Income per Capita in Different Regions of China, 2005

Per capita income (yuan)
6,000

5,000

4,000

3,000

2,000

1,000

0
06
78

20
19

Northeast East Central West
88 | MANTANG CAI

approach has not shortened the distance between rural and urban areas because
most of the processing industries are based in urban areas. Measures are also taken
to build up farmers’ cooperatives, and a national law for farmers’ economic coop-
eratives was issued two years ago. But the current situation is still at an early stage.
In a project funded by the World Bank in central China’s Hunan Province, 20
“farmers’ associations” applied for support, and less than 30 percent of those that
applied were really farmers’ associations.

Investment
Another obstacle in rural areas is investment, or agricultural, credit. Due to low
economic return and management difﬁculties, ﬁnancing institutions are normally
not interested in providing credit for agricultural projects, including both short-
and long-term loans and agricultural insurance.

Regional Disparity
Agriculture is relatively weak because of poor accessibility to market, which is a
result of both distance to market and difﬁculty accessing information, supplies, and
technologies. In addition, accessibility varies from region to region as a result of
weak transportation and communication infrastructure. Therefore, different strate-
gies should be applied in different regions to take advantage of the conditions of a
particular region.
It is critical for government policies to address these factors in an integrated way.
However, the current centralized and sector-divided operational system of the Chi-
nese government faces a big challenge in coming up with a comprehensive solution.

Concluding Remarks

The Chinese government’s policy on agriculture is based on social development
targets—that is, an effective rural administrative system, expanded coverage of
public ﬁnance, and a solid rural education system. Achieving these goals will rely
largely on government investment. This approach will not be able to address the
lack of competitiveness of agriculture in the global market.
First, the reform of the agricultural economic system has not been completed. A
complete agricultural system will need the support of markets for all the major
elements of agricultural production, that is, land, credit, labor, technology, and
supplies. The biggest constraint is the current land use policy. Land is the most
fundamental element in rural people’s livelihood, and it is very sensitive to any
adjustments. The possible solution is to build up innovative institutional
arrangements, such as economic cooperatives for farmers who work the land.
Under the new institutional arrangement of various types of farmers’ organizations,
COMPARATIVE COMPETITIVENESS OF AGRICULTURE | 89

economy of scale can be established and provide a basis for the rational allocation
of productive resources such as investment and labor.
Second, further administrative reform is needed. The current centralized, sector-
divided system does not make effective use of resources. Various experiments have
been conducted to initiate such reform at the county level of government.
Integrated planning and use of resources at the county level have been approved,
and an effective mechanism has been devised to build up regional advantages and
improve overall competitiveness at the grassroots level.
Economic Growth in Cities
and Urban Networks
FRANK VAN OORT AND PHILIP MCCANN

What explains the pace and pattern of urbanization in developed and developing
countries? A general notion in the literature is that urbanization is predominantly
inﬂuenced by regional disparities in economic growth potentials and that, although
in different time regimes, mechanisms of economic growth are more or less the
same in different macro geographic settings, such as Europe, the United States, and
currently also Asian countries (Cheshire and Duranton 2004; Enright, Scott, and
Chang 2005; Van Dijk 2006). The case of China shows that challenges exist for
currently lagging regions.
But can we determine what matters for urban economic growth? From the 1980s
onward, there has been an increase in the use of geographic models in economic
analyses. This development can mainly be ascribed to the failure of orthodox eco-
nomics to provide appropriate explanations for the variation in the wealth and
poverty of areas. Inspired by the success of Silicon Valley, Cambridge (United King-
dom), and the Third Italy compared to the decline of other regions in the West (in
particular, the old industrial areas), pressing issues are to understand why ﬁrms
decide to locate in particular areas, which kind of agglomeration is needed to foster
localized growth, and how geographic location affects the performance of ﬁrms.
Rooted in new growth theory, this “rediscovery” of space in economics has led to
an extensive empirical literature examining which spatial circumstances give rise to
spatial externalities (or “agglomeration externalities”) that endogenously induce
economic growth. This paper reviews the state-of-the-art literature on economic
agglomeration, urbanization, and economic growth in cities and urban networks.
We pay special attention to economic complementarities, as these can stimulate
growth in a system (network) of cities in which the sum is more than its parts.
Local specializations in urban networks might help cities in developing countries to
integrate functionally in their regions.

Frank van Oort is Professor of Urban Economics and Spatial Planning at Utrecht University in The Netherlands.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

91
92 | FRANK VAN OORT AND PHILIP MCCANN

Classical and Neoclassical Insights into Urban Economic Growth:
Specialization, Diversity, and Technology

The major developments in spatial economics and economic geography from the
late nineteenth century up until the 1960s came from a variety of traditions and a
variety of analysts. In terms of the location of economic activities, major insights
were provided by, among others, Weber (1909) and Isard (1956). At the same time,
related work on the causes of and consequences for regional growth of the spatial
clustering of economic activities was also being undertaken by Vernon (1960) and
Chinitz (1961), whose work focused speciﬁcally on issues relating to growth and
agglomeration. In particular, their work focused on the features of different types
of agglomeration economies, and their analyses were undertaken within the tradi-
tional analytical framework of agglomeration phenomena, which had emerged as a
fusion of the insights of Marshall (1890) and Hoover (1948). Marshall (1890)
focused on the role of local knowledge spillovers and the existence of nontraded
local inputs and a local pool of specialist labor, while Hoover (1948) allocated the
sources of agglomeration advantages into internal and external economies of scale
in the form of localization and urbanization economies. On the one hand, internal
increasing returns to scale may occur to a single ﬁrm due to production cost efﬁ-
ciencies realized by serving large markets, and as such there is nothing inherently
spatial in this concept other than that the existence of a single large ﬁrm in space
implies a large local concentration of factor employment. On the other hand,
external economies are qualitatively very different.
Whether due to ﬁrm size or a large initial number of local ﬁrms, a high level of
local factor employment may allow the development of external economies within
the group of local ﬁrms in a sector. These are termed localization economies. The
strength of these local externalities is assumed to vary, so that these are stronger in
some sectors and weaker in others (Duranton and Puga 2000). The associated
economies of scale comprise factors that reduce the average cost of producing out-
puts in that locality. The theories on localization economies can be enhanced fur-
ther by explicitly taking market form into consideration (Gordon and McCann
2000). Externalities characterized by knowledge spillovers between ﬁrms in a spa-
tially concentrated industry are generally known as Marshall-Arrow-Romer (MAR)
externalities. The MAR theory in a dynamic context (Glaeser and others 1992;
Henderson, Kuncoro, and Turner 1995) predicts that local monopoly is better for
growth than local competition, because local monopoly restricts the ﬂow of ideas
to others and allows optimal proﬁting from internal scale economies. Porter (1990)
agrees with the importance of localization economies, also arguing that knowledge
spillovers in specialized, geographically concentrated industries stimulate growth.
However, urbanization economies reﬂect external economies passed to enterprises
as a result of savings from the large-scale operation of the agglomeration or city as
a whole, which are therefore independent from industry structure. Relatively more
populous localities, or places more easily accessible to metropolitan areas, are also
more likely to house universities, industry research laboratories, trade associations,
ECONOMIC GROWTH IN CITIES AND URBAN NETWORKS | 93

and other knowledge-generating institutions. It is the dense presence of these insti-
tutions, which are not solely economic in character, but also social, political, and
cultural in nature, that supports the production and absorption of know-how, stim-
ulating innovative behavior and differential rates of interregional growth (Harrison,
Kelley, and Gant 1997). The diverse industry mix in an urbanized locality therefore
improves the opportunities to interact, copy, and modify practices and innovative
behavior in the same or related industries. In her well-known theory on urban
growth, Jane Jacobs (1969) deﬁnes diversity as a key source of agglomeration econ-
omies and, unlike the MAR theory, believes that the most important knowledge
transfers come from outside the own industry.
Quigley (1998) describes four features of agglomeration economies. The ﬁrst
feature concerns scale economies or indivisibilities within a ﬁrm that are the histori-
cal rationale for the existence of productivity growth in agglomerated industries in
the ﬁrst place (Brakman, Garretsen, and Van Marrewijk 2001). Without the exis-
tence of scale economies in production, economic activities would be dispersed so
as to save transportation costs (Fujita, Krugman, and Venables 1999). In consump-
tion terms, the existence of public goods leads to urban amenities. Cities function
as ideal institutions for the development of social contacts corresponding to various
kinds of social and cultural externalities (Florida 2002).
The second factor—namely, shared inputs in production and consumption—
encompasses the economies of localized industry described by Marshall. The use
of shared inputs to produce more differentiated consumption goods in
agglomerations associated with variety, fashion, culture, and style is well known
(Katz and Shapiro 1985).
A third possible reason why agglomeration economies may provide greater eco-
nomic efﬁciency arises from potential reductions in transaction costs (Martin and
Ottaviano 1999). The Western economies in general have developed primarily into
services-based economies. Business and consumer services now make up most of
urban employment, and most of these urban activities are characterized in terms of
a knowledge-based information society. A logical outcome of the interaction
between urban economies and knowledge-based service industries is the growing
importance of transactions-based explanations of growth in local economic pro-
ductivity (Castells 1989; Gottmann 1983). The so-called California school of eco-
nomic geography emphasizes transactional costs in explaining agglomeration
economies (Scott 1988) and the survival of local ﬁrms and the lower search costs of
workers (Acemoglu 1996; Helsey and Strange 1990) and demonstrates that, in a
matching context, returns to human capital accumulation can be shown to exist,
even when all output in a city is produced with constant returns to scale and no
technological externalities. Again analogous to production, better matching may
occur in consumer functions (shopping).
The fourth set of potential economies identiﬁed by Quigley (1998) relates to the
application of the law of large numbers to the possibility of ﬂuctuations in the
economy. Fluctuations in purchases of inputs are usually as imperfectly correlated
94 | FRANK VAN OORT AND PHILIP MCCANN

across ﬁrms as are the sales of outputs across buyers. As such, ﬁrms are required
to hold less inventory due to the greater possibilities for pooling supplies.
Each of these aspects of agglomeration economies provides a possible rationale
for why cities and regions characterized by agglomeration generally exhibit higher
growth than those without such features. In addition to these features of
agglomeration economies, two additional features of cities contribute to the growth
potential of a city region. First, the structure of a regional or urban economy can be
considered in a manner analogous to corporate diversiﬁcation in product portfolios.
Regional variety can be considered a portfolio strategy to protect regional income
from sudden asymmetric sector-speciﬁc shocks in demand (Attaran 1986; Dissart
2003). This will especially protect labor markets and thus prevent the occurrence of
sticky unemployment. Even if interregional labor mobility is high, asymmetric
shocks reduce economic growth as agglomeration economies and the tax base
deteriorate (Krugman 1993). Following this reasoning, industrial variety at the
regional level would reduce regional unemployment and promote regional economic
growth, while specialization would increase the risk of a rise in unemployment and
a slowdown in growth. As for ﬁrms, a central question is whether related or
unrelated diversiﬁcation is most rewarding for stability and growth (Baldwin and
Brown 2004). One can expect that related industries more often (though, again, not
as a rule) have correlated demand shocks. Therefore, spreading risk over unrelated
sectors is likely to be preferred from the viewpoint of a portfolio strategy. However,
one should take into account the possible beneﬁts from related diversiﬁcation as
well. Analogous to economies of scope at the ﬁrm level, one expects knowledge
spillovers within the region to occur primarily among related sectors and only to a
limited extent among unrelated sectors. In terms of agglomeration theory, Jacobs’s
externalities are expected to be higher in regions with a related variety of sectors
than in regions with an unrelated variety of sectors (Frenken, Van Oort, and
Verburg 2007).
Second, technological development and the diffusion of knowledge and inno-
vation are central to the modern concept of regional growth. However, the con-
cept of knowledge diffusion across space in the economic geographic literature
dates back some 60 years, beginning with the growth pole theory of Perroux
(1950), which was subsequently embedded in geographic space by Boudeville
(1966). Its main assumption is that economic growth, manifested in the form of
innovations, is spread throughout a growth center’s hinterland to lower-order cit-
ies and localities nearby. Innovations and knowledge once generated in a certain
central location are expected to spread among regions from one locality to its
neighbors (Parr 1999; Richardson 1978). Hirschman (1958) distinguished two
types of spillover effects associated with growth pole theory: backward linkages
and forward linkages. The former effects are associated with activities that pro-
vide inputs to economic activities, drawing toward the location of the clients. The
latter concern activities that use outputs by creating new activities or by expand-
ing existing activities that draw them toward locations where these existing activ-
ities are already (over) represented. This can turn into backwash effects that are
ECONOMIC GROWTH IN CITIES AND URBAN NETWORKS | 95

usually unanticipated, occurring when the growth pole attracts so much attention
and cumulative growth that it drains the surrounding areas. Migration of work-
ers toward the pole and the concentration of investment capital in the initial cen-
ter of innovation initiate the emergence of high-level urban services in the growth
pole. This can then lead to a further polarization of economic growth, restricting
growth elsewhere (Richardson 1978). The existence of spread effects is based on
the belief that the ongoing growth of the core location (the growth pole) will lead
eventually to diseconomies of scale due to congestion and the appreciation of fac-
tor costs. A parallel stream of work also emerged from Vernon (1960) and Chin-
itz (1961), in which the role of cities as incubators of new ﬁrms and new ideas
was regarded as critical. More recently, this theoretical framework has been
applied in agglomeration studies of Henderson (1997) and Rosenthal and Strange
(2001). The central argument concerns an urban product cycle notion that new
products are more easily developed in large diverse metro areas with a diversiﬁed
industrial structure and skill base, particularly those with many corporate head-
quarters (Pred 1977), whereas mature products eventually are decentralized to
hinterland or peripheral areas.
After the period of rapid analytical developments up to the late 1960s that were
associated with the quantitative revolution in economic geography and the micro-
economic breakthroughs in regional science (Isard 1956), outside of the specialist
research ﬁeld, widespread interest in spatial economic issues largely waned in both
economics and geography for a period of two decades. As such, another 20 years
passed before a major resurgence of interest was witnessed in spatial and regional
economic issues. This resurgence of interest was associated with the work of Paul
Krugman (1991) and Michael Porter (1990), and both of these commentators not
only borrowed from the existing insights but also added new insights.

The 1990s Revolution: New Economic Geography and
New Growth Theory

Prior to the development of new trade theory, traditional international trade
theory was largely unable to explain intra-industry, intra-national, or intra-re-
gional trade. At the same time, gravity models suggested that most trade tended
to be localized. The development of new trade theory based on the Dixit and
Stiglitz (1977) modeling framework subsequently led to renewed interest in both
localized and intra-industry trade. These developments in international trade
theory, in turn, led to a renewed interest in modeling spatial economics in the
form of new economic geography, and regional economics as a whole subse-
quently experienced a resurgence via a combination of developments in both new
economic geography and new growth theories.
New economic geography is based on the insights and analytical approaches that
are common to new growth theory and new trade theory. As both new growth the-
ory and new trade theory predate new economic geography, it is worthwhile to
96 | FRANK VAN OORT AND PHILIP MCCANN

recap the basic features and insights of new economic geography’s two antecedent
literatures. In both of these strands of literature, the dominant analytical approach
is the modeling of imperfect competition and increasing returns to scale within the
monopolistic competition framework of Dixit and Stiglitz (1977), in which utility
is a function of variety. New theories now allow for the modeling of inter- as well
as intra-industry trade ﬂows within a general equilibrium framework in which the
structure of demand and supply is endogenously determined.
Krugman (1991) ﬁrst applied this modeling framework to the question of geog-
raphy under conditions of economies of scale and labor mobility and reinterpreted
Marshall’s principles of externalities as stemming from the beneﬁts of the pooling
of the local labor supply and the demand for specialized nontradable inputs. In
these models, spatial concentration and dispersion were seen to emerge as a natural
consequence of market interactions involving economies of scale at the level of the
individual ﬁrm, with many of the results generated by these models being reminis-
cent of the results of central place theory and the rank-size rule (Fujita, Krugman,
and Venables 1999). Indeed, the cumulative causation characteristics of these mod-
els is in many ways akin to the processes described by Pred (1977), among others;
in this respect, the work by Fujita, Krugman, and Venables builds on most of the
standard location theory (Dymski 1996; Krugman 1993).
This spatial version of the Dixit-Stiglitz monopolistic competition theory has
since become a crucial element of all spatial economic models on the location of
economic activities (Abdel-Rahman 1988; Fujita, Krugman, and Venables 1999),
and several key insights have emerged from this literature. First, if internal econo-
mies of scale are strong and transportation costs are low, this induces a circularity
that tends to keep geographic concentration in existence once established (compare
Pred 1977 and Myrdal 1957 on their notions of cumulative causation). The reason
is that manufacturers in the larger economic agglomerations have an advantage,
because the size of local demand allows them to proﬁt more from internal econo-
mies of scale, and hence they can afford higher nominal wages. A higher local
demand for goods induces a greater variety of goods, which induces real income
effects, which attract new workers, consumers, and ﬁrms. These developments are
manifested in a greater range of local forward linkages (the supply of a greater vari-
ety of goods increases the worker’s real income) and local backward linkages (as
greater numbers of consumers attract more ﬁrms), as pecuniary externalities create
scale economies at the individual ﬁrm level that are transformed in increasing
returns at the level of a location as a whole. In general, this effect will be stronger
as local demand is greater and internal economies of scale are higher.
Meanwhile, this observation of spatial industrial concentration is consistent with
the observation that some producers survive in peripheral locations. One reason is
that peripheral producers exhibit local advantages outside the large agglomeration
due to higher transportation costs, which mean that they face less competition for
their local demand. A second reason is that negative externalities such as conges-
tion and high land rents in the larger agglomerations (Quigley 1998) may eventu-
ally lead to decreasing returns to scale in cities (Glaeser, Scheinkman, and Schleifer
ECONOMIC GROWTH IN CITIES AND URBAN NETWORKS | 97

1995; Moomaw 1985). If the industrial sector itself constitutes a principal source
of demand for industrial products, and if transportation costs increase with dis-
tance, then ﬁrms will cluster because they produce under increasing returns. The
existence of sufﬁciently high transportation costs therefore ensures that multiple
clusters will exist instead of one monocentric city. As such, the pull of Krugman’s
pecuniary externalities balances the push of transportation costs. The ultimate equi-
librium depends on the initial point of departure, the extent of economies of scale,
and the level and structure of transportation costs (McCann 2005). Equilibrium no
longer automatically means that spatial units of observation converge in terms of
regional growth (Kubo 1995).
A second and related body of literature related to geography and space has been
developed on the basis of the new or endogenous growth theories. These theories
themselves are built on foundations similar to those of new trade theory and new
economic geography (Barro and Sala-i-Martin 1995), although they are different in
that they do not treat time in a comparative static manner, but take growth over
time and its determinants as the principal subjects of the analysis. According to this
view, when individuals or ﬁrms accumulate new capital, they inadvertently contrib-
ute to the productivity of capital held by others. Such spillovers may occur in the
course of investment in physical capital or human capital (Lucas 1988). As Romer
(1990, 1994) demonstrates, if the spillovers are strong enough, the private marginal
product of physical or human capital can remain permanently above the discount
rate, even if individual investments would face diminishing returns in the absence
of external boosts to productivity. These model approaches became widely known
as “endogenous growth” theory, because technological change is also seen to be
endogenously determined in these models.
When applied to regions and geography, these models all assume that the notion
of increasing returns is spatially embodied in agglomeration economies. Endoge-
nous regional growth models are similar to new economic geography models in
that such effects can only operate within an environment of imperfectly competitive
monopolistic competition. However, these regional growth models are different
from mainstream new economic geography models in that, in the endogenous
growth framework, local external economies not only may be associated with mar-
ket size or pecuniary external economies but also can be related to information or
technological externalities and spillovers. However, whereas agglomeration in new
trade theory and new economic geography is the geographic outcome of modeling,
in new growth theory it forms an endogenously determined explanation of growth.
These types of arguments therefore provide additional possible explanations for
systematic variations in competitive advantage (Porter 1990) across regions and
why certain regions are able to maintain and even reinforce their advantages over
other regions, once certain locations have taken a lead in a particular activity
(Arthur 1994; Krugman 1991).
98 | FRANK VAN OORT AND PHILIP MCCANN

Economic-Geographic Criticism and Common Ground

Several criticisms of the monopolistic modeling logic underpinning new economic
geography have come from economic geography schools of thought (Martin 1999;
Martin and Sunley 1996) as well as both orthodox (Neary 2001) and heterodox
schools of economics (Peneder 2001). These critiques focus variously on the immea-
surability of some of the notions of increasing returns inherent in these frameworks,
the static nature of some of the assumptions, the speciﬁc focus on the representative
ﬁrm, the presence of pecuniary economies and the absence of either human capital
or technological spillovers as externalities, and the problems associated with the
iceberg transport costs assumption (McCann 2005). Other evolutionary critiques
(Martin and Sunley 2003) also question the originality and validity of the Porter
(1990) concept of clusters. However, many of these criticisms relate to speciﬁc
models and speciﬁc papers rather than to the whole ﬁeld. Yet the most fundamental
critique of these ﬁelds in general relates to the question of institutions and the rela-
tionship between knowledge and institutions. Within economics, institutions are
regarded as being important in explaining economic growth (Aghion and Howitt
1998; Helpman 2004; North 1990). However, for economic geographers and
heterodox economists working within the arenas of evolutionary and institutional
economics, the role played by institutions in economic development is paramount.
In this intuitional-evolutionary schema, cities, regions, and countries that have
more efﬁcient institutions are superior in both the generation and diffusion of
knowledge and consequently have better prospects for economic growth. As such,
while new economic geography and new growth theories are mathematically
complex, these analysts regard them as being philosophically too simplistic. This is
because they aim to produce generalizable predictions based on a representative
model, whereas the counterargument implies that the appropriate investments,
favorable institutional arrangements, and entrepreneurial dynamics that allow
regions to grow are features of regions that have emerged for historically and
spatially contingent reasons rather than generalizable reasons. For economic geog-
raphers, as well as institutional and evolutionary economists working in this tradi-
tion, cultural and cognitive proximity are therefore deemed to be just as important
as geographic proximity in the transmission of ideas and knowledge. Boschma and
Lambooy (1999) further argue that the generation of local externalities is crucially
linked to the importance of selection in terms of “ﬁtness” of a local milieu, the
sociological dimensions of which can be institutional, cultural, legal, and historical.
According to these perspectives, these speciﬁc historically contingent and geograph-
ically contingent features of space, rather than simply space as a dimension, are
crucial in determining the geography of entrepreneurship and growth (Audretsch,
Keilbach, and Lehmann 2006).
The original behavioral geographic literature (Pred 1966; Webber 1964) focused
on incomplete information, the limited cognitive capacities of entrepreneurs, and
the differences in the ability of ﬁrms to absorb information at different stages in
their life cycle (Alchian 1950). However, institutional structures are now regarded
ECONOMIC GROWTH IN CITIES AND URBAN NETWORKS | 99

as being much more than simply the aggregation of individual choices: rather they
are seen as the result of many interactive processes. Economic geography research
has always emphasized the untraded interdependencies that function as externali-
ties and spillovers (Storper 1997), and this has led to calls for research to focus on
institutional issues (Amin and Thrift 2002). As such, evolutionary economic geog-
raphy theory focuses primarily on the creation of new spatial structures, rather than
on explaining equilibrium states. Within the same spatial and institutional context,
ﬁrms and entrepreneurs may arrive at different location behavior by means of either
chance occurrences or by fundamental processes of neo-Schumpeterian, creative
destruction. Alternatively, different spatial and institutional contexts will mean that
ﬁrms and entrepreneurs may arrive at either different or similar locational out-
comes, but for a variety of reasons. As such, the initial states that determine alloca-
tions may vary signiﬁcantly, although the future trajectories of these initial
outcomes are determined primarily by path-dependency phenomena, which them-
selves are underpinned by local externalities and spillovers. In turn, these path-de-
pendent phenomena subsequently give rise to localized regional clustering.
Although the differences between the formal modeling approaches of new eco-
nomic geography, new growth theory, and the evolutionary-institutional approaches
to regional growth at ﬁrst appear to be irreconcilable, common ground between
these competing theories can be found on several key points. First, in each of these
strands of literature, as we have seen, the role of agglomerations is regarded as
being a crucial element of regional performance, and the common element is the
issue of local knowledge generation, accumulation, and spillovers. Second, and
related to the ﬁrst point, is the issue of the level of connectivity: speciﬁcally, all of
these theories regard the number of connections between local regional nodes and
other key international nodal points in the global economy as being important
(Saviotti 1996). Recent work on global cities suggests that particular cities that are
well connected via international hub airports, in particular, are consistently at an
advantage with regard to other locations in their ability to acquire relevant knowl-
edge spillovers. Third, the geographic scale over which knowledge spillovers oper-
ate is regarded as critical, and once again, most of the apparently competing
theories are largely in agreement.
Regarding this third point, one of the features that neither the new economic
geography nor the new growth theory explicitly models is the actual geographic
scale over which any mechanisms of knowledge spillover operate. As Jaffe, Trajten-
berg, and Henderson (1993) conclude, we know very little about where such spill-
overs actually go, although we can acquire some information regarding this point
by studying the geographic location of patent citations. Jaffe, Trajtenberg, and Hen-
derson (1993) therefore test the extent to which knowledge spillovers are geograph-
ically localized. Their measured effects were particularly signiﬁcant at the local
level, indicating that localization fades over time, but very slowly. Further research
by Acs (2002), Audretsch and Feldman (1996), and Feldman (1994), among others,
provides corroborating evidence that knowledge spillovers tend to be geographi-
cally bounded within the location where the new economic knowledge was created.
100 | FRANK VAN OORT AND PHILIP MCCANN

Lucas (1993) emphasizes that the most natural context in which to understand the
mechanics of dynamic knowledge externalities and economic growth is in metro-
politan areas where the compact nature of the geographic unit facilitates communi-
cation and human capital accumulation. He argues that the only compelling reason
for the existence of cities would be the presence of increasing returns to agglomera-
tions of resources, which make these locations more productive. This view of
human capital as social input that induces productivity gains in cities has been fur-
ther explored by others (Bostic, Gans, and Stern 1997; Cheshire and Duranton
2004; Rosenthal and Strange 2004), who all argue that the microeconomic founda-
tion of the external effect of human capital is the sharing of knowledge and skills
among workers that occurs through both formal and informal interactions. The
distinction between tacit and implicit knowledge, as against explicit knowledge, is
deemed to be crucial here in terms of how those knowledge externalities are embod-
ied in growth (implicit) and innovation (explicit) externalities. Intuitively, it seems
clear that the higher is the average level of human capital (knowledge) or the more
spatially concentrated is the number of agents, the more “luck” these agents will
have with their meetings and the more rapid will be the diffusion and growth of
knowledge (Rauch 1993: 381).
These observations, which emphasize the role played by the city as a knowledge
and information environment, largely accord with many of explanations employed
by the economic geography, institutional, and evolutionary approaches. The origi-
nal behavioral arguments generally pointed to large urban agglomerations as being
superior incubator locations to other places (Chinitz 1961). This thinking has heav-
ily inﬂuenced contemporary thinking on economic geography. The difference, how-
ever, is in the emphases. The evolutionary-institutional approaches stress institutions
and policy makers (Amin and Thrift 2002) on the assumption that, in each observed
case, the actual impact of these externalities on productivity remains heavily depen-
dent on the historical economic context (Bostic, Gans, and Stern 1997), the indus-
trial structure (Moomaw 1985; Glaeser and others 1992), and the speciﬁc role
played by face-to-face contact in local production processes (McCann 2007). There-
fore, when behavioral and evolutionary explanations for interregional economic
development are taken seriously, primary attention is paid to the behavioral and
entrepreneurial causes of agglomeration. The concept of externalities in this schema
is therefore also related to the nature of mechanisms that transmit information
among actors in ﬁrms and the cognitive and interactive characteristics that deter-
mine the construction of locational preferences.

Cities and Urban Systems in the Network Society

Steadily, cities shifted their functional borders when mobility steadily increased and
communication technology further developed. These developments led to the rise of
larger metropolitan areas. Local economic growth and prosperity were not only
contingent on the urban core, but also on the economic development in the suburbs.
ECONOMIC GROWTH IN CITIES AND URBAN NETWORKS | 101

Nevertheless, the relationship between the urban core and its suburbs at ﬁrst
instance remained hierarchical-nodal. Most of the economic activities were based in
the urban core, commuting ﬂows were directed toward the central cities, and
suburbs only fulﬁlled a residential function. In other words, one center was respon-
sible for the labor demand, while the surrounding areas took care of the labor
supply. Nowadays, such straightforward city-hinterland separation is supposed to
be nonexistent in Western societies. Legal status has become uniform, at least in
each national area, the functional borders of cities reach far beyond the (former)
city walls, and social and economic processes are taking place at an ever larger
geographic scale. At the same time, suburban areas increasingly emerge into local
centers that develop their own economic activities and, because of this, start
competing with the original urban core. It is generally argued that these changes in
contemporary urban systems are fueled by the rise of the network economy
(Castells 1996), which is exempliﬁed by recent advances in transport and commu-
nication technology, the ongoing globalization, the rise of the service economy, and
the individualization of production (Anas, Arnott, and Small 1998; Batten 1995;
Graham and Marvin 2001). Due to these developments, the role of physical prox-
imity in shaping inter-ﬁrm relations is losing ground, resulting in greater spatial
ﬂexibility for economic actors. Moreover, to compete in the network economy,
ﬁrms have to make production processes more ﬂexible with respect to time, place,
contracts, and job content. This need for ﬂexibility is increased by growing inter-
national competition and product differentiation. It is not only the price of a
product that inﬂuences the purchasing behavior of consumers, but also quality,
brand preferences, and market trends. This has led to increasing uncertainty in
markets. To deal with this uncertainty, the outsourcing of economic activities that
do not belong to the core activities of the company, as well as cooperation with
ﬁrms active within the same sector, have become more important.
This process of making economic processes more ﬂexible, and the functional
division of tasks between companies, create opportunities for a spatial division of
labor: different spatial settings or locations become suitable for different economic
functions. The result is often argued to be of polycentric and multinodal structures,
in which ﬂows of goods, services, and people are not one-sided, but rather two-sided
and crisscrossed. This leads to the emergence of systems of economically comple-
mentary urban regions. The notion of a central city on which the population of the
surrounding towns is heavily dependent for amenities and employment becomes
obsolescent in this view. One location may be regarded as “central” in terms of one
particular function, while other places may be central in terms of another function.
As a result, the cities’ catchment areas will overlap. The greater urban conurbation
then loses signiﬁcance as an independently functioning daily urban system, instead
forming part of an urban network. These urban networks are regarded as the cities
of the future, both in Western countries and in developing countries (Van Oort,
Burger, and Raspe 2007).
Cities are agglomerations, characterized by a high degree of human interaction.
Originally cities were the outcome of economic agents seeking physical proximity
102 | FRANK VAN OORT AND PHILIP MCCANN

to one another. In the network economy, it is not only physical proximity to other
ﬁrms that determines the pattern of interaction among companies, but also tech-
no-economic and sociocultural proximity (Boschma 2005). One can think of simi-
larities in the organization of production, similarities in strategies, similarities in
technologies employed by ﬁrms, and ﬁrms having a joint history or common back-
ground. It is argued that these new types of proximity require less physical prox-
imity. Cooperative relationships between companies and individuals need not be
predominantly local in nature anymore; instead they can manifest themselves at
any spatial scale (Lambooy 1998). As a result, the functional boundaries of cities
are moving, the catchment areas of cities will overlap, and metropolitan areas will
stop functioning as a daily urban system, instead forming part of an urban net-
work. However, what the original cities and the contemporary urban networks
have in common is that they are both characterized by a high degree of interac-
tion between economic agents. In other words, both cities and urban networks
can be characterized by a high degree of spatial integration. The Greater Pearl
River delta in China is a good example of an urban regional network outside
Europe and the United States (Enright, Scott, and Chang 2005).
According to Quigley (1998), the degree of economic diversiﬁcation explicitly
separates a city from an agglomeration, which can be regarded as a concentration
of similar agents. Accordingly, in order to label urban networks as the cities of the
future, the cities in this network should be specialized in different sectors, thereby
fulﬁlling different economic roles. This touches on the earlier-mentioned spatial
division of labor, which means that cities in a network will specialize in those
activities that arise from their comparative advantages. Specialization offers a more
productive (integrated) whole than each individual town or city would be able to
offer in isolation. In other words, cities in an urban network complement each
other. Policies directed toward specialization and integration of economic activities
in systems of cities not only reﬂect Western urban developments, but also might
help cities in developing countries to integrate functionally in their regions.

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Part IV: Spatial Disparity and
Labor Mobility
Can Investment in Human Capital
Reduce Regional Disparities?
Some Evidence for Spain

ÁNGEL DE LA FUENTE MORENO

Can educational policies be used to reduce regional income disparities? In principle,
the answer should be a clear “yes.” If educational attainment is an important
determinant of productivity—and the available evidence suggests that this is indeed
the case1—raising average schooling in backward regions should help to bring their
income levels closer to the national average. A possible complication is that skilled
youngsters may choose to migrate to other regions, thereby mitigating the expected
contribution of educational investment to income convergence. If we are worried
about regions as such, this possibility may be a cause for some concern. But if we
worry about individuals, as we should, the case for increased educational investment
in low-income regions does not depend on the degree of mobility of their population.
This paper examines the case for using education as a regional policy tool in
Spain. Drawing on the results of some recent work in collaboration with Rafael
Doménech, I examine the evolution of regional educational disparities in Spain dur-
ing the last four decades and the prospects for further educational convergence in the
future. I also analyze the determinants of regional productivity in Spain, paying spe-
cial attention to the role of human capital. I use the results to quantify the impor-
tance of education as a source of regional income disparities, to estimate the social
return to investment in different types of productive assets in each territory, and to
extract some tentative conclusions regarding the changes in our pattern of invest-
ment that may help to speed up the growth of the country as a whole and to reduce
internal inequality.

Angel de la Fuente Moreno is Associate Professor at Universitat Autònoma de Barcelona in Spain.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

This note summarizes some of the main results of de la Fuente and Doménech (2006a) and de la Fuente (2006a).
Financial support from the European Regional Development Fund (ERDF) and from the Spanish Ministry of Education
(through project ECO2008-04837/ECON) is gratefully acknowledged.

109
110 | ÁNGEL DE LA FUENTE MORENO

The Evolution of Regional Schooling Levels and Perspectives for
Future Educational Convergence

In de la Fuente Moreno and Doménech (2006a) we use data from the national
census and the municipal registers to construct new regional series of educational
attainment covering the period 1960–2000. Figure 1 summarizes some of the key
features of these data. Educational attainment in Spain, measured by average years
of schooling of the adult population, rose more than 60 percent between 1960 and
2000, while the dispersion of attainment levels across regions fell 28 percent. Prog-
ress on both fronts was considerably faster during the second half of the sample
period. Following some oscillations in the ﬁrst two decades of the sample, regional
disparities in attainment decreased steadily after 1980, and the growth rate of years
of attainment roughly doubled relative to the ﬁrst half of the sample.
Using data for 1995, ﬁgure 2 shows that educational attainment is closely related
to income per capita. The correlation between relative income per capita and rela-
tive attainment (both measured in percentage deviations from the national mean) is
0.773, and the majority of regions concentrate on the northeastern and southwest-
ern quadrants of ﬁgure 2, indicating that below-average income goes hand in hand
with below-average attainment. In particular, all Objective 1 regions but two
(Asturias and Cantabria) have attainment levels below the national mean.2
Using data from the 2001 census in de la Fuente Moreno (2006a), I construct
measures of educational attainment by cohort for the different regions and
explore their implications for the likely future evolution of regional educational
disparities. In particular, I construct indicators of educational convergence across
regions as we move to younger and younger cohorts and interpret them as pre-

FIGURE 1. Average Years of Schooling in Spain and Coefﬁcient of Variation of
Regional Attainment Levels, 1960–2000

180

160

140

120

100

40
1960 1965 1970 1975 1980 1985 1990 1995 2000

average attainment coefﬁcient of variation

Source: Author’s calculations
CAN INVESTMENT IN HUMAN CAPITAL REDUCE REGIONAL DISPARITIES? | 111

FIGURE 2. Relative Attainment versus Relative GDP per Capita in Spain, 1995

Relative attainment
15%
Ma

10% PV
Na

Cnt 5%
As Ca
Ar
Ri Ba

– 40% – 30% – 20% – 10% 0% 10% 20% 30% 40%
CL Cn
Mu Relative income per capita
– 5% Va

An Ga
– 10%

Ex CM – 15%

Source: Author’s calculations.
Note: Relative income per capita is GDP per capita in percentage deviations from the national average in 1995.
The data used to calculate it are taken from Fundación BBV (2000). An = Andalucía; Ar = Aragón; As = Asturias; Ba
= Baleares; Cn = Canarias; Cnt = Cantabria; CL = Castilla y León; CM = Castilla la Mancha; Cat = Cataluña; Va =
Valencia; Ex = Extremadura; Ga = Galicia; Ma = Madrid; Mu = Murcia; Na = Navarra; PV = País Vasco; Ri = Rioja.

dictors of future trends in educational convergence. Although the dispersion of
schooling levels across regions is signiﬁcantly smaller for younger cohorts than
for the overall population, I conclude that sizable disparities are likely to persist
in the future. At higher levels of attainment, differences across regions may actu-
ally be expected to increase over time.
As expected, attainment rises sharply and its dispersion across regions falls as we
move from older to younger cohorts. A comparison between the entire adult popu-
lation and its youngest cohort can be especially informative, as it tells us how the
existing situation is likely to change in the future, assuming that current patterns of
enrollment remain unchanged and that there are no signiﬁcant migration ﬂows.
Under these assumptions, regional disparities in attainment can be expected to fall
26.3 percent in the future (that is, the coefﬁcient of variation of relative attainment
would drop from 9.2 to 6.8 percent). This is a rather signiﬁcant change, but it
would still leave a substantial amount of regional inequality and a difference in rel-
ative attainment of more than 20 points between the top and the bottom regions.
To see what is driving the process of regional convergence in years of schooling
across cohorts, it is useful to examine how regional disparities vary across age
groups for different educational levels. Figure 3 shows the degree of convergence
across cohorts for four educational indicators: average number of years of school-
ing and the fraction of the population that has completed at least each of three suc-
cessively higher levels of education (lower secondary, upper secondary including
vocational training, and the ﬁrst cycle of university). Convergence is measured by
the percentage reduction in the coefﬁcient of variation across regions of the relevant
112 | ÁNGEL DE LA FUENTE MORENO

measure of attainment that we observe as we go from the entire population to the
youngest relevant cohort. This indicator is computed for all regions together and
for a restricted sample that excludes Madrid (which displays some rather atypical
behavior).3
The ﬁgure suggests that the process of convergence in years of schooling is driven
mainly by the extension of compulsory schooling to the lower secondary level. Attain-
ment rates at this level are uniformly very high across regions for younger cohorts.
Things are rather different, however, for postcompulsory cycles. If we exclude Madrid
from the sample, there is absolutely no convergence across cohorts in terms of upper-
secondary (or better) attainment, and regional disparities in terms of university attain-
ment can actually be expected to increase by 30 percent in the future.
Figure 4 shows what is behind this last ﬁnding. It plots the increase in relative
university attainment as we go from the entire adult population (25+) to the 25–34
age group against the relative attainment of the 25+ population. Madrid is an
extreme outlier in this ﬁgure. If we keep it in the sample, there is a broadly negative
relationship between the two variables that may be taken as an indication of con-
vergence (that is, that initially less educated regions are making faster progress). In
the absence of Madrid, however, this is no longer the case. Moreover, more than
half the regions display divergent behavior, meaning that university attainment
tends to rise further in regions that are already above the national average (Castilla
and León, Aragón, Navarra, and País Vasco) and to fall in regions that are below
the Spanish mean (Baleares, Murcia, Andalucía, Canarias, and Cantabria).
These ﬁndings are clearly not good news from the point of view of the future
prospects for increased internal cohesion and suggest that a more activist

FIGURE 3. Regional Convergence of Attainment Levels across Cohorts in Spain
(in percentage)

70
60
50
40
30
20
10 University
0
– 10 Years Lower secondary Upper secondary
– 20 or better or better
– 30

all regions without Madrid

Source: Author’s calculations.
Note: Percentage decrease in the coefﬁcient of variation across regions as we go from the entire adult population
(25+) to the youngest cohort (20–24 for lower and upper secondary or better and 25–34 for university).
CAN INVESTMENT IN HUMAN CAPITAL REDUCE REGIONAL DISPARITIES? | 113

FIGURE 4. Regional Convergence in University Attainment across Cohorts in Spain

Incremental relative attainment, 25–34
20%
CL
15%
Ga Ast

CM 10% Ar PV
Ri
Ex
5%
Na
Va Ca
Cnt
– 40% – 30% – 20% – 10% 10% 20% 30% 40% 50% 60%
– 5% Relative attainment 25+
Ba An

Mu – 10%

– 15%
Ma
Cn
– 20%

Source: Author’s calculations.
Note: For abbreviations, see note to ﬁgure 2.

educational policy in favor of disadvantaged groups may be required to reduce the
educational gap of the more backward regions.
As noted in the introduction, labor mobility may reduce the effectiveness of such
policies when measured in terms of their effects on regional income levels. In the
case of Spain, however, this potential “problem” would seem to be relatively unim-
portant due to low mobility. This is illustrated in ﬁgure 5, which plots the relative
attainment of the 25–34 age group against the relative university graduation rate
by region of origin.4 The correlation between these two variables is clearly positive,
indicating that most graduates tend to remain in their home region.
Large deviations from the ﬁtted regression line in ﬁgure 5 alert us to regions
where migration ﬂows are important determinants of university attainment rates
for young cohorts. As expected, Madrid shows a large positive deviation that sig-
nals a large inﬂow of young university graduates from other regions (or an inﬂow
of university students who remain in the region after graduation). At the other
extreme, the migration of highly qualiﬁed young people appears to be an important
problem in Murcia, Castilla la Mancha, Canarias, and Andalucía. In all these
regions, however, gross graduation rates are well below the national average, indi-
cating that migration is not the only cause of the problem.

Educational Attainment and Regional Productivity

In the remainder of the paper, I attempt to quantify the impact of schooling on
regional income and estimate the social return to investment in education and in
114 | ÁNGEL DE LA FUENTE MORENO

other assets. In de la Fuente Moreno and Doménech (2006a), we estimate a regional
production function using panel data for the Spanish regions. The equation is of
the following form:

∆q it
= c + µi + ηt + λbit + αk∆kit + αk∆xit+ β∆sit+ εit (1)

where ∆ denotes annual growth rates (over the subperiod starting at time t), qit is
the log of output per employed worker in region i at time t, k and x are the logs of
the stocks of (noninfrastructure) physical capital and infrastructure per employed
worker, s is the log of the average number of years of schooling of the adult popu-
lation, and bit is a measure of technological gap that enters the equation as a deter-
minant of the rate of technical progress in order to allow for a catch-up effect. This
term is the Hicks-neutral total factor productivity (TFP) gap between each region
and Madrid (M) at the beginning of each subperiod, given by

bit = (qMt – αkkMt – αxxMt – βsMt ) – (qit – αkkit – αxxit – βsit ) (2)

To estimate this speciﬁcation, I substitute equation 2 into equation 1 and use
nonlinear least squares with data on both factor stocks and their growth rates. In
this speciﬁcation the parameter measures the rate of (conditional) convergence in
relative TFP levels. If this parameter is positive, relative TFP levels eventually stabi-
lize, signaling a common asymptotic rate of technical progress for all territories,

FIGURE 5. Relative University Attainment of Individuals 25–34 Years of Age versus
Relative Graduation Rate, by Region of Origin in Spain

Relative attainment 25–34
150

140 Ma

130 PV

120 Na
Ar CL
Ri As

Ca
40 50 60 70 80 90 110 120 130 140
Cnt Va 90 Relative graduation rate
Ga Ex
An 80
Ba CM Mu
Cn 70

Source: Author’s calculations.
Note: For abbreviations, see note to ﬁgure 2.
CAN INVESTMENT IN HUMAN CAPITAL REDUCE REGIONAL DISPARITIES? | 115

and the regional ﬁxed effects capture permanent differences in relative total factor
productivity that will presumably reﬂect differences in research and development
(R&D) investment and other omitted variables.
The data on regional employment (number of jobs) and output (gross value
added, at factor cost) are taken from Fundación BBV (1999, 2000). Gross value
added is measured in pesetas of 1986 and excludes the value added of the building
rental sector, which includes imputed rents on owner-occupied buildings. Employ-
ment in this sector, which is very small, is also deducted from overall employment.
The series of infrastructure and noninfrastructure capital stocks have been con-
structed by Mas, Pérez, and Uriel (2002). The (net) stock of physical capital, which
is also measured in 1986 pesetas, is broken down into two components. The infra-
structure component (x) includes publicly ﬁnanced transportation networks (roads
and highways, ports, airports, and railways), water works, sewage, urban struc-
tures, and privately ﬁnanced toll highways. The stock of noninfrastructure capital
(k) includes private capital, net of the stock of residential housing, and the stock of
public capital associated with the provision of education, health, and general
administrative services. These last three items are aggregated with the capital stock
of the private sector because our output measure includes government-provided
services. As a proxy for the stock of human capital, we use our own series of aver-
age years of schooling.
The results are reported in table 1. Inspection of the table and a comparison with
other studies reveal a number of interesting results. First, the coefﬁcient of human
capital (β) displays a large and signiﬁcant positive value that is roughly consistent
with our estimates of the same parameter using cross-country data for a sample of
Organisation for Economic Co-operation and Development (OECD) countries (de
la Fuente Moreno and Doménech 2006b).

TABLE 1. Estimation Results
Variable Coefﬁcient
0.171
αk (3.50)
0.0560
αx (3.88)
0.835
β (4.13)
0.045
λ (6.36)

Adjusted R2 0.763
Standard error regression 0.0094
Number of observations 255
Source: Author’s calculations.
Note: The equation includes a full set of period dummies and those regional dummies that were signiﬁcant in the
ﬁrst iteration. White’s heteroskedasticity-consistent t ratios are in parentheses below each coefﬁcient.
116 | ÁNGEL DE LA FUENTE MORENO

Second, our estimate of β implies that human capital accounts for a substantial
fraction of cross-regional disparities in productivity. Figure 6 shows the contribu-
tion of schooling to the relative productivity of the Spanish regions. Relative pro-
ductivity is deﬁned as log real output per job measured in deviations from the
(unweighted) sample average of the same variable. Using regression weights to aver-
age the different regions, we ﬁnd that the share of schooling in average productivity
was 39.86 percent in 1995—that is, for the typical Spanish region, schooling
accounts for four-tenths of the productivity gap with the sample average.5

FIGURE 6. Contribution of Schooling to Relative Regional Productivity in Spain, 1995
(in percentage)

0
PV Ca Ma Na Ri Ar
Va Cn
Cnt Ba Mu CL
– 10 As
CM An
– 20 Ex
Ga
schooling other factors

Source: Author’s calculations.
Note: For abbreviations, see note to ﬁgure 2.

Third, our results also imply private returns to education (measured by the wage
increase induced by an additional year of schooling) that are well above those
obtained through the estimation of wage equations with individual-level data. That
is, the estimated value of β is too high to be capturing only the direct level effects of
human capital that should translate into higher wages. This discrepancy can be
interpreted as evidence of the existence of externalities linked to the accumulation
of human capital.
Turning to the remaining coefﬁcients of the model, ﬁnally, we ﬁnd that both the
stock of private capital and the stock of infrastructure enter the equation with posi-
tive and signiﬁcant coefﬁcients. However, both of these coefﬁcients are smaller than
those obtained in previous studies that have made use of similar regional data,
including in some cases older schooling series constructed using Labour Force Sur-
vey data.6 The sum of these two coefﬁcients is about 25 percent below capital’s
share of national income, whose average value over the last decade in our sample
was 31.4 percent. To be on the safe side when comparing the social returns to dif-
ferent assets, I scale up the coefﬁcient of private capital (αk) so that the sum αk + αk
is equal to the share of capital in national income. This ad hoc correction yields a
baseline value of αk of 0.258.
CAN INVESTMENT IN HUMAN CAPITAL REDUCE REGIONAL DISPARITIES? | 117

Using our corrected estimates of the parameters of the production function, ﬁg-
ure 7 shows the shares of schooling and private and public capital in the relative
productivity of a typical Spanish region in 1965 and 1995. The ﬁgure shows that
differences in schooling have become relatively more important over time as a
source of (shrinking) disparities in productivity across regions, making this variable
a potentially very powerful instrument of regional redistribution. By contrast,
remaining differences in the stock of private capital account for only 10 percent of
observed disparities in productivity in the last year of our sample, and infrastruc-
ture stocks display a slightly negative correlation with relative productivity.

The Social Return to Schooling and the Optimal Pattern of Investment

In de la Fuente Moreno and Doménech (2006a), we construct estimates of the
social rate of return to schooling and to other assets in each of the Spanish
regions. Our ﬁndings suggest that, at the national level, the economic returns to
human capital are at least comparable to, and probably slightly higher than, those
to noninfrastructure physical capital. However, the estimated return to infrastruc-
ture investment appears to be signiﬁcantly higher than the return to private and
human capital. The situation, however, varies greatly across regions, particularly
in terms of the relative returns to education and infrastructure.
Figure 8 plots the social premium on human capital relative to infrastructure
(deﬁned as the difference between the social rate of return to schooling and the
expected return to infrastructure) against regional income per capita in 1995.
According to our estimates, the return to public capital exceeds that to human
capital in 10 out of 17 regions. Education, however, continues to yield the highest
return in most of the poorer territories. For the richest Spanish regions (Madrid,

FIGURE 7. Shares of Different Factors in Relative Productivity in Spain, 1965 and 1995

%
40

0
schooling (s) capital (k) infrastructure (x)
– 10
1965 1995

Source: Author’s calculations.
118 | ÁNGEL DE LA FUENTE MORENO

Baleares, and Cataluña), the expected returns to infrastructure investment are
extremely high and exceed those to education by more than 10 percentage points.
For the rest of the regions, the differences in estimated returns are much lower, and
the human capital premium is generally positive in the poorer regions and tends to
decline with income per capita. This suggests that public investment strategies
should differ across regions. Infrastructure stocks appear to be the critical bottle-
neck at the top of the income distribution, while increasing educational attainment
seems to be crucial for low-income regions.

Conclusions

Infrastructure investment and training schemes, together with location incentives
for private investment, have traditionally been the main instruments of regional
policy and have played a key role in European Union (EU) efforts to increase
internal cohesion. Our results indicate that both schooling levels and infrastructure
endowments are signiﬁcant and quantitatively important determinants of income.
One direct implication is that investment in both education and infrastructure can
be effective in reducing internal disequilibria within Spain and in promoting the
country’s convergence toward average EU income levels.
The results summarized in this paper also suggest that there are important differ-
ences in the role that these two types of investment can and should play in achiev-
ing these two objectives. First, there seems to be more room for reducing internal
inequality through investment in human capital than in infrastructure. Differences
in schooling levels account for around 40 percent of productivity differentials
across regions, while the distribution of infrastructure stocks contributes very little
to such differences and actually reduces them marginally. Second, the pattern of
returns across regions is very different for the two factors. While the expected
returns to infrastructure are generally higher in the richer regions and reach
extremely high levels in Madrid, Baleares, and Cataluña, the return to education
tends to be higher in the poorest territories, where it also exceeds that to infra-
structure. Hence, a conﬂict between the two goals of cohesion policy—national
convergence to EU income levels and the reduction of internal disparities—arises in
relation to infrastructure, but not with regard to education.
These considerations suggest that it may be possible to increase the effectiveness
of both national and EU cohesion and growth policies by devoting greater resources
to investment in human capital in poorer regions and by redirecting part of EU and
national ﬁnancing for infrastructure toward richer regions. As I have argued else-
where (de la Fuente Moreno 2004), a shift in the pattern of infrastructure invest-
ment in this direction, by itself, is likely to generate a net welfare gain because the
operation of the standard mechanisms for personal redistribution within Spain will
channel a substantial part of the resulting output gains back to the poorer regions
and to the needier segments of the population. If part of the reduction in infrastruc-
ture investment in Objective 1 regions is compensated by an increase in educational
funding, the net welfare gains are likely to be considerably larger, for aggregate out-
put will rise faster without a substantial increase in internal inequality.
CAN INVESTMENT IN HUMAN CAPITAL REDUCE REGIONAL DISPARITIES? | 119

FIGURE 8. Human Capital Premium Relative to Infrastructure versus Relative Income
per Capita in Spain, 1995

Human capital premium relative to infrastructure
10%
Ex CM
5%
As CL
An Ar
Cnt Ri
– 40% – 30% – 10% 10% 20% Na 30% 40%
Ga Mu
PV Relative income per capita
Cn Va

– 10%
Ca

– 15%

Ba
– 20%
Ma
– 25%

Source: Author’s calculations.
Note: For abbreviations, see note to ﬁgure 2.

References

Dabán, Teresa, and Ana Lamo. 1999. “Convergence and Public Investment Allocation, Spain
1980–93.” Documento de Trabajo D-99001, Dirección General de Análisis y
Programación Presupuestaria, Ministerio de Economía y Hacienda, Madrid.
de la Fuente Moreno, Ángel. 2002. “The Effect of Structural Fund Spending on the Spanish
Regions: An Assessment of the 1994–99 Objective 1 CSF.” CEPR Discussion Paper 3673,
Centre for Economic Policy Research, London.
———. 2004. “Second-Best Redistribution through Public Investment: A Characterization,
an Empirical Test, and an Application to the Case of Spain.” Regional Science and Urban
Economics 34 (5): 489–503.
———. 2006a. “La educación en las regiones españolas: Algunas cifras preocupantes.”
Presupuesto y Gasto Público 44 (3): 7–49.
———. 2006b. “Human Capital and Growth: A Survey.” Unpublished paper, Instituto de
Análisis Económico.
de la Fuente Moreno, Ángel, and Rafael Doménech. 2006a. “Capital humano, crecimiento,
y desigualdad en las regiones españolas.” Moneda y Crédito 222: 13–56.
———. 2006b. “Human Capital in Growth Regressions: How Much Difference Does Data
Quality Make?” Journal of the European Economic Association 4 (1): 1–36.
de la Fuente Moreno, Ángel, and Xavier Vives. 1995. “Infrastructure and Education as
Instruments of Regional Policy: Evidence from Spain.” Economic Policy 20 (April):
11–54.
Fundación BBV. 1999. Renta nacional de España y su distribución provincial: Serie
homogénea; Años 1955 a 1993 y avances 1994 a 1997, vol. 1. Bilbao: Fundación BBV.
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———. 2000. Renta nacional de España y su distribución provincial: Año 1995 y avances
1996–1999. Bilbao: Fundación BBV.
González-Páramo, José Manuel, and Isabel Argimón. 1997. “Efectos de la inversión en
infraestructuras sobre la productividad y la renta de las CC.AA.” In Infraestructuras y
desarrollo regional: Efectos económicos de la Autopista del Atlántico, ed. Emilio Pérez
Touriño. Madrid: Editorial Civitas, Colección Economía.
Mas, Matilde, Joaquín Maudos, Francisco Pérez, and Ezequiel Uriel. 1995. “Infrastructures
and Productivity in the Spanish Regions: A Long-Run Perspective.” Unpublished paper,
Instituto Valenciano de Investigaciones Económicas (IVIE), Valencia.
Mas, Matilde, Francisco Pérez, and Ezequiel Uriel. 2002. El stock de capital en España y su
distribución territorial. Bilbao: Fundación BBVA.

Notes

1. For a survey of the relevant literature, see de la Fuente Moreno (2006b).
2. Valencia (Va) and all the regions located to its left in ﬁgure 3 were Objective 1 regions in
1995—that is, their real income per capita was below 75 percent of the European Union
average, and, as a result, they were entitled to special support from the European struc-
tural funds.
3. Being the seat of the national government and the headquarters of most large companies,
Madrid has traditionally attracted large numbers of highly skilled people. Over the last
25 years, however, this factor has become increasingly less important as a result of decen-
tralization and the creation of regional governments.
4. The (gross) university graduation rate was originally deﬁned as the ratio between the total
number of graduates in the universities of a region during a given academic year and the
total population of the same region with the theoretical age of college graduation. I have
corrected this variable so that it approximates the graduation rate by region of origin
(rather than by location of the university).
5. We deﬁne the relative productivity of region i (qreli) as the difference between the region’s
log output per employed worker and the average value of the same variable in the
sample. The contribution of human capital to relative productivity (csi) is obtained by
multiplying the coefﬁcient of this factor, β, by the relative level of schooling (measured in
log differences with the geometric sample mean). After constructing these two variables
for each region, we estimate a regression of the form csi = a**qreli + ei, where ei is a
random disturbance. The coefﬁcient obtained in this manner, a ≅ csi /qreli, measures the
fraction of the observed productivity differential that can be attributed to human capital
in the sample as a whole.
6. See, for instance, Dabán and Lamo (1999); de la Fuente Moreno (2002); de la Fuente
Moreno and Vives (1995); González-Páramo and Argimón (1997); and Mas and others
(1995).
Family Migration:
A Vehicle of Child Morbidity
in the Informal Settlements of
Nairobi City, Kenya?
ADAMA KONSEIGA

Sub-Saharan Africa has the lowest level of urbanization, but the fastest-growing
urban population, in the world. Its urban population, which was 15 percent in
1950 and 32 percent in 1990, is projected to reach 54–60 percent by 2030 (United
Nations 1998). While it is true that urban areas and cities offer the cost-reducing
advantages of economies of agglomeration, scale, and proximity, as well as
numerous economic and social externalities (such as skilled workers, cheap trans-
port, and social and cultural amenities), the social costs of a progressive overloading
of housing and social services, not to mention increased crime, pollution, and
congestion, tend gradually to outweigh these historical urban advantages, especially
in a context where urban growth is not accompanied by economic expansion. The
unprecedented growth of urban areas in the context of declining economic perfor-
mance (World Bank 2000), poor planning, and weak governance is creating a new
face of poverty, whereby a signiﬁcant proportion of the urban population lives
below the poverty line in overcrowded slums and sprawling shantytowns in most
African countries. An estimated 72 percent of all urban residents in Sub-Saharan
Africa live in informal settlements, commonly known as slums (UN-Habitat 2003).
In Kenya, with an urban population of about 34 percent, an estimated 71 per-
cent of all urban dwellers are living in informal settlements, which are characterized
by extreme poverty, poor sanitation, inadequate social services, insecurity, social
fragmentation, and poor livelihood opportunities. The situation is partly due to
misguided urban planning policies and outmoded building codes that often make
80–90 percent of new urban housing illegal (United Nations 1991). Emerging evi-
dence shows that the traditional advantage in health and social indicators that

Adama Konseiga is Affiliate at African Population & Health Research Center (APHRC) in Kenya, and Research Affili-
ate of GREDI (Research Group in Economics and International Development) in the Faculty of Administration at
University of Sherbrooke in Canada.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

The author is grateful to Joost de Laat, who made these data available, and to the African Population and Health
Research Center (APHRC) in Nairobi, for its support in understanding the complex setting of the Nairobi Urban and
Health Demographic Surveillance System.

121
122 | ADAMA KONSEIGA

urban areas have enjoyed over rural areas has either drastically dwindled or even
reversed in favor of rural areas (APHRC 2002; Brockerhoff and Brennan 1998;
Dodoo, Sloan, and Zulu 2002; Mugisha and Zulu 2004). Between 1 million and
2 million migrants reside in cramped conditions in the slums of the capital city of
Nairobi, which lack proper access to sanitation and affordable clean water. Chil-
dren in such areas are exposed to enormous risks, health risks in particular. For
example, a large demographic and health-focused survey conducted in various Nai-
robi slums in 2000 by the African Population and Health Research Center
(APHRC) ﬁnds not only that morbidity risks for all major childhood illnesses (fever,
cough, diarrhea) are higher for slum children than for children elsewhere in Kenya,
but also that slum children have less access to health care, including immunization,
and subsequently face higher mortality rates than even their rural counterparts.
One coping strategy for slum dwellers is to adopt split migration, whereby the
wife and children are secured in the home village, while the head of household
undertakes the income diversiﬁcation and risk management1 project that is migra-
tion to Nairobi. However, this strategy is often impaired by the important monitor-
ing costs that the migrant incurs to ensure that the spouse fulﬁlls the ex ante
contract and does not divert the remittances into unproductive activities. The wel-
fare implications of this information asymmetry are signiﬁcant. Precious resources
that could otherwise have been spent on, for example, health care or school fees,
are spent on frequent, costly travel home. According to de Laat’s estimations (de
Laat 2005), the average migrant couple visits each other at least 12.6 times a year,
with the husband making the majority (at least 9.5) of the trips. The combined
travel cost of these visits is US$109, or 11.1 percent of his annual urban income.
Some families for whom monitoring is simply too costly decide to move together to
Nairobi, leaving children to be raised in precarious urban slum conditions, with
obvious implications for their health and general well-being. For example, the
major change in the living environment has been shown to have a more negative
impact on the grade progression of children migrating from rural communities to
large urban centers than on that of children moving from one rural community to
another (Pribesh and Downey 1999).
It is against this backdrop that the current study seeks to understand the role of
migration in the urbanization of poverty and poor health in the two slums (Korogo-
cho and Viwandani) where the Nairobi Health and Demographic Surveillance Sys-
tem (NUHDSS) is ongoing. The paper focuses on under-ﬁve children living in
Nairobi and compares them to under-ﬁve children living upcountry. The study
examines the motivations behind the choice of joint migration as compared to split
migration and the effect of joint migration on child morbidity, after controlling for
incidental truncation and other socioeconomic factors. The study hypothesizes that
children born to joint migrants and exposed to the slum environment are more
likely to fall sick than children born to split migrants because of the poor socioeco-
nomic conditions, poor environmental sanitation, and absence of alternative medi-
cal care in the slums. Slum settlements therefore expose children to high morbidity
from preventable infectious diseases.
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 123

Conceptual Framework: Child Morbidity and Choice of Location

Health plays a dual role as input to the aggregate production function and as
output, which places it at the heart of the modern concept of economic develop-
ment. Health is central to well-being and essential for a satisfying and rewarding
life. It is fundamental to the broader notion of expanded human capabilities, choice,
and ability to participate. Health is a prerequisite for increases in productivity and
a precondition for a successful education, especially for children.
Health is usually measured using infant mortality rates and life expectancy. Life
expectancy can be very misleading because its increase may mask additional years
of suffering and poor health (Todaro and Smith 2006). An alternative measure for
the general well-being is the DALY: disability-adjusted life year. However, measures
based on DALY have so far faced numerous data limitations. Child health remains
one of the most popular development indicators because it does a relatively good
job of measuring the quality of life in developing countries.
The world as a whole experienced dramatic improvements in health over the
past half century, with under-ﬁve mortality in developing countries decreasing from
280 deaths per 1,000 live births in 1950 to 120 deaths per 1,000 live births by
2002 in low-income countries. However, developing countries face huge challenges
compared to developed countries (seven deaths per 1,000 live births).2 Each year,
millions of lives could be saved simply by treating diarrhea: 2 billion of those who
survive suffer malnutrition (lack of micronutrients) and infections. Every year,
about 12 million children under 5 die in developing countries. Because most of
these children die of causes that could be prevented for just a few cents per child, it
has been rightly claimed that poverty is the underlying disease. In its 1993 report,
the World Bank estimated that one-quarter of the global burden of disease was rep-
resented by diarrhea, childhood diseases including measles, respiratory infections,
parasitic infections, and malaria (World Bank 1993). Similarly, the World Health
Organization (WHO) has found that 5 conditions account for 70 percent of
deaths among children under 5: acute respiratory infections, diarrhea, measles,
malaria, and malnutrition.
Finally, average health levels can mask great inequality, especially among special
populations and infants. Nairobi slum dwellers exhibit notably poor infant health
outcomes (not less than 145 deaths per 1,000 live births, which is above the current
world average). In order to achieve the Millennium Development Goals (MDGs), it
is essential to assess the distribution of health, examine speciﬁc populations that are
especially exposed to poverty, and shed light on the root causes of child mortality.

Urbanization of Poverty in Kenya
Urban population growth in Sub-Saharan Africa is driven principally by rural-
urban migration of young adults seeking jobs and other livelihood opportunities in
urban areas (Adepoju 1995; Anderson 2001). Given the increasingly poor living
conditions and livelihood opportunities in most metropolitan centers in the region
124 | ADAMA KONSEIGA

(APHRC 2002; Brockerhoff and Brennan 1998; World Bank 2000), it appears
paradoxical that many rural residents continue to ﬂock to urban areas. Classical
migration theories portray migrants as rational economic agents moving to areas
that maximize their incomes and overall well-being (Harris and Todaro 1970). In
this long-term endeavor, migrants account for their time horizon and probability of
getting a job, which explains why younger and more educated individuals are more
likely to migrate. In Nairobi, for instance, attempts to move squatter residents to
better and more expensive housing have had limited success. Many prefer to live in
the relatively cheap squatter settlements in order to accumulate savings for various
investments in their home communities, while acquiring the city experience that
prepares them for a more permanent formal urban job. This may explain the fact
that the urban population growth rates have persisted at very high levels, despite
the sustained economic downturn experienced over the past two to three decades.
The short-run consequences are the growth of urban poverty and poor health
performance, especially in the informal settlements.
Despite the fall in employment opportunities associated with the economic
downturn in Kenya beginning in the 1980s, Nairobi’s population continued to
grow at about 5 percent a year between 1969 and 1999 (Agwanda and others
2004; Government of Kenya 2000). The city’s population is composed largely of
migrants; the proportion of city-born residents is no more than 20 percent up to
age 35 and less than 10 percent after age 50. Half of the migrants came to Nairobi
when they were between 17 and 23 years old (Agwanda and others 2004). In this
context, income differentials between rural home and urban settlement and remit-
tances cannot be the sole motivation for migration.

Relationships between Child Morbidity and Physical Environment
Parental migration is often found to be negatively correlated with child health in
Africa, yet the causal mechanisms are poorly understood. This paper assumes that
the health environment is an endogenous choice. Unlike previous studies, I assume
that households ﬁrst endogenously determine whether they will gain from partici-
pating in migration and, if they will, whether they will leave the children behind.
The ﬁnal choice is rationally made to ensure the optimal chances of survival for the
child.
A basic speciﬁcation of the resulting reduced-form child health output is based
on Glewwe (1999). Child health depends on variable inputs such as health and
nutritional inputs and some shifters (the environment and a child’s health endow-
ment).

Hi = f(HIi; E i, İi), (1)

where Hi is the health of child i, HIi is a vector of health inputs chosen by child ’s
household, Ei is a vector summarizing the environmental conditions surrounding
child i, and εi is the child’s genetic health endowment.
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 125

However, even though in optimizing child health the household head ultimately
decides how to allocate health and nutritional inputs (prenatal care, breast milk,
medicines, and medical care), it is clear that the environment is also his own endog-
enous choice to some extent. Survey data collected in two of Nairobi’s informal
settlement areas in 2004 indicate that, among married migrants,1 48 percent were
split migrants and the remaining 52 percent were joint migrants.
At a ﬁrst stage, the household is confronted with the decision about where they
want their children to grow up with the optimal chances of survival. In particular,
most households in the surveillance slums compare the health environment of the
slum with that of the place of origin upcountry. The split-migration decision, which
generally leaves the mother and children upcountry, increases the amount of time
the mother works at the household’s rural farm. Increased time of the mother at
home has a direct positive impact on child health.
Given the national amenities and health facilities policy biased toward the for-
mal sector, health-related reasons appear as the least important reason (0.36 per-
cent) attracting rural residents into the slums. In comparison, health is a more
important factor pushing slum residents to move back to the rural parts of Kenya
(3.05 percent).3 Even though the latter evidence encompasses older people and ter-
minally ill people with HIV/AIDS, it clearly suggests that health outcomes are not
generally neutral to choice of location. As pointed out in de Laat and Archambault
(2007), large urban inequities exist in Nairobi, and among the urban poor, the
advantages of urban social amenities and public services are questionable. Parents
use perceptions of urban-rural differences in social amenities to carefully weigh
concerns about child well-being when deciding whether to embark on family migra-
tion. This helps to explain why more than half of all children of married migrant
men in the Nairobi slums are not living in Nairobi.
For slum residents ages 15 years and above by the end of 2004, NUHDSS
data also show that family-related reasons (especially for females), better job
prospects, and lower costs are the most important reasons why people across all
ages move into the Demographic Surveillance System (DSA).4 These responses are
the ex ante perceptions of the migrants. However, for outmigration that occurs
following the experience with living in a slum, ﬁgure 1 shows that family rea-
sons are the most important reason among female out-migrants, while among
males poor job prospects are the most important, together with poor amenities
and social services (including health reasons). Among older individuals (60+),
health-related reasons are among the most important factors that determine their
migration out of the DSA.

1
Heads of households born outside Nairobi and married formally or informally.
126 | ADAMA KONSEIGA

FIGURE 1. Reason for Outmigration in Kenya, by Gender

80
70
60
50
40
30
20
10
0
Family Poor amenities Poor job High cost Conﬂict Other
reasons and prospects
social services

female male

Source: 2004 NUHDSS data.

Additionally, de Laat and Archambault (2007) also ﬁnd that security is Nairobi’s
main disadvantage, including the risk to children’s health when living in the slums.
Even though many of the people interviewed believe that the availability of health
facilities is better in urban slums than in their rural homes, most perceive that the
daily health risks to children living in the slums are much higher than in rural areas.
Slums are characterized by polluted rivers and the lack of sewers, sanitation facili-
ties, and garbage pick-up, thus exposing children to greater health risks.
Finally, migration out of rural areas and into the urban slums is a major environ-
mental change for all members of migrant households, but especially for children
(who suffer negative impacts on their grade progression as well as on their psycho-
logical and health development).

Data and Econometric Analysis

The following analysis is based on the 2004 Nairobi Informal Settlement Survey
(2004 NIS), which collected data in two of Nairobi’s slums, Korogocho and Viwan-
dani (de Laat 2004). The survey was conducted between May 4, 2004, and June
27, 2004, on a subsample in these two communities where the NUHDSS operates.5
Eligibility was deﬁned as being “ever married” and between the ages of 24 and 56
years old. The primary objective of this research was to look at the health and
education of children whose parents live in the Nairobi informal settlements
(Korogocho and Viwandani).
The survey randomly selected 1,817 “eligible” heads of household; that is, heads
of household who are divorced or separated (153 in total) or widowed (150); heads
of household who are married and live with their spouse together in the Nairobi
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 127

informal settlement (858 joint migrants in total); or heads of household who are
married but live split from their spouse, who usually lives in the upcountry village
(656 split migrants in total). There was no stratiﬁcation by informal settlement
area. A total of 37 household heads refused to participate in the NIS 2004, which
represents only 2 percent of the initial sample. The most comprehensive survey
questionnaire is that for the category of married household heads who live split
from their spouse. The survey also contains relatively detailed information about
family members who are not members of the household being interviewed. The fol-
lowing information is recorded in the database:
• All variables at the household level, including consumption
• All variables related to members of the household who are living in the Nairobi
slums
• All variables related to the spouse(s) of the household head (called spousal
household).
This paper focuses on the health of children whose parents are currently mar-
ried. It is assumed that the groups of widowed, divorced, or separated households
are independent from the study groups and can be left out. Two groups of house-
holds are then considered: household heads who live in the slums with their
spouse(s) and children, and those who keep the whole family upcountry. Hereafter
these groups are referred to respectively as joint migrants and split migrants (see
table 1).
Comparing the two sources of information (the NUHDSS and the NIS), it
appears that the major difference is that the split migrant’s spouse and children are
not observed in the risk set of the DSA. For this purpose, the survey included the
additional module called spouses household roster. However, this has a strong
methodological impact. Indeed, the current study disposes of a data set with 1,514
observations on the living arrangements of migrants (type of migration) in Viwan-
dani and Korogocho. I have full data (no missing values) for all the covariates in
the morbidity and migration type participation functions. I use the latter informa-
tion to estimate a child morbidity function. This estimation needs to be corrected
for selection into the DSA as a split or joint migrant. The problem can be summa-
rized by considering data on the following:
• “Split” subsample: heads of households who are married but live split from their
spouse, who usually lives in the upcountry village (656 in total)6
• “Joint” subsample: heads of households who are married and live with their
spouse together in the Nairobi informal settlement (858 in total).
While the outcomes of the joint-migration children are observed, morbidity data
on split-migration children are not observed in the same slum conditions and are
obviously missing for the slum structural model. This entails a problem of inciden-
tal truncation that can be resolved using the Heckman model. The latter consists of
128 | ADAMA KONSEIGA

using a sample (Joint+Split) to estimate the migration selection model and then uses
a subsample (Joint) to estimate the child morbidity equation.

Methodological Approach
While some studies ask about the health and education of children, these studies
often do not recognize that, while some people have their whole family in the urban
slums, many others have children and spouses living upcountry. The objective of
this section is to analyze the NIS data to understand why some parents have their
children in the slums and others do not and what the effects are for the well-being
of children. The ﬁndings may suggest relevant policies that may improve the lives
of poor people living in cities, in line with the Millennium Development Goals.
Precisely the relationship between migration strategy and child health among
slum residents is estimated. First, I describe the changes in child morbidity across

TABLE 1. Distribution of the Study Participants According to Migration Status and
Age of the Slum Households
Child morbidity
Survey sample (house- Household with children prevalence (household
hold) (estimation sample) level)
Indicator Number % Number % Number %
Total 1,514 100 951 100 951 100

Joint
2004 NIS 858 57 557 59 241 43
Viwandani 470 31 294 31 117 40
Korogocho 82 5 49 5 20 41
Nyayo 306 20 214 23 104 49

Split
2004 NIS 656 43 397 42 125 31
Viwandani 497 33 311 33 90 29
Korogocho 33 2 14 1 3 21
Nyayo 126 8 72 8 32 44

Age 945 62 945
0 year 97 6 97 10 — —
1 year 190 13 190 20 — —
2 year 325 21 325 34 — —
3 year 194 13 194 21 — —
4 year 139 9 139 15 — —
Source: 2004 NIS.
Note: Korogocho includes Nyayo in the deﬁnition of the NUHDSS. Nine households (three in Nyayo and six in
Viwandani) have children both in the urban and rural places. This may be an interesting strategy where the head of
a split household takes the older or most healthy children to Nairobi.
— Not available.
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 129

migration type. Second, I estimate an econometric model and investigate whether
the impact of migration on child health is different across gender.
Slum dwellers are an important group to study because they are highly mobile
(in- and outmigration rates describe a circular migration, in particular, between
rural and urban places) and exhibit notably poor infant health outcomes (not less
than 145 deaths per 1,000 live births, which is above the current world average).

Analytical Framework
This section provides a framework for thinking about the pathways by which
choice of destination affects child health. The “new home economics” formalizes
the process of time allocation within the household when labor has an opportunity
cost (Sadoulet and de Janvry, 1995). Typically, labor can be used in production
within the house, outside the house as a worker, or in leisure. While the narrow
deﬁnition of leisure includes relaxation, pleasure, and sleep, it is broadly under-
stood in the context of developing countries as home time. The latter is time not
spent in directly productive labor market activities (family maintenance, family
reproduction, socialization, and leisure). Therefore, utility is derived not directly
from purchased goods, but from a vector of goods produced in the household with
purchased goods and family time. Consumption decisions include a trade-off
between the choice of time spent at home and the consumption of goods that would
require more income and hence more work. The time allocated to family reproduc-
tion (pregnancy, childrearing, child health, and production) becomes increasingly
costly, especially for the most educated households.
A demand for child well-being or children’s health is derived from the applica-
tion of Becker’s theoretical framework. The household maximizes a utility function
and chooses child health H, leisure L, and consumption of goods and services C.
The household problem can be speciﬁed as follows:

MaxU = U (H , L, C ; z
H , L ,C
h
, µ ), (2)

where Zh is a usual vector of household characteristics, including the education
level of both the household head and his spouse and the household assets, and µ is
the unobserved heterogeneity in preferences.
The household maximizes this utility function subject to two constraints: a
health production function for child health status and a budget constraint.7 Child
health is generated by the following production function:

H i
= f (Y , z , z , z ,η ),
i i h c i
(3)

where Yi is a vector of health inputs, which are nutrient intake, health care prac-
tices, time spent by parents taking care of children, and disease incidence, Zi is a
vector of child characteristics, which are body size, age, and gender, Zh is a vector of
community characteristics that may have a direct impact on child health, which are
130 | ADAMA KONSEIGA

the accessibility and quality of health services and safe water, and ηi are unobserv-
able individual health endowments such as the child’s genetic inheritance.
In addition, the full income constraint includes the opportunity cost of leisure:

π p C + wL + p
*
= Y +T , (4)
c Y

where pc , w, and py are the market prices of consumption goods, leisure, and
health inputs, respectively, and π* is the full household’s income, including the
value of the time endowment of the household and nonfarm income transfers.
Equation (1) above can then be derived as a reduced-form child health output.

Econometric Model
The importance of split migration has rarely been studied in the migration litera-
ture. Typically, split migrants are married heads of household who adopt a tempo-
rary move and live split from their spouse (who usually lives in the upcountry
village with the children). This allows the family to protect the children’s health
from the poor environmental conditions of the destination. Among the study popu-
lation, 62.8 percent have at least one child (951 households), and among them,
42 percent have left their children upcountry. The relevant sample for the current
study is therefore composed of 557 joint households and 397 split households.
The distribution of the split-household sample suggests that 42 percent of the
households who have children consider the migration project more beneﬁcial if they
leave their children upcountry, according to the theory. Analyzing the behavior of
split-migration households from a population leads to an incidental truncation
problem because these migrants are a restricted nonrandom part of an entire popu-
lation. The households that supply migrants’ labor may possess unobserved charac-
teristics that are generally positively related to health and income, resulting in a
sample-selection bias. With such a distortion, results from standard ordinary least
squares (OLS) are simply biased. The regression model that includes the above
selection issue is the migration model à la Nakosteen and Zimmer (1980). The
simultaneous system writes the following:
Net beneﬁt of moving:

V =α ' Z + γ X + ε
* '
i i i i (1) (6)

Child morbidity outcomes of joint-migration households:
log mo ji = β +µ
'

j X ji ji (2) (7)

Child morbidity outcomes of split-migration households:
log mosi = β +µ
'

s X shi si
(3) (8)
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 131

To estimate the simultaneous migration-type decision and child morbidity equa-
tions, it is assumed that vi* and logmoi have a bivariate normal distribution with
correlation ρ. An analysis of morbidity in either subsample must account ﬁrst for
the structural differences of health and production markets in the related locations
(slums and upcountry) and for the incidental truncation of the split migrant’s (joint
migrant’s) morbidity on the sign of the net beneﬁt. To face estimation problems of a
model with sample selection, a Heckman two-step procedure is used to study joint
migration. In this case, outputs are interpreted with split migrants as the reference
category. The Heckman regression model adapted to the current situation, where
the outcome variable is binary, can be written for the selected sample as in equa-
tions 6' and 7'–8'. For the selection model,

P =α Z +γ X +ε
* ' '
i i i i (1)'(6')

where P* is the probability of the variable indicator of the sign of the selection
criteria that is the net beneﬁt from joint migration. Zi and Xi represent the
independent variables of the selection equation identiﬁcation and those of the
morbidity equation, respectively.
For the morbidity model,

log moi = β X + β λ λ +ν
'
i i i
(2-3)'(7'–8')

where the following relationship exists between the coefﬁcient of the inverse Mills’s
ratio λ and the model statistics: βλ ρσ µ. The inverse Mills’s ratio itself evaluates the
ratio of the probability and cumulative density functions from the selection equa-
tion. Heckman (1979) argues that this function is a monotone decreasing function
of the probability that an observation is selected into the analyzed sample.
The Heckman’s two-step estimation procedure is applied to the select group of
joint migrants, taking into account the fact that joint migrants and split migrants
face distinct labor and production market structures, respectively, in their rural
home and in the urban slums. The probit equation 6' is estimated to obtain esti-
mates of α and ϒ and compute the inverse Mills’s ratio. At a second step of the
Heckman procedure, the inverse Mills’s ratio is added to the child morbidity out-
come equations 7'–8' to produce the consistent estimates of β and βλ. However, the
coefﬁcients estimated in equation 6'—respectively, 7' and 8'—measure how the log-
odds in favor of migrating (falling sick) change as the independent variables change
by a unit. For the correct interpretation of these nonlinear outcomes, marginal
effects should then be computed (Long and Freese 2001).

Model Variables and Estimation
The child health outcome depends on household characteristics, local community
environment, and child endowment. This leads to the following principal variables:
• Household initial assets (toilet, water), parental education
• Health and education facilities in the community (social amenities, availability
and accessibility of health services, parasites, contagious illnesses)
132 | ADAMA KONSEIGA

• Child’s genetic endowment.
In this paper, child health status is quantiﬁed using self-reported morbidity data.
Because of all the problems related to such data, it is important to explain in detail
the outcome variable being used.

The Morbidity Variable and Reliability Issues
The dependent variable is an indicator of whether the household had a child who
was sick in the month preceding the NIS 2004 survey or not. Table 1 shows that,
while only 31 percent of split households had an under-5 child who was sick last
month, about 43 percent of joint migrants had a child in the slums who suffered
illness. Of all split households, I estimated that 61 percent have children under
5 years old who live upcountry (split-migration children). The proportion in the
group of urban or joint households who have under-5 children is 64 percent. This
may suggest that the two groups of the study population are comparable in terms
of their fertility rates.
Although an important literature addresses migration and assimilation processes
for understanding health differences, most suffer from a common limitation: they
are based on data from the destination area (Landale and Oropesa 2001). Even
though our data do not solve that problem, this rich survey has made an effort to
overcome the limitation.
Typically, the main weakness of previous studies is that they are based on the
same population at risk (located in the slums). These studies compare outcomes
within a quite homogeneous group across generations of residence or according to
duration of residence in the place of destination. Although such comparisons pro-
vide useful information (Zulu and others 2006), the evaluation of arguments stress-
ing migration-related processes requires that migrants be compared with
nonmigrants in the place of origin. This is the emphasis of the present study.
Comparing self-reported morbidity with indicators of morbidity from physi-
cians’ evaluations, Ferraro and Farmer (1999) ﬁnd that self-reported morbidity is
equal or superior to physician-evaluated morbidity in a prognostic sense. When
data from respondents and physicians do not agree, the presumption is that respon-
dents are underreporting or overreporting medical conditions. However, the study
suggests that biopsy or autopsy may be the gold standard. The study suggests that
self-reported data should not axiomatically be characterized as inferior solely
because they come from respondents. The accuracy of survey data remains an
empirical question. Most of the time responses from survey participants are likely
to be biased by the assumptions that the respondents apply to the problem. The
type of information collected and the context of the questioning are also important
when attempting to understand discrepancies between self-reported data and other
sources of information. For instance, questions regarding sexually transmitted dis-
eases probably contain more bias than questions regarding conditions such as heart
attacks or child health.
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 133

The data collected on self-reported morbidity outcomes, especially for children
staying upcountry, may have some measurement errors. This may not be a major
problem, as morbidity is the primary dependent variable of interest. Indeed, mea-
surement error in an explanatory variable traditionally has been considered a much
more important problem than measurement error in the response variable (Wool-
dridge 2002). Self-reporting may be a mismeasurement of actual child health, but
all economic decisions (for instance, the decision to return upcountry or to regroup
the family in one place) by the household head are conditioned by his perceptions
of child well-being upcountry relative to child well-being in the slums. When esti-
mating a linear equation with measurement error in the dependent variable under
OLS conditions, what is important is how the error is related to other factors
(Wooldridge 2002). It is possible to ignore the fact that the dependent variable is an
imperfect measure and obtain consistent estimators of the regression parameters if
the measurement error is statistically independent of each explanatory variable. In
this context, the measurement error may only affect the intercept if the former does
not have zero mean. However, it is possible to assume that the measurement error
is not independent of migration status. Even in the scenario where the split head of
household may underreport sickness of his children upcountry due to lack of con-
tact (at least 11 percent of the urban annual income is spent on frequent travel
upcountry, not including phone communications), the error term is negatively cor-
related with migration status. The correction for the downward bias in the split-
migration parameter involves instrumental variables estimation, which is done in
the Heckman procedure used below.
In this study, attempts to control for measurement bias do not show any signiﬁ-
cant evidence of information bias on reporting sickness upcountry versus urban
location. The respondent bias is captured as an indicator of a household head who
did not know about the sickness status of his children living upcountry (missing,
refuse to answer, or don’t know as response) but did know the morbidity status of
household members in the slums.
Finally, it is important to compare the current ﬁndings with data collected using
more reliable measurements of child health, such as using anthropometry or bio-
markers to measure nutritional status of children and mothers, or using WHO and
other quality of life measurements for child and adult health focused on disability,
mental health, and so forth.
Table 2 shows the total morbidity rate in the two slums of Nairobi at the indi-
vidual level—that is, 23.2 percent for the whole population. However, child mor-
bidity reached 39 percent in 2004. There appears to be no signiﬁcant difference by
gender of the study population as regards under-ﬁve morbidity. However, under-ﬁve
children in the slums tend to be sicker than their rural counterparts, especially girls
(7 percentage points difference).
The covariates used in the Heckman model to identify the selection equation and
explain morbidity outcomes in the slums are summarized in table A.1 and include
the following:
• Selection variable: migration status (joint versus split migration)
134 | ADAMA KONSEIGA

TABLE 2. Gender and Morbidity Proﬁle in the Slums and Upcountry (Individual Level) of Kenya
Total Male Women
Population Number % Number % Number %
Urban population
Total 5,733 100 3,165 55 2,568 45
Sick 1,331 23 737 13 594 10

Upcountry population
Total 2,773 100 1,144 41 1,629 59
Sick 511 19 214 8 297 11

Under-ﬁve urban population
Total 865 100 420 49 445 51
Sick 337 39 164 19 173 20

Under-ﬁve upcountry population
Total 531 100 293 55 238 45
Sick 146 27 75 14 71 13
Source: 2004 NIS.

• Control variables: age of the children, average educational attainment of the
household, literacy of the household head in the urban settlement, religion, gen-
der of the household head, orphan status, ethnicity, total size of the household,
caregiver, social network in the place of origin, wealth index, production factors
(land and labor), and location of the household head.

Empirical Results
This section implements the econometric analysis and interprets the reduced form
of the selection of migration type and the morbidity outcome model. The latter
evaluates the impact of the covariates corrected for selection bias.
Table 3 indicates that the bivariate effect of choosing the joint-migration strategy
is signiﬁcantly high. The risk of having a child fall sick is 39.2 percent higher in the
slums than in the rural place of origin.
A more elaborate estimation that controls for selection bias and other covariates
follows in table 4. The results in regression 1 in table 4 show that the child morbidity
of joint-migration households in the slums of Nairobi is a positive function of the level
of schooling of the household but a negative function of the education level of the
head of household as compared to the reference group of split migrants. This suggests
two ﬁndings. First, the average level of education of the urban household plays against
the health of children. This is explained by the fact that educated adults tend to leave
children with caregivers while at work. In the poor sanitation conditions of the slums,
the younger children suffer the most (negative impact of age of under-ﬁve children). In
particular, educated spouses spend more time in the urban labor market and therefore
spend less time in reproduction activities (less time spent breastfeeding, for example).
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 135

TABLE 3. Morbidity of Slum Children in Joint-Split Households
Explanatory variables Sick last month
Married under joint migration 0.331***
(3.90)
Constant −0.482***
(−7.35)
Observations 945
Log likelihood −623.2
Source: Author’s calculations.
Note: z statistics in parentheses.
*** Signiﬁcant at 1 percent.

Additionally, the presence of an educated head (joint migration) is very important for
the health of children. Children born to educated household heads who stay far from
the family may be sicker. In the case of a missing or imperfect labor market, the house-
hold must rely on family labor, and thus sending a household member (the head in this
case) may stop the household from moving toward local high-return activities (farm
and health production). The adverse effect of lost labor may be higher when migrants
tend to be younger and better educated than the average rural laborer.
Similarly, the regression shows that children without a father who are raised in
the slums suffer more diseases than others.
Children born to a Protestant family appear to be less sick than children from
the other religious groups. This suggests that the Protestant social network and
level of cooperation work better in the conditions of city life. Being from a Luhya
family exposes children to higher health risks than being from other ethnic groups
such as Kikuyu.
The likelihood that the household will migrate jointly (regression 2 in table 4) is
signiﬁcantly dependent on median size of social network, the wealth index, and the
availability of agricultural factors. Compared to households who know 1 to 10
people in their community of origin, households who know between 11 and 30
people are more likely to choose split migration. The social network literature
argues that knowing more people enables the migrant to leave for the city. In the
2004 NIS survey, it is found that monitoring costs in terms of controlling the work
effort and investment behavior of the spouse are very high (at least 11 percent of
urban annual income is spent on frequent travels upcountry). The most frequent
and costly monitoring mechanism is frequent travel upcountry, and the split migrant
can substitute this by delegating some monitoring activities to his relatives who are
left behind. One explanation of the advantaged health status of the upcountry resi-
dent also emphasizes the role of culture in fostering family cohesion and providing
social support. Because close friends and family members often encourage health-
promoting behavior, especially by being an important source of information
through their childcare experiences, social support may play an important role in
the positive health practices and outcomes of those staying upcountry as compared
with slum migrants.
136 | ADAMA KONSEIGA

TABLE 4. Morbidity of Slum Children in Joint-Split Households
Sick last month Joint migrant
Covariate (1) (2)
Average years of schooling of the household 0.0519**
(2.14)
Average age of children under 5 −0.0640
(−1.34)
Religion = Protestant −0.122
(−1.09)
Urban head is literate = Yes −0.781*
(−1.75)
Has lost father in the last 10 years 0.264**
(2.19)
Female household head 0.465**
(2.35)
Ethnicity = Luhya 0.328**
(2.11)
Slum = Nyayo 0.172
(1.45)
Social network from origin community = 0 0.0396
(0.30)
Social network from origin community = 11–30 −0.343***
(−3.21)
Social network from origin community = 31–50 0.00173
(0.011)
Social network from origin community = 50+ −0.0132
(−0.082)
Members in spousal + urban household −0.201***
(−8.62)
Own land or houses in Nairobi 0.0481**
(−2.30)
Available agricultural production factors 0.00811**
(2.18)
0.108 1.299***
(0.20) (9.72)
946 946
−955.9
Source: Author’s calculations.
Note: z statistics are in parentheses.
*** Signiﬁcant at 1 percent.
** Signiﬁcant at 5 percent.
* Signiﬁcant at 10 percent.

Finally, households that are better endowed with production factors (land and
labor) or richer (own houses in Nairobi) can afford to undertake split migration,
leaving the family members to work on the agricultural farm, while being able to
face important monitoring costs.
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 137

Conclusion

To provide better education and health services to everyone as required by the
Millennium Development Goals, it is important to understand why some parents
allow their children to live in the slums and others do not, and what the effects are,
for the children.
This study examines the joint migration of the whole family to the slums of Nai-
robi and estimates the effect of such a strategy on child morbidity. On the one
hand, the likelihood of the household migrating jointly is signiﬁcantly higher for
households with poor social networks in their community of origin, which makes it
impossible for the household head to face the high monitoring (especially travel)
costs related to split migration. Households that are better endowed with produc-
tion factors (land and labor) or richer (own houses in Nairobi) can afford to under-
take split migration.
The ﬁndings indicate that the bivariate effect of choosing the joint-migration
strategy is signiﬁcantly high. The risk of falling sick for a child is 39.2 percent
higher in the slums than in the rural place of origin. Moreover, the morbidity of
joint-migration households in the slums of Nairobi negatively depends on the edu-
cation level of the head of household as compared to the reference group of split
migrants. This suggests that the presence of an educated household head is very
important for the health of children. Children born to an educated household head
who stays far from the family may be sicker. In the case of a missing or an imper-
fect labor market, the household must rely on family labor, and thus sending a
household member (the head in this case) may prevent the household from moving
toward local high-return activities (farm and health production). The adverse effect
of lost labor may be higher when migrants tend to be younger and better educated
than the average rural laborer.
Finally, the research indicates that, in the poor sanitation conditions of the slums,
the younger children suffer the most, especially when adults (especially the mother)
allocate time away from home to the urban labor market. Similarly, children who
have lost their father but are raised in the conditions of the slums suffer more dis-
eases than others.
The study suggests several ways to ensure better health of slum children by pro-
moting the split-migration strategy or compensating the welfare of children living
in the slums. A constructive urban policy is necessary to realize the potential of cit-
ies to foster successful development, while at the same time giving more balanced
treatment to development in rural areas to avoid urban bias. These ﬁndings can be
validated using the rich longitudinal data collected by the NUHDSS, which, unlike
the cross-sectional NIS survey, may enable researchers to study the time dimension
and vulnerability by monitoring changes in health status of the urban poor.
138 | ADAMA KONSEIGA

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Notes

1. For further details, see Stark (2003).
2. Nairobi slum dwellers exhibit notably poor infant health outcomes (not less than 145
deaths per 1,000 live births, which is above the current world average).
3. Figures are estimated from a livelihood survey conducted in May 2003 in Korogocho and
Viwandani.
4. The reasons for in-migration into the DSA were recoded into ﬁve categories: family-related
reasons, which include marriage, moving with the family, and moving to live near rela-
tives; better amenities and social services, which include housing- and health-related
attributes; better job prospects; lower cost; and other reasons.
5. APHRC is conducting an extensive Health and Demographic Surveillance System, which
served as sampling frame for the NIS survey. The data collection procedures include visits
to all 23,000 households in the DSA every four months to update information on all vital
events (births, deaths, movements, vaccinations, and pregnancies). Movements include
change of residence and migrations.
6. In fact, this group is reduced to 652 cases of split migrants who have information on their
spouse upcountry.
7. See also Bassolé (2007).
140 | ADAMA KONSEIGA

Appendix. Descriptive Statistics

TABLE A.1. Descriptive Statistics, by Migration Status
% Standard
Variable and migration status Number missing Mean deviation
Average years of schooling of the household
Split 403 0 9.26 2.43
Joint 543 0.91 7.67 2.56
Average age of children under 5
Split 397 1.49 2.26 1.19
Joint 548 0 2.09 1.16
Income activity last month = Yes
Split 403 0 0.98 0.14
Joint 548 0 0.98 0.13
Religion = Catholic
Split 403 0 0.36 0.48
Joint 548 0 0.3 0.46
Religion = Protestant
Split 403 0 0.54 0.5
Joint 548 0 0.49 0.5
Religion = Other Christian
Split 403 0 0.04 0.2
Joint 548 0 0.09 0.29
Religion = Muslim
Split 403 0 0.02 0.13
Joint 548 0 0.05 0.21
Religion = No religion
Split 403 0 0.03 0.16
Joint 548 0 0.05 0.21
Literate = Yes
Split 403 0 0.98 0.15
Joint 548 0 0.98 0.13
Has lost father in the last 10 years
Split 403 0 0.17 0.37
Joint 548 0 0.3 0.46
Female household head
Split 403 0 0.01 0.12
Joint 548 0 0.09 0.28
Ethnicity = Luhya
Split 403 0 0.07 0.26
Joint 548 0 0.15 0.36
Social network from origin community = 0
Split 403 0 0.11 0.32
Joint 548 0 0.14 0.35
FAMILY MIGRATION: A VEHICLE OF CHILD MORBIDITY | 141

% Standard
Variable and migration status Number missing Mean deviation
Social network from origin community = 1–10
Split 403 0 0.42 0.49
Joint 548 0 0.48 0.5
Social network from origin community = 11–30
Split 403 0 0.3 0.46
Joint 548 0 0.2 0.4
Social network from origin community = 31–50
Split 403 0 0.07 0.26
Joint 548 0 0.08 0.27
Social network from origin community = 50+
Split 403 0 0.08 0.28
Joint 548 0 0.08 0.27
Members in spousal + urban household
Split 403 0 5.7 1.98
Joint 548 0 4.61 1.69
Own land or houses in Nairobi
Split 403 0 1.83 13.34
Joint 548 0 1.04 9.7
Available agricultural production factor
Split 403 0 8.94 66.52
Joint 548 0 6.74 65.97
Slum = Nyayo
Split 403 0 0.18 0.39
Joint 548 0 0.39 0.49
Source: Author’s calculations.
142 | ADAMA KONSEIGA

TABLE A.2. Morbidity of Slum Children in Joint-Split Households
Variable Sick last month (1) Joint migrant (2)
Average years of schooling of the household 0.0396*
(1.65)
Average age of children under 5 –0.0670
(–1.41)
Income activity last month = Yes –0.480
(–1.12)
Religion = Catholic 0.175
(1.39)
Religion = Other Christian 0.0930
(0.47)
Religion = Muslim –0.153
(–0.54)
Religion = No religion 0.0218
(0.079)
Head is literate = Yes –0.743*
(–1.68)
Has lost father in the last 10 years 0.286**
(2.37)
Female household head 0.528***
(2.66)
Ethnicity = Luhya 0.343**
(2.20)
Social network from origin community = 0 0.0415
(0.31)
Social network from origin community = 11–30 –0.344***
(–3.23)
Social network from origin community = 31–50 0.000640
(0.0040)
Social network from origin community = 50+ –0.0121
(–0.075)
Members in spousal + urban household –0.201***
(–8.61)
Own land or houses in Nairobi –0.0479**
(–2.29)
Available agricultural production factor 0.00808**
(2.16)
0.562 1.299***
(0.84) (9.72)
946 946
–956.0
Source: Author’s calculations.
Note: z statistics are in parentheses.
*** Signiﬁcant at 1 percent.
** Signiﬁcant at 5 percent.
* Signiﬁcant at 10 percent.
Remittances and Their Impact on the
Macroeconomic Situation of and
Financial Sector Development
in the Kyrgyz Republic
ROMAN MOGILEVSKY AND AZIZ ATAMANOV

This report has been prepared within the framework of the Asian Development
Bank (ADB) study on remittances and poverty in Central Asia and South Caucasus.
It complements a parallel study on remittances and poverty in the Kyrgyz Republic.
The study aims to analyze the impact of remittances on the macroeconomic situ-
ation in the Kyrgyz Republic and on development of the country’s ﬁnancial sector.
The paper has six sections and two appendixes. The ﬁrst section addresses deﬁni-
tions, measurement techniques, amounts, and structure of remittances in the Kyr-
gyz Republic. The second assesses the relationship between remittances and recent
macroeconomic variables. The third provides information on individual and house-
hold characteristics of the senders and recipients of remittances, pattern of remit-
tance sending, and use of remittances at the micro level. The fourth discusses
remittance channels used in the country and competition in the remittance market-
place. The ﬁfth reviews the Kyrgyz ﬁnancial sector and opportunities for its devel-
opment related to remittance inﬂow. A ﬁnal section summarizes the paper’s contents
and formulates recommendations for economic policy regarding remittances and
related issues. Appendix A provides background information on migration in the
Kyrgyz Republic. Appendix B contains tables and graphs, which provide additional
details on remittances and remitters in the country.

Remittance Flows in the Kyrgyz Republic

Massive cross-border monetary ﬂows involving individuals have characterized the
Kyrgyz Republic since independence. This is due to several factors:

Roman Mogilevsky is Executive Director of the Center for Social and Economic Research (CASE) in Kyrgyzstan.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

143
144 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

• Large permanent migration. After the breakup of the former Soviet Union (FSU),
many ethnic minority groups in their respective republics started moving to the
republics of the FSU or to other countries where they comprise a majority of the
population (see appendix A). In the Kyrgyz Republic, many Russians, Germans,
and other minority groups moved to the Russian Federation, Germany, and other
countries, while a smaller but significant number of ethnic Kyrgyz people returned
to the Kyrgyz Republic. This permanent migration required the cross-border
movement of property and increased the frequency of intrafamily monetary
transfers, as many families were separated by the new borders.
• Widespread shuttle trade. During the period of independence, shuttle trade largely
replaced official trade implemented by legal entities concerning imports and, later,
exports of goods.1 Shuttle trade required traders to bring with them large amounts
of money (either in cash or via the financial system) from the Kyrgyz Republic to
other countries and back.
• Liberal regime of foreign currency circulation in the Kyrgyz Republic. Since the
early years of independence, the Kyrgyz Republic has had a liberal currency
regime. As early as 1993, the national currency was introduced; thereafter, there
were practically no restrictions on the exchange of national to foreign currency
and vice versa—either for individuals or for other legal entities (corporations
and financial institutions). This allowed migrants and shuttle traders to have the
foreign and national currencies necessary for their operations.
Only in 2002–03 did professional and political discussions focus on remittances
in the Kyrgyz Republic. This happened for two key reasons. First, migration of
Kyrgyz workers to Russia and Kazakhstan increased swiftly due to robust economic
growth and fast-growing demand for labor in these oil-rich countries coupled with
a large wage differential between these countries and the Kyrgyz Republic. Second,
measures to achieve macroeconomic stabilization and strengthen the ﬁnancial sector
that were implemented after the 1998–99 ﬁnancial crisis created a better
environment in the early 2000s for the expansion of ﬁnancial services. As a result,
the Kyrgyz Republic experienced an increase in the activity of monetary transfer
operations (MTOs) and a surge in money transfers via this channel. This made a
considerable part of long-existing ﬂows (shuttle traders’ operations) visible for
everybody. Both trends developed further from 2004 to 2007. Currently, labor
migration and remittances have become a big issue in the Kyrgyz Republic because
they have signiﬁcantly affected the domestic labor market, private consumption,
imports, government budget, family relations, and many other components of the
socioeconomic situation in the country.
Another important process that has been developing during the same period is
the maturing of some segments of the informal economy, especially garment pro-
duction and exports, and the conversion of the Kyrgyz Republic into a regional
center of reexporting activity. Many thousands of people are employed in the Kyr-
gyz garment and trade industries. The open market, Dordoi, which is near Bishkek,
has become the largest distribution center serving the whole of Central Asia and
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 145

many parts of the Siberia and Ural regions of Russia. Commodities imported from
the People’s Republic of China, Turkey, and the United Arab Emirates as well as
those produced in the Kyrgyz Republic (mainly garments) are sold in the open mar-
ket to traders or individuals from the Kyrgyz Republic and other Central Asian
republics who, in turn, reexport them to other countries. Another large market in
Kara-Suu in the southern part of the Kyrgyz Republic serves a similar role for the
densely populated region of Fergana Valley. These activities involve massive cross-
border ﬁnancial transactions implemented by individuals and may expand because
of the signiﬁcant growth of consumption throughout Central Asia and the Asian
part of Russia.

Previous Studies of Remittances in the Country
Two known papers are devoted to the issue of remittances in the Kyrgyz Republic
and their impact on the economy. The ﬁrst was prepared by the Economic Policy
Institute (2005) and the second by Japarov and Ten (2006). Additionally, a publica-
tion by Mansoor and Quillin (2006) from the World Bank covers the issue of remit-
tances in Central and Eastern Europe and the FSU including the Kyrgyz Republic.
To assess the role of remittances in the Kyrgyz economy and to evaluate their
magnitude, in 2005 the Economic Policy Institute conducted a survey of 1,177
respondents comprising labor migrants or their family members. The sample does
not pretend to be representative of the country. According to the survey results,
two-thirds (67 percent) of respondents go to Russia and 19 percent go to Kazakh-
stan. Remittances come mainly in cash (61 percent), and only 34 percent of the
respondents send money through the banking system. Half of remittances report-
edly are spent on daily needs, 10 percent are directed to investments, and the
remainder are spent on items such as health care, education, and durable goods.
The average size of remittances is an estimated US$1,419 per migrant per year.
This paper uses two approaches to estimate the total value of remittances. The
ﬁrst approach uses ofﬁcial numbers about money transfers from the National Bank
of the Kyrgyz Republic (NBKR). As ofﬁcial numbers only reﬂect money transferred
through the ﬁnancial system, they are too low and should be increased 66 percent
to account for money entering through informal channels.2 Using this approach, the
total volume of inbound remittances in 2003 was estimated at US$207 million (the
ofﬁcial number from NBKR was US$70.3 million). The second uses the number of
labor migrants and the average size of remittances. As there are no ofﬁcial data on
the number of labor migrants, data from various sources are used, and several
assumptions are made. In particular, information about 350,000 labor migrants in
Russia and Kazakhstan is taken from the International Organization for Migration
(IOM). In addition, it is assumed that 50,000 labor migrants are working in other
countries. Using these numbers, the volume of remittances in 2003 was estimated
at US$520 million. This number forms 27 percent of gross domestic product (GDP)
and 158 percent of the budget expenditure in 2003. Remittances clearly play a cru-
cial role in the socioeconomic development of the Kyrgyz Republic, accelerating
146 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

economic growth by increasing consumption and decreasing poverty. The accuracy
of these estimates depends on the accuracy of the underlying data on remittances
sent via formal channels, assumptions on the number of labor migrants, and repre-
sentativity of the survey sample. As the Economic Policy Institute (2005) notes,
none of these estimates is guaranteed, and all should be viewed as indicative only.
Japarov and Ten (2006) estimate the size of remittances in 2005 using an
approach similar to that of the Institute for Economic Policy. The only difference is
that they assume that 44 percent of the money transferred entered through the
banking system. They estimate remittance inﬂow to the Kyrgyz Republic in 2005 as
between US$520 million and US$750 million. To verify this range, the authors
compare data from the National Statistical Committee (NSC) on the population’s
monetary income with data on the turnover of retail trade and paid services. Exces-
sive consumer expenditures over monetary income appear to be close to the esti-
mated remittances.
Mansoor and Quillin (2006) focus on trends in international migration and
remittances in Eastern Europe and the FSU countries. It analyzes the situation in
the Kyrgyz Republic based on ofﬁcial statistics, household budget surveys, and a
survey of returned migrants. It ﬁnds that Kyrgyz citizens favored Russia and
Kazakhstan as migration destinations. In 2002 more than 75 percent of remittances
went to rural areas. An analysis of data from household budget surveys conducted
in six European and Central Asian countries shows that richer households receive
more remittances than poor households. For instance, only 0.8 percent of house-
holds received remittances in the poorest quintile of the Kyrgyz Republic, compared
with 7.0 percent in the richest quintile. In addition, among all countries under con-
sideration, only in the Kyrgyz Republic is the ratio of remittances to consumption
higher for richer households than for poorer ones. Aggregate information from the
six countries also shows that a larger part of remittances is used for food and cloth-
ing, but a signiﬁcant share (more than 10 percent) is used for savings and educa-
tion. The majority of migrants prefer to spend shorter times abroad and then to
return home. During their stay in Russia, many migrants from the Kyrgyz Republic
and Tajikistan work in low-skill sectors.

Measuring Remittances in the Kyrgyz Republic
This section considers the ﬁnancial ﬂows that are associated with remittances in the
Kyrgyz context.
According to the ﬁfth edition of the Balance of Payments Manual of the Interna-
tional Monetary Fund (1993), remittances consist of three components:
• Employee compensation, which comprises wages, salaries, and other benefits
earned by individuals for work performed for and paid by residents of economies
other than those in which the employee is a resident.
• Worker remittances, which cover current transfers by migrants, defined as persons
who come to an economy and stay there or expect to stay there for a year or more.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 147

• Migrant transfers, which consist of the flow of goods and financial exchanges that
arise from the migration of individuals from one economy to another.
NBKR, which is responsible for compiling the balance of payments of the coun-
try, has limited information on these monetary ﬂows. Therefore, the remittance-re-
lated methodology of NBKR is based on sensitive assumptions.3
NBKR has the following information on cross-border monetary ﬂows involving
participants in the Kyrgyz Republic:
• Data on repatriated wages and salaries of foreign employees who are not residents
of the Kyrgyz Republic and are working on large joint ventures in the Kyrgyz
Republic such as Kumtor Operating Company, the country’s largest gold-mine
enterprise
• Data on international monetary transfers to and from the Kyrgyz Republic done
by individuals through banking accounts including card accounts, money transfer
systems (for example, Western Union and the like), as well as the postal system
• Data on the number of permanent migrants to and from the Kyrgyz Republic
and the estimated average value of the property that they bring with them to the
country of destination.
In the majority of cases, apart from data on repatriated wages or salaries of for-
eign employees working in the Kyrgyz Republic, NBKR has no information on the
migrant or worker status of people sending money to or from the Kyrgyz Republic
or on the economic nature of such transactions (for example, intrafamily transfer,
payment for goods and services, and person-to-person loan disbursements). There-
fore, NBKR uses the following rules:
• Repatriated wages and salaries of foreign employees working in the Kyrgyz
Republic are considered outgoing compensation of employees.
• All incoming and outgoing monetary transfers to and from the Kyrgyz Republic
sent by individuals via MTOs and the postal system are considered worker remit-
tances.
• All incoming and outgoing monetary transfers to and from the Kyrgyz Repub-
lic sent by individuals via banking accounts with amounts below or equal to
US$3,000 are considered worker remittances, while transfers that are US$3,000
and above are considered business transactions and are not counted as remit-
tances.
• Migrant transfers are estimated as a product of the number of immigrants and
emigrants and the average value of each migrant’s property.
According to this approach, there is no incoming compensation of employees on
the Kyrgyz balance sheet. In addition, NBKR has no information about and does
not attempt to account for international informal cash transfers done by individu-
als (cash brought by migrants or their agents to and from the Kyrgyz Republic).
148 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

As a result of the incomplete information on the amount and economic nature of
transborder ﬁnancial ﬂows as well as the need to employ assumptions, this method-
ology suffers from some important shortcomings:
• Lack of accounting for informal transfers. These transfers may compose a signifi-
cant share of total remittance inflow and outflow.
• Risk of misinterpreting the economic nature of financial transfers. For example,
all transfers via MTOs, which are a major part of all financial flows currently
identified as remittances in the Kyrgyz Republic, and the postal system are consid-
ered worker remittances. However, other options are equally possible: (a) repatri-
ation of money earned as employee compensation in Russia or in other countries
by Kyrgyz citizens who stay there for less than a year, (b) repatriation of money
earned in Russia or in other countries by Kyrgyz citizens who stay there for a year
or more (worker remittances there would not be an interpretation error in this
case only), (c) compensation of the costs of goods brought by Kyrgyz shuttle trad-
ers to other countries (goods exported at free-on-board prices), (d) compensation
for transportation and other costs associated with bringing goods from the Kyrgyz
Republic to other countries, (e) export credit resources sent by a trader in another
country to a Kyrgyz counterpart (a credit operation that is to be included in the
financial account of the balance of payments), and (f) international intra-family
transfers (other transfers in the balance-of-payments classification). Obviously,
other options are also possible.
• Risk of misidentifying worker remittances and business transactions. Similarly, the
threshold of US$3,000, which is used to separate worker remittances from busi-
ness transactions, runs the risk of misidentifying transfers via banking accounts.
Thus of the three components of remittance inﬂows, only two—worker remit-
tances and migrant transfers—are estimated by NBKR. Only one—worker remit-
tances—is relevant to labor migration and is capable of inﬂuencing the Kyrgyz
economy and its ﬁnancial sector.4 The estimated amount of worker remittances,
however, most probably represents a mixture of components with different eco-
nomic meanings.

Remittance Dynamics
Remittances5 grew very quickly in 2002 to 2006 (see ﬁgure 1; quarterly data on
remittances and their components are provided in table B.1). The average annual
growth rate of remittance inﬂow (credit) for these ﬁve years is 125 percent (that is,
on average, remittances more than doubled every year). The growth rate was some-
what reduced in 2005 to 2006, but, for these years, it was still 50 percent and more
per year. This dynamic has been driven mainly by the inﬂow of worker remittances,
which, on average, tripled yearly. Inﬂows of migrant transfers, in contrast, were
almost constant over this period, at less than US$10 million per year.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 149

FIGURE 1. Dynamics of Remittance Inﬂow into the Kyrgyz Republic, 2000–06

Million US$
500

400

300

200

100

0
2000 2001 2002 2003 2004 2005 2006

worker’s remittances migrants’ capital transfers

Source: NBKR and authors’ estimates (for 2006).

There was also a growing outﬂow of remittances in these years (debit in table
B.1). The average annual growth rate of total remittance outﬂow in 2002 to 2006
was 22 percent. This outﬂow was driven by worker remittances, which increased
from zero in 2001 to more than US$40 million in 2006. This growth may reﬂect an
increase in the activity of Chinese traders as well as Tajik and Uzbek hired workers
in the Kyrgyz Republic and the expansion of international intra-family (and possi-
bly business) transfers involving Kyrgyz citizens. Another growing item of remit-
tance outﬂow was migrant transfers. This reﬂects an increase in permanent
emigration from the Kyrgyz Republic and in the estimated value of emigrants’
properties. However, inﬂow of remittances has been growing much faster than out-
ﬂow, so net total remittances are growing quickly as well.
As noted, these data do not account for informal money transfers of migrants.
Some indirect information on these informal transfers may be derived from the
analysis of the balance-of-payments item on “net errors and omissions.” This item,
in essence, is a balance of all informal foreign currency transactions in the Kyrgyz
economy. These informal transactions include imports and exports implemented by
shuttle traders (only a small part of these trade ﬂows are covered by ofﬁcial statis-
tics); smuggling of some commodities such as gasoline from Kazakhstan and
Uzbekistan, where prices for these commodities were and still are subsidized; other
receipts from illegal activities; and, among others, informal transfers of Kyrgyz
workers abroad. As shown on ﬁgure 2, until 2003 net errors and omissions ﬂuctu-
ated—sometimes with large amplitude—around zero. This means that different
components of informal foreign currency ﬂows were basically balanced. However,
since 2003, this item has increased signiﬁcantly, indicating a growing inﬂow of for-
eign currency to the Kyrgyz Republic. Of course, it is not known which compo-
nents of informal ﬂows have contributed to this growth, but it is possible to
presume that some part of this growth is related to informal transfers.
150 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE 2. Net Errors and Omissions in the Balance of Payments of the Kyrgyz
Republic, 1997–2006

Million US$
500
418.7
400
303.2
300

200
109.6 91.0
100 63.6
3.0 23.1 8.5
– 3.4
0

– 100 – 57.6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: NBKR.
Note: The 2006 data are preliminary.

Figure 3 compares the quarterly dynamics of worker remittances (transfers
through formal channels) and net errors and omissions (a possible proxy for infor-
mal transfers) in 2003 to 2006. Both variables have similar upward trends (dash
lines in ﬁgure 3) and a similar seasonal pattern of change (see ﬁgure 4). These
similarities,6 especially the similarity in seasonality, may indicate that these two
ﬂows originate from the same source. This does not mean, however, that all errors
and omissions can be attributed to worker remittances. On the contrary, remit-
tances of formal workers are a mixture of components, including remittances, as
are net errors and omissions.

FIGURE 3. Dynamics of Net Errors and Omissions versus Worker Remittances, 2003–06
Million US$
180

150

120

– 30
:I

:II

:IV

:II

:IV

:II

:IV

:II

I
:II

:II

:II
03

06
03

05
20

20
20

worker’s remittances inﬂow net errors and omissions

Source: NBKR.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 151

FIGURE 4. Seasonality of Remittances and Net Errors and Omissions, 2002–05

Average deviation from trend
in 2002–05 (million US$)
20 16.0
15
9.8
10 7.7
5.6
5

25 – 0.9

– 10 – 8.2
– 15 – 12.4
– 20 – 17.6
Q1 Q2 Q3 Q4

worker’s remittances inﬂow net errors and omissions

Source: NBKR and authors’ calculations.

The distinct seasonality of both formal and informal transfers—their relative
increase in the third and fourth quarters and decrease during the ﬁrst quarter of
every year—may be linked to the pattern of cross-border movement of Kyrgyz
workers and shuttle traders who are not residents of their country of migration.
During winter, they usually stay home and do not earn any income, which is the
source of remittances, nor do they have a need to send home remittances. Such need
typically appears closer to the end of their stay abroad, which is the second part of
the year.

Composition of Remittance Inflows
Disaggregated data on international monetary transfers, available at NBKR, allow
analyzing the geography of transfers and their composition in terms of transaction
value. NBKR collects information from commercial banks. This is the main source
of information on the country’s balance of payments regarding transfers from indi-
viduals. The database contains the following information: country from which the
money is sent, money transfer channel, date of transfer, and amount transferred in
U.S. dollars. There are some other ﬁelds in the database (such as commercial bank
mediating the transaction), but these pieces of information are not available for
research purposes according to the regulations on banking secrecy. NBKR started
to compile the database in 1999, and data for 1999 (seven months) up to 2006 are
used for the analysis here.
As mentioned, there are three formal channels for sending remittances: MTOs,
banking accounts, and transfers via Kyrgyz Post (the postal service). The relative
role of these channels in the total inﬂow of worker remittances is shown in table 1.
152 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

TABLE 1. Inﬂow of Worker Remittances, by Sending Channel, 2002–06
2002 2003 2004 2005 2006a
Million % of Million % of Million % of Million % of Million % of
Channel US$ total US$ total US$ total US$ total US$ total
MTOs 24.4 80.5 62.8 89.3 167.0 93.3 295.4 94.3 455.3 96.2
Banking accounts 2.2 7.1 4.4 6.2 8.7 4.8 14.7 4.7 14.2 3.0
Kyrgyz Post 3.8 12.4 3.2 4.5 3.4 1.9 3.2 1.0 3.6 0.8
Total 30.3 100.0 70.3 100.0 179.1 100.0 313.3 100.0 473.1 100.0
Source: NBKR.
a Preliminary data.

Almost all remittances enter the Kyrgyz Republic through MTOs, and their role is
growing with time. Absolute amounts of money sent through banking accounts are
increasing, but their share in the total amount is falling. The Kyrgyz Post serves
only a small segment of the international transfer market.
Two countries are the main sources of remittances for the Kyrgyz Republic: Rus-
sia and the United States (see ﬁgure 5). The Russian Federation’s role as a source of
remittances, which started in 2002, is growing steadily. In 2005 transfers from Rus-
sia accounted for 86 percent of the total amount of remittances sent, while those
from the United States accounted for 11 percent. The role of other countries is
much less important. The third and fourth important sources of remittances,
Kazakhstan and the United Kingdom, together account for less than 3 percent of
the total number of transactions and less than 1 percent of the total amount of
remittances. The unexpectedly low share of Kazakhstan, which is considered the
second largest labor market for Kyrgyz migrants, may be due to two factors:
(a) migrants’ preference for using informal channels to send money to and from the
relatively geographically close country and (b) the unfriendly legal environment in
Kazakhstan for nonresident use of the services of ﬁnancial institutions.
To understand trends in remittances, it is worth looking at the distribution of
transactions by country, channel, and size (see ﬁgure B.1, panels A through D). The
pattern of transfers from Russia via MTOs has been changing since 2002 (see ﬁg-
ure B.1, panel A). There were few large transactions before 2002, but from 2002 to
2004, the value and number of transactions grew two to three times (and more)
each year, accompanied by a reduction in the median size of transfer. Starting in
2005, the trend changed again. The median size of transfer grew along with the
number of transactions. Such dynamics could reﬂect changes in the composition
and income of senders. Mass labor migration started in 2002. Since then, among all
senders, labor migrants started to dominate, sending relatively small amounts of
money. This led to a decline in the median size of transaction. However, with the
passage of time, people adapted to the situation in the receiving country, and their
incomes as well as monetary transfers grew in size. Migrants also mastered some
cost-reducing techniques such as consolidation of remittances,7 leading to an
increase in the median size of transfers. Other factors affecting both the number
and the size of transactions could be the growing conﬁdence in the reliability of
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 153

FIGURE 5. Worker Remittance Inﬂows from Main Countries of Origin, 2000–06

Million US$
320

280

240

200

160

120

0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

Russia United States others

Source: NBKR.

transactions mediated by ﬁnancial institutions and the expansion in the number
and location of retail outlets serving MTO clients in the Kyrgyz Republic.
The pattern of transfers via MTOs from the United States also changed somewhat
(ﬁgure B.1, panel B). Similar to Russia, a growing number of smaller transactions
from 2002 to 2004 replaced the smaller number of larger transactions from 1999 to
2001. However, in 2005, the number of transactions fell almost sixfold, with a dras-
tic increase in the median (11 times more!) and mean size of transfer. Reasons for
such a sharp change are unclear.
The existence of a threshold of US$3,000 for transfers via banking accounts to be
considered as remittances explains why there is no trend in the size of transactions
(ﬁgure B.1, panels C and D). Larger transactions are censored from the database.
However, mean and median sizes of transfers via banking accounts from the United
States are considerably larger than those from Russia.
The large difference between mean and median size of transactions made via
MTOs (see ﬁgure B.1, panels A and B) suggests the presence of very large single
transactions, which account for a large portion of the total amount of remittances.
The distribution of transfers via MTOs by transaction value is shown in ﬁgure 6,
panels A and B. These ﬁgures show that large (US$10,000–US$50,000) and very
large (more than US$50,000) transactions make up a relatively small (while grow-
ing with time) share in the total number of transactions, but a very large and grow-
ing share in the total amount of transactions. In 2005 large transactions accounted
for 22 percent, and very large transactions accounted for 72 percent of the total
amount of remittances sent via MTOs, leaving just 6 percent for smaller transac-
tions. On the contrary, very small (less than US$100) and small (US$100.01–$500)
transactions constituted 30–50 percent of the total number of transactions in 2001
154 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE 6. Worker Remittance Inﬂows from Main Countries of Origin, 2000–06
A. Share in the total number of transactions

A. Share in the total number of transactions
%
100

0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

h h l l f
Source: NBKR.

B. Share in the total value of remittances

B. Share in the total value of remittances
%
100

0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

US$ 100 100.01–500 500.01–1,000 1,000.01–5,000
5,000.01–10,000 10,000.01–50,000 > 50,000

Source: NBKR.

to 2006 (with a maximum of 51 percent in 2004), while their share in the total
value of remittances was small and falling, from 1.6 percent in 2001 to 0.3 percent
in 2005 to 2006. Thus small and medium (US$500–US$10,000) transactions domi-
nate the total number of transactions, but large and very large transactions prevail
in the total value of remittances.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 155

In 2005, 3,002 transactions were in the range of US$10,000–US$50,000, and
1,549 transactions were above US$50,000. The maximum transaction registered
was US$779,000. In the ﬁrst seven months of 2006, the maximum single transac-
tion was US$2,101,122, and ﬁve transactions exceeded US$1 million! Moreover,
the number of large transactions, their share in the total value of remittances, and
the maximum value of transactions increased with time. So the growth in remit-
tances in 2002 to 2006 should be attributed to the growth in large and very large
transactions. This trend coincided with the revival of the Kyrgyz ﬁnancial market.
This prevalence of large transactions raises a question about their economic
interpretation and their relationship to labor migration. Taking into account the
typical income of Kyrgyz-hired workers in Russia, which ranges from several hun-
dred to a few thousand U.S. dollars per month for highly skilled workers, and the
fact that they could save only a portion of it, their savings could only be a source of
very large transactions if the remittances of a group of hired workers were consoli-
dated. Although such consolidation does take place, the amounts consolidated
could hardly exceed US$50,000. Therefore, the massive migration of Kyrgyz citi-
zens to Russia and Kazakhstan and their eventual employment in construction,
municipal services, and other relatively low-paying jobs do not seem to be a major
source of remittance growth. Therefore, the increase in remittances is not necessar-
ily associated with growth in the number of labor migrants.
A much more realistic explanation for large transactions and the growth in their
number and amount is that these transfers represent revenues from and loans for
the trade operations of Kyrgyz wholesale shuttle and retail traders in the markets of
Russian cities. If this is the case, the larger part of what is called “worker remit-
tances” is a mixture of revenues from exports of goods and services, trade credits,
as well as mixed income of Kyrgyz retail traders operating in Russia.8 The growth
in remittances then should be attributed to a shift in the pattern of revenue repatri-
ation—from informal to formal (mainly MTO) channels—and to expansion of the
Kyrgyz shuttle trade.

Macroeconomic Effect of Remittances

In recent years, remittances have been growing so quickly that they have become
the second largest source of foreign currency for the country after exports of goods
(see table 2). In 2002 to 2005, the inﬂow of remittances grew much faster than the
exports of goods and services, foreign direct investment, and ofﬁcial development
assistance—all positive items on the balance sheet of the Kyrgyz Republic. In the
ﬁrst three quarters of 2006, the only source of foreign exchange with a growth rate
higher than remittances was the export of tourism services. However, this item is
much smaller than remittances. The share of remittances in GDP at market
exchange rates is also growing, from 12.7 percent in 2005 to an estimated
16.8 percent of GDP in 2006.
156 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

TABLE 2. Worker Remittances as a Percent of Other Important Sources of Foreign
Exchange, 2000–06
Source 2000 2001 2002 2003 2004 2005 2006
Exports of goods 0.3 0.4 6.1 11.9 24.4 45.6 58.3
Exports of services 2.1 2.4 21.4 44.4 85.4 122.6 126.3
Exports of tourism services 8.5 7.8 85.2 146.9 236.9 429.0 283.3
Gross foreign direct investment 1.5 2.1 26.3 47.8 102.0 148.9 141.0
Ofﬁcial development assistance and other
government receipts in foreign currency 0.7 1.2 8.6 27.1 69.0 152.1 515.3
Worker remittances as % of GDPa 0.1 0.1 1.9 3.7 8.1 12.7 16.8
Source: NBKR, NSC, and World Bank.
a At market exchange rate.

In the small open economy of the Kyrgyz Republic, such signiﬁcant inﬂows of
money could affect virtually all economic variables. There are several potential
mechanisms through which remittances inﬂuence other macroeconomic variables.
Households receiving remittances could increase their consumption; therefore,
remittances could have a positive effect on private consumption. Moreover, the
share of imported consumer goods in total consumption is high,9 so part of the
remittances could be spent on imported consumer goods. Arguably, one would not
expect remittances to have a considerable impact on investments in ﬁxed capital.
On the one hand, the inﬂow of remittances in many households is positively associ-
ated with savings, so growth in remittances could cause growth in domestic sav-
ings. This does not mean, however, that increased savings result in the growth of
investments. Many households prefer to save by acquiring real estate, which is con-
ﬁrmed by the rise in the price of apartments and houses in Bishkek and Osh during
the last several years. Obviously, this type of saving behavior does not contribute
much to investments and GDP growth.10 So remittances can be expected to have a
positive impact on GDP overall, but it will be smaller than the impact on private
consumption. Increased domestic production of consumer goods and services
induced by remittances could cause some growth in employment. However, this
growth may not be registered because a large part of consumer goods and services
is produced in the informal economy.
Imports are a key source of government revenues in the Kyrgyz Republic. The
state’s custom committee collects value-added tax, excises, and custom duties on
imports that, altogether, exceed 50 percent of the total tax collections. Therefore,
an increase in imports—an expected outcome of the inﬂow of remittances—should
result in the growth of government revenues.
On the one hand, remittances, which strengthen the current account, could also
encourage appreciation of the exchange rate. On the other hand, they may fuel
inﬂation if NBKR tries to sterilize the inﬂow of foreign currency by purchasing cur-
rency on the open market, accumulating net international reserves that, until very
recently, were at a rather low level if measured in months of imports; this causes an
increase in money supply in the economy.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 157

Obviously, many other factors inﬂuence the country’s economic development.
Therefore, it is necessary to test the hypotheses presented here by looking at actual
trends of the variables under consideration. In the period under consideration,
almost all variables experienced upward trends; so, of course, all these variables
were strongly correlated with remittances. However, these correlations could be
spurious, as many other growth-inducing forces and exogenous shocks were present
in the Kyrgyz economy apart from remittances. All these variables also have very
large and similar seasonality, which increases the probability of spurious correlation.
Therefore, the correlation of growth rates of seasonally adjusted variables seems to
be a more reliable (but still imperfect) indicator of the existence of a causal
relationship between remittances and other variables. The shortness of available
time series (three to ﬁve years only) precludes the use of more sophisticated methods
of time-series analysis such as co-integration.
With regard to the relationship of remittances to personal consumption and
GDP, ﬁgure 7 shows that the share of remittances in GDP and personal consump-
tion was growing steadily in 2001 to 2005 (preliminary data for 2006 show con-
tinuation of this trend). In relation to share of GDP, this is a result of the rapid
growth of remittances, while the average annual GDP growth rate for 2001 to 2006
was just 3.6 percent. This relatively low and unstable growth rate is explained par-
tially by problems in the Kumtor gold mine, which is a major contributor to Kyrgyz
GDP. In 2002 and 2005, Kumtor had technological accidents that signiﬁcantly
decreased its production. NSC also publishes data on GDP without Kumtor;
according to NSC data, the average annual growth rate of GDP without Kumtor in
2001 to 2006 was 4.5 percent. This number is not very high when compared with
the growth rates of other Commonwealth of Independent States (CIS) countries,

FIGURE 7. Worker Remittances as a Percent of GDP and Private Consumption, 2001–05

%
25 24.0%

15 15.1%
12.7%
10.7%
10
7.0% 7.5%
5.3% 4.7% 8.3%
5 4.7% 8.1%
2.8% 3.7% 7.0%
2.2% 1.9%
0 0.1% 0.2%
0.0% – 0.2%

–5
2001 2002 2003 2004 2005

remittances as % of GDP remittances as % of private consumption
GDP growth rate private consumption growth rate

Source: NBKR and NSC.
158 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

which are closer to 10 percent a year. So far, the fast growth of worker remittances
has not been associated with comparable GDP growth. However, analysis of a
cross-correlation of remittances and GDP real growth rates in the quarterly series
from 2002 to 2006 indicates a statistically signiﬁcant (at 5 percent), yet not very
strong,11 positive correlation between the growth of remittances and the growth of
GDP ﬁve quarters later (ﬁgure B.2, panel A). Therefore, it seems that data provide
some evidence of a marginally signiﬁcant positive impact of remittances on GDP
growth.
Growth of private consumption in 2001 to 2006 was much larger than growth
of GDP. The average annual growth rate for this period was 11.2 percent. Wide
ﬂuctuations in the growth of private consumption (from 2.2 percent in 2001 to
24.0 percent in 2003 and to 22.1 percent in 2006) somewhat erode the correlation
between private consumption and remittances. Still, a cross-correlogram shows a
5 percent statistically signiﬁcant positive correlation between remittances and pri-
vate consumption four and ﬁve quarters later (ﬁgure B.2, panel B).12 Thus private
consumption seems to be inﬂuenced by remittances, while, of course, remittances
have not become a major driving force for consumption (for example, performance
of the agriculture sector has a stronger and more immediate effect on this variable).
The relationship between remittances and imports is much stronger (see ﬁgure
8). Both variables have similar upward time trends. Yet the absolute growth of
imports is always considerably larger than the absolute growth of remittances. This
suggests that there should be other sources of ﬁnancing of imports (such as exports
of goods and services, foreign credit to the private sector) apart from remittances.13
A cross-correlogram indicates a statistically signiﬁcant positive correlation between
remittances and imports with a ﬁve-quarter lag (ﬁgure B.2, panel C).

FIGURE 8. Remittances, Imports, and Government Revenues, 2001–06 (US$ in millions)

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2001 2003 2003 2004 2005 2006
I–IIII quarters I–III quarters

imports of goods (cif) government revenues worker remittances

Source: NBKR and NSC.
Note: U.S. dollar values of government revenues have been estimated at current exchange rate for each quarter.
CIF = cost, insurance, freight.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 159

The relationship between imports and government revenues is also weaker than
expected, while there is a statistically signiﬁcant immediate positive correlation
between these variables (ﬁgures 8 and B.2, panel D). According to expectations,
there appears to be a statistically signiﬁcant positive correlation with a ﬁve-quarter
lag between remittances and government revenues (ﬁgure B.2, panel E).
As ﬁgure B.3 indicates, investments in ﬁxed capital declined in 2001–03 and
started to grow again only in 2004. This investment growth in the last two to three
years was closely associated with a big inﬂow of foreign direct investment in
2002–06. Gross foreign direct investment (in U.S. dollars) was almost four times
larger in 2006 than in 2001. Given the very small degree of conversion of remit-
tances into deposits, the small role of banking credit in ﬁnancing capital invest-
ments, and the weak propensity of recipients to invest their remittances in business,
there is virtually no evidence that remittances have an impact on investments in the
Kyrgyz Republic.
The impact of remittances on employment is difﬁcult to measure because of the
existence of a very large informal labor market, which includes mainly agriculture,
trade, construction, and other market services as well as some manufacturing indus-
tries (for example, garment and food production). The formal market covers non-
market services (education, health, government, as well as social and municipal
services) and industries represented by large enterprises (for example, mining,
power generation, railroad, and communications). Figure 9, panel A, shows a per-
manent downward trend in employment in the formal labor market. Obviously,
remittances do not have a positive impact on this component of employment. Nei-
ther do they have a negative impact on formal employment; this decline in formal
sector employment started well before the increase in remittances and labor migra-
tion. The reduction in formal employment is linked to imperfections in the coun-

FIGURE 9. Formal and Informal Employment in the Kyrgyz Republic, by Sector, 2001–05

A. Formal employment B. Informal employment
Thousand people Thousand people
600 1,500
595
500 571 560 555 1,359 1,435
550 1,200
400
900
300 515
600 474
200 144 134 126 120 119
300 86
100 74
89 83 79 74 72
0 0
2001 2002 2003 2004 2005 2004 2005

total manufacturing market services

Source: NSC.
160 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

try’s business climate and a heavy tax burden—notably the payroll tax—on formal
enterprises. Recently, NSC published data from a household survey on informal
employment in 2004–05 (ﬁgure 9, panel B). These data conform to the expectations
that remittances have a positive inﬂuence on employment in market services and
sectors producing consumer goods.
Inﬂow of remittances, together with tourism export revenues and some other
balance-of-payments items, leads to an increase in the supply of foreign exchange
in the domestic currency market.14 NBKR is a major buyer of foreign currency. In
2001–06, the net cumulative purchase of NBKR on the interbank currency market
was US$375 million; of that amount, US$186 million was for 2006 only. This
allowed NBKR to increase its net foreign reserves from som 2.6 billion (US$55 mil-
lion) in 2001 to som 24.7 billion (US$647 million) in 2006. This policy resulted in
a larger money supply. Monetary aggregate M2x grew from som 8.2 billion
(US$172 million) at the end of 2001 to som 32.3 billion (US$847 million) at the
end of 2006. Remarkably, until 2007 this rapid growth in the supply of money
(31.5 percent a year on average) did not cause serious inﬂation. The average annual
inﬂation rate (based on the consumer price index) in 2002 to 2006 was just 4.0 per-
cent. This is a good result, accounting for numerous unfavorable external shocks
(such as an increase in the price of oil and gas). Obviously, the surge in money sup-
ply has been absorbed by the growing demand for money. Monetization of the
economy increased from 11.1 percent of GDP in 2001 to 28.5 percent of GDP in
2006, the result of a deeper ﬁnancial market, a reduction of in-kind settlements
between economic agents, and, probably, some substitution of foreign currency by
soms in domestic economic transactions and savings of the population. However,
the inﬂation situation changed dramatically in 2007; in the ﬁrst 10 months of 2007
the consumer price index grew 20.1 percent, which is more than its cumulative
growth in four previous years. While this inﬂation hike was triggered by external
price shocks, the inﬂationary pressure of the quickly growing money supply also
had a role.
The global trend of the depreciation of the U.S. dollar also affected the som,
which appreciated strongly (by more than 20 percent) versus the U.S. dollar in nom-
inal terms in 2001 to 2006. This nominal appreciation, however, does not mean an
overall appreciation of the Kyrgyz currency (see ﬁgure 10). In real terms, the som
appreciated 17 percent for non-CIS countries, but depreciated 30 percent for CIS
countries—mainly vis-à-vis the ruble—due to higher inﬂation in Russia and stronger
nominal appreciation of the ruble versus the U.S. dollar. Therefore, exchange rate
developments increased the competitiveness of imports from non-CIS countries in
the domestic market and the competitiveness of Kyrgyz exports in CIS markets.
Stronger price competitiveness of Kyrgyz goods in CIS markets, coupled with the
robust growth of these economies, led Kyrgyz exports to these countries to increase
2.2 times in U.S. dollar terms in 2006 compared with 2001. As mentioned, imports
also strongly increased in 2001–06, but only part of this increase could be related to
real exchange rate developments, as imports from CIS countries grew even faster
than imports from non-CIS countries, despite unfavorable real exchange rates.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 161

In summary, the inﬂow of worker remittances to the Kyrgyz economy (a) has a
positive impact on GDP and personal consumption; (b) contributes to the growth
of imports and, indirectly, of government revenues; (c) is associated with some
growth of employment in the informal economy; (d) does not produce any measur-
able effect on investments; and (e) has no negative consequences for inﬂation and
the real exchange rate.

Pattern of Remittances at the Micro Level

To understand the factors driving remittance ﬂows, it is necessary to examine the
individuals and households that send and receive these money transfers. In the
context of this study, key issues for consideration are the composition of senders
and recipients, their preferences regarding transmission channels for remittances,
the impact of remittances on their savings as well as business activities, and the atti-
tude of recipients toward services currently offered to them by the Kyrgyz ﬁnancial
sector.
Analysis in this section is based on data from two surveys conducted in the
framework of the ADB project. The ﬁrst is a representative household survey cover-
ing 3,997 households in all parts of the Kyrgyz Republic which provides informa-
tion on household characteristics, welfare, migration, and remittances.
Methodological details of this survey are provided in the Asian Development Bank
report on remittances and poverty in the Kyrgyz Republic (ADB 2008).
Another source of data is a remittance recipient survey (RRS), which was con-
ducted in October 2006 in Bishkek and Osh at the premises of different branches
of four banks: Amanbank, Bank Kyrgyzstan, Ecobank, and Settlement and Saving
Company. Three hundred and six randomly selected recipients of remittances were
interviewed. Table B.2 provides a composition of the sample. This survey is not
representative of the country’s population because the sampling method led to a
disproportionately high share of urban residents in the sample. Despite that, this
survey provides useful information on the composition and behavior of senders and
recipients of remittances. The survey included questions on the social and demo-
graphic proﬁle of recipients and senders, details of money transfers, savings, busi-
ness activities, and experience with the ﬁnancial sector. Some questions were asked
in both surveys, and an analysis of similarities of and discrepancies in the data col-
lected by the two surveys is provided in this section to shed additional light on the
pattern of remittances at the household level.

Profiles of Remittance Senders and Recipients
Household survey data provide information on the characteristics of Kyrgyz
migrants (table B.3). An absolute majority of migrants come from rural areas, but
urban areas other than Bishkek provide the largest share of migrants in the total
162 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

population. Bishkek provides the smallest share of migrants. This is understandable
because the capital city has the best employment situation, while other urban areas
have the worst. By educational status, an absolute majority of migrants (77 percent)
have completed secondary education, 16.5 percent have completed education higher
than secondary (secondary special, higher, and postgraduate levels), and 6.4 percent
have completed education below secondary. The share of migrants with higher
education is signiﬁcantly larger in Bishkek (41.8 percent); about ﬁve of six migrants
(82.5 percent) go to Russia, 12 percent go to Kazakhstan, and only 5.5 percent go
to other countries. However, a higher share of Bishkek migrants go to Kazakhstan
and other countries—16.5 and 16.6 percent, respectively. The majority of migrants
stay abroad for a short period. The median stay is 1.2 years (two years for Bishkek).
By occupational status, the majority (71.6 percent) are employed in the private
sector; 19.5 percent are self-employed, which is a relatively high share, 5.8 percent
are employed in the public sector, 1.4 percent are students, and 1.7 percent have
other types of occupation. Again, migrants from Bishkek demonstrate a somewhat
different picture. Fewer are employed in the private sector (51.9 percent), consider-
ably more are employed in the public sector (12.7 percent), and 25.3 percent are
self-employed. Two main sectors of employment of Kyrgyz migrants are construc-
tion (45 percent) and trade (30.4 percent). Migrants from Bishkek work in more
diverse sectors, with much fewer working in the construction industry. It is clearly
necessary to distinguish between migrants originating from Bishkek and those orig-
inating from other areas.

FIGURE 10. Exchange Rate Dynamics in 2000–06
REAL effective exchange rate = 100 for 2000

US$ per som %
0.026 140

0.025 130

0.024 120

0.023 110

0.022 100

0.021 90

0.020 80
2000:I 2000:III 2001:I 2001:III 2002:I 2002:III 2003:I 2003:III 2004:I 2004:III 2005:I 2005:III 2006:I 2006:III

nominal exchange rate, USD/som (lhs) real effective exchange rate, CIS countries (rhs)
real effective exchange rate, non-CIS countries (rhs)

Source: NBKR.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 163

FIGURE 11. Characteristics of Migrants Sending Remittances

A. Country of employment or residence B. Duration of stay abroad

% of all respondents
69%

> 15 years, (9%)
< 1 year, (16%)
10–15 years, (5%)
8–10 years, (5%)

5–8 years, (8%)

12% 12%
6%
2% 3–5 years, (19%)
1–3 years, (38%)
Russia Kazakh- United United Other
stan States Kingdom countries

Source: RRS data.

The survey of recipients receiving remittances provides a similar picture with
regard to migration geography (see ﬁgure 11, panel A). Russia (with a big lead) and
Kazakhstan are again the two main destinations of migrants; the United States and
the United Kingdom are the most frequent destinations outside the CIS. The lower
share of Kyrgyz migrants in Russia, compared with the household survey, is due to
the large share of Bishkek residents in this survey; Bishkek migrants go less fre-
quently to Russia and more frequently to other countries (table B.3).
RRS data on duration of stay abroad are also generally consistent with the
results of the household survey for Bishkek (ﬁgure 11, panel B). They show that
more than one-third (38 percent) of the migrants work outside the Kyrgyz
Republic for one to three years. The share of migrants who stay abroad for three
to ﬁve years (19 percent) and of newcomers who stay abroad less than one year
(16 percent) is also signiﬁcant; 27 percent of all migrants stay abroad for more
than ﬁve years. In 14 percent of cases, people continue to remit money after
staying 10 and more years abroad. This is evidence of stable family relations in
many Kyrgyz households.

TABLE 3. Respondents’ Household Annual Income per Capita, by Location
thousand soms

Location Mean Median
Bishkek 40.4 28.0
Osh 22.5 13.0
All samples 31.3 18.0
Source: RRS data.
164 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

Data on income of respondents correspond to the well-known fact that incomes
are higher in Bishkek than in Osh (see table 3). Median per capita income for the
sample was reasonably close to GDP per capita (som 21,900 or US$545) in 2006,
suggesting that the income level of households receiving remittances is similar to
the average level for the country.

Pattern of Remittance Transfer
Data from these two surveys shed light on the preferences pertaining to remittance
transfers of the Kyrgyz senders and receivers. These relate to amount, geography,
form, frequency, and channel of remittances, preferred currency, and consolidation
of transfers, among others.
Household survey data on remittance amounts, forms, and shares of households
receiving remittances are provided in table 4. The share of households receiving
remittances is 16 percent in the Kyrgyz Republic and 11.2 percent in Bishkek. The
total amount of remittances is estimated at US$256.4 million (9 percent GDP). This
amount differs considerably from ofﬁcial estimates and from numbers circulating in
the Kyrgyz media. Remittances are composed of cash and goods: 95 percent of
remittances are in cash and 5 percent are in the form of goods. In Bishkek, the
share of in-kind remittances approaches 10 percent. The average amount of remit-
tances per receiving household for the country is US$1,380 a year, varying from
US$1,283in rural areas to US$1,865 in Bishkek.
RRS gives quite similar estimates for average amounts per household. In this sur-
vey, respondents (mostly Bishkek residents) reported median remittances of
US$1,800. This is very close to the estimate for Bishkek provided in table 4.
According to the RRS data, 95 percent of respondents get their money in cash. This

TABLE 4. Amount of Remittances Received by Households, by Location
Other
Kyrgyz urban
Indicator Republic Bishkek areas Rural areas
Households receiving remittances (%) 16.0 11.2 18.1 16.8
Total amount of remittances (million US$) 256.4 47.8 52.7 156.0
Share of cash remittances in total amount of
remittances (%) 95.0 90.3 94.8 96.5

Average amount of remittances a year
Cash remittances per household (US$) 1,334 1,691 1,373 1,255
In-kind remittances per household (US$) 387 733 354 298
Total remittances per household (any form) 1,380 1,865 1,385 1,283

Share of remittances in total income of receiving
households (%) 50.0 41.6 51.5 51.2
Source: Household survey data.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 165

coincides exactly with the value for the country and is higher than, but still close
to, the value for Bishkek from the household survey.
According to household survey data, more than 80 percent of all remittances
come from Russia (see ﬁgure 12), slightly less than 10 percent come from Kazakh-
stan, and another 10 percent come from other countries. Regarding Russia, these
data are consistent with the NBKR data on geography of transfers (ﬁgure 5). How-
ever, one can see a difference between these two sources of information regarding
Kazakhstan and the United States. Kazakhstan is the second largest source of remit-
tances in the household survey, but not an important source of remittances in the
NBKR database. The situation of remittances from the United States is, in some
sense, the reverse. The United States is the second largest source of remittances in
the NBKR data, but a very small source in the household survey. In the RRS, 7 per-
cent of the respondents reported having relatives in the United States and receiving
remittances from them. These are mainly people living in Bishkek, who have more
education and income than the average. Obviously, this group is small in absolute
numbers, although they may receive a signiﬁcant portion of total remittances enter-
ing the country. Therefore, recipients of remittances from the United States appar-
ently have not been sufﬁciently covered by the household survey.
The household survey data provide the geographic distribution of recipients of
remittances within the country (see ﬁgure 13). Almost three-quarters of all cash
remittances go to the southern part of the country—Osh City, Osh oblast, and Jala-
labat as well as Batken oblasts. Batken oblast, which is one of the poorest regions
of the country, receives a disproportionately high share of remittances compared to
its population. Labor migration and remittances are especially important for this
oblast. Bishkek’s share of remittances is roughly equal to its share of the country’s
population. More economically developed Chui and Issykkul oblasts receive a small
fraction of remittances.
Information on the frequency and amount of remittance transfers in the house-
hold survey allows us to estimate the distribution of transfers by transaction value
(see ﬁgure 14). According to these data, more than half of all transfers are in the
range of US$100–US$500, with a median value close to US$300. Large transfers
(more than US$5,000) constitute just 0.3 percent of the total number of transac-
tions. These results differ signiﬁcantly from those shown on ﬁgure 6, panel A,15
indicating that households reported much smaller amounts of remittances than
shown in the NBKR data (even controlling for the possible consolidation of remit-
tances sent). This conﬁrms the idea that a large part of the money entering the
country via large transactions (through MTOs) is not from worker remittances but
from trade- and other business-related monetary ﬂows.
Apart from the amount of remittances, another relevant issue is the selection of
remittance channels by migrants and their households. It is possible to distinguish
formal channels of money transfer (for example, MTOs, banking accounts, and the
postal service) and informal channels (migrant and individual intermediaries). The
household survey provides information on the current practices of migrants (see
table 5). The majority of migrants (78.5 percent) use a bank account or an MTO to
166 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

TABLE 5. Channels for Cash Remittances
Average amount Channel as %
% of households of remittance of total
receiving (US$ per amount of
remittances using receiving cash remit-
Channel this channela household) tances
Bank or MTO 78.5 1,330 78.2
Postal service 1.3 320 0.3
Carried by household migrant 25.6 898 17.2
Carried by friend or relative 6.9 646 3.3
Carried by other individuals 1.3 987 1.0
Source: Household survey data.
a More than one answer was possible.

transmit money—that is, a formal channel—and most remittances (78.2 percent)
enter the country through this channel. Another formal channel—the postal ser-
vice—has a negligible role. The second important channel of transmission is hand
carrying the money by the migrants themselves; 25.6 percent of all receiving house-
holds hand carry money, and 17.2 percent of all cash remittances enter in this way.
Many migrants commute, so they travel home often and have a chance to bring
money with them. The role of intermediaries appears to be relatively low—just
8.2 percent of all households use this channel—and individual intermediaries bring
in only 4.3 percent of the total amount of cash remittances. The amounts sent
through formal channels (apart from the postal service, which limits the amount
transmitted) are larger than the amounts entering through informal channels.
Among MTOs, the best known and popular are Western Union, Anelik, and
UNIstream (see table 6). People interviewed by the RRS are aware of, more or less,

FIGURE 12. Remittances, by Country of Origin

%
100
9.4 10.6
9.2 0.4 0.6
9.2
80

40 80.9 79.6

0
Cash remittances Total remittances

Russia Kazakhstan United States others

Source: Household survey data.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 167

TABLE 6. Use of Money Transfer Systems of All Respondents (by percentage)
Aware of Ever Used last Used
System the system used time most often
RRS (% of all respondents)
Western Union 69 44 21 22
MIGOM 26 16 11 11
Money Gram 16 3 1 1
Contact 17 8 4 5
Leader 7 1 0 1
Anelik 50 33 20 17
Xpress Money 5 1 0 1
UNIStream 51 39 29 30
Travelex 11 3 1 1
Zolotaya Korona 6 1 1 1
Bystraya Pochta 14 5 4 3
Kyrgyz Transfer 4 0 0 0
Allure 5 1 0 0
Interexpress 2 1 1 1
Argymak 2 0 0 0
Country Express 1 0 0 0
Eco-perevod 19 7 3 3
Blizko 1 0 0 0

Household survey (% of all households receiving remittances)
Western Union 72 51 38 38
Anelik 38 21 12 13
Bystraya Pochta 3 0 0 0
MoneyGram 13 3 2 2
UNIStream 23 11 5 5
Contact 14 5 3 3
Interexpress 8 0 0 0
MIGOM 11 4 2 2
Source: Data from the household survey and RRS.

and have used MIGOM, Contact, Eco-perevod, MoneyGram, and Bystraya Pochta.
These data are broadly consistent with the data of NBKR, although in the latter,
Contact is much more important and MIGOM as well as Eco-perevod are much less
important. This discrepancy may be due to the selection of respondents at the prem-
ises of only a few banks (more than half of the respondents were contacted at the
Ecobank premises in Bishkek and Osh). Similar questions were asked in the house-
hold survey, while fewer MTOs were listed directly in the questionnaire. The results
appear to be reasonably consistent with those of the RRS (table 6). Answering
questions about the advantages of MTOs, people stressed that money transfers are
quick, secure, and convenient and that money collection procedures are simple.
168 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE 13. Cash Remittances, by Oblast

Osh city
(8.2%)

Jalalabat oblast
(18.8%)
Osh oblast
(38.8%)

Batken oblast
(7.7%)
Talas oblast (1.2%)
Naryn oblast (1.2%)
Issykkul oblast (0.7%)
Chui oblast
(5.6%) Bishkek
(17.7%)

Source: Household survey data.

FIGURE 14. Distribution of Cash Remittance Transfers, by Transaction Value
and percent of Total Number of Transactions

>US$5,000
(0.3%) US$100
US$1,000–US$5,000
(12.2%)
(12.4%)

US$500–US$1,000
(15.0%)

US$100–US$500
(60.2%)

Source: Household survey data.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 169

TABLE 7. Use of Informal Money Transfer Channels (% of all respondents)
Aware of Ever Used Used most
Informal channel the channel used last time often
Conductor 25 4 1 1
Private person 34 11 7 4
Bus driver 19 6 3 2
Truck driver 5 1 1 1
Tourist agency 4 1 0 0
Stewardess 3 1 0 0
Source: RRS data.

Respondents in the household survey also consider informal channels to be
secure and reliable (especially when a migrant carries money home), cheap, and
readily available, but slow, which is the main disadvantage in the eyes of remitters.
In the RRS, by the very design of the survey, all respondents use formal channels.
Still, they were asked about their attitude toward informal ones. Relatively few
people reported using or even being aware of informal channels of money transfers
(see table 7): 96 percent of respondents said that they prefer formal ways of send-
ing money, and only 4 percent prefer informal channels. The dominant reasons for
preferring formal channels are their quickness, security, and convenience of use.
The most popular informal way of sending money is through private persons (rela-
tives or friends).
In the RRS, in a majority of households (83 percent), the sender decides on the
type of money transfer system to be used, and in the remaining 17 percent of house-
holds, the recipient determines the system to be used. The senders notify 96 percent
of the recipients about the money transfer, and only 3 percent receive this informa-
tion from an MTO. In the household survey, the responses were similar. Senders
select the MTO to be used in 95 percent of cases, and only in 5 percent are deci-
sions made by or with the participation of the recipient. In 99.7 percent of house-
holds in the household survey, the sender notiﬁes the recipient of the transfer.
According to the RRS data, 73 percent of respondents receive information about
the transfer within one day, 25 percent in two to three days, and 3 percent in a
week. Moreover, 12 percent of the respondents pay a commission to the money
transfer company when receiving money; 88 percent pay nothing. For those paying
a commission, the charge varies from 0.1 to 10 percent of the transaction amount,
with a median of 1.5 percent. Only 36 percent of respondents can get money imme-
diately after receiving notiﬁcation of a money transfer, and 64 percent wait for their
money. Waiting time varies from a few minutes to three days, and the median
reported time is one hour. In the household survey, respondents (mostly rural peo-
ple) reported that more time is needed to collect money, with a median of four
hours, which is still reasonably quick.
Both surveys provide similar data on the currency of transfers (see ﬁgure 15).
Three-quarters of all recipients obtain their money in U.S. dollars. In some cases,
people receive soms (much more often in the household survey) and rubles (in the
170 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

RRS). Considerably more people prefer receiving money in the national currency.
This may indicate that remittances are mainly used for consumption, which is usu-
ally done in the national currency; rather than for saving, which is often done in
U.S. dollars or the appreciating Russian ruble.
In contrast to the previous indicators, information on the frequency of sending
remittances differs signiﬁcantly between the two surveys (see ﬁgure 16). Respon-
dents in the household survey reported much lower frequencies of sending money.
More than 70 percent said that they receive money transfers one to three times a
year. In the RRS, only 25 percent of respondents receive transfers one to three times
a year. Just 6 percent of households receiving remittances get transfers more than
10 times a year; in the RRS, this share is as high as 37 percent. One possible expla-
nation for this discrepancy could be a difference between rural residents (prevailing
in the household survey) and urban residents (prevailing in the RRS). Rural dwell-
ers have less access to key remittance channels than urban dwellers, which suggests
that their frequency of transfers is lower too.
Data for length of receiving remittances by households from the two surveys are
not fully comparable because of differences in the formulation of questions. How-
ever, comparison is still possible (see ﬁgure 17), and it shows that respondents in
the RRS (predominantly urban residents) receive remittances for a longer period
than respondents in the household survey (predominantly rural residents), in which
more than half (58 percent) reportedly receive remittances for less than a year. If
one takes into account the fact that migration decisions and remittances associated
with them depend on the available information and that urban people have much
more access to information than rural people, these results seem reasonable. In both
surveys, the share of households receiving remittances for more than ﬁve years is
about or below 10 percent.
Household survey data show considerable correlation between migrants’ length
of stay abroad and the length of period they send remittances. The correlation coef-
ﬁcient is 0.56 for migrants who are members of receiving households and 0.48 for
migrants who are not members of receiving households. This indicates that family
ties between migrants and their relatives in the Kyrgyz Republic are rather strong
and are uninterrupted for a period of time.
Finally, in the RRS, 73 percent of all respondents collect the money sent to them,
14 percent collect money sent to other people (for example, urban people collect
money for their rural relatives), and 13 percent participate in bulk remittance trans-
actions (that is, they own only part of the money received). The share of bulk remit-
tances is considerable. Pooling remittances may be related to the remitters’ desire to
minimize both the costs (such as reducing the costs of traveling to MTO outlets,
which may be relatively far from the migrants’ workplace, or realizing economies
of scale by using regressive transfer fee schemes offered by some MTOs and banks)
and the risks associated with the remittance-sending procedure.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 171

Remittances and Business Activities of Recipient Households
Inﬂow of remittances signiﬁcantly increases the amount of disposable income of
receiving households that can be used not only for consumption but also for savings
and investments in business activities. The surveys under consideration provide some
information on savings and own businesses of households.
More than half of all households receiving remittances reported the availability
of some savings (59.9 percent in the household survey and 68 percent in the RRS).
In the household survey, only 37.3 percent of households that do not receive
remittances have savings, and the majority of households receiving remittances save
money in the form of cash in domestic (54.3 percent of all households in this
category) or foreign (22.1 percent) currency. The third popular form of saving is
the purchase of consumer goods for future consumption (16.9 percent). Only
6.3 percent of households receiving remittances invest their money in businesses.
Fewer people than expected, just 3.5 percent, reported investing in real estate, and
only 1 percent of respondents save money in the form of bank deposits. Among
households without remittances, 94 percent of those that save do so in cash (soms).
The preference for domestic currency as an instrument for savings is a new
phenomenon. Previously, people generally saved in U.S. dollars. This behavioral
change may be related to low inﬂation in the 2000s and a strong and steady
nominal appreciation of the som against the U.S. dollar.
Whether a household receives a remittance or not, 73 percent of all respondents
mainly use cash savings in emergencies; 20 percent use cash for special events,
15 percent use cash for the purchase of consumer goods, and 9 percent use cash for
educational purposes. In emergencies, when their savings are insufﬁcient, respon-
dents in both surveys reportedly resort to the ﬁnancial support of relatives and
friends living in the Kyrgyz Republic or in other countries. Meanwhile, the propor-
tions relying on relatives at home or abroad are somewhat different. In the house-
hold survey, 81 percent of respondents receiving remittances rely on relatives and
friends living in the Kyrgyz Republic, and 60 percent resort to the assistance of rel-
atives or friends living abroad (more than one answer on this question was possi-
ble). In the RRS, 47 percent of all respondents said that they request assistance
from family members living in other countries (only one answer was possible here),
and 40 percent ask for help from family members living in the Kyrgyz Republic. In
households without remittances, 92 percent rely on their relatives and friends in the
Kyrgyz Republic, and 17 percent resort to a community member or neighbor. Peo-
ple do not rely on the support of or borrow from ofﬁcial organizations, including
banks. In the RRS, only 3 percent of respondents consider going to a bank for a
loan in an emergency. This reliance on relatives abroad indicates that recipients of
remittances see migration as a way to diversify household risk. For example, a bad
harvest or natural disaster would affect households with migrants less than house-
holds without migrants; all members and relatives would be adversely affected in
equal portion.
Of all households (both receiving and not receiving remittances), 12 percent
reported having a business or entrepreneurial activity owned or carried out by
172 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE 15. Currency of Money Transfers

% of all respondents
100 1 2
0 3 6
3
16 13
80
51
60 76
52
75
40

20 43
23 29
5
0
Household survey RRS Household survey RRS

Usual currency Preferred currency

Som $ Ruble Euro

Source: Data from household survey and RRS.

household members. Only 18 percent of these businesses have hired labor (22 per-
cent in the case of households receiving remittances), and in all other cases people
are self-employed. The median number of hired workers is two, and the median
time of business operations is 29 months. Households running their own business
make some investments in them, and the median reported amount of investments
for both households receiving and not receiving remittances is som 20,000 (close to
US$500). Thus receiving remittances does not affect the households’ propensity to
have a business or their method of operating it.

FIGURE 16. Number of Money Transfers per Year Received by the Respondents

% of total number of recipients
100
90
80
70
60
50
40
30
20
10
0
household survey RRS

1 2–3 4–5 6–10 11–12 more than 12

Source: Data from household survey and RRS.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 173

Remittance Recipients and the Financial Sector
Financial activities of households considered in this section include borrowing,
lending, and cashless settlement. Both surveys provide information on these issues.
According to the household survey, households receiving remittances and those
not receiving them are similar in their use of and attitude toward ﬁnancial services
(see table 8). Less than 13 percent of households borrow money from any source,
1.7 percent lend money, and less than 1 percent have a bank account or any type of
banking card; 14.5 percent of households give money away, and 26.9 percent con-
tribute to community or religious organizations.
Among those who borrow money, 55 percent borrow from their relatives and
friends, 22 percent borrow from microﬁnance organizations and credit unions, and
17 percent borrow from banks. The relative popularity of nonbank ﬁnancial insti-
tutions (NBFIs) as suppliers of credit may be related to their proximity (compared
with banks) to rural respondents, who predominated in the survey. The amount of
debt outstanding is not large; the median is som 10,000 (approximately US$260).
People borrow to pay for business investments (22 percent), consumption of goods
(17 percent), health (9 percent), education (6 percent), and rituals (10 percent).
Key reasons for not having a bank account are lack of money to keep or main-
tain an account (72.4 percent of households do not have an account) and “no need
of a bank account” (44.8 percent). Low trust in the banking system is a much less
frequent answer (18 percent). Respondents do not consider technical issues such as
“no bank near my house” (12.2 percent) and “complicated procedure for opening
a bank account” (8 percent) as main impediments to having a bank account.
Regarding geographic proximity of banking infrastructure to the respondents, the
median distance to a bank is 5 kilometers, and the median time to get to a bank
branch is 25 minutes.
Regression analysis of factors inﬂuencing the probability of a household having
a bank account indicates that this probability is higher for households with higher
income (without remittances), with higher education of household head, living in

FIGURE 17. Number of Years Respondents Have Received Remittances

A. Household survey B. Remittance recipient survey

< 1 year
< 1 year 1-4 years (25%)
(58%) (34%)

>10 years (2%)
9–10 years (3%)
5–8 years (6%)
5–8 years (5%)
9–10 years (2%) 1–4 years
>10 years (1%) (64%)

Source: Data from household survey and RRS.
174 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

an urban area, and with savings (see table B.4). The amount of remittances received,
involvement in entrepreneurial activity, and gender of the household head do not
appear to be signiﬁcant determinants of access to bank services. These results are
consistent with other data showing that (a) urban people with higher income and
educational status constitute a narrow group of banking system clients and that (b)
receiving remittances does not produce a measurable increase in the probability of
a household having closer contact with the banking sector.
The RRS survey provides somewhat different results regarding access to ﬁnancial
services. Among these predominantly urban respondents, 23 percent have bank
accounts, 8 percent have a credit or a debit card, and 6 percent use automated teller
machines (ATMs)—that is, 10 to 20 times more than in the household survey.
Among respondents with a bank account, 55 percent have one with Ecobank,
13 percent with Kyrgyz Bank, and 10 percent with Settlement and Saving
Company;16 fewer people reported accounts in seven other banks. Of those receiv-
ing remittances through a bank, 85 percent take the whole amount in cash, while
15 percent take part of the money in cash and leave the rest in their bank account.
The most popular reason for not having a bank account are “I do not need a bank
account” (48 percent of those answering this question) and “I do not have enough
money to keep or maintain a bank account” (38 percent); 6 percent do not trust
banks. Compared with answers received in the household survey, lack of money is
the second, not the most, important reason; respondents in the RRS apparently have
more income than respondents in the other survey.
People did not express much enthusiasm when answering the question on poten-
tial incentives and banking services to make them keep part of their remittances in
a bank; 68 percent did not respond at all. Among those who responded to this
question, the most popular answers were to “provide higher interest rates on depos-
its” and “help open a bank account.” Obviously, the majority of the respondents
do not understand the purpose of banks or how to use them. In large part, this is a
consequence of lack of previous banking experience, which points to the need to
educate people on the use of ﬁnancial services and the potential advantages of dif-
ferent ﬁnancial products. This is an area where the government, ﬁnancial institu-
tions, and international organizations may undertake joint efforts.
In the RRS, 39 percent of respondents reported the availability of some kind of
ﬁnancial obligations. Of those with such obligations, the most frequent types of
obligations are related to business (17 percent), consumer credit (15 percent), and
support of family members living separately from the household (13 percent). Of
these obligations, 47 percent are with family members, 27 percent are with a bank,
and 13 percent are with a private lender. These obligations typically are associated
with running a business and paying for education.
In summary, the population, especially those individuals from rural areas and the
poor, has limited access to ﬁnancial services. On the one hand, the Kyrgyz popula-
tion has a generally low level of income and welfare: people simply do not have
enough money to save or enough assets to serve as collateral for borrowing. On the
other hand, ﬁnancial services suffer from various perceptual problems. Both ﬁnan-
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 175

cial institutions and their potential clients consider using ﬁnancial services as a lux-
ury accessible only to people with higher income and educational status or to
people with lower-than-usual risk and an aversion to transparency. This view has
its roots in the turbulent history of the Kyrgyz economy and its ﬁnancial sector in
the 1990s up to the early 2000s. Because of such attitudes, the number of clients of
banks and other institutions is small. Banks do not enjoy economies of scale and
must keep their prices prohibitively high for the majority of the population. This, in
turn, constrains access of the population to ﬁnancial services. However, conditions
in the ﬁnancial sector and living standards of the population are gradually improv-
ing. It is time for ﬁnancial institutions to invest in conﬁdence building and in
educating people on the use of ﬁnancial services. The government and international
development organizations should support such efforts.

Issues and Patterns of Remittance Transfer Businesses

Inbound and outbound money transfers in the Kyrgyz Republic are regulated by
laws governing transactions with foreign currency, banks and banking activities,
and licensing. Several regulations issued by NBKR are related to money transfer
operations. No speciﬁc legislation on international money transfers currently
exists.
The regulatory and legal framework establishes that only commercial banks and
exchange ofﬁces with a special license issued by the NBKR have a right to under-
take professional transactions in a foreign currency with individuals. Legally, no
regulation restricts organizations from providing money transfer services. Accord-
ing to NBKR specialists, a license to provide money transfer services is being devel-
oped. A new license will include requirements regarding organizational form,
liquidity, and type of operators eligible to provide international money transfer ser-
vices. Before introducing this license requirement, NBKR feels that it is necessary to

TABLE 8. Involvement of Households in Financial Activities (% of all households)
Households Households not
receiving receiving
Activity All households remittances remittances
Borrow from any source 12.6 11.5 12.8
Lend money 1.7 2.5 1.5
Give money 14.5 19.3 13.6
Donate money to community or religious
organizations 26.9 29.6 26.3
Have bank account 0.7 1.3 0.6
Have credit card 0.4 0.8 0.4
Have debit card 0.2 0.4 0.1
Use ATM 0.2 0.6 0.1
Source: Household survey data.
176 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

assess the possible impact of the legislation on the market, but it does not have
enough resources and capacity to do that.
The foreign exchange regime in the Kyrgyz Republic is very liberal. There are no
restrictions on transactions and savings in foreign currency for either residents or
nonresidents. International travelers (both leaving and entering the country) may
hold unrestricted amounts of foreign currency in cash, subject only to a customs
declaration.
There are no legal restrictions on the size of outbound transfers. The size of
inbound remittances is regulated by legislation in the country of origin17 or by
internal rules of MTOs. For example, Kyrgyz Post limits the size of a single
transfer within the Kyrgyz Republic to a maximum of som 10,000 (US$250 in
2006). Restrictions on cross-border postal and telegraphic transfers depend on
bilateral agreements between countries and are revised periodically.
In 2006 a new law preventing money laundering and ﬁnancing of terrorism was
enacted. According to this law, a banking transaction should be checked, and infor-
mation about it should be transferred to the Financial Intelligence Unit under the
Ministry of Finance if the transaction amount is equal to or above som 1 million or
its equivalent in foreign currency (slightly more than US$26,000 in mid-2007). The
following transactions are subject to mandatory control when they exceed this
threshold: all internal and external operations of depository institutions, foreign
exchange operations, real estate deals where the threshold is som 4.5 million or
US$118,000, remittances, all suspicious deals and transactions, and so forth. At the
time of writing, little is known about the practical implementation of this very
recent law.
The Kyrgyz Republic is a member of the Eurasian Economic Community
along with Belarus, Kazakhstan, Russia, Tajikistan, and Uzbekistan. The aim of
this international organization is to elaborate uniﬁed foreign economic policies,
tariffs, prices, and other operational components of the common market.
Members of the community inform each other about local laws regulating cross-
border money transfers.
The monitoring body for international money transfers is the Department of
Balance of Payment at NBKR. Each month, all commercial banks and the Kyrgyz
Post report their inbound and outbound money transfers. The information is
expressed in U.S. dollars (the currency of the balance sheet compiled by NBKR)
irrespective of the currency of transaction.

Money Transfer Operators in the Kyrgyz Republic
While there are no legal restrictions, in practice, only commercial banks handle
money transfers. The only nonbanking institution operating in this market is the
state enterprise, Kyrgyz Post. According to NBKR specialists, commercial banks
dominate the provision of international money transfer services because only they
have adequate liquidity and resources to work with asymmetrical ﬂows of money
transfers, as inbound remittance ﬂows are much larger than outbound ones.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 177

As noted, remittances enter the Kyrgyz Republic mainly through money transfer
companies. These companies operate via their agents, Kyrgyz commercial banks.
The banks offer two channels for remittances: banking accounts (including credit
card transactions) and MTOs. Practically all active banks operating in the Kyrgyz
Republic (19 of 21) are involved in the business of money transfers.
Sixteen MTOs are present in the Kyrgyz Republic, including two major global
organizations (Western Union and MoneyGram). Practically all MTOs are operat-
ing in the CIS: Allure (formerly STB Express), Anelik, Blizko, Bystraya Pochta (Fast
Post), Contact, Country Express, Faster, InterExpress, Leader (formerly VIP Money
Transfer/VMT), MIGOM, Travelex Money Transfer, UNIStream, Xpress Money,
and Zolotaya Korona (Golden Crown). In addition, there are three domestic money
transfer systems: Argymak, Eco-perevod, and Kyrgyz Transfer. Usually, MTOs part-
ner with several banks in the country18 and vice versa; banks serve more than one
MTO simultaneously.19 Technologically, Kyrgyz commercial banks usually use pay-
ment platforms of partner MTOs for transacting, sharing information, and moni-
toring. Systems are well tested, which allows reliable performance and does not
raise any concerns on the Kyrgyz bankers’ side.
The network of outlets opened by commercial banks to serve international
money transfers is geographically dense throughout the country. These outlets are
located inside all bank branches, but most are located outside them. Numerous
MTO outlets are located in the two largest cities, Bishkek and Osh, in practically
all smaller towns, and in many large and even medium-size villages. For example,
according to the data of MTO Web sites, UNIStream has outlets in 57 towns and
villages of the Kyrgyz Republic, Contact is present in 55 settlements, Anelik is pres-
ent in 63 locations, and Western Union has 140 outlets in Bishkek only. The MTO
network is well represented in the areas experiencing massive labor emigration,
which are in the south of the country.
An important and attractive feature of transfers through MTOs is that it is not
necessary to disclose any information about the sender and recipient of the transfer
(apart from personal identiﬁcation) or about the economic nature of the transac-
tion. The absence of transfer taxation also seems a crucial factor in the popularity
of this remittance channel.
All commercial banks provide international money transfer services via banking
accounts. However, this option is much less popular than the use of money transfer
systems that do not require opening a bank account (table 1). Urban people with
relatively high levels of education and income are the principal users of transfers
through bank accounts. There could be several reasons for the relatively low popu-
larity of bank accounts as a money transfer tool:
• It is not always legally possible for a Kyrgyz migrant to open an account in the
country of destination. This problem is especially typical in Kazakhstan.
• There are much fewer bank branches than MTO outlets in the country. Banks are
located mainly in cities (Bishkek has 48) and towns.
178 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

• Opening a bank account is costly and burdensome (at least for less educated peo-
ple). Many perceive these costs as being high and do not understand the benefits
of using a bank account for purposes such as deposits, loans, and credit cards.20
• Some types of transfer operations have relatively high transaction costs.
• According to bank representatives, the introduction of anti–money laundering
legislation has caused many clients to leave commercial banks. According to this
legislation, banks must report to the authorities all very large transactions, which
compose the bulk of remittances entering the country. This deters many clients
from using bank accounts as a transmission channel.
• Finally and closely related to that, Kyrgyz shuttle traders are competitive in large
part due to informality and the associated reduction in tax payments (substituted
by much smaller payments to officials in customs or the open market). From this
point of view, using MTO services—implying a quick contact with the banking
system—is more attractive than opening a bank account.
In recent years, NBKR with the support of donors—mainly the World Bank—
has paid a lot of attention to modernizing the country’s payment system. One activ-
ity directly related to international money transfers has been the creation of an
interbank collective point for SWIFT (Society for Worldwide Interbank Financial
Telecommunications) at NBKR in 2002. This substantially increased the number of
banks connected to SWIFT—currently, there are 20—and reduced the costs of its
use. To establish a uniﬁed national interbank cashless settlements system and to
introduce the national banking card, commercial banks, with the participation of
NBKR, established Elcard, an interbank processing center. This center started oper-
ating in December 2006. Currently, 13 banks are members of the system, and six
accept payments with this card.
Bank cards, which are one of the most convenient methods of transferring
money internationally via the banking system, are not popular in the Kyrgyz
Republic. Use of bank cards implies high ﬁxed and variable costs for customers.
The two domestic card systems are not integrated with international ones. The
ATM and postal terminal network is being developed, and at this point having or
maintaining a bank card is a luxury affordable by only a few people. By the end of
2006, there were only 19 ATMs, 324 postal terminals, and 13 imprinters for inter-
national cards in the country. Only 11,800 cards of VISA and MasterCard have
been issued by Kyrgyz banks. In 2006 cardholders made 242,000 transactions with
their international cards. In more than 90 percent of cases, these transactions were
cash withdrawals from ATMs; settlements with cards in nonﬁnancial enterprises
are still infrequent.
The situation with bank cards illustrates the slow introduction of new ﬁnancial
services and technologies in the country. In interviews bankers said that they are
interested in introducing new technological solutions like mobile banking,21 but
they need technical assistance in designing new ﬁnancial products affordable for
potential clients. The key problem, which so far has prevented banks from intro-
ducing many advanced technologies, is the high ﬁxed costs of equipment, soft-
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 179

ware, and system design, which cannot be covered by charging high user fees
because the demand for this kind of service is very elastic.
Although mobile telephony initially faced a similar problem in the country,
timely investments accompanied by an aggressive advertising campaign made this
sector one of the most proﬁtable and fastest growing in the Kyrgyz Republic. Cur-
rently, ﬁve mobile phone operators working in three standards provide services that
are accessible in all populated areas of the country. The number of mobile tele-
phony subscribers is almost doubling each year, according to the consulting agency,
Expert. This number exceeded 900,000 people at the end 2006 and approached
1.3 million, or 25 percent of the country’s total population, in April 2007.
According to the same source, in Bishkek—the national capital—mobile telephony
coverage exceeded 80 percent at the end of 2006. Therefore, the penetration of
mobile telephony is already deep enough to make the introduction of mobile bank-
ing a practical undertaking.
The Kyrgyz Post, which provides the third remittance channel, is a state-owned
enterprise with the widest network of ofﬁces in the country. It delivers money
(postal money orders, pensions, and government allowances) to doorsteps. Simi-
larly, its partners—other countries’ postal services—have very good coverage in the
destination countries of Kyrgyz migrants. This network could give Kyrgyz Post an
important comparative advantage in the remittance market, but it has not taken
advantage of it. The postal service has a marginal and diminishing share of
inbound transfers (table 1). The postal service’s remittance transmission services
are the most expensive in the market. This state-owned enterprise does not have
enough incentives or capacity to expand its role in the money transfer business.
The Kyrgyz government is discussing a plan to establish a postal bank based on
the postal service network.22 Perhaps this would provide an opportunity to revive
this remittance channel.
One more channel for transferring money internationally is the so-called infor-
mal transfers, which include bringing in cash to the country by migrants or their
agents (typically relatives or friends). Recently, this was the most popular way of
sending money back to the Kyrgyz Republic. In early 2005 an estimated two-
thirds of all transferred amounts entered the country through this channel; of
these, around 30 percent were made through agents or intermediaries (Economic
Policy Institute 2005). However, during the last two years, the situation has
changed dramatically. Interviews with migrants, diaspora representatives, and
bankers as well as data from the household survey and the RRS indicate that the
majority of migrants have switched to using formal channels (mainly MTOs). The
reduction in the role of informal intermediaries is especially striking. According to
survey data, less than 5 percent of all remittances enter through informal interme-
diaries, and less than 10 percent of recipients frequently use their services. MTOs’
affordable costs, reliability, and wide network of outlets have eliminated the main
advantages of informal transfers. People still bring considerable assets with them
when returning to the Kyrgyz Republic, but these are frequently in the form of
commodities to be sold in the domestic market, transforming remittances into
imported goods.
180 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

Competition in the Remittance Market
The growing demand for international money transfer services has attracted many
suppliers of these services to the market. The availability of numerous MTOs and
consumers—combined with the existence of a competitive and reasonably regulated
banking sector, very liberal regulatory regime for international money transfers,
and low barriers to entry (such as affordability of the costs of equipment and exper-
tise needed for commercial banks to start operations)—has made this market truly
competitive in the Kyrgyz Republic. Competition has at least three facets:
(a) between MTOs, (b) between banks, and (c) between transfer-sending channels.
Table 9 provides a list of the most popular MTOs. There is no obvious leading
organization in the market. In different periods and by different indicators, Anelik,
Contact, UNIStream, and Western Union have been in the lead position. In the
early development of the international money transfer business (2000–03), Western
Union was the undisputed leader in the market. It had the largest market share both
in the number of transactions and in the amount of money transferred. This is nat-
ural, as Western Union is a relatively old MTO that developed its business in other
regions of the world and was prepared to step into the Kyrgyz market quickly.
MoneyGram, another global provider of these services, has been less successful in
this market and plays only a secondary role. With the passage of time, however,
CIS-based MTOs have taken over the leading positions. First Anelik and then Con-

TABLE 9. Share in Total Number and Amount of Incoming Transfers in the Kyrgyz
Republic, by MTO, 2000–06 (by percentage)
2005 2006
Indicator 2000 2001 2002 2003 2004 2005 7 months 7 months
Share in total number of transactions conducted through MTOs
Anelik 0 5 29 27 14 21 19 15
Contact 0 5 8 23 41 42 41 44
Leader 0 0 0 0 4 2 2 6
MIGOM 0 0 0 3 4 3 3 4
MoneyGram 0 9 5 3 1 1 1 0
UNIStream 0 0 0 0 4 7 7 9
Western Union 100 81 58 44 29 20 22 18
Other MTOs 0 0 0 0 2 4 5 3

Share in total amount of money transfers sent through MTOs
Anelik 0 1 8 34 34 25 27 16
Contact 0 1 5 15 17 9 10 10
Leader 0 0 0 0 1 1 1 3
MIGOM 0 0 0 1 3 4 4 3
MoneyGram 0 3 7 4 2 1 1 1
UNIStream 0 0 0 0 13 30 25 40
Western Union 100 95 81 45 28 24 26 19
Other MTOs 0 0 0 0 1 6 5 7
Source: NBKR.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 181

FIGURE 18. Mean and Median Amount of Transaction for Leading Money Transfer
Operators, 2005

US$
100,000 85,438

23,931 24,253
18,924
11,912
10,000
4,410

909
1,000
500

100
Anelik Contact Unistream Western Union

median mean

Source: NBKR.

tact as well as UNIStream have gained the largest shares of the market. Currently,
leadership in the market is split between these systems. In the number of transac-
tions, Contact has the largest share, approaching 50 percent of the total number of
incoming transfer operations. Western Union and Anelik are also popular. From the
point of view of the share of money remitted, the situation is different. UNIStream
is now the largest channel for transfers; its market share was one-fourth of all
money in 2005 and 40 percent in seven months of 2006. Shares of Anelik and
Western Union have been gradually declining, but they still hold the second and
third places.
The fact that Contact, which handles the largest number of transactions, is only
fourth in share of total amount of money transferred means that it remits smaller
amounts per transaction than other MTOs. As ﬁgure 18 shows, the mean and
median amounts of transactions for Contact are much smaller than for other major
MTOs. UNIStream is another extreme case. It handles much fewer transactions,
but these transactions are large or very large (the mean transfer in 2005 exceeded
US$85,000).
Analysis of transfers via MTOs by country provides further insight into market
structure. The situation with transfers from Russia (ﬁgure B.4, panels A and B) is
similar to the aggregate picture: Contact handles a large number of relatively small
transactions, while UNIStream handles a small number of very large transactions;
Anelik is number two; and Western Union is number three for either indicator.
However, the picture of transfers from the United States is somewhat different (ﬁg-
ure B.4, panels C and D). Western Union is an absolute leader here, in both the
number and the amount of transactions. MoneyGram is the only competitor, with
a considerable share of the total amount of transfers. In 2005 to 2006 Anelik com-
pletely lost its market share in the United States, which was large in 2002 to 2004.
182 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

Another factor that could affect the MTOs’ ability to compete is the cost of
transactions. Table 10 shows the costs of sending some typical transfer amounts
from Russia (cities other than Moscow) to the Kyrgyz Republic (as of May 1,
2007). UNIStream charges less to send large amounts of money than its main
competitors.23 Price competition seems to be an important factor in this market.
Many companies offer regressive tariffs in an effort to attract larger transactions. A
comparison of market shares of the ﬁve most popular systems in Russia with the
systems’ transaction costs (measured as a percentage of median transfer) shows that
the correlation coefﬁcient between market shares and transaction costs is −0.56 and
is signiﬁcantly different from zero at the 5 percent signiﬁcance level. The negative
correlation may be a consequence of the ﬂexibility of the remitters, who tend to
switch to the cheapest system available.
It follows that different MTOs prevail in speciﬁc segments of the market. Con-
tact serves mainly individual labor migrants in Russia, which explains the predomi-
nance of relatively small transfers. UNIStream is oriented more toward bulk
remittances and merchant transfers from Russia. Western Union is a leader in the
U.S. market. However, the situation is very dynamic, and market shares of different
companies rise and fall quickly. Many factors affect market share: (a) proximity of
retail outlets to the migrants, which is a function of the number and geographic
coverage of their networks and the extent to which these networks match the loca-
tion of the majority of Kyrgyz migrants in Russia, the United States, and other
countries; (b) size of transaction costs; (c) density of MTO outlets in the Kyrgyz
Republic and their proximity to the recipients of remittances; and (d) convenience
and quality of services provided to clients. Acute competition has meant that all
leading MTOs have well-developed networks. However, this is more a result of the
work of Kyrgyz banks than of MTOs themselves. Quality of services is also similar
for all existing MTOs. Therefore, the ﬁrst two factors—density of networks outside
the Kyrgyz Republic and transaction costs—seem to explain the current position of
MTOs in the market. Moreover, these are exactly the factors primarily affecting
senders, usually the party deciding which remittance channel to use.

TABLE 10. Transaction Costs for Transferring Money from Russia to the Kyrgyz
Republic, by MTO Transfer Amount
MTO US$500 US$3,000 US$5,000 US$10,000
Allure 2.0 2.0 1.6 1.0
Anelik 3.0 0.9 0.8 0.7
Contact 3.0 3.0 3.0 3.0
Leader 1.5 1.5 1.5 1.5
MIGOM 2.4 2.0 2.0 2.0
MoneyGram 4.6 3.2 2.1 1.8
Travelex 3.6 2.9 1.9 —
UNIStream 1.5 1.5 1.5 1.5
Western Union 4.8 3.3 3.6 3.8
Source: Web sites of MTOs.
— Not available.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 183

Commercial banks form another group of competitors in the Kyrgyz remittance
market. By estimates, Ecobank is an absolute leader in the market,24 followed by
Kyrgyzstan Bank, Amanbank, and Settlements and Savings Company. These banks
are the most active market participants from the point of view of number of part-
ner MTOs, number and geographic diversity of retail outlets, as well as advertise-
ment efforts (for example, television, magazines, newspapers, booklets, and
newsstands), both within the Kyrgyz Republic and among migrants in the countries
of their destination, mainly Russia. Representatives of banks visit the workplaces
and residences of migrants in Russia, board trains frequented by migrants (the prac-
tice of Ecobank) to distribute booklets and leaﬂets promoting their services, and
collaborate with diasporas and embassies of the Kyrgyz Republic in Russia and
other countries (the approach of Amanbank). Ecobank also has agreements with
Russian banks, and police stations to distribute their information through these
channels. All banks extend their networks of retail outlets and tailor the working
hours (including weekends) of their branches and outlets in the Kyrgyz Republic to
be more accessible and convenient for clients. In selecting their partner banks and
MTOs in Russia, Kyrgyz banks try to collaborate with those that are well repre-
sented in areas where Kyrgyz migrants are located (Moscow, Siberia, St. Petersburg,
and Urals) and have the most client-friendly atmosphere. Anelik, with its long expe-
rience of working with Armenian labor migrants, is such a partner. The banks make
much less effort to serve Kyrgyz migrants in Kazakhstan or China. Banks do not
attempt to develop approaches speciﬁc to different types of migrants (for example,
shuttle traders versus construction workers). No bank has made a serious effort to
strengthen its position in the market by introducing new technological solutions or
providing complementary ﬁnancial services on conditions that are sufﬁciently
attractive for their clients. Bankers seem to believe that their own ﬁnancial services
are not affordable for the majority of senders and recipients of remittances.
Money remitters may choose not only between MTOs and commercial banks,
but also between sending channels. As noted, sending transfers via MTOs without
opening a bank account is the most common channel. Apart from structural prob-
lems, which could explain the underuse of bank accounts and marginalization of
postal and telegraphic transfers, there is the issue of transaction costs. Postal ser-
vices are the most expensive because their transfer fee can be as high as 10 percent
of the transferred amount. This, of course, excludes the postal service from any
serious participation in the market. The costs of transferring money through a bank
account are much lower. A typical transaction may cost 0.2–0.5 percent (but not
less than US$20–US$25) on the sender’s side plus 1.04 percent (1 percent fee plus
0.04 percent retail sales tax) for cashing the transferred amount in the bank on the
recipient’s side. This makes transaction costs for banking accounts higher than
those for some MTOs, even for large transfers. For small amounts, below US$500,
using a bank account makes no economic sense because the transaction costs would
exceed 5 percent.
Thus the money transfer market has experienced a dynamic period of develop-
ment in the last four to ﬁve years and has become a healthy, competitive segment of
184 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

business activity of the Kyrgyz ﬁnancial sector. Commercial banks have established
themselves as a reliable remittance channel. Many market participants seem to have
matured and have entered the next stage of development: that is, offering money
transfer services with other ﬁnancial sector products.

Remittances and Financial Intermediation

The ﬁnancial sector of the Kyrgyz Republic consists of a two-tier banking system
and NBFIs.25 The regulatory body for the Kyrgyz ﬁnancial sector is NBKR, whose
status, tasks, functions, organization, and principles are legally set by the constitu-
tion of the Kyrgyz Republic and the Law on the NBKR of July 29, 1997. The main
goal of NBKR is to achieve and support price stability by means of relevant mone-
tary policy. The main objective is to support the purchasing power of the national
currency and to ensure the security and reliability of the banking and payment
system (Article 3). To carry out its tasks, NBKR organizes and carries out its
activity independent of the state authorities. NBKR has the following functions:
• Developing and conducting monetary policy in the Kyrgyz Republic
• Regulating and supervising activities of banks and other financial as well as credit
institutions licensed by NBKR
• Working out and implementing a unified exchange rate policy
• Possessing an exclusive right to issue bank notes
• Promoting effective functioning of the payment system
• Establishing rules of banking transactions, accounting, and reporting for the
banking system.
In the 1990s the Kyrgyz ﬁnancial sector experienced several severe crises, which
substantially reduced its role in the economy and undermined the trust of economic
agents in banking and nonbanking institutions. These crises were the result of mac-
roeconomic instability and inappropriate ﬁnancial regulation. In the early 2000s
the government and NBKR undertook signiﬁcant corrective measures, reducing the
government’s budget deﬁcit, curbing inﬂation, and putting in place a much more
rigorous regulatory system for ﬁnancial institutions. Therefore, beginning in 2001
and starting from a very low base, the Kyrgyz ﬁnancial sector began to develop into
a considerably different and healthier sector than before.
In terms of banking regulation and supervision, the main laws regulating these
issues in the Kyrgyz Republic are the Law on the National Bank and the Law on
Banks and Banking. According to these laws, NBKR is solely responsible for bank-
ing supervision and has the right to issue regulations and instructions to oversee
bank activities. The government cannot interfere with its activities. NBKR has the
exclusive right to license banks. Should a bank fail to comply with its requirements,
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 185

NBKR has the right to impose penalties and corrective measures. In extreme cases,
it may suspend or revoke a license. NBKR conducts regular extensive off- and on-
site inspections, and these include regular stress testing of banks. Signiﬁcant efforts
were made to introduce International Accounting Standards, and since 2003, com-
mercial banks have been publishing ﬁnancial statements according to these stan-
dards. By assessment of the International Monetary Fund and the European Bank
for Reconstruction and Development, compliance with the Basel Core Principles
for Effective Banking Supervision Assessment is generally “medium” in the Kyrgyz
Republic. The main deﬁciencies are in the transfer of ownership and major acquisi-
tions, supervision of overseas operations of domestic banks and local operations of
foreign banks, risk management, and governance and auditing. NBKR is continu-
ing its efforts in the regulatory area. Minimum capital requirements for banks were
increased to som 60 million in early 2006; a further increase to som 100 million
(around US$2.6 million) is scheduled for 2008. NBKR has developed a supervisory
framework for market, country, and transfer risk and has instructed banks to main-
tain adequate capital to cover these risks effective January 2007. NBKR has also
introduced regulations for consolidated supervision to monitor risks faced by ﬁnan-
cial institutions in line with the recommendations of the Basel Core Principles. A
bill before Parliament seeks to amend the central bank charter to enhance its auton-
omy and ensure legal protection of its employees in performing ofﬁcial duties.
Apart from commercial banks, NBKR supervises nonbanking credit institutions.
All other ﬁnancial institutions are supervised by the State Agency on Financial Sur-
veillance and Reporting.
As of end 2006, the Kyrgyz Republic had 21 active commercial banks with 171
branches or 3.3 branches per 100,000 people (3.6 branches per 100,000 people in
Bishkek). The branch density has not changed much since 2000, when it was 3.2.
This indicator is low by international standards, well below the average of 4.9 for
low- and middle-income countries (according to World Development Indicators
data for 2004). Apart from the active banks, 11 commercial banks are in the pro-
cess of external administration, conservation, or liquidation.
Table 11 provides key cumulative indicators of the Kyrgyz banking system.
The period from 2001 to 2006 brought the rapid expansion of total assets, liabil-
ities, and own capital of commercial banks. In 2006 alone the capital of the
banks increased 48 percent, assets increased 29 percent, and liabilities increased
26 percent. Still, GDP shares of these indicators are lower than in the majority of
CIS countries.
An analysis of the structure of banking assets in 2005 to 2006 shows that, as
expected, the largest bank asset consists of net credits to nonﬁnancial corporations
and individuals (see ﬁgure 19). However, a large part of assets consists of highly
liquid assets, which yield little or no income, money on “nostro” accounts in for-
eign banks, excessive reserves on correspondent accounts in NBKR,26 and cash.
This means that the asset allocation of banks is generally very conservative. At the
end of 2006, the liquidity ratio for the banking system was 77.9 percent, that is, it
was much higher than NBKR’s normative of 30 percent. Similarly, the capital ade-
186 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

TABLE 11. Assets and Liabilities of Active Commercial Banks, 2001–06
Indicator 2001 2002 2003 2004 2005 2006
Total assets of active commercial banks
Million soms 4,958 7,836 11,274 17,471 21,709 28,057
% of GDP 6.7 10.4 13.4 18.5 21.5 24.8

Total liabilities of active commercial banks
Million soms 3,427 6,191 9,377 15,107 18,528 23,353
% of GDP 4.6 8.2 11.2 16.0 18.4 20.6

Total capital of active commercial banks
Million soms 1,530 1,645 1,897 2,364 3,182 4,704
% of GDP 2.1 2.2 2.3 2.5 3.2 4.2
Source: NBKR.

quacy ratio (capital-to-risk-weighted assets) was 28.3 percent compared with a nor-
mative of 12 percent. This excessive liquidity reﬂects a response to the maturity
mismatch of banking loans and deposits. As of the end of 2006, the average dura-
tion of loans was 20.1 months, while the average duration of deposits was just 2.6
months. The short duration of deposits is a result of the prevalence of call deposits;
the share of time deposits in the total amount of deposits (stability ratio) is as low
as 22.4 percent. Still, liquidity reserves of the banking system are very large and
sufﬁcient to cover any disintermediation risk.27 Under the country’s conservative
credit policy, banks have signiﬁcant liquidity reserves. Some recently received a sig-
niﬁcant inﬂow of capital from their domestic and foreign owners. This weakens the

FIGURE 19. Banking System Assets, 2005–06

Billion soms
30

25 6.0

20 4.4 2.0
2.9
1.2
15 2.1
6.5
10 7.0

5 11.0
7.3
0
2005 2006

other assets cash correspondent accounts in NBKR
correspondent accounts and net credits to clients
deposits in other banks

Source: NBKR.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 187

interest of banks in remittances as a source of capital. So far, their main incentive to
work with remittances has been to earn income from money transfer services.
In 2006 the share of credit in total assets grew signiﬁcantly, reﬂecting the rapid
expansion of banking credit to the economy (see also table B.5), which could be
seen as a positive sign of increasing intermediation of the ﬁnancial system. Another
positive sign is some improvement in the quality of the credit portfolio; the share of
classiﬁed credits declined from 10.7 percent in 2000 and 8.2 percent in 2005 to
6.1 percent in 2006. Further good news on the lending activity of Kyrgyz banks is
related to the increase in the share of longer-term loans (with maturity of more than
one year), from 30.4 percent in mid-2005 to 36.4 percent in mid-2006; 2006 also
marked an end to the long trend of increasing dollarization of deposits and credits.
In 2006 the share of domestic-currency deposits in total deposits increased for the
ﬁrst time since 2001, from 27 percent in 2005 to 34 percent in 2006; the share of
domestic-currency credits in total credits also increased, from 29 percent in 2005 to
31 percent in 2006.
The economic sector receiving the largest share of all credit is trade. For the last
three years, the share of trade was in the range of 43–47 percent of total credits. The
second large sector is industry; its share, however, fell from 21.7 percent at the end of
2003 to 12.7 percent in mid-2006. Consumer credit to households is the third largest
segment of the credit market, with 7–9 percent of all credits. Mortgage credit is the
fastest-growing sector; its share increased from 3.1 percent at the end of 2003 to
8.6 percent in mid-2006. Thus consumer and mortgage credit to households have
become an increasingly important part of ﬁnancial services. This provides an opportu-
nity to bring the recipients of remittances into closer contact with the ﬁnancial sector.
Disinﬂation, growing supply of credit, and improved efﬁciency in the banking
sector have led to a considerable reduction in the interest rates on credit, which
declined from 54.8 and 32.3 percent a year on credit in domestic and foreign cur-
rency, respectively, in 1999 to more realistic (but still high) values of 24.6 and
18.9 percent, respectively, in 2004 (table B.5). In 2005 to 2006 interest rates rose
slightly, reﬂecting growing demand for credit and, perhaps, a perception of higher
risk of political instability.
Deposits of legal persons or entities and individuals are the main components of
commercial bank liabilities (see ﬁgure 20). The share of deposits of individuals
increased from 14.5 percent in 2005 to 17.8 percent in 2006. The share of call
deposits in total deposits of legal persons or entities is very high and growing,
increasing from 83 percent in 2005 to 90 percent in 2006 (table B.5). Call deposits
of legal persons are the largest component (more than 40 percent) of Kyrgyz banks’
liabilities and explains a large part of the high liquidity of the banking system.
188 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE 20. Banking System Liabilities, 2005–06

Billion soms
25

3.2
20
2.4
2.6
2.7
15 1.5
2.3 4.1

10 2.7

5 10.8
9.4

0
2005 2006

other liabilities correspondent accounts credits received
deposits of physical persons deposits of other legal entities

Source: NBKR.

Interest rates on time deposits are low compared with the rates on credit (table
B.5) and are declining. In 2006 the real weighted interest rate on deposits in domestic
currency was slightly higher than zero. Nominal rates are somewhat higher (around
10 percent a year in domestic currency) for deposits with maturity longer than 12
months, but the share of such deposits in total deposits is relatively small.
Thus the Kyrgyz ﬁnancial sector has substantially expanded its intermediation in
recent years. The share of total deposits in GDP increased from 3.5 percent in 2001
to 14.9 percent in 2006. Aggregate credit of banking and NBFIs to nonﬁnancial
corporations and individuals grew from 3.4 percent of GDP in 2001 to 14.6 per-
cent in 2006 (table B.5). Yet ﬁnancial intermediation is small in the Kyrgyz Repub-
lic compared with other countries. For example, according to the World
Development Indicators, in 2005, domestic credit provided by the banking sector
(not including NBFIs) was 20.7 percent of GDP in Russia, 21.7 percent in Georgia,
24.7 percent in Kazakhstan, 32.3 percent in Moldova, 35.5 percent in the region of
Europe and Central Asia, and 48.3 percent in low-income countries. In number of
deposits per 1,000 people (table B.5), the Kyrgyz Republic is far behind countries
such as Armenia (111.4 in 2004) or Central and Eastern European countries (in the
range of 1,000–2,000).28
To boost conﬁdence in the banking system and foster ﬁnancial deepening, NBKR
plans to introduce a deposit insurance scheme for small depositors by late 2008.29
Enabling legislation on deposit insurance has already been submitted to Parliament,
and NBKR has drawn up the modalities for commercial bank participation. It has
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 189

estimated the level of protection, total cost, and cost sharing between banks and the
government. To help lenders to gather information on debtors, NBKR created the
Credit Information Bureau in 2000, which became an independent credit bureau in
2003. To establish effective contract enforcement mechanisms, the government and
NBKR plan to amend the civil, housing, and land codes as well as the laws govern-
ing collateral to harmonize provisions on collateralized lending by ﬁnancial institu-
tions and facilitate collateral seizure in cases of default.
Expansion of all activities of the Kyrgyz banking sector has led to some improve-
ment of its ﬁnancial results (see ﬁgure 21). In 2006 all relevant indicators such as
gross and net interest income, noninterest income, net operating income, net prof-
its, return on assets (ROA), and return on equity (ROE) improved compared with
2005. Net proﬁts increased from som 430 million (US$10.5 million) in 2005 to
som 791 million (US$19.7 million) in 2006, growing 84 percent. This improvement
in proﬁtability is partially a result of a reduction in the tax rate on proﬁts from 20
to 10 percent, which became effective in 2006. ROA and ROE increased from 2.3
and 17.6 percent, respectively, in 2005 to 3.3 and 22.4 percent in 2006. Noninter-
est income of commercial banks approached their gross interest income and
exceeded net interest income, indicating that other ﬁnancial services, including
MTOs, are as important for banks as intermediation activities (deposits and cred-
its).
The banking sector of the Kyrgyz Republic is relatively small. There is no obvi-
ous leader in the market. During 2002 to 2006, in different years, nine banks
ranked as the top three banks by at least one of four indicators: statutory capital,
assets, deposits, and credits. AsiaUniversalBank has always been the largest bank in
terms of deposits and assets and one of the leaders in terms of statutory capital. In
term of credit, the leading position belongs to Ineximbank, which was also in the
top three on all other indicators in 2004 to 2006. In 2002 to 2006 the share of the
largest bank in any of these four indicators was in the range of 13–29 percent, and
the share of the three largest banks was in the range of 37–54 percent. As shown
on table 12, concentration in the banking sector, which showed no clear trend in
2002 to 2005, declined signiﬁcantly in 2006.

TABLE 12. Herﬁndahl Index, 2002–06
Indicator 2002 2003 2004 2005 2006
Statutory capital 0.0854 0.0848 0.0823 0.0869 0.0768
Assets 0.0916 0.0901 0.1215 0.1147 0.0909
Deposits 0.1349 0.0913 0.1249 0.1348 0.1089
Credits 0.1202 0.1012 0.1034 0.0986 0.0895
Source: www.bankir.kg and authors’ calculations.

Among active commercial banks, two—Aiyl Bank and SSC—are owned by the
state, and there are plans to privatize them. The government is a minority share-
holder of KICB. All remaining banks are private. Fifteen banks have foreign share-
holders, and in 10 banks foreign participation exceeds 50 percent. Large banks
190 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

from Kazakhstan play a leading role in or have full control over ﬁve banks in the
Kyrgyz Republic. Ownership structure somewhat inﬂuences bank strategies in the
Kyrgyz market, and there are three classes of ownership: (a) predominantly domes-
tic ownership, (b) full or partial ownership by Kazakh banks, and (c) full or partial
foreign ownership.
The foreign-ownership group concentrates on transactions with the owners’
country of origin or joint ventures with the participation of companies from these
countries. With few exceptions, these banks are less active in other segments of the
Kyrgyz ﬁnancial market. Banks afﬁliated with Kazakh ones are well capitalized and
aggressive in the Kyrgyz domestic market, including its money transfer segment.30
Of course, they also serve transactions with Kazakhstan and Kazakh companies
operating in the Kyrgyz Republic. Domestically owned banks are more active in the
regions of the Kyrgyz Republic and in the retail segment of the market. This cate-
gory of bank is much less capitalized (only two are in the top 10). This may be one
reason why this group of banks is the most active in the market for international
money transfers and why this group is interested in offering advanced services to
the senders and recipients of remittances and in retaining their resources in banking
accounts. They are explicitly interested in collaborating with ADB on these issues.
Two other groups demonstrated much less interest in this business. Domestically
owned banks make some efforts to transform recipients of remittances into bank
customers. They open branches near typical workplaces of their customers (in open
markets), develop new deposit schemes for the recipients of remittances (with no
requirement for the minimum sum of deposit), and so forth. In spite of these efforts,
they have made little progress, and most recipients of remittances use money for
consumption only and do not use other banking services. No bank monitors the
extent of ﬁnancial intermediation to recipients of remittances. In addition, even the
banks that are most interested and active in the remittance market make no effort
to hire special staff to transform recipients of remittances into full-scale customers.
The banks very often do not know what kind of products could or should be devel-
oped, how to sell these products to remittance clients, and how to use remittances
for leveraging and capitalizing on incoming ﬂows.
As of the end of 2006, NBFIs included the Kyrgyz Agricultural Financial Corpo-
ration (KAFC),31 the Financial Company for Support and Development of Credit
Unions, which provides credits to credit unions, 12 insurance companies, 164 micro-
ﬁnance organizations, 308 credit unions, 145 pawnshops, 269 exchange ofﬁces, ﬁve
investment funds, three stock exchanges, one private pension fund, and 79 other
ﬁnancial institutions (for example, ﬁnancial brokers, investment consultants).
NBFIs are an important source of credit for the economy. In 2006 NBFIs pro-
vided credit to the nonﬁnancial sector in the amount of som 4.81 billion or
US$120 million (table B.5), 22.8 percent more than in 2005; this is more than
40 percent of banking credit to the economy. Of this amount, KAFC provided
som 2.07 trillion (US$51.5 million), more than any commercial bank. Other lend-
ing NBFIs are microﬁnance organizations (som 2.05 billion or US$51.2 million of
credits in 2006), credit unions (som 674 million or US$16.8 million), and pawn-
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 191

shops (som 20 million or US$0.5 million). In 2006, 54.2 percent of all NBFI cred-
its went to agriculture and 31.5 percent went to trade; the share of mortgage loans
was 3.2 percent. KAFC was created and is capitalized by concessional loans of
international ﬁnancial institutions to supply relatively cheap credit to farmers and
rural entrepreneurs. As a result, KAFC interest rates on credit are the lowest in
the country (table B.5), and KAFC credit has longer maturity, usually from two to
ﬁve years.
The securities market in the Kyrgyz Republic is rather weak. The most signiﬁ-
cant segment of this market is trade with Treasury bills. In 2006 the volume of
outstanding T-bills was som 1.26 billion (US$31.4 million or 1.1 percent GDP).
T-bills gradually have become longer-term ﬁnancial instruments, and short-term
(three- and six-month) bills have been almost completely replaced by 12-, 18-, and
24-month bills. This has led to a change in the previous trend of weighted yield
on T-bills. In 2000 to 2005, the yield fell from 14.2 to 7.1 percent a year (reﬂect-
ing little interest on the part of government to borrow in the domestic market).
However, in 2006 the yield rose to 9.5 percent, with an increase in the share of
T-bills with 18- and 24-month maturity in the total amount of outstanding bills.
The market for corporate shares and bonds is small. In 2006 there were only
2,200 transactions (roughly nine transactions a day) on the Kyrgyz Stock
Exchange. The total volume of trade was som 3.9 billion (US$97 million or
3.5 percent GDP), of which only som 840 million (US$21 million) were transac-
tions with securities listed on this exchange. Yet this market was much more active
in 2006 than in previous years.
In sum, the Kyrgyz ﬁnancial market is growing quickly from a very low base.
Largely, this growth is a consequence of macroeconomic stabilization, considerably
stronger regulation, inﬂow of foreign direct investment, and competition. Still, the
country’s ﬁnancial market is shallow, and ﬁnancial intermediation is insufﬁcient to
meet the country’s needs. Banks consider remittances to be a source of noninterest
income and make little effort to provide intermediary services to the senders or
recipients of remittances. However, with some revival of consumer ﬁnance, growing
competition in the banking sector, and adaptation of households receiving remit-
tances to contacts with the banking sector, chances for more successful ﬁnancial
intermediation are improving.

Issues and Recommendations

In the last four to ﬁve years, remittance ﬂows have had a signiﬁcant impact on the
economic and ﬁnancial development of the Kyrgyz Republic. Remittances contrib-
uted to the growth of household consumption and extended contacts of the popu-
lation with the ﬁnancial sector as never before. This had numerous spillover effects
on different segments of the national economy.
The inﬂow of remittances also raised several issues that need to be addressed by
the authorities and the business community of the Kyrgyz Republic:
192 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

• Clarifying the notion of remittances in the Kyrgyz context and refining the meth-
odology of their measurement and tracking
• Creating an enabling environment for converting remittances into investments in
the Kyrgyz economy
• Increasing and broadening the scope of financial services offered to and used by
senders and recipients of remittances.
Ofﬁcial data on worker remittances also include revenues from exports of goods
and other types of economic ﬂows. For this reason, actual remittances related to
Kyrgyz migrants’ labor abroad are somewhat smaller, but still signiﬁcant, for the
country. A new remittance-measuring methodology needs to be introduced, which
would allow excluding irrelevant ﬂows and accounting for remittances entering
through informal channels.
The impressive growth of the remittance transfer industry and the voluntary
switching of remitters from informal to formal remittance-sending channels, which
took place in just a few years, may be attributed to liberal rules governing foreign
currency, competitive environment, and improved general regulation in the banking
sector. The service providers, because of acute competition in the market, have low-
ered their initially high transaction costs for transmitting remittances. It is remark-
able that stakeholders (recipients of remittances, bankers, regulators) generally are
satisﬁed with the quality of transfer services, which means that the market perfectly
regulates itself. From this point of view, the plans to introduce new remittance-re-
lated legislation as well as the application of existing anti–money laundering legis-
lation, which seem to be impeding the development of normal banking practices,
may require reconsideration to avoid unnecessary distortions in the market.
Macroeconomic and microeconomic consequences of the inﬂow of remittances
appear to be generally positive. Apart from an increase in household consumption,
it has caused the development of a services sector, increased imports and govern-
ment budget revenues, and expanded domestic employment opportunities (mostly
in the informal economy). The remittances so far have exerted little inﬂuence on
investments because of the poverty of the majority of households receiving remit-
tances and the lack of experience of the majority of the population with ﬁnancial
services. However, frequent and trouble-free contacts with the banking system cre-
ate a basis for building the population’s conﬁdence in the banking system, which is
a key prerequisite for an increase in ﬁnancial intermediation.
Commercial banks have developed a dense network of MTO outlets. This has
contributed to the expansion of this money transfer channel and to the growth in
banks’ noninterest income. However, they have been less successful in providing the
senders and recipients of remittances with other ﬁnancial services. Now is the
moment for banks to begin an aggressive campaign to involve the senders and
recipients of remittances in the ﬁnancial sector in ways other than money transfer
services. To do this, banks will have to adopt a strategic, ﬂexible approach and be
prepared to educate their current and potential clients.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 193

The rest of this section offers recommendations to the Kyrgyz authorities,
donors, and the banking community. The following recommendations are geared
speciﬁcally to the government and the national bank:
• Introduce a new remittance-measuring methodology and coordinate it with other
remittance-receiving countries of the region
• Establish a system of regular periodic collection, analysis, and reporting of data
on remittance as well as migration flows in the country
• Negotiate with Russia, Kazakhstan, and other remittance-sending countries mea-
sures to improve migrants’ status and facilitate remittance flows using bilateral
and multilateral frameworks (for example, that of the Central Asian Regional
Economic Cooperation Programme)
• Provide financial literacy training to remitters and their families and introduce
such training into the school curriculum
• Review comprehensive financial legislation to amend and enhance the introduc-
tion of modern remittance technologies such as mobile banking

FIGURE 21. Income and Expenditures of Commercial Banks, 2005–06

Billion soms
5

3 2.0

2 1.1
1 2.2
1.5
0
– 0.4 – 0.6
–1
– 1.5
–2 – 2.5
– 0.3
–3
– 0.3
–4
2005 2006
other expenditures non-interest expenditures
non-interest income interest expenditures
interest income

Source: NBKR.
194 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

• Revise anti–money laundering legislation and its application to avoid discouraging
clients from using the banking sector
• Refrain from introducing specific remittance regulations and instead strengthen
general banking regulation
• Avoid introducing any form of remittance taxation.
The following recommendations are geared to donor organizations:
• Support the adoption of legislation in sending countries (such as Kazakhstan),
which would enable or ease the access of Kyrgyz migrants to banking services
• Provide technical assistance and, possibly, financial resources to Kyrgyz banks for
developing financial products (for example, mobile banking) that are attractive
and affordable for senders and recipients of remittances
• Provide training programs in financial education for senders and recipients of
remittances.
The following recommendations are geared to Kyrgyz commercial banks:
• Develop a long-term strategy to develop banking for recipients of remittances by
investing in infrastructure and new technological solutions (for example, mobile
banking), possibly forming consortia for these purposes
• Lower the fees for clients and make services more convenient for recipients of
remittances on the condition that they use complementary banking services (for
example, waive cashing fees if the client puts the remittance on time deposit or
takes a loan from the bank)
• Conduct more aggressive and more targeted advertising campaigns explaining the
long-term benefits of the extensive use of financial services, especially for invest-
ments, bulky expenditures (ritual expenses or education), and retirement.

References

ADB (Asian Development Bank). 2006. Central Asia: Increasing Gains from Trade through
Regional Cooperation in Trade Policy, Transport, and Customs Transit. Manila: ADB.
———. 2008. “A Study on International Migrants’ Remittances in Central Asia and South
Caucasus.” Country Report on Remittances of International Migrants and Poverty in the
Kyrgyz Republic. Manila: ADB.
Economic Policy Institute. 2005. Estimation of the Remittances from Labor Migrants.
Bishkek: Аки Press.
IMF (International Monetary Fund). 1993. Balance of Payments Manual. Washington, DC:
IMF.
Japarov, Akylbek. and L. Ten. 2006. Estimation of the Remittances from Labor Migrants.
Bishkek: Аки Press.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 195

Mansoor, Ali, and Bryce Quillin. 2006. Migration and Remittances: Eastern Europe and the
Former Soviet Union. Europe and Central Asia Region. Washington, DC: World Bank.
NBKR (National Bank of the Kyrgyz Republic). 2006. 2006 Balance of Payments. Bishkek:
NBKR.

Notes

1. See, for example, ADB (2006).
2. Calculated as 100 percent less 34 percent coming via formal channels.
3. In June 2007 the National Bank of the Kyrgyz Republic introduced important modiﬁcations
of its methodology of estimating remittance ﬂows. NBKR (2006) contains revised
(upward) estimates of remittance ﬂows for 2002–06. It states that the amount sent via
ofﬁcial channels is adjusted for informal cash transfers by multiplying on an unspeciﬁed
coefﬁcient, which is greater than 1. This information is insufﬁcient for this paper’s
analytical purposes; therefore, this paper is based on the NBKR’s initial data and
methodology.
4. Estimated migrant transfers have no link to labor migration or to any phenomena associ-
ated with it.
5. The quantitative estimates of remittances are published by NBKR in the Balance of
Payments.
6. The fast growth of formal transfers compared with net errors and omissions conforms to
the assumption that formal transfers will gradually replace informal ones as the Kyrgyz
ﬁnancial system becomes stronger.
7. In the survey of recipients of remittances conducted in Bishkek and Osh in October 2006,
13 percent of respondents indicated that they received bulk remittances.
8. Interviews with representatives of some Kyrgyz diaspora organizations in Russia show
that these organizations try to consolidate transfers of their fellow citizens (mainly
traders) into large and very large bulk transactions.
9. According to NBKR data, imports of consumer goods in 2006 amounted to US$497.5
million or som 20 billion (at current exchange rate), which is 18 percent of total private
consumption.
10. Of course, the rising price of apartments creates more incentives for residential construc-
tion. Despite signs of increased construction activities in Bishkek, so far this economic
sector is not a major contributor to the country’s GDP.
11. Correlation coefﬁcient of 0.51.
12. There is also a marginally signiﬁcant immediate (with zero lag) negative correlation
between these two variables. The correlation coefﬁcient sign is counterintuitive and may
be a purely statistical phenomenon.
13. This is especially relevant for 2006. According to preliminary data, the absolute growth of
imports was US$617 million, while the absolute growth of net worker remittances was
only US$150 million. In other words, more than three-quarters of the absolute increase
in imports were covered by sources other than remittances.
14. Of course, not all of these currencies enter the currency market because a large part of
domestic turnover and a major part of savings are in U.S. dollars or other foreign
currencies.
196 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

15. While these ﬁgures are not fully comparable, more than three-quarters of cash remittances
in the household survey come via MTOs or the banking system, so the distribution of
remittances via this channel is similar to the distribution of all cash transfers.
16. These results may also be a consequence of the method undertaken in selecting the respon-
dents in the survey.
17. There is a restriction on money transfers through MTOs for residents of Russia. A single
transaction through an authorized bank during a working day cannot exceed US$5,000.
There is no limitation on the amount of money transfers for nonresidents. A federal
unitary enterprise, Russian Post/Pochta Rossii, provides electronic money transfer services
to Kazakhstan and Belarus, while only postal transfers are available for other CIS coun-
tries. Starting in 2005, the maximum amount of a postal money transfer for an individual
is Rub 100,000 (close to US$4,000). The number of transfers is unlimited.
18. For example, in 2006, UNIStream had 11 bank partners, Western Union had 9, Anelik
had 8, and Contact had 7.
19. Ineximbank has 10 MTO partners, Ecobank has 9, and Kyrgyzstan has 8.
20. For example, account opening fee (up to US$25), notarial attestation of signatures, and
other documents for entrepreneurs (up to US$10).
21. Some Kyrgyz banks had planned to introduce mobile banking, but recent political insta-
bility and associated change in ownership of the largest mobile operator—which was
expected to be a partner in this business—did not allow these plans to become a reality.
22. Some of the post ofﬁces in this network already provide banking services, as Kyrgyz Post
rented them to commercial banks.
23. Anelik’s rates, shown in the table, were introduced recently. In 2005 to 2006, Anelik had
a ﬂat rate of 3 percent, which was much higher than UNIStream. The “Super-Anelik”
tariff with rates below 1 percent, which was introduced at the end of 2006, could be seen
as an attempt to cut prices.
24. Despite Ecobank’s share in this market (about 40 percent), this bank has no instrument
with which to exercise market power. Therefore, its big market share does not limit
competition in the market.
25. This paragraph is based on information on the NBKR Web site.
26. In 2002 to 2006, excessive reserves of commercial banks in NBKR were always in the
range of 50–60 percent of mandatory reserves.
27. Such as a massive premature withdrawal of deposits from banks.
28. The source of data is the World Development Indicators for 2006.
29. This paragraph is based on the IMF (1993).
30. In recent years, they received substantial capital injections from their mother banks, and
all ﬁve are in the top 10 Kyrgyz banks in terms of statutory capital.
31. In December 2006 KAFC received its banking license and has been converted into Aiyl
(Rural) Bank. This paper covers activities of the organization only in the capacity of
an NBFI.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 197

Appendix A. Migration Patterns

The tremendous social and economic change related to the breakup of the former
Soviet Union strongly affected the demographic situation in the Kyrgyz Republic.
Fertility and birth rates dropped, and the death rate declined following the transi-
tion to independence and a market economy, accompanied by sharp political and
economic shocks as well as a period of continuous instability, a sudden shift to a
new environment with signiﬁcantly greater risks and uncertainties, an end to
massive subsidies from the central Soviet budget, and the resulting decline in the
quantity and quality of social services. The natural population growth rate fell
from 24.1 percent in 1987 (the last “quiet” year of the Soviet period) to
15.9 percent in 2006. Still, the population is growing relatively quickly. In 2007,
it reached 5.2 million people or 0.7 million more than in 1991, when the country
gained independence.
The population is predominantly rural (65 percent) and young (children and
adolescents compose 34 percent of the population, while 57 percent are of working
age). The issue of employment, especially rural employment, is therefore acute.
While ofﬁcial unemployment ﬁgures are rather low—registered unemployment is
just 3 percent, and estimated unemployment according to the International Labour
Organisation’s (ILO) deﬁnition is 9 percent—these ﬁgures presume that all peasants
with a piece of land are employed. Because land and agrarian reform in the 1990s
gave land to virtually every peasant, there is no rural unemployment according to
ofﬁcial records. In reality, however, since the collapse of the previous mode of agri-
cultural production based on the extensive use of resources and permanent inﬂow
of subsidies to large agricultural enterprises, agricultural activities have not been
able to feed the growing rural population. A natural response to this situation is the
migration of young people from rural to urban areas and, increasingly, abroad in
search of employment opportunities. Labor migration has become a major social
and economic phenomenon in the Kyrgyz Republic.
Migration both from and to the Kyrgyz Republic has been traditionally large
since the end of the nineteenth century. However, in the pre-Soviet and especially in
the Soviet period, migration was mainly immigration from Russia and Ukraine and
was forced or organized (Cossack settlers in pre-Soviet times, evacuees during
World War II, specialists and skilled workers participating in postwar industrializa-
tion, and students); voluntary migration was marginal. The situation changed dra-
matically after independence. There was a large outﬂow of people in the early
1990s (see ﬁgure A.1). All these people emigrated voluntarily for ethnic identity and
economic reasons. All these migrations—apart from those of students—were asso-
ciated with a permanent change of residence.
198 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE A.1. Emigration from and Immigration to the Kyrgyz Republic, 1991–2004

160
143.6
140

120
103.7
100

80 71.3 71.2

60
37.5 37.3
40 31.6 32.7
26.3 27.6 27.9
23.0 20.1 18.4 21.2 22.6
20 15.9 19.5
12.8 15.7
17.8
10.2 7.9 5.3 5.0 4.9 4.5 4.3
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

emigration immigration

Source: NSC.

Recently, however, there has been a new trend: temporary migration driven by
exclusively economic reasons. The temporary migrants are mainly ethnic Kyrgyz,
but ethnic minorities are also well represented. This makes the phenomenon
different from the permanent migrations, where the migrants were mostly minorities
(mainly Russians, Ukrainians, and Germans). The main destinations of the
temporary migrants are Kazakhstan and the Russian Federation, but Kyrgyz
migrants can be found in many other countries as well. Currently, there are no
reliable estimates of the number of international labor migrants in the Kyrgyz
Republic. In 2003 the National Statistical Committee of the Kyrgyz Republic (NSC)
conducted a one-time survey of labor migration, but did not disseminate the survey
results. According to the International Organization for Migration, the majority of
labor migrants work in Russia (300,000) and in Kazakhstan (50,000). Journalists
even say that the total numbers are closer to 500,000–700,000, but these ﬁgures
seem too subjective and unfounded.
The reasons for migration are mostly economic. Living standards, wages,
employment, and market opportunities are signiﬁcantly higher in oil-rich
Kazakhstan and the Russian Federation than in the Kyrgyz Republic, Tajikistan, or
Uzbekistan. The migrants ﬁll niches in the labor markets of Kazakhstan and Russia
that citizens do not ﬁnd as attractive as other employment options. Apart from
economic reasons, the migrants choose to go to Kazakhstan and Russia because
they speak Russian—universally spoken by people in their 30s and 40s in the
Kyrgyz Republic, but less common among younger people—or the Kazakh
language, which is similar to the Kyrgyz language, and they feel a cultural kinship
with the other former Soviet republics.
Internal migration is also large. According to NSC estimates, the total number of
internal migrants in 1999 to 2005 exceeded 350,000. Most internal migrants
(72.8 percent) come from densely populated rural areas to Bishkek and Chui Valley.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 199

Similar to international labor migration, internal migrants are mainly young
people.
The Kyrgyz Republic not only supplies labor migrants to other countries but also
receives them from other countries, mainly from Tajikistan and Uzbekistan. These
immigrants work in agriculture and construction and successfully compete in the
domestic labor market of the Kyrgyz Republic with their attractive combination of
skill, readiness to work for modest pay (even by standards of the Kyrgyz Republic),
and good work ethic. Again, there are no reliable statistics on these immigrants, as
they work largely on an informal basis, but there are thousands of immigrant
workers during the agricultural season in the Kyrgyz Republic. Chinese traders also
are a visible component of foreign labor in the country.
200 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

Appendix B. Complementary Tables and Graphs

TABLE B.1. Balance-of-Payments Data on Remittance Flows, by Quarter, 2000–06 (million US$ )
2000 2001
Indicator I II III IV I II III
Net compensation of employees (2.5) (2.8) (2.6) (2.5) (2.3) (2.4) (2.9)
Credit 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debit 2.5 2.8 2.6 2.5 2.3 2.4 2.9

Net worker remittancesa 0.3 0.3 0.3 0.4 0.4 0.4 0.6
Credit 0.3 0.3 0.3 0.4 0.4 0.4 0.6
Debit 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net migrants’ capital transfers (4.6) (7.6) (8.4) (6.9) (4.7) (8.8) (13.1)
Credit 1.1 1.8 2.0 1.6 0.9 1.7 2.5
Debit 5.7 9.4 10.4 8.5 5.6 10.5 15.6

Net total remittancesb (6.8) (10.1) (10.7) (9.0) (6.6) (10.8) (15.4)
Credit (gross inﬂow) 0.3 0.3 0.3 0.4 0.4 0.4 0.6
Debit 7.1 10.4 11.0 9.4 7.0 11.2 16.0

2004 2005
Indicator I II III IV I II III
Net compensation of employees (2.9) (2.8) (3.1) (4.9) (4.1) (4.0) (4.8)
Credit 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debit 2.9 2.8 3.1 4.9 4.1 4.0 4.8

Net worker’s remittancesa 22.8 30.2 51.6 59.1 38.9 64.7 87.0
Credit 25.0 32.7 57.0 64.4 44.3 74.5 95.3
Debit 2.2 2.5 5.4 5.3 5.4 9.8 8.3

Net migrants’ capital transfers (7.3) (10.8) (12.6) (13.1) (8.7) (16.7) (20.4)
Credit 1.8 3.6 2.1 2.0 2.0 1.9 2.2
Debit 9.1 14.4 14.7 15.1 10.7 18.6 22.6

Net total remittancesb 12.6 16.6 35.9 41.1 26.1 44.0 61.8
Credit (gross inﬂow) 26.8 36.3 59.1 66.4 46.3 76.4 97.5
Debit 14.2 19.7 23.2 25.3 20.2 32.4 35.7
Source: NBKR and authors’ estimates.
a Data on 2000–01 are estimates, as only net values of worker remittances have been published.
b No data on worker remittances, the main component of total remittances, were published before 2000.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 201

2002 2003
IV I II III IV I II III IV
(2.7) (3.0) (2.7) (2.9) (3.7) (3.1) (3.2) (3.0) (3.3)
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
2.7 3.0 2.7 2.9 3.7 3.1 3.2 3.0 3.3

0.5 4.4 6.4 8.4 9.1 9.0 13.3 20.4 22.3
0.5 4.7 7.2 8.9 9.6 9.8 15.5 21.5 23.4
0.0 0.3 0.8 0.5 0.5 0.8 2.2 1.1 1.1

(8.0) (5.5) (10.0) (12.6) (8.5) (4.6) (7.3) (9.3) (7.8)
1.5 1.3 1.4 1.9 1.8 1.6 1.7 2.1 2.4
9.5 6.8 11.4 14.5 10.3 6.2 9.0 11.4 10.2

(10.2) (4.1) (6.3) (7.1) (3.1) 1.3 2.8 8.1 11.2
0.5 6.0 8.6 10.8 11.4 11.4 17.2 23.6 25.8
10.7 10.1 14.9 17.9 14.5 10.1 14.4 15.5 14.6

2006
IV I II III
(4.5) (5.1) (4.7) (4.7)
0.0 0.0 0.0 0.0
4.5 5.1 4.7 4.7

89.7 68.5 103.8 128.3
99.1 75.6 115.0 140.6
9.4 7.1 11.2 12.3

(17.8) (11.1) (16.2) (21.7)
2.6 1.9 2.2 2.1
20.4 13.0 18.4 23.8

67.4 52.3 82.9 101.9
101.7 77.5 117.2 142.7
34.3 25.2 34.3 40.8
202 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

TABLE B.2. Sample Composition in the Remittance Recipient Survey
Bishkek Osh All samples
Composition Number % Number % Number %
Number of respondents 153 100 150 100 303 100

Urban residents 135 88 108 72 243 80
Rural residents 18 12 42 28 60 20

Women 90 59 84 56 174 57
Age < 21 13 8 3 2 16 5
Age 21–59 70 46 76 51 146 48
Age 60+ 7 5 5 3 12 4

Men 63 41 65 44 128 43
Age < 21 4 3 4 3 8 3
Age 21–59 57 37 57 38 114 38
Age 60+ 2 1 4 3 6 2
Source: RRS data.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 203

TABLE B.3. Proﬁle of Migrants (% of all migrants, unless otherwise noted)
Other
Kyrgyz urban Rural
Characteristic Republic Bishkek areas areas
Migrants
Number (thousands) 251.5 26.2 52.4 173.0
% of total population 5.0 3.6 6.2 4.9
% of working-age population 8.1 5.4 10.0 8.3
Female migrants as a % of all migrants 27.5 40.5 26.8 25.7

Age of migrants (years)
Minimum 15 18 15 15
Median 28 32 31 27.5
Maximum 67 63 66 67

Education of migrants
Less than completed secondary education 6.4 2.5 10.0 6.0
Completed secondary education 77.1 55.7 72.6 82.0
Above secondary education 16.5 41.8 17.4 11.9

Destination country
Russian Federation 82.5 67.1 81.1 85.2
Kazakhstan 12.0 16.5 10.0 11.9
Other countries 5.5 16.6 8.9 2.9

Duration of stay abroad (years)
Minimum 0.1 0.1 0.1 0.1
Median 1.2 2.0 1.5 1.0
Maximum 24.0 24.0 10.4 11.0

Occupation abroad
Self-employed 19.5 25.3 18.4 19.0
Entrepreneurial activity (with hired employees) 0.0 0.0 0.0 0.0
Employed in the public sector 5.8 12.7 7.9 4.2
Employed in the private sector 71.6 51.9 70.0 75.0
Unpaid family work (help on the farm, housework) 0.7 0.0 1.1 0.7
Unemployed and looking for work 0.4 3.8 0.0 0.0
Unemployed and not looking for work 0.0 0.0 0.0 0.0
Student 1.4 2.5 2.1 1.0
Retiree with pension 0.2 1.3 0.0 0.2
Others 0.4 2.5 0.5 0.0
204 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

Other
Kyrgyz urban Rural
Characteristic Republic Bishkek areas areas
Sector of employment or entrepreneurial
activity abroad
Agriculture (including hunting, forestry, and ﬁshing) 1.4 2.5 3.2 0.7
Mining and quarrying industry 0.0 0.0 0.0 0.0
Processing industry 6.6 10.1 8.4 5.5
Power, gas, and water supply 0.7 3.8 0.0 0.5
Construction 45.0 17.7 44.2 49.3
Wholesale and retail trade 30.4 27.9 26.8 31.9
Transport and communications 3.8 8.9 4.7 2.7
Financial sector 0.6 2.5 0.5 0.3
Public administration and defense 0.4 2.5 0.5 0.0
Education, health care, and social protection 0.6 3.8 0.5 0.2
Other 7.8 12.7 7.9 7.0
Seasonal workers 44.1 26.6 43.7 46.8
Source: Household survey data.

TABLE B.4. Logit Model Describing Probability for Household to Have
a Banking Account
Standard
Variable Coefﬁcient error z statistic p value
Urban 0.826 0.444 1.859 0.063
TOT–MON–REM 2.69·10(6) 2.01·10(6) 1.336 0.182
Gender (0.360) 0.479 (0.752) 0.452
Education 1.005 0.461 2.179 0.029
Business 0.672 0.438 1.535 0.125
Income–WR 1.36·10(5) 3.73·10(6) 3.655 0.000
Savings 0.719 0.403 1.783 0.075
Constant (6.796) 0.512 (13.272) 0.000

LR statistic (7 df) 43.32
Probability (LR statistic) 2.89·10(7)
McFadden R 2
0.12612
Source: Household survey data and authors’ estimates.
Note: The dependent variable is Y. The method is ML–binary logit. Included observations are 3,997. Convergence
was achieved after 12 iterations, and the covariance matrix was computed using second derivatives. Variables are
deﬁned as follows. Y is a binary variable equal to 1 for households with at least one member having a banking
account and 0 otherwise. Urban is a binary variable equal to 1 for households living in an urban area and 0 for rural
households. TOT–MON–REM is total cash remittances received by household (soms). Gender is a binary variable
equal to 1 for households in which the household head has higher education and 0 otherwise. Business is a binary
variable equal to 1 for households that are involved in entrepreneurial activity and 0 otherwise. Income–WR is
income without remittances (soms). Savings is a binary variable equal to 1 for households that reported availability
of savings and 0 otherwise.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 205

TABLE B.5. Deposits and Credits, 1996–2006
Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Deposits of individual(s) and other legal entities in national currency (end of period)
Million soms 483.9 894.5 947.9 1,212.8 1,175.6 1,068.5 1,385.9 1,823.5 2,460.9 3,539.7 5,771.2
% of GDP 2.1 2.9 2.8 2.5 1.8 1.4 1.8 2.2 2.6 3.5 5.1

Deposits of individual(s) and other legal entities in foreign currency (end of period)
Million soms 390.7 643.3 1,173.8 1,418.1 1,617.6 1,526.9 2,256.4 3,195.2 5,745.0 9,512.4 11,035.7
% of GDP 1.7 2.1 3.4 2.9 2.5 2.1 3.0 3.8 6.1 9.5 9.8

Total deposits
Million soms 874.7 1,537.8 2,121.7 2,630.8 2,793.22,595.351 3,642.3 5,018.7 8,206.0 13,052.1 16,806.9
% of GDP 3.7 5.0 6.2 5.4 4.3 3.5 4.8 6.0 8.7 13.0 14.9

Banking credit to nonﬁnancial corporations and individuals in national currency (end of period)
Million soms 250.1 453.0 479.5 439.0 457.2 654.2 847.3 1,127.4 1,723.9 2,207.1 3,469.0
% of GDP 1.1 1.5 1.4 0.9 0.7 0.9 1.1 1.3 1.8 2.2 3.1

Banking credit to nonﬁnancial corporations and individuals in foreign currency (end of period)
Million soms 157.1 470.1 1,235.9 982.7 998.3 863.3 1,164.1 1,767.1 4,081.5 5,505.0 7,881.3
% of GDP 0.7 1.5 3.6 2.0 1.5 1.2 1.5 2.1 4.3 5.5 7.0

Total banking credit to nonﬁnancial corporations and individuals (end of period)
Million soms 407.2 923.1 1,715.3 1,421.7 1,455.6 1,517.4 2,011.4 2,894.6 5,805.3 7,712.2 11,350.3
% of GDP 1.7 3.0 5.0 2.9 2.2 2.1 2.7 3.5 6.2 7.7 10.0

NBFI credits to nonﬁnancial corporations and individuals (end of period)
Million soms — — — — — 874.0 1,256.8 2,010.1 2,772.0 3,922.2 4,817.7
% of GDP — — — — — 1.3 1.8 2.6 3.2 4.2 4.6

Weighted average interest rate on new time deposits (percent)
National currency 35.0 36.9 37.8 38.4 26.6 16.6 11.5 8.7 8.3 9.4 6.6
Foreign currency — — — — 7.5 5.8 5.5 3.6 4.3 3.1 5.3

Weighted average interest rate on new banking credits ( percent)
National currency 58.3 49.9 42.5 54.8 50.1 36.4 30.2 25.1 24.6 25.4 25.6
Foreign currency 31.2 34.7 26.5 32.3 31.4 25.0 22.6 19.2 18.9 16.8 17.3

Kyrgyz Agricul-
tural Financial
Corporation
weighted
average
interest rate in
national
currency (%) — — — — — 27.4 21.3 17.3 17.0 15.8 14.2

Bank deposits
per
1,000 people — — — — 21.5 19.1 24.6 31.3 34.6 44.8 —
Sources: NBKR and NSC.
— Not available.
206 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE B.1. Mean and Median Size of Transfer, by Country and Mode of Transfer, 2000–06

A. Russian Federation, money transfer companies
25,000 22,984
21,468
19,966
20,000

15,000 12,822 12,822
11,842 11,927 12,240
11,710
10,000 9,245
5,922
4,665
5,000 3,842 2,900
2,712 1,584 1800 1,796
747 2,063 750 500 500
146
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

B. United States, money transfer companies
25,000

20,000 17,666 18,088

14,593
15,000
11,326 11,584
10,000
7,130
5,693 5996
5,152 4,752
5,000 2,527
2,555 1,216
1,184 1,800 1,689 1,386 1,921
1,055
316 450 309 500 500
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

C. Russian Federation, banking accounts
700
596 584 564
600 562 557 567
537 532
500
400
287 297 297
300 253 267 252
212
200 173

100
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

D. United States, banking accounts
1,200
1,059
995 1,005 995 973
982
1,000 869
912 895
800 795
800 754 742 725
640
600 545

400
200
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

Sources: NBKR and authors’ calculations.
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 207

FIGURE B.2. Cross-Correlograms of Remittances and Key Macroeconomic Variables

Sources: NBKR, NSC, and authors’ calculations.
208 | ROMAN MOGILEVSKY AND AZIZ ATAMANOV

FIGURE B.3. Remittances and Investments in Fixed Capital, 2001–05

%
79.5%
80
70
60 55.6%
50
40
30 26.8%
20 16.8% 16.3% 13.6% 14.6% 16.0%
11.6%
10
0.7%
0
7.4% 10.3%
–10 –1.9% –7.4% –6.4%
2001 2002 2003 2004 2005
investments in ﬁxed capital remittances as % growth rate of investments
as % of GDP of investments

Sources: NBKR and NSC.

FIGURE B.4. Structure of Transfers from the Russian Federation and the
United States, by Money Transfer Operator

A. Russian Federation, number of transactions as % of total
%
100
90
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

B. Russian Federation, amount of remittances as % of total
%
100
90
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months
Aneliuk Contact Unistream Western Union other MTOs
REMITTANCES AND THEIR IMPACT ON THE MACROECONOMIC SITUATION | 209

A. United States, number of transactions as % of total
%
100
90
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months
B. United States, amount of remittances as % of total
%
100
90
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2005 2006
7 months 7 months

Aneliuk Contact UNIstream Western Union other MTOs Money Gram

Source: NBKR.
Part V:
Africa—Rethinking Growth
and Regional Integration
Spatial Development Patterns
and Policy Responses:
A South African Case Study
HASSEN MOHAMED

Regional disparities are characteristic of all economies. South Africa is no excep-
tion. Like all countries, the subnational regional patterns of development have
evolved historically and culturally over a long period of time. Two main processes
have shaped South Africa’s space economy.
At one level the space economy is a product of historical patterns of growth and
preexisting geographic differences such as natural, locational, and community
endowments. However, and signiﬁcantly, South Africa’s spatial conﬁguration is also
the product of apartheid spatial planning, which appropriated land, wealth, and
opportunities for the beneﬁt of a minority. Black people were turned into “unfree”
cheap labor on white-owned farms, a trend that continued until and beyond the
discovery of diamonds and gold in 1867 and 1886, respectively, in the former
Transvaal—the hinterland—which became the launching pad for South Africa’s
industrialization. The apartheid policy consolidated the dispossession and subjuga-
tion of black people, Balkanizing the country into ethnically based homelands
where black people were forced to live away from economic activity of any signiﬁ-
cance. The economically important and dynamic parts were designated as white
South Africa. Black people were only useful in white South Africa as cheap labor, in
particular in the gold and diamond mines. At a micro level apartheid spatial policy
was reinforced particularly in the planning of human settlements, where black
townships were located farthest from areas of economic activity, and signiﬁcant
investment was directed only to areas where white people lived. South Africa’s
uneven spatial development must be understood as the result of a brutal and
oppressive system of land dispossession of black people by white settlers spurred on
by a deliberate policy of apartheid and historical dynamics and patterns of growth.
The conﬂuence of these processes left the post-apartheid democratic state with a
terrible legacy of huge spatial disparities in income and welfare.

Hassen Mohamed is Chief Director of the Planning, Policy Coordination and Advisory Unit for The Presidency in
South Africa.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

213
214 | HASSEN MOHAMED

South Africa’s Space Economy

On a macro scale the polarized nature of the South African space economy ﬁnds
expression in two clearly distinguishable sets of spatial arrangements and patterns
of economic activity: concentrated areas of high economic activity, with high popu-
lation densities and high levels of poverty, and areas where economic activities are
at a low ebb, also with high population densities and high levels of poverty.
The core of South Africa’s space economy is made up of 26 areas.1 These,
together with their immediate hinterlands (within a 60-kilometer-proximity radius),
make up 31 percent of the land surface, but account for 84 percent of the popula-
tion, 77 percent of the poor,2 and almost 96 percent of national income (see table
1). Hence the policy objectives of promoting sustainable economic growth and
attacking poverty operate largely in the same space.

TABLE 1. Economic Indicators in South Africa, by Economic Area
People National
under gross value Land
National minimum added surface
Area population living level (rand) (hectares)
26 economic core areas
Number 29.3 million 12.5 million 940 billion 12.7 million
Percent 62.62 53.21 77.04 27.15

Areas of economic signiﬁcance extend-
ed into an accessibility radius of 60
kilometersa
Number 39.6 million 18.2 million 1.167 billion 38 million
Percent 84.46 77.31 95.59 31.24
Source: Presidency, Republic of South Africa (2006).
a In which R1 billion of gross value added is generated annually.

One of the abiding legacies of the apartheid system of separate homelands (the
despised Bantustan system) is the high concentration of people living in extreme
poverty in barren backwaters. Some 1.9 million people (or 4 percent of the national
population) and about 1.5 million (or 6.5 percent of the total number living below
the minimum living level) are concentrated in dense settlements in areas with an
extremely frail and underdeveloped economic base.3 Average per capita annual
income is at about R2,374 (US$330) or approximately 9 percent of the national
average. There is 1 employed person for every 10 people on average. Economic
activity is largely survivalist, and state transfers and grants are the main source of
income. Outmigration toward towns and cities particularly of the young and eco-
nomically active exacerbate their vulnerability and marginality. Of the 47 district
municipalities, 34 (or 72 percent) mainly rural districts experienced net outmigra-
tion to the major metropolitan centers and secondary towns and cities (Presidency,
Republic of South Africa 2006). Quite clearly these areas have substantial thresh-
SPATIAL DEVELOPMENT PATTERNS AND POLICY RESPONSES | 215

olds to overcome and, as a result, continue to lag behind the established core eco-
nomic regions.
Research into the spatial structure of economic growth in South Africa reveals
that existing patterns of growth reﬂect a structure that has been in existence since
the early twentieth century (McCarthy 2000), and convergence is not much in evi-
dence. This seems to support the argument that convergence between developed
and undeveloped regions takes a long time, and regions and countries with unequal
spatial economies, such as South Africa, converge at a very slow pace (if at all).

Policy Response: The National Spatial Development Perspective

The stark social and economic dualism and unevenness of the national space
economy prompted the South African government to confront a fundamental ques-
tion: what kind of spatial arrangements will enable the country to bring about
democratic nation building, address poverty and inequality, and promote sustain-
able growth?
Given the uneven pattern of social and economic development, how should pol-
icy interventions impinge on spatial disparities? Speciﬁcally, the following questions
arise:
• Are infrastructure investments in areas with low economic potential effective in
reducing poverty?
• What types of investments are effective in areas with poor natural resources and
economic potential?
• What kinds of areas afford the poor greater protection against the deleterious
effects of economic shocks and ability to diversify income sources?
• Is the aggregate impact on poverty reduction greater by focusing on areas with
high poverty rates or high poverty densities?
• Is it possible in all circumstances to locate jobs where people reside, or does it
make more sense to link people to areas with job opportunities?
How these questions are answered may lead to different policy responses and
approaches. Some (in the name of so-called balanced development) misguidedly call
for the redirection of public investment from the economically dominant regions to
the lagging regions. South Africa, however, has taken a distinctive approach to deal-
ing with the massive spatial disparities based on its unique history and context.
Given South Africa’s uneven pattern of spatial development, in 2003 the govern-
ment adopted the National Spatial Development Perspective (NSDP) as a principle-
based overarching framework to contribute to government’s broader growth and
development objectives.4 The NSDP arose as an initiative to improve the coordina-
tion of government infrastructure spending and ensure that the investments in infra-
structure and development programs achieve better spatial outcomes. Given the
216 | HASSEN MOHAMED

objectives to stimulate the economy, create jobs, address poverty, and promote
social cohesion, the NSDP enables government to confront three fundamental plan-
ning questions:
• Where should government direct its investment and development initiatives to
ensure sustainable, maximum social and economic impact?
• What kinds of spatial forms and arrangements are conducive to achieving the
objectives of democratic nation building and social and economic inclusion?
• What is the best way to capitalize on complementarities and facilitate consistent
decision making within government and achieve coordinated and integrated
action?
In order to respond to these questions, contribute to the broader growth and
development policy objectives of the South African government, and respond to the
disparate spatial contexts, the NSDP puts forward a set of ﬁve normative principles
to guide government infrastructure investment and social spending (Presidency,
Republic of South Africa 2006):
• Principle 1. Rapid economic growth that is sustained and inclusive is a prerequisite
for the achievement of other policy objectives, among which poverty alleviation is
key.
• Principle 2. Government has a constitutional obligation to provide basic services
to all citizens (water, sanitation, energy, health, and educational facilities)
wherever they reside.
• Principle 3. Beyond the constitutional obligation identified in principle 2,
government spending on fixed investment should be focused on localities of
economic growth and economic potential in order to gear up private sector
investment, stimulate sustainable economic activities, and create long-term
employment opportunities.
• Principle 4. Efforts to address past and current social inequalities should focus
on people, not places. In localities where there are both high levels of poverty
and demonstrated economic potential, this could include fixed capital investment
beyond basic services to exploit the potential of those localities. In localities with
low demonstrated economic potential, government should, beyond the provision
of basic services, concentrate primarily on developing human capital by providing
social transfers such as grants, education and training, and poverty relief programs
and on reducing migration costs by providing labor market intelligence so as to
give people better information, opportunities, and capabilities to enable them to
gravitate, if they choose, to localities that are more likely to provide sustainable
employment and economic opportunities. Moreover, sound rural development
planning, aggressive land and agrarian reform, and expansion of agricultural
extension services should serve as the bedrock of sustainable rural development.
• Principle 5. In order to overcome the spatial distortions of apartheid, future
opportunities for settlement and economic development should be channeled
SPATIAL DEVELOPMENT PATTERNS AND POLICY RESPONSES | 217

into activity corridors and nodes that are adjacent to or link the main growth
centers. Infrastructure investment should primarily support localities that will
become major growth nodes in South Africa and the South African Development
Community (SADC) region to create regional gateways to the global economy.
From the preceding discussion on South Africa’s spatial economy, it is strikingly
evident that the focus on people and on localities with demonstrated economic
potential is far from narrow. Unlike in many other developing countries, in South
Africa the analysis reveals that economic potential and large concentrations of pov-
erty often coincide. Thus the policy objectives of promoting broad-based economic
growth and addressing poverty operate largely in the same geographic spaces.
This is not to ignore the existence of spatial poverty traps in parts of the country
where households are marginalized from economic activities (circled areas in ﬁgure
2). In areas where economic development is at a very low ebb and prospects for
sustaining livelihoods well into the future appear slim, the NSDP advocates
improvements in the “aspatial aspects” (particularly human capital) and a focus on
redistributive intervention mechanisms to increase productivity of households’ own
income (see principle 4).
In generating the principles, the NSDP has been informed by international theory
and domestic and international case studies showing the following:
• Unfocused infrastructure spending does not necessarily result in improved gross
domestic product (GDP) growth.
• Unfocused human resources development does not improve GDP growth.
• Regions that already have some economic success are more likely to grow than
other regions because successful regions have individuals, firms, and industries
with the wherewithal to learn from concrete experience.
• Successful learning occurs when institutions and incentives work and institutions
are locally specific.
• Success is often achieved through focused, polarized investment.
• Redirecting public investment from economically dominant regions to lagging
regions has not automatically spurred economic activity in lagging regions.
In terms of poverty eradication, the NSDP advocates the view that poverty is
not necessarily best addressed where it manifests itself. Ellis and Harris (2004)
argue, “The poor beneﬁt when they have more options to which to turn, and
more options are created in the vortex of dynamic growth processes, not in the
declining sectors that are left behind.” From a spatial point of view, local as well
as international studies (Kanbur and Venables 2003) have shown that the impact
on poverty depends crucially on the proximity of poor households to centers of
economic activity and the extent to which these households are connected to such
economic activities.
218 | HASSEN MOHAMED

The NSDP argues that the following conditions are critical in order to turn the
tide against poverty (Presidency, Republic of South Africa 2006):
• Location is critical for the poor to exploit growth opportunities.
• The poor who are concentrated around economic centers have greater opportunity
to gain from economic growth.
• Areas with demonstrated economic potential provide greater livelihood and
income protection because of a greater diversity of income sources.
• Areas with demonstrated economic potential are most favorable for overcoming
poverty.
• The poor make rational choices about relocating to areas with greater economic
opportunities.
• Government has to ensure that policies and programs are in place to ensure that
the poor are able to benefit fully from growth and development opportunities in
such areas, including easing the transaction costs of migration for poor families.

The NSDP and Regional Development

In line with current thinking about regions as the critical foundations of develop-
ment processes, the NSDP argues that, while macroeconomic considerations are
important, development ultimately is strongly shaped by processes on the ground in
the speciﬁc 26 core economic regions.
Successful regions are the building blocks of economic development and innova-
tion, and the health of the national economy depends on the growth potential of
these regions and their ability to compete nationally and internationally.
Regions are not uniformly good at everything and have unique trajectories,
strengths, and weaknesses. The logic underpinning the NSDP principles for regional
development can be summarized as follows:
• Dynamic qualities of areas are developed historically and culturally over a long
period of time.
• Subnational regions are not uniformly good at everything, and it is not possible
for social and economic development and potential to be distributed evenly across
geographic space.
• Different regions have different economic potential, and the spatial variations in
the incidence of poverty are vastly different.
• The policy response itself should be differentiated and should correspond to the
specificity of the different subnational contexts.
SPATIAL DEVELOPMENT PATTERNS AND POLICY RESPONSES | 219

Conclusions

In the South African context, a national spatial perspective is invoked as the crucial
instrument to support the development of regions through the coordination of poli-
cies and programs according to set principles and guidelines.
To give effect to the principles of the NSDP, government has adopted a subna-
tional approach (a decentralized regional development approach) to tackling pov-
erty and promoting growth. Recognizing the importance of regions in economic
development and the insufﬁciency of national efforts alone, government has desig-
nated district and metropolitan municipalities together with provincial govern-
ments as the pivotal sites for facilitating coordinated planning and action drawing
together state and other actors in a process of joint decision making and collabora-
tive action.

References

Ellis, Frank, and Nigel Harris. 2004. “New Thinking about Urban and Rural Development.”
Keynote paper delivered at the Department for International Development Sustainable
Development Retreat, University of Surrey, July.
Kanbur, Ravi, and Anthony J. Venables, eds. 2003. Spatial Inequality and Development.
Oxford: Oxford University Press.
McCarthy, Jeff. 2000. “The Changing Spatial Structure of Economic Growth in South Africa
Over 50 Years.” A research paper prepared for The Presidency, South Africa, January.
http://www.idp.org.za/NSDP/documents/mccarthy%20ﬁnal.pdf.
Presidency, Republic of South Africa. 2006. National Spatial Development Perspective.
Pretoria: Presidency of the Republic of South Africa.

Notes

1. A map of South Africa’s space economy is available at the following link:
http://www.thepresidency.gov.za/main.asp?include=docs/pcsa/planning/nsdp/main.html.
2. As measured by the minimum living level measure, which is deﬁned as the minimum
monthly income needed to sustain a household and varies according to household size.
The larger the household, the larger the income required to keep its members out of
poverty. Minimum living level includes food, clothing, payments to municipalities in
respect of rent, utilities, washing and cleaning, education, transport, contribution to
medical and dental expenses, replacement of household equipment, and support of rela-
tives.
3. A poverty map of South Africa is available at the following link: http://www.thepresidency.
gov.za/main.asp?include=docs/pcsa/planning/nsdp/main.html.
4. The full version of the NSDP is available on www.thepresidency.gov.za/publications.
Geography and Regional
Cooperation in Africa
WIM NAUDÉ

Africa’s relatively poor economic performance remains a cause for concern. In a
comprehensive recent review of this performance, Ndulu and others (2007a) describe
four “policy syndromes” as central to Africa’s problems: state controls, adverse
redistribution, intertemporally unsustainable spending, and state breakdown.
This paper departs from this view by positing that, in addition to these policy
syndromes, “geographic syndromes” are also central to Africa’s poor economic per-
formance. Two elements of this are a “proximity gap” (the cumulative result of long
distances to markets, being landlocked, and suboptimal patterns of agglomeration)
and a “health gap” (the result of tropical diseases and adverse climatic and soil con-
ditions). This paper focuses on Africa’s “proximity gap,” conveying the message that
much can be done to reduce it, particularly through regional cooperation.

Proximity and African Development

Productivity in Africa is low because of insufﬁcient proximity between economic
agents. This has two dimensions: a lack of proximity (a) between African countries
and international markets and (b) between economic agents within Africa due to
insufﬁcient agglomeration (Naudé and Krugell 2006; Venables 2006). Low produc-
tivity limits industrialization and urbanization.
Africa’s lack of proximity is due to adverse geography (Naudé 2004). First-
nature geography limits development through geographic isolation, a disease bur-

Wim Naudé is a Senior Research Fellow at UNUWIDER in Finland.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

An earlier version of this paper was presented at the International Policy Workshop on Spatial Disparities and Develop-
ment Policy in Preparation of the World Development Report 2009, Berlin, Germany, October 2, 2007. The author is
grateful to the participants for their constructive comments. An extended version of this paper is available as a
World Institute for Development Economics Research of the United Nations University discussion paper at
http://www.wider.unu.edu/publications/working-papers/discussion-papers/2007/en–GB/dp2007-03/.

221
222 | WIM NAUDÉ

den due to its largely tropical location, scarcity of large, navigable rivers, lack of
alluvial plains, high rates of evaporation, a “curse” of abundant natural mineral
resources (Sachs and Warner 2001; Sachs and others 2004), and the North-South
orientation of the continent, which has made technological transfers, especially in
agriculture, difﬁcult (Diamond 1997).
Second-nature geography, reﬂected in the large number of landlocked countries
in Africa, increases proximity in three ways. First, the distance to international
markets is great and entails the need to cross a large number of borders (Ndulu and
others 2007b). Second, small internal markets cannot easily gain from specializa-
tion. Third, landlocked countries often have neighboring countries that are eco-
nomically poorly performing, in conﬂict, or both (Collier 2006a). This creates a
proximity gap by reducing interactions among economic agents across countries.
Consequently, the positive spatial spillover effects of growth are low in Africa
(Collier and O’Connell 2007).
This geography makes investment more expensive in Africa than elsewhere
(Ndulu and others 2007b). It increases transport costs through distance
(Martínez-Zarzoso, García-Menéndez, and Suárez-Burguet 2003), being landlocked
(Hausmann 2001), and the inability to reap economies of scale (Naudé and
Matthee 2007).

Regional Cooperation and the Proximity Gap

Overcoming the proximity gap may require a “big push” in infrastructure (United
Nations Millennium Project 2005). Due to the cross-border nature of such infra-
structure, regional cooperation is important. Reducing the proximity gap requires
at least four longer-term issues to be prioritized in regional cooperation: transport
infrastructure, trade facilitation, decentralization or local economic development,
and migration.

Transport Infrastructure
Transport infrastructure is subject to network effects, threshold effects, and compat-
ibility requirements that necessitate regional coordination. Despite these, coopera-
tion might not be simple because the incentives to cooperate are asymmetrical. This
is because, ﬁrst, for transport infrastructure connecting the interior with the coast,
the beneﬁts are often smaller for the coastal country than for the landlocked
country. Two, customs ofﬁcials may have a negative attitude toward transit trade
because it does not imply revenue (Zanamwe 2005). Three, transit trade creates
risks for transit countries because transit goods may be diverted into them. Guar-
antees required for such trade are thus high and often cannot be met due to the
poor development of banking and insurance (Zanamwe 2005).
GEOGRAPHY AND REGIONAL COOPERATION IN AFRICA | 223

Given that the incentives for coordination are not symmetrical, there is the dan-
ger that commitments in regional trade agreements will not be credible—that is,
they will be exacerbated by a lack of third-party enforcement. Thus a call may be
made for transport infrastructure to be included in World Trade Organization
(WTO) binding rules on trade facilitation.
Additional measures to improve the incentives for cooperation could include
the design of transport corridors to maximize the mutual advantages of coun-
tries—for instance, by fast-tracking transit trade—and for landlocked countries to
apply peer pressure collectively on their neighbors (Collier 2006b).

Trade Facilitation
In trade facilitation, African countries should have three explicit aims: to ensure
(a) appropriate physical infrastructure and facilities for the movement of goods,
(b) the harmonization and effectiveness of customs procedures, and (c) the
upgrading of information and communication technology (Zanamwe 2005).
Countries should also use the opportunities afforded within the WTO negotia-
tions concerning global rules on trade facilitation. The current negotiations are lim-
ited to issues of transparency and the administration of trade regulations. African
priorities thus may not be reﬂected in these negotiations (Zanamwe 2005). How-
ever, African countries should commit to broad and binding rules on trade facilita-
tion and link these to foreign aid (in technical assistance, capacity building, and
infrastructure investment).

Decentralization and Local Economic Development
It is not only international transport infrastructure and costs that matter, but also
domestic infrastructure and costs (Elbadawi, Mengistae, and Zeufack 2006). The
development of these will beneﬁt from ﬁscal decentralization and an emphasis on
local economic development, which should include the promotion of investment
and the marketing of localities. When local politicians are required to improve the
attractiveness of their localities to investors, they become aware of shortcomings in
transport and related infrastructure.
A precondition for the role of local authorities in local economic development is
to deepen local democracy and strengthen local government capacity (Jansen van
Rensburg and Naudé 2007). Decentralization and local economic development
should be on the regional cooperation agenda: local communities can better use
beneﬁts of cross-country infrastructure if they are involved in the planning and
implementation thereof.
224 | WIM NAUDÉ

Migration
Because Africa’s population is concentrated in landlocked countries (40 percent)
and these face geographic constraints, migration will continue. Without migra-
tion, the costs of adverse geography are borne disproportionately by labor
(Venables 2006). Migration is not exclusive to Africa: on a global scale, popu-
lations are moving from poor inland regions toward the coast (Venables 2006).
Climate change and growing productivity in African urban areas may further
encourage this migration (Stern 2006).
Facilitating migration and explicitly recognizing the greater overall efﬁciency of the
resulting distribution of the African labor force should be high on the regional agenda.

The Role of the International Community

Regional cooperation could be supported by the international community in at least
four ways. The ﬁrst is by according higher levels of foreign aid, including nonﬁnan-
cial aid such as technical assistance, and by linking aid with commitments to
binding rules on trade facilitation. Nonﬁnancial aid and security guarantees will be
more credible if transport infrastructure is improved (Collier 2006a). Funding for
infrastructure should also be accompanied by measures to reduce the potential for
corruption in infrastructure construction (Collier 2006a).
The second is by ensuring adherence to international laws on the rights of land-
locked countries to have access to the sea (Zanamwe 2005). The third is by extend-
ing trade preferences to African countries. According to Collier and Venables
(2007), African countries need to overcome a threshold effect if they are to become
a location for international production. An additional case made here is that the
investments required in transport infrastructure in Africa need to be supported by
higher volumes of trade, which trade preferences can help to establish. Trade pref-
erences may even be in the interest of developed countries, which are likely to be
involved in the ﬁnancing of bulk infrastructure. However, care must be taken to
design these preferences so as not to undermine the ability of African countries to
diversify their exports (Gamberoni 2007).
The fourth is by ensuring consistency of the currently negotiated Economic Part-
nership Agreements and regional integration efforts (such as the South African
Development Community Free Trade Area, which commenced in 2008). By the
time of writing, accusations were leveled that Economic Partnership Agreements
were undermining regional integration in Africa.
The question of Africa’s relationship with Asia, and in particular China, is cru-
cial for its development. Too often the position is that the European Union (EU) is
Africa’s main market and that Africa merely competes against Asia there. Asia
should not be considered a mere competitor with Africa. It is an important market
in itself for African goods (Zafar 2007).
GEOGRAPHY AND REGIONAL COOPERATION IN AFRICA | 225

Concluding Remarks

Greater spatial inequalities may result as Africa achieves economies of scale and
specialization in manufacturing and reaps the beneﬁts of growing cities. Similar
processes are playing out in China. As long as these spatial inequalities are accom-
panied by the migration of the population to denser, richer areas, they could be
seen as an important route for closing the global spatial disparities between Africa
and the rest of the world.

References

Collier, Paul. 2006a. “African Growth: Why a ‘Big Push’?” Journal of African Economies
(AERC supplement 2): 188–211.
———. 2006b. “Assisting Africa to Achieve Decisive Change.” Centre for the Study of
African Economies, Oxford University, Oxford.
Collier, Paul, and Stephen O’Connell. 2007. “African Economic Growth: Opportunities and
Choices.” In The Political Economy of African Economic Growth 1960–2000, ed. Benno
Ndulu, Robert Bates, Paul Collier, and Stephen O’Connell. Cambridge, U.K.: Cambridge
University Press.
Collier, Paul, and Anthony J. Venables. 2007. “Rethinking Trade Preferences: How Africa
Can Diversify Its Exports.” World Economy 30 (8): 1326–45.
Diamond, Jared. 1997. Guns, Germs, and Steel: The Fates of Human Societies. New York:
W.W. Norton.
Elbadawi, Ibrahim, Taye Mengistae, and Albert Zeufack. 2006. “Market Access, Supplier
Access, and Africa’s Manufactured Exports: A Firm-Level Analysis.” Journal of Interna-
tional Trade and Economic Development 15 (4): 493–523.
Gamberoni, Elisa. 2007. “Do Unilateral Trade Preferences Help Export Diversiﬁcation?”
HEI Working Paper 17/2007, Graduate Institute of International Studies, Geneva.
Hausmann, Ricardo. 2001. “Prisoners of Geography.” Foreign Policy 122 (January): 44–53.
Jansen van Rensburg, Linda, and Wim A. Naudé. 2007. “Human Rights and Development:
The Case of Local Government Transformation in South Africa.” Public Administration
and Development 27 (5): 393–412.
Martínez-Zarzoso, Inmaculada, Leandro García-Menéndez, and Celestino Suárez-Burguet.
2003. “Impact of Transport Costs on International Trade: The Case of Spanish Ceramic
Exports.” Maritime Economics and Logistics 5 (2): 179–98.
Naudé, Wim A. 2004. “The Effects of Policy, Institutions, and Geography on Economic
Growth in Africa: An Econometric Study Based on Cross-Section and Panel Data.”
Journal of International Development 16 (6): 821–49.
Naudé, Wim A., and Willem F. Krugell. 2006. “Economic Geography and Growth in Africa:
The Case of Sub-National Convergence and Divergence in South-Africa.” Papers in
Regional Science 85 (3, August): 443–57.
Naudé, Wim A., and Marianne Matthee. 2007. “The Signiﬁcance of Transport Costs in
Africa.” UNU Policy Brief 6/2007, United Nations University, Tokyo.
Ndulu, Benno, Robert Bates, Paul Collier, and Stephen O’Connell. 2007a. The Political
Economy of African Economic Growth 1960–2000. Cambridge, U.K.: Cambridge
University Press.
226 | WIM NAUDÉ

Ndulu, Benno J., Lopamudra Chakraborti, Lebohang Lijane, Vijaya Ramachandran, and
Jerome Wolgin. 2007b. Challenges of African Growth: Opportunities, Constraints, and
Strategic Directions. Washington, DC: World Bank.
Sachs, Jeffrey D., John M. McArthur, Guido Schmidt-Traub, Margaret Kruk, Chandrika
Bahadur, Michael Faye, and Gordon McCord. 2004. “Ending Africa’s Poverty Trap.”
Brookings Papers on Economic Activity 1: 117–216.
Sachs, Jeffrey D., and Andrew M. Warner. 2001. “The Curse of Natural Resources.”
European Economic Review 45 (4-6): 827–38.
Stern, Nicholas. 2006. The Economics of Climate Change [The Stern Report]. Cambridge,
U.K.: Cambridge University Press.
United Nations Millennium Project. 2005. Investing in Development: A Practical Plan to
Achieve the Millennium Development Goals; Overview. London: Earthscan Publications.
http://www.unmillenniumproject.org/reports/index–overview.htm.
Venables, Anthony J. 2006. “Shifts in Economic Geography and Their Causes.” Paper
presented at the Federal Reserve Bank of Kansas City’s Symposium on the New Economic
Geography, Jackson Hole, WY, August 24.
Zafar, Ali. 2007. “The Growing Relationship between China and Sub-Saharan Africa:
Macroeconomic, Trade, Investment, and Aid Links.” World Bank Research Observer
22 (1): 103–30.
Zanamwe, Gainmore. 2005. “Trade Facilitation and the WTO: A Critical Analysis of
Proposals on Trade Facilitation and Their Implications for African Countries.” TRALAC
Working Paper 5/2005, Trade Law Center for South Africa, Stellenbosch.
Part VI: Learning from
Europe’s Efforts at Integration
and Convergence
The Role and Objectives
of European Cohesion Policy
NICOLA DE MICHELIS

When looking at the rationale of a policy, it is crucial to start from the basics. In
the case of European cohesion policy, these are deﬁned in the treaty establishing the
European Community. In Article 158, the treaty says that the European Commu-
nity should aim to reduce disparities between the levels of development of the
various regions and the backwardness of the least favored regions. In Article 159,
the treaty says that, for European cohesion policy to function, other policies need
to move in the same direction, notably, national policies and other European
Community policies. This dimension is often forgotten in the debate on objectives,
operation, and effectiveness.
These two articles summarize the main features of European cohesion policy and
its rationale. First, the policy contributes to the integration of the European Union
(EU). At the moment of the launch of the single-market project, it was recognized
that opening capital, ﬁnancial, and labor markets would have asymmetric impacts
on different parts of the EU and that there would be winners and losers. Rather
than counting on labor mobility as the only adjustment mechanism, it was decided
to set up an accompanying investment-based instrument—that is, cohesion poli-
cy—to promote the full use of the capacity of regions to contribute to and beneﬁt
from creation of the single market.
From this stems the structural role of European cohesion policy. Contrary to
widespread belief, European cohesion policy is not about compensating disadvan-
tage, and it is not about revenue and income support; rather it is about ensuring
that regions are able to unlock their underused potential. In this sense, the policy
fulﬁlls a very important allocative function by conditioning its support on targeting
the ﬁnancial resources made available on investments that support key growth-
enhancing areas, administrative and institutional modernization, and networking
and exchange of experience between local and regional actors. The policy pursues

Nicola de Michelis is Head of Unit, Development of Cohesion Policy for the European Commission in Brussels.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

229
230 | NICOLA DE MICHELIS

this objective throughout the European Union, by modulating its ﬁnancial support
on the basis of the “ability to pay” of the actors concerned.
The second objective of European cohesion policy is to promote solidarity
between the citizens of the EU and between the regions; resources are redistributed
according to the relative wealth of the recipient member states and regions.
Finally, the policy promotes EU legitimacy by strengthening the support of Euro-
pean citizens for the EU by addressing their expectations of a rightful citizenship
independent of where they live. Successive surveys have shown that European cohe-
sion policy emerges as one of the only policies that are perceived locally as a guar-
antee that the EU will not favor one place over another and that it will operate as a
balancing institution to reduce tensions between countries and regions.
The Organisation for Economic Co-operation and Development (OECD) has
been arguing over the past few years that a new paradigm is emerging whereby
public policies are shifting increasingly from sectoral to multisectoral, multidisci-
plinary approaches; from direct subsidies to the provision of public goods; and
from central governance of those policies to multilevel governance systems.
European cohesion policy, in many respects, reﬂects most of this paradigm shift.
It operates on the basis of place-based economic development strategies promoting
integration of different sectors (such as infrastructure, services to enterprises,
research and development, innovation, education, and skills upgrading) and areas
(for example, between rural and urban areas). It has, over time, shifted its focus
toward the environment in which ﬁrms and economic agents operate and away
from direct aid to those agents, trying to reduce the perverse dependence on public
aid that certain regions may have had in the past. And it is operated through a sys-
tem of multilevel governance based on a “contract” between the European Com-
munity, the national, and the regional levels.
This latter dimension is particularly important and deserves a few additional
words. It is important because European cohesion policy allows addressing effec-
tively issues of information incompleteness and heterogeneity of preferences, which
are typical of any public intervention. Member states or nations in general have the
resources, but they often lack the knowledge of local and regional assets and there-
fore lack the capacity to target investment. Regions do have that knowledge but
often lack the strategic vision. And both regional and national governments lack
the knowledge of the private sector in deciding where to locate investment.
The question is not whether multilevel governance is important, but how it needs
to be implemented.
Some aspects of the policy obviously need and can be improved to avoid, for
example, having resources be captured by local interests and diverted toward objec-
tives other than those pursued by the policy. Another difﬁcult problem that the pol-
icy faces and for which it is often criticized is related to the difﬁculty of properly
assessing its impact. Investment supported by European cohesion policy is inﬂu-
enced by many other variables, such as the overall macroeconomic framework, the
functioning of ﬁnancial and labor markets, the quality of the public administration,
and the operation of the other national and regional investment policies that some-
THE ROLE AND OBJECTIVES OF EUROPEAN COHESION POLICY | 231

times operate in a different direction from European cohesion policy. While these
are problems that most public policies face, it is clear that more needs to be done,
whether by clarifying the objectives of the policy, by developing new, more solid
statistics and indicators, or by improving the contracting arrangements between the
different levels of government involved.
Nonetheless, European cohesion policy remains the only continent-wide experi-
ment of a place-based public investment policy, with strong conditionality, to which
27 countries have agreed to participate.
European cohesion policy in this respect provides a very interesting case study
for other countries outside the EU to study how these contractual mechanisms
between different levels of government could be put in place.
Its implementation is governed by a series of key principles that have changed
and modernized the functioning of public decision making and policy design. It is
based on the principle of partnership, whereby all the actors—vertically and hori-
zontally—need to discuss and agree ex ante what sort of strategies and investments
need to be pursued. It has improved the evaluation of public policies in all member
states of the EU. While evaluation can and should be improved in all member
states, evaluation has become part and parcel of public policy design through ex
ante evaluations during the programming period, with feedback mechanisms that
allow governments to adapt the policy and reorient its direction, and ex post evalu-
ations. It is based on multiannual programming, moving away from a project-based
approach to a system whereby resources are made available for a seven-year period
on the condition that an overall development strategy is agreed by the EU, national,
and subnational levels. It is not a blank check. Countries are obliged to coﬁnance
investment so as to ensure accountability and ownership. The principle of addition-
ality is respected. This principle states that the money coming from the European
budget does not replace public resources, but is additional to them.
These are some of the reasons why many countries outside the EU are looking
with increasing interest to this policy. The European Commission has signed memo-
randa of understanding with Brazil, China, and the Russian Federation, and con-
tacts are in place with the Republic of Korea, many countries in South and Central
America, and Africa.
Learning from Europe’s Efforts at
Integration and Convergence:
Lessons for Developing Countries’
Integration Policies
ROLF J. LANGHAMMER

The theoretical underpinnings of convergence funds are rooted in the new theories
of economic geography and the endogenous growth models. They explain persis-
tent spatial disparities between core and peripheral regions in the process of
economic growth as being the result of the attractiveness of core regions for mobile
resources that are absorbed by economic activities with increasing returns to scale.
Core regions can thus collect the gains of geographic specialization from agglomer-
ation effects as long as these effects are not jeopardized by congestion effects. Given
technical indivisibilities of lump-sum infrastructure investment with long gestation
periods, imperfect foresight of private capital markets in ﬁnancing such investment,
and their character as collective goods (nonrivalry, nonexcludability), convergence
funds are ﬁnanced from public funds, in particular by taxing activities and factors
of production in core regions. To be effective in terms of not substituting for own
funds in the recipient countries that could be used otherwise (fungibility problem),
recipients must be fungibility constrained—that is, external savings should add to
but not replace local savings. Analogies to development aid inﬂows come to mind.
Development aid can prevent fungibility problems from becoming serious if the
recipients are poor and if the projects to be ﬁnanced are characterized by lumpi-
ness. Regions beneﬁting from convergence funds are the more fungibility
constrained, the more such funds ﬁnance infrastructure with a high minimum
amount of capital binding and the more they change supply conditions and thus
raise income and domestic savings. In order to give full justice to convergence
funds, opportunity costs for those ﬁnancing the funds must be taken into consider-
ation as much as the beneﬁcial effects of some degree of regional disparities.
This calls for distinguishing the effects of convergence funds seen from a single
recipient’s view and those seen from the net view of recipients and donors. While
the recipient’s assessment can easily be positive if domestic infrastructure could

Rolf J. Langhammer is Professor and Vice-President of Kiel Institute of World Economics in Germany.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

233
234 | ROLF J. LANGHAMMER

have been ﬁnanced from nonlocal sources only, donors may forgo growth if ﬁnanc-
ing infrastructure in donor regions would have been more productive.

Have European Union Convergence Funds Lived Up to Expectations?

Unlike so-called shallow integration schemes focusing on internal free trade only
(like the North American Free Trade Agreement [NAFTA]), the European Union
(EU) stands alone as a model of deep integration with common policies and supra-
national institutions. Consequently, the EU is the only regional integration scheme
whose long-standing history with convergence policies using structural funds can
be assessed.
In a meta analysis, Dall’erba and de Groot (2006) ﬁrst take stock of the econo-
metric literature on the funds’ impact on economic growth and then use formal
meta regression analysis techniques to explain why outcomes from the ﬁrst step
show such divergence in results. In fact, the variance in results is striking. Studies
ﬁnd that structural funds have a range of effects on economic growth, from statisti-
cally positive effects, which nonetheless have certain side conditions, to statistically
insigniﬁcant or even negative effects. Side conditions comprise a number of “good
policy conditions” such as low unemployment, high research and development, or
no impact of corruption on the allocation of funds. Side conditions affecting struc-
tural funds in a negative way are expenditures for the Common Agricultural Policy
(CAP) and a high degree of centralization in national tax collection.1 There is strong
similarity to arguments in the debate regarding the effectiveness of development
aid, which stresses the indispensable nature of a “good policy” environment and
struggles with the diminishing returns issue, the endogeneity problem, and the
reverse causality issue between growth and structural funds or aid, respectively,
Likewise, as in the recent aid literature, afﬁliation of authors to countries or institu-
tions beneﬁting from the allocation of funds is found relevant in the Dall’erba and
de Groot analysis. As a result, the authors suggest meta analysis techniques in
which the variable to be explained is the size of effect. The size of effect is derived
from comparing the outcomes of several individual studies on the effect of a 1 per-
cent increase in the amount of structural funds received on the growth rate under
different deﬁnitions of funds’ resources and growth.

Insights and Limits to Findings from Research on EU Structural Funds

What the studies cited above have in common is the importance of the institutional
environment in which EU structural funds are embedded, mobilized, allocated, and
disbursed. Such environment comprises general indicators such as the Sachs-Warner
index of institutional quality but also digs deeply into EU speciﬁcs when it comes to
the CAP or the degree of ﬁscal decentralization, which differs by member states.
LEARNING FROM EUROPE’S EFFORTS AT INTEGRATION AND CONVERGENCE | 235

While the common result is helpful for focusing on the degree of institutional
quality in regional integration schemes among developing or least developed
countries, it is also disenchanting, as it impedes the transferability of EU experi-
ences to other integration schemes that fail to operate common policies or to host
common institutions.
Pure developing-country South-South integration schemes that exist without
membership of industrial economies (South-North integration) can be categorized
into two groups: an Asian and a Latin American–African type. The Asian type is
informal, minimizes contractual commitments, stresses “open regionalism,” pools
national sovereignties but does substitute them for communitywide sovereignty,
and thus survives with a minimum level of “bindingness.” Extreme heterogeneity
in historical roots, economic structures, and size has made this nonbinding type of
integration the only credible option.
The other type has been very much inﬂuenced by the EU experience and for
many years has sought to establish formal commitments, milestones, targets, con-
tracts, and stepwise integration processes. The list of failures including disintegra-
tion steps, dissolution, stagnation, and decay is almost as long as the list of new
endeavors, especially since the early 1990s, when a second wave of integration
(after the ﬁrst one in the 1960s) inspired many countries to follow the European
single market program. Therefore, it does not come as a surprise that the largest
similarity between EU policies and the past experiences in South-South integration
schemes has its roots in the second type of integration in Africa.
In the francophone West African Economic and Monetary Union, for instance, a
so-called community solidarity tax exists that compensates net importers (basically
the landlocked Sahel countries) for tariff revenue lost due to the removal of internal
tariffs. Part of the proceeds from this tax may be used to ﬁnance the cost of elimi-
nating regional disparities (Doe 2006). In the companion scheme of Central Africa,
a similar tax existed in the early days of Central African integration. Finally, the
South African Customs Union (SACU) provides for a common external tariff and a
common excise tariff for this common customs area. All customs and excise taxes
collected in the common customs area are paid into South Africa’s national revenue
fund. The revenue is shared among members according to a revenue-sharing for-
mula as described in the agreement. South Africa is the custodian of this pool. Only
the member states’ shares of Botswana, Lesotho, Namibia, and Swaziland are cal-
culated, with South Africa receiving the residual. SACU revenues constitute a sub-
stantial share of the state revenue of these four countries.2
Neither in Latin American nor in Asian integration schemes were intraregional
tax sharing or allocation of public funds negotiated with the goal of removing
regional disparities. Yet it is evident that, due to weak institutional foundations of
regional integration in Africa (including lack of enforcement capacities), the modest
schemes like the solidarity tax were unable to reduce regional disparities.
This is not to say that the issue of regional disparities has not been tackled in
Latin America and Asia. Yet, because of the national rather than supranational
approach to integration to which Latin American member states and those of the
236 | ROLF J. LANGHAMMER

Association of South East Asian Nations (ASEAN) adhere, regional disparities
were tackled mainly through a special regional focus of infrastructure projects
ﬁnanced by the two regional development banks: the Inter-American Development
Bank (IDB) and the Asian Development Bank (ADB). The latter, for instance, was
the driving force behind the Greater Mekong Subregion Project, which promoted
transport capacities in the backward area linking the Indochinese states and the
Yunnan Province of China to the more advanced ASEAN economies (Cuyvers
2002). Salazar and Das (2007) argue that, except for Brunei, Singapore, and to
lesser extent Malaysia, the other founding member states of ASEAN have limited
capacity to provide ﬁnancial support and to transfer resources to the poorer Indo-
chinese states of Cambodia, the Lao People’s Democratic Republic, Myanmar, and
Vietnam. As a result, ﬁscal redistribution between richer and poorer member states
mostly did not occur.

A Viable Option

Standard Heckscher-Ohlin-Samuelson trade theory suggests that the poorer the
median member state in South-South integration is, the more such integration is
income diverging (Venables 2003). The reason is that freeing internal trade leads
the costs of trade diversion to fall on the poorest state. This is the country that
has the most abundant unskilled labor and thus, prior to integration, tended to
import relatively capital-intensive goods from the cheapest source. After integra-
tion, the more industrialized member state beneﬁts from trade that gets diverted
from outside to inside the integration scheme. This suggests that regional dispari-
ties in South-South integration will not be eroded but, at least in the short run,
will be cemented or even extended. The postwar experience of South-South inte-
gration provides ample evidence for many distributional conﬂicts after divergence
has occurred, irrespective of whether or not such disparities would have shown
up without integration anyway. Thus there is demand for policies to reduce
regional imbalances. Yet, with weak regional institutions, weak tax bases, and
low initial economic interdependence, neither the domestic private sector nor the
domestic public sector is likely to support and operate an EU type of structural
fund. Nor will a horizontal ﬁscal redistribution scheme be established. Time pref-
erence rates in these regions are notoriously high, so the future beneﬁts of
redressing regional disparities are given low priority in domestic policies. If inter-
national development policies have lower time preference rates (which is likely),
they could become ﬁnanciers and managers, provided that they can withstand the
pressure of local pressure groups to distort the regional allocation of infrastruc-
ture funds toward projects of national importance only. The historical experience
LEARNING FROM EUROPE’S EFFORTS AT INTEGRATION AND CONVERGENCE | 237

of the Southern African Development Cooperation Conference (until 1993), which
became eligible for external funding of infrastructure projects of regional impor-
tance, points to the risk of mislabeling infrastructure projects with a national
scope as “regional” projects.
Nevertheless, the EU in particular should feel responsible for keeping regional
imbalances in Sub-Saharan African integration schemes at bay. In the context of
European Partnership Agreements, the EU will conclude four bilateral free trade
arrangements comprising all Sub-Saharan African states. After long transition peri-
ods, the agreements will ultimately end with free trade conditions inside the four
groups and with the EU. As argued, trade theory signals welfare-impeding trade
diversion effects to the detriment of the poorest member states, unless they are off-
set by the positive effects of opening EU markets fully to African products. Euro-
pean Partnership Agreements seem well designed to host structural funds ﬁnanced
by the EU in favor of peripheral African states, which are threatened by marginal-
ization should the EU enforce South-South integration. Rather than just spending
project funds in a focused spatial way, the EU could also think of preferred budget
ﬁnancing in favor of backward states by simultaneously hardening the budget con-
straints for the more advanced countries in order to maintain a budget cap for the
African integration scheme in total.
Success, however, seems conditioned on taking the lessons of EU structural
funds seriously. Often structural funds are threatened by redundancy: that is, by
“doing what comes naturally” or by doing it in an unconditional way. There are
too many critical views on the ineffectiveness of EU structural funds that one could
easily ignore if the transferability of the concept to poor developing countries is on
the agenda.

References

Bähr, Cornelius, Ulrike Stierle von Schütz, and Matthias Wrede. 2007. “Dezentralisierung in
den EU-Staaten und räumliche Verteilung wirtschaftlicher Aktivitäten.” Perspektiven der
Wirtschaftspolitik 8 (2): 110–29.
Beugelsdijk, Maaike, and Sylvester Eijfﬁnger. 2005. “The Effectiveness of Structural Policy
in the European Union: An Empirical Analysis for the EU-15 in 1995–2001.” Journal of
Common Market Studies 43 (1): 37–51.
Cappelen, A., F. Castellaci, J. Fagerberg, and B. Verspagen. 2003. “The Impact of EU
Regional Support on Growth and Convergence in the European Union.” Journal of
Common Market Studies 41 (4): 621–44.
Cuyvers, Ludo. 2002. “Contrasting the European Union and ASEAN Integration and
Solidarity.” Fourth EU-ASEAN Think Tank Dialogue, European Parliament, Brussels.
Dall’erba, Sandy, and Henri L. F. de Groot. 2006. “A Meta-Analysis of EU Regional Policy
Evaluation.” Unpublished paper, Vrije Universitet, Amsterdam. http://www.ecomod.org/
ﬁles/papers/1277.pdf.
238 | ROLF J. LANGHAMMER

Doe, Lubin. 2006. “Reforming External Tariffs in Central and Western African Countries.”
IMF Working Paper 06/12, International Monetary Fund, Washington, DC.
Ederveen, Sjef, Henri L. F. de Groot, and Richard Nahuis. 2006. “Fertile Soil for Structural
Funds? A Panel Data Analysis of the Conditional Effectiveness of European Cohesion
Policy.” Kyklos 59 (1): 17–42.
Esposti, Roberto, and Stefania Bussoletti. 2004. “Regional Convergence, Structural Funds,
and the Role of Agriculture in the EU: A Panel-Data Approach.” Quaderno di ricerca,
Università Politecnica delle Marche, Dipartimento di Economia.
Rodriguez-Pose, Andrés, and Ugo Fratesi. 2004. “Between Development and Social Policies:
The Impact of European Structural Funds in Objective 1 Regions.” Regional Studies 38
(1): 97–113.
Salazar, Lorraine C., and Sanchita B. Das. 2007. “Bridging the ASEAN Developmental
Divide Challenges and Prospects.” ASEAN Economic Bulletin 24 (1): 1–14.
Venables, Anthony J. 2003. “Winners and Losers from Regional Integration Agreements.”
Economic Journal 113 (490): 747–61.

Notes

1. For a positive yet conditioned assessment, see Beugelsdijk and Eijfﬁnger (2005); Cappelen
and others (2003). Insigniﬁcant results are noted by Rodriguez-Pose and Fratesi (2004),
while others stress the importance of binding factors like institutional quality (Ederveen,
de Groot, and Nahuis 2006) and ﬁscal decentralization (Bähr, Stierle von Schütz, and
Wrede 2007). The negative impact of the CAP is underlined by Esposti and Bussoletti
(2004).
2. http://www.dfa.gov.za/foreign/Multilateral/africa/sacu.htm.
The Geography of
Inequalities in Europe
PHILIPPE MARTIN

The concern for cohesion is an important feature of the process of European inte-
gration. While the single market offered the promise of increased output and efﬁ-
ciency for the European Union (EU) as a whole, it is often argued that the
viability of the project, in social and political terms, requires that the gains be
distributed fairly across countries and regions. This has led to a large increase in
funds for regional policies and an explicit mention of the objective of reducing
regional disparities in the Single European Act (Article 1). The EU has been
devoting an increasing share of its budget to regional policies. The structural
funds and the cohesion fund represent more than one-third of the 2004 European
Community budget.
At the European level, the goal of the cohesion policy is not deﬁned precisely: it
can be interpreted broadly as being to reduce the welfare differences among Euro-
pean regions. Article 158 of the amended Treaty of Amsterdam (European Union
1997) establishing the European Community reads, “The Community shall aim at
reducing disparities between the levels of development of the various regions and
the backwardness of the least favored regions or islands, including rural areas.”
This is broad because it could be interpreted as reducing inequalities between coun-
tries or between regions inside countries. Moreover, regional policies are often pre-
sented by policy makers as part of a broader objective to reduce inequalities
between the poor and the rich. Regional cohesion is seen as a prerequisite for social
cohesion, and this is the main reason that regional inequalities should be reduced.
There is an implicit assumption here: the spatial dimension of inequalities is an
important determinant of inequalities between individuals at the national level. This
assumption is important because it implies that social transfers that are not spatially
deﬁned (such as unemployment beneﬁts, national income taxes, and social security
transfers) are not enough to ensure social cohesion at the national level.

Philippe Martin is in the Paris School of Economics at Université Paris 1, Panthéon Sorbonne in France.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

The author would like to thank two referees as well as Karolina Ekholm for helpful suggestions.

239
240 | PHILIPPE MARTIN

In this paper, I argue that regional policies, as they exist today in Europe, are
based on shaky grounds both from an empirical and a theoretical point of view. It
starts by reviewing the existing evidence that European integration has led to a pro-
cess of convergence between countries, but not between regions inside countries,
and suggests some mechanisms through which trade integration in Europe can lead
to a process of convergence between countries, but not between regions inside
countries. This will be so in particular if, due to European structural and institu-
tional features, poor regions cannot exploit their comparative advantage relative to
rich regions as well as if poor countries cannot exploit their comparative advantage
relative to rich countries. As evident in the example of France, in the past 20 years
regional divergence in production has indeed occurred. However, the geography of
incomes has, during the same period, become more equal, producing a “scissors
effect” between the geographies of production and income. This suggests that trans-
fers, which have nothing to do with regional policies, have, at least in France, more
than compensated the increase in production inequality. Hence, “regional conver-
gence” is not a synonym of “regional cohesion,” at least at the national level.
I then review evidence on a possible trade-off between growth and regional
inequalities to suggest that efﬁciency motives cannot easily be used to defend
regional policies. Both evidence and theory suggest that regional concentration
leads to efﬁciency gains so that regional policies that attempt to reduce such spatial
concentration cannot be based on strong efﬁciency grounds. This also implies that
the EU is faced with a choice it has tried to avoid until now. Either it puts its effort
into slowing or even reversing the process of spatial economic concentration at the
national level or it concentrates on policies to speed up the convergence between
poor and rich countries. Finally, I analyze the relation between spatial and social
inequalities and report empirical evidence that suggests a strong empirical relation
between the two in the EU.

Regional Convergence and Divergence in Europe

Spatial inequalities have developed among the European countries and among the
countries’ own internal regions in different ways. Table 1 illustrates the develop-
ment of those disparities measured by the standard per capita gross domestic
product (GDP) deviation for the NUTS2 (Nomenclature of Territorial Units for
Statistics, level 2) regions for the year 1990 and the period 1995–2000. In eight
countries internal regional disparities increased after 1995. The two last lines of the
table also show that, while inequalities among countries diminished, those among
the countries’ own internal regions on average increased a little. The data also
suggest that disparities increased especially in countries with initially low disparities
and decreased in countries with initially high disparities.
Detailed studies have shown that up to the mid-1980s GDP per capita inequali-
ties among member states represented half of the inequalities among the European
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 241

TABLE 1. Regional Disparities in per Capita GDP within the Member States, NUTS2,
1990 and 1995–2000
STANDARD deviation of index EU15 = 100
Member state 1990 1995 1996 1997 1998 1999 2000
Belgium 25.1 40.8 41.6 41.6 41.6 40.2 39.4
Germanya 21.8 20.1 20.5 20.9 21.0 21.5 22.1
Greece 6.3 10.4 10.3 9.5 9.5 9.5 9.6
Spain 14.9 16.8 17.1 17.4 17.4 18.1 18.1
France 28.9 28.2 27.9 27.3 26.6 27.5 28.3
Italy 24.8 28.5 28.9 27.7 28.1 27.8 27.2
Netherlands 10.6 13.5 14.6 15.3 15.7 15.8 15.5
Austria 27.5 25.4 24.8 23.6 22.7 22.5 23.9
Portugal 13.5 15.2 15.4 17.3 17.9 17.6 16.6
Finland 17.9 19.5 21.2 20.8 23.9 24.2 25.0
Sweden 10.9 12.0 13.0 15.2 16.3 20.1 20.9
United Kingdom 20.2 31.5 32.0 34.0 35.6 34.2 34.2

EU15 (by member state) 12.5 12.5 11.8 11.6 11.7 11.0 11.4
EU15 (within member states) 26.5 28.3 28.1 28.2 28.5 28.2 28.5
Source: European Commission 2002.
a Excludes New Länder.

regions and that inequalities among regions within each state represented the other
half (Duro 2001). Since then, inequalities among states have diminished 25 percent,
but regional inequalities within the states have increased 10 percent. As a result,
regional inequalities in Europe are explained mainly by inequalities within coun-
tries. Thus Europe is experiencing a process of convergence among countries at the
same time as it is experiencing a process of nonconvergence or divergence among
the countries’ own regions: all of the convergence among the regions in Europe at
the European level is thus explained by the convergence among countries.
Further evidence on the subject is given by Midelfart-Knarvik and Overman
(2002). Figure 1 shows the coefficient of variation (the standard deviation divided
by the mean) for the distribution of manufacturing activity across states and regions
in the EU. At the national level this index of geographic concentration has remained
roughly constant over time. At the regional level, however, geographic concentration
is more pronounced and has been increasing over time.
At the EU level, a similar development in spatial polarization may be described
for unemployment. Overman and Puga (2002) show that, since the mid-1980s,
regions starting with a low or high unemployment rate have not experienced much
change in their relative situation. Regions with intermediate unemployment rates
have developed toward extremes. Overman and Puga interpret this result as an
effect of the spatial polarization of economic activities due to economic integration.
They show that the fate of the regions in terms of unemployment is linked much
more closely to the results of the neighboring regions (whether or not they belong
to the same country) than to the results of the respective country itself.
242 | PHILIPPE MARTIN

FIGURE 1. Geographic Concentration of Economic Activity
Concentration of economic
activity (percent)
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
1980–83 1985–88 1990–93 1992–95
Regional level National level

Note: Coefﬁcient of variation for four-year averages of shares in total EU manufacturing.
Source: Midelfart-Knarvik and Overman 2002.

To sum up, trade integration in Europe has fostered convergence between coun-
tries. It has not fostered convergence between regions inside countries. In some
cases, regional disparities have increased. The spatial polarization has occurred in
terms of both income and unemployment.

Divergent Geographies of Production and Income: The French Case
This picture is misleading if it suggests that social inequalities have increased
between regions inside Europe. A contradictory image may emerge if one looks at
regional inequalities of disposable income—that is, income net of transfers. Here
we only look at the French example. For French regions the difference is quite

FIGURE 2. Coefﬁcient of Variation: GDP per Capita, French NUTS2 Regions, 1981-2004

0.190

0.185

0.180

0.175

0.170

0.165

0.160

0.155

0.150
1980 1985 1990 1995 2000

Source: Insee.
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 243

FIGURE 3. Coefﬁcient of Variation: Unemployment Rate, French NUTS2
Regions,1981-2004

0.28

0.26

0.24

0.22

0.20

0.18

0.16

0.14

0.12
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Source: Insee.

striking. Figure 2 shows the coefﬁcient of variation across French NUTS2 regions
from 1982 to 2002. There is a clear upward trend of regional inequalities in
production during the period.
Figure 3 gives the same measure of regional inequalities for the unemployment
rate from 1981 to 2004. In the 1980s up to the 1990s, regional inequalities also
increased. However, and quite surprising, the recent years show a dramatic decrease
in this measure of inequality. It is known that regional inequalities in unemploy-
ment are countercyclical (high-unemployment regions have more stable unemploy-
ment rates than low-unemployment regions), so the latest drop is partly cyclical
and reﬂects the recent increase in unemployment in France.
Figure 4 gives a very different picture. It shows the coefﬁcient of variation of dis-
posable income for NUTS regions from 1982 to 1999 (more recent data are not
available). First, and not surprising, the inequality is less for disposable income per
capita than for GDP per capita. On average the regional inequality in GDP per cap-
ita is more than double the inequality in disposable income. More surprising, even
though the ﬁrst measure increased by more than 2 percentage points, the second
measure decreased by 2 percentage points. As Davezies (2001) stresses, there is a
growing disconnect between the geography of production (becoming more unequal)
and the geography of incomes (becoming more equal), so that “regional conver-
gence” is not a synonym of “regional cohesion.” The reason for this is that interre-
gional income transfers are important even though nothing much is known about
them. In particular, it is difﬁcult to quantify the impact of public versus private
transfers in the difference between GDP and income at the regional level.
This French disconnect between the geography of production and the geography
of income is not a general phenomenon. Unfortunately, we do not have data for
other countries from which to draw general conclusions. There is, however, evi-
dence that in the United Kingdom both types of regional inequalities (in terms of
244 | PHILIPPE MARTIN

FIGURE 4. Coefﬁcient of Variation: Disposable Income per Capita, French NUTS2
Regions,1982-99

0.085

0.080

0.075

0.070

0.065

0.060
1980 1985 1990 1995 2000

Source: Insee.

GDP per capita and disposable income) have increased in the past 20 years (see
Monastiriotis 2003). This suggests that the evolution of the welfare state is key.
Whereas in France, during the past 20 years, transfers (due to the progressivity of
the income tax, social security, and unemployment beneﬁts) have increased, this has
not occurred in the United Kingdom. The important point is that regional policies
certainly do not explain much of the difference between the United Kingdom and
France. In France national regional policies that attempt to give incentives (essen-
tially through tax cuts) for ﬁrms to locate in the poorest regions (the politique
d’aménagement du territoire) are very active, although it is difﬁcult to evaluate their
real impact, in part because the government does not provide much data. In the
United Kingdom these policies are much less important. This suggests that interre-
gional transfers are very large and growing in France. It also suggests that they are
mostly due to progressive income taxes and the welfare state, not to spatially
deﬁned policies such as regional policies.

A Tentative Explanation for Global Convergence and Local Divergence

The presence of economies of scale and trade costs may explain why regions with
no obvious comparative advantage in certain activities can become centers of
production of those activities. A model of the underlying mechanisms was intro-
duced by Krugman (1991), who was at the origin of the so-called new economic
geography. The central ﬁnding of this literature is that the reduction of trade costs
may engender a concentration of economic activities in certain regions that have
better access to the large markets even if they do not have the lowest production
costs. This spatial concentration is advantageous because of the existence of econo-
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 245

mies of scale conducive to limiting production locations, and it is made possible by
trade integration, which, while reducing transaction costs, does not oblige enter-
prises to be located close to all their consumers.
Here we analyze very brieﬂy some of the necessary conditions for a process of
“local divergence” with “global convergence” to follow trade integration. The
interaction of economies of scale, comparative advantage, and trade costs is essen-
tial. The purpose of the small “model” provided here is simply to illustrate a mech-
anism that may be more general. Suppose there are three regions. The ﬁrst one,
which for illustrative purposes is called the Ruhr, is a rich, central region with high
wages and high labor costs. The second region, Catalonia, is a middle-income
region close to the large European markets. A third region, Andalusia, is a periph-
eral region with low wages and low labor costs. Economies of scale play a major
role in the sense that average production costs increase with the number of loca-
tions due to ﬁxed costs. Let us assume that the ﬁrm can produce in the three regions
or in only one.1 The choice of location is simply a minimization of the sum of pro-
duction and trade costs.
If the ﬁrm decides to produce in the three regions, its total cost is as follows:

TC(R + C + A) = 3F + cRSR + cCSC + cASA, (1)

where F is the ﬁxed cost associated with each plant, cR, cC , and cA are the marginal
costs of production (which can be interpreted as the wage costs), respectively, in the
Ruhr, Catalonia, and Andalusia. We assume that cR > cC > cA. SR, SC, and SA are the
market sizes, respectively, in the Ruhr, Catalonia, and Andalusia. We assume that
SR > SC > SA. In this situation, the ﬁrm pays no trade or transport costs, as it produces
in all three locations.
If the ﬁrm produces in the Ruhr only, its total cost is as follows:

TC(R) = F + cR(SR + SC + SA) + tI(SC + SA) + tDSA, (2)

where tI, is the international trade cost that the ﬁrm located in Germany has to pay
to sell in Catalonia and Andalusia. To sell in Andalusia, the ﬁrm also has to pay the
domestic Spanish trade cost (which can be interpreted as a transport cost), as this
region is in the periphery.
If the ﬁrm produces in Catalonia only, its total cost is as follows:

TC(C) = F + cc(SR + SC + SA) + tISR + tDSA, (3)

so it pays the international trade cost to sell in Germany and the domestic Spanish
cost to sell in Andalusia.
Finally, if the ﬁrm decides to produce in Andalusia, its total cost is as follows:

TC(A) = F + cA(SR + SC + SA) + (tI + tD)SR + tDSC , (4)

Suppose we start from a situation where international trade costs tI are very high.
In this situation, which we interpret as the pattern before the European integration
process, the ﬁrm will want to locate some activity in the three locations. It is easy
246 | PHILIPPE MARTIN

to check, and it is intuitive indeed that if tI is high enough (and domestic transport
costs are not too low either), then or any other location equilibrium. This just says
that if trade costs are high, ﬁrms will want to be close to all their consumers.
Suppose now that Spain and Germany lower their trade costs tI. In a highly styl-
ized way, we interpret the scenario of “global convergence with local divergence”
as a case when the ﬁrm chooses to locate in Catalonia only. In this case, Spain as a
whole gains some economic activity, but Andalusia loses it.
This will be the case under the following conditions:
• Condition 1. TC (R + C + A) > TC,
• Condition 2. TC (R) > TC (C),
• Condition 3. TC (A) > TC (C).
Condition 1 is fulﬁlled when ﬁxed costs are sufﬁciently high, international and
domestic trade costs are sufﬁciently low, the international cost advantage of Spain
over Germany is sufﬁciently high, but the cost disadvantage of Catalonia is rela-
tively small compared to Andalusia. Condition 2 applies for some of the same char-
acteristics as for condition 1, but it also requires that the overall Spanish market is
not too small compared to the German market. Finally, condition 3 requires on top
of some these three characteristics that the domestic cost in Spain is not too low.
Figure 5 shows an example of some possible outcomes of locations depending
on combinations of international trade costs tI and national cost differences between
the two Spanish regions, cC − cA. It illustrates that the scenario of global conver-
gence and local divergence (going from location pattern R + C + A to the location

FIGURE 5. The Possibility of Global Convergence and Local Divergence following
European Trade Integration
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 247

in C only) is possible when international trade costs are lowered, but the difference
in production costs between C and A is low enough.
Overall, this example suggests that international integration (lower tI) can lead to
global convergence and local divergence, if the international cost advantage of the
poorer country is larger than the national cost advantage of the poorer region. One
can think that the European practice of nationally uniform minimum wages (and
more generally of labor institutions) coupled with different labor costs between coun-
tries can produce exactly such a situation. The example also suggests that such a sce-
nario will occur in countries for which the richest region has both a large domestic
market and good market access to other rich regions. In this case, market access is the
main driving force of location between regions inside countries, and differences in the
costs of production are the main driving force of location between countries.
Lower domestic transport costs in Spain, due, for example, to infrastructure proj-
ects ﬁnanced by structural funds, may not produce local convergence. This has been
shown, for example, in Martin and Rogers (1995). In this example, when domestic
trade costs are high, the ﬁrm prefers to locate production in both Spanish regions, in
order to serve the market of the poor region. At intermediate levels, the ﬁrm prefers
to concentrate its production in the richest of the two and save on transport costs.
At low levels of transport costs, the difference in production costs becomes the most
important factor determining the ﬁrm’s choice of location, which presumably favors
the poorest region. However if, again for institutional reasons, differences in pro-
duction costs between regions inside countries are constrained to be small, then
regional policies that build transport infrastructure between rich and poor regions
will only emphasize the differences in market size between those regions.
Overall, this analytical framework suggests quite intuitively that the interaction
of economies of scale and trade costs may produce a scenario of global convergence
with local divergence following trade integration if poor countries—but not, or to a
lesser extent, poor regions—can take advantage of their “natural” comparative
advantage. This same mechanism that leads to the phenomenon of global conver-
gence and local divergence can also explain why regional policies emphasizing
transport infrastructure may not be successful in decreasing inequalities between
poor and rich regions (see Martin 2003 for a review of the evidence on the effects
of regional policies in Europe).

Regional Policies and the Possibility of a Trade-Off between
Equity and Efficiency

A motivation for public intervention at the regional level, put forward by the
commission, is that of efﬁciency. It sees in geographic disequilibria “an under-
utilization of economic and social potentials and an inability to take advantage of
opportunities that could be beneﬁcial to the Union as a whole.”
This motivation is much less clear than the equity-based motivation. If the phe-
nomenon of spatial concentration is explained by the existence of economies of
248 | PHILIPPE MARTIN

scale, this means that spatial agglomeration is at the origin of economic gains. This
will be the case if ﬁrms can beneﬁt from the proximity of other enterprises in the
same sector to diminish their costs (transport costs or ﬁxed costs). This will also be
the case if such concentration makes it possible to increase the ﬁrms’ productivity
through localized spillover effects—that is, if the ﬁrms can receive transfers of
knowledge from other neighboring businesses. These localized spillovers have been
documented in numerous studies (see, for example, Jaffe, Trajtenberg, and Hender-
son 1993), and the existence of agglomeration gains has been discussed extensively
by economists since Marshall described them in 1890. The example of Silicon Val-
ley shows the advantage a country can obtain from a very heavy spatial concentra-
tion of activities with positive technological externalities. The stronger spatial
concentration of innovation-based activities in relation to production activities thus
has an economic rationale, and the beneﬁts of this spatial concentration go beyond
private gains. Another gain from agglomeration, both for workers and for ﬁrms, is
labor pooling: ﬁrms beneﬁt from a large spatial concentration of specialized work-
ers in an area because they can easily hire from this large pool.
The objective of policies promoting a greater dispersal of economic activities is
based on the assumption that the economic geography produced by market forces
alone is too concentrated. However, the efﬁciency argument may demand more or
less spatial concentration: on the one hand, the economic gains of spatial agglomera-
tion and, on the other, the effects of congestion (as, for example, reﬂected in pollution
or the high price of ﬁxed factors such as land). The fact that in Europe the conver-
gence of countries is accompanied by national divergence makes one think that the
former type of argument—efﬁciency gains with spatial concentration—has pride of
place. In this case, a trade-off between equity and spatial efﬁciency appears (see Bald-
win and others 2003; Martin 1998, 1999). It is difﬁcult to assess this trade-off quan-
titatively. Figure 6 shows the relation between the levels of regional disparities and

FIGURE 6. GDP per Capita and Regional Disparities, 2000

GDP per capita (EU = 100)
120
Netherlands Austria
110 Belgium
Sweden Germany
r. France United Kingdom
100 Finland
Italy

90
Spain
80

70 Greece Portugal

60
5 15 25 35 45
Disparities in GDP per capita in PPS by region within member states

Source: Eurostat.
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 249

FIGURE 7. Growth and Regional Disparities, 1995-2000

GDP growth rate (in log)
Finland
Portugal
1.4 Spain Netherlands
Greece Sweden
Belgium
0.9 Austria France
United Kingdon

Italy Germany

0.4
0 0.5 1.0 1.5 2.0 2.5 3.0
Annual growth rate of disparities in GDP per capita by region within members states (log)

Source: Eurostat.

GDP per capita in the larger EU15 countries. Denmark, Ireland, and Luxembourg are
excluded because regional data are lacking for those small countries. Two groups
appear clearly. The three poorest countries (Greece, Portugal, and Spain) have the
lowest level of regional disparities. The second group of countries (the relatively rich)
have an average level of regional disparities that is clearly above the ﬁrst group. How-
ever, inside this group no obvious relation appears. The positive relation between a
country’s growth of GDP overall and the growth of regional disparities during the
period 1994–2000 appears more clearly in ﬁgure 7.2 Of course, this positive correla-
tion should be taken with much caution. It suggests the possible existence of a trade-
off between spatial equity and growth, but such correlation may not be causal.
Other evidence is provided by Ciccone and Hall (1996) for the United States and
Ciccone (2002) for Europe. Both ﬁnd that employment density has a positive effect
on productivity levels. Recent econometric work by Crozet and Koenig (2005) gives
a more precise picture of this trade-off in Europe. They ﬁnd a positive relation
between the growth of GDP per capita of a region and the change in the level of
inequalities inside the region. The effect is economically signiﬁcant: a 10 percent
increase in the standard deviation index of GDP per capita within a NUTS1 region
leads to a 1.6 percent increase in regional GDP per capita.
The existence of such a trade-off has consequences for the deﬁnition and quanti-
ﬁcation of the objectives of regional policies, in particular for the case of new
entrants. It implies that a strategic choice has to be made between the objective of
lowering or stabilizing the absolute differences in GDP per capita between regions
inside countries and the objective of achieving rapid convergence toward the rest of
the EU. The decisions of which infrastructure projects to ﬁnance and where to
locate them are obviously dependent on this strategic choice between external and
internal convergence. In this matter, Ireland made an interesting choice, deciding to
be deﬁned as a single NUTS2 region rather than as several small regions, which
gave rise to a high degree of spatial inequalities. As Davezies (1999) emphasizes,
Ireland took the risk of being excluded more rapidly from the beneﬁt of the struc-
250 | PHILIPPE MARTIN

tural funds, but it could choose to develop projects in those regions that provided
the highest national return.
To sum up, spatial agglomeration of economic activities may (at least up to a
certain point where congestion effects may become too large) have positive efﬁ-
ciency effects and may be a welcome consequence of trade integration. This implies
a trade-off for regional policies between efﬁciency and equity.

Inequalities between Regions and Inequalities between Individuals

Equity is, after efﬁciency, the other traditional motivation of regional policies.
Certain economic agents—be they workers or consumers—are not mobile and are
therefore condemned to live in poor or declining regions from which the mobile
factors (capital and highly skilled workers) have departed. Because of the lower
labor demand in such regions, real wages will adjust downward or, if real wages do
not adjust because of labor market rigidities, unemployment will increase. In both
cases, the welfare of the inhabitants will deteriorate. As consumers, those agents
will also see their welfare deteriorate because certain goods and services will no
longer be produced locally (the businesses will have left for more wealthy regions).
In certain cases, in particular for certain services, the transaction costs will become
so high that they can no longer be consumed by those agents. Thus the diversity of
consumable goods and services in the poor region will decline. Moreover, the most
mobile agents are in general those with the highest level of human capital (educa-
tion, experience). Such agents, thanks to the possession of “positive externalities”
in the form of localized social interactions, have a positive impact on productivity
and thus on the real wages of other workers. By leaving a region in decline, the
most productive workers also have a negative impact on the productivity of the
remaining workers, that is, those who are the most disadvantaged. There is an
absence of market coordination, given that, when certain agents decide on their
location, they do not take into account the effect of their choice on the other agents.
From that standpoint, the possibility of a market failure, with the consequent
increase in inequalities that is speciﬁc to the spatial dimension of the economy,
exists and may thus serve as motivation for public intervention.
There are several ways to analyze the impact of the agglomeration phenomenon
on the least mobile agents. The ﬁrst is to refuse to see it as a problem of equity and
to interpret it as coming from a speciﬁc market failure. In Europe, except in the
United Kingdom, promoting the spatial mobility of workers is not considered a
solution to the problems of regional inequality. This is legitimate, but only partially,
because cultural and social obstacles mean that there will always be a substantial
fringe of workers who will be harmed by geographic inequalities. The vision of
regions empty of both inhabitants and economic activities (such as the Dakotas in
the United States) is unacceptable in Europe.
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 251

Are Spatial Inequalities in Production Correlated with Social Inequalities?
Policy makers often argue that a strong rational for decreasing regional inequalities
is that part of the wider objective is to decrease inequalities between individuals.
Spatial cohesion is part of an overall objective of social cohesion. This is based on
the belief that there is a strong relation between spatial inequalities and individual
inequalities so that regional policies that decrease spatial inequalities can also
decrease individual inequalities.
From a theoretical point of view, it is not obvious that countries that are more
unequal spatially are those that have more unequal income distribution. The prob-
lem comes from aggregation, which is well known to those who have studied the
dynamics of inequalities at the international level.
Take a simple example of two countries, A and B, each of them comprising two
regions, 1 and 2, each with the same population of 50 individuals. Both countries
have the same average GDP and GDP per capita. Country A has no spatial inequal-
ity; its two regions have the same income per capita. However, in both regions the
distribution of income is highly unequal. Say, 10 percent of individuals each earns
10 and 90 percent of the population earns 1. So the overall inequality, as measured
by the percentage of total income that goes to the richest 10 percent, is 100 / 190 =
53 percent. This is a very unequal society, even though there is no spatial inequal-
ity. The other country has a different distribution of total income. In region 1,
20 percent of the population earns 5.5, and 80 percent earns 1.5, so average income
per capita in the region is 2.3. In the other region, all earn 1.5. Hence spatial
inequality is quite large in this case, as income per capita in the rich region is more
than 50 percent more than in the poor region. However, the distribution of income
at the country level is much less unequal than for country A: the percentage of total
income that goes to the richest 10 percent of the population (all in the richest
region) is 55 / 190 = 29 percent.
This example shows that higher spatial inequality measured by differences in
income per capita across regions does not automatically generate a more unequal
distribution of income. Moreover, in this example, a spatially based redistributive
policy would seem unfair to the “poor” of the rich region. An income transfer from
region 1 to region 2, even if ﬁnanced by the rich of the richest region, would artiﬁ-
cially create an inequality between the “poor” of the rich region and the poor of
the poor region. Such a transfer from the rich to the poor region would increase
certain measures of income inequality.
An obvious question is whether there is a relation between spatial and social
inequalities. One way to check whether such a relation exists is to regress a mea-
sure of interpersonal inequality (namely, the log of the ratio of the mean net income
of the top decile to the bottom decile) on likely determinants of interpersonal
inequality as well as a measure of spatial inequality. Table 2 shows the results of
such regressions for pooled data of 12 countries (Austria, Belgium, Finland, France,
Germany, Greece, Italy, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom) and the seven years available (1995 to 2001). Again, the three countries
(Ireland, Luxembourg, and Denmark) with no NUTS2 regional data are excluded.
252 | PHILIPPE MARTIN

The measure of spatial income inequality (SPATIAL) is the log of the coefﬁcient of
variation of income per capita at the NUTS2 level.

TABLE 2. Income Inequality and Spatial Inequality
DEPENDENT variable: log of the ratio of the mean net income of the top decile to the bottom decile at
country level

Variable (1) (2) (3) (4) (5)
SPATIAL 0.772** 0.805** 0.972***
(0.238) (0.234) (0.205)
COHESION 0.107 0.093 −0.039
(0.110) (0.139) (0.094)
INCPERCAP 0.096 −0.020 0.134 0.190 0.036
(0.170) (0.176) (0.076) (0.163) (0.203)
SOCIAL 0.143 −0.087 −0.076
(0.176) (0.299) (0.251)
Year ﬁxed effects Yes Yes Yes Yes Yes
Country ﬁxed effects Yes Yes Yes Yes Yes
Number of observations 81 71 81 71 71
R2 (within) 0.96 0.96 0.96 0.96 0.97
Source: Eurostat/Region.
Note: Standard errors are in parentheses. The constant and dummy coefﬁcients are not reported. All
variables are in log.
*** Signiﬁcant at 1 percent.
** Signiﬁcant at 5 percent.
* Signiﬁcant at 10 percent.

The ﬁrst column shows the regression of inequality on the coefﬁcient of varia-
tion (SPATIAL) and the log of income per capita (INCPERCAP), as it can be argued
that richer countries are less unequal than poorer ones. Year dummies are added to
control for purely cyclical effects and country dummies for any omitted variables
that are country speciﬁc. Spatial inequality is indeed positively correlated with indi-
vidual inequality. Income per capita has a negative impact on interpersonal income
per capita only in (unreported) regressions when country dummies are not included.
An important question is whether, once national transfers are taken into account,
spatial inequality still affects individual income inequality. If, when such transfers
are controlled for, spatial inequalities no longer affect individual inequalities, it can
then be argued that national redistribution tools are sufﬁcient for cohesion. To test
this, the log of per capita expenditure on social transfers (SOCIAL) is added, which
is interpreted as measuring the preference of the country for redistribution. These
are measures of national redistribution and not of regional policies. The interesting
result is that introducing this crude measure of the national redistributive policy
does not reduce the coefﬁcient on spatial income inequality (SPATIAL). If anything,
it increases the correlation between social and spatial inequalities.
In columns 3 and 4, we redo the exercise using a different measure of spatial
inequality. Spatial inequality is now in terms of unemployment using the European
Commission measure “Cohesion,” which measures regional dispersion of unem-
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 253

ployment rates for each country. In this case, this measure of spatial inequality is
not signiﬁcantly correlated with income inequality. When both measures of spatial
inequality are included in the regression (column 5), only the spatial inequality in
incomes is signiﬁcantly correlated with individual inequalities. The correlation is
also quantitatively quite large. Given that the variables are in logs, the estimated
coefﬁcients can be interpreted as elasticities. Hence, a 10 percent increase in spatial
inequalities of income is correlated with a 9.7 percent increase in individual
incomes, even after controlling for regional inequalities in unemployment, income
per capita, social transfers, year, and country ﬁxed effects.
This exercise should be interpreted with caution, as many other determinants
can affect individual income inequalities. The sense of causality is not obvious.
Clearly, spatial inequalities could affect individual inequalities, but individual
inequalities could also lead to spatial inequalities if agents (rich and poor) agglom-
erate in different regions. The link between regional and social inequalities seems
strong even when controlling for year and country-speciﬁc effects, and national
redistribution policies seem unable to eliminate the full impact of regional income
inequalities on social inequalities.

Is There a Spatial Component to Wage Inequalities?
An alternative way to analyze the relation between spatial and social inequalities is
to look at the determinants of wage inequalities. If a large part of wage inequalities
between individuals is explained by geographic factors, then regional policies that
induce the relocation of industries toward poor regions may help to decrease indi-
vidual inequalities, even though they may not be the most efﬁcient way to do this.
Work by Duranton and Monastiriotis (2002) and Gobillon (2002) suggests that
this is only partially the case. The ﬁrst paper uses data on average regional earnings
in the United Kingdom during the 1982–97 period. It shows a worsening of U.K.
regional inequalities and a rise in the north-south gap. However, differences in
education account for most of the aggregate divergence. London gained because its
workforce became relatively more educated over the period. Second, returns to
education increased nationwide, which favored the most educated regions (that is,
London). Third, returns to education were initially lower in London, but they
(partially) caught up with the rest of the country. Had returns to education and
their distribution across U.K. regions remained stable over the period, the U.K.
north-south divide would have decreased.
Gobillon (2002) uses individual French data on wages to quantify the determi-
nants of local disparities in wages during the 1978–90 period. He ﬁnds that two-
thirds of regional inequalities in wages are explained by the individual
characteristics of the workers; in particular, his or her level of education. Of course,
this leaves one-third unexplained, but this is the maximum that geographic factors
could account for.
These two studies suggest that a major reason for the increase in regional
inequalities inside European countries may have little to do with the geography of
254 | PHILIPPE MARTIN

production per se. If returns to education have increased since the 1980s, which
most labor economists believe, then the increase in regional inequality is at least
partially a consequence of the increase in individual inequalities itself caused by the
increase in the return to education. A plausible story is that initially rich regions
were well endowed with workers with high levels of education so that the increase
in regional disparities in GDP per capita reﬂected the association of a general
increase in the return to education and the initial geographic disparity in education
levels. Furthermore, it is well known that better educated workers are more mobile,
so they may have concentrated in the richer regions too.

Can Regional Policies Increase Social Inequalities?
The type of instrument used by regional policies also has important implications
for the link between individual and regional inequalities. Most countries subsidize
investment rather than employment at the regional level, and this translates into
subsidies to capital rather than labor (see Fuest and Huber 2000; Yuill, Bachtler,
and Wishlade 1997). An important example is the subsidy program provided to
eastern Germany. According to Fuest and Huber (2000), 90 percent of the subsidies
to ﬁrms locating in eastern Germany take the form of investment subsidies. At the
European level, more than 400 types of subsidies exist that can help ﬁrms in poor
regions. They take so many forms that it seems quite safe to characterize them as a
complicated mix of subsidies to capital and labor.
Regional policies consisting of subsidizing industries so as to give them an incen-
tive to relocate in disadvantaged regions may have perverse effects on individual
inequalities. If capital is mobile, subsidizing the return on that capital in one region
amounts to increasing its return in all regions. The reason is that, if the return to
capital is higher in one region than in another, in the long term, delocation will take
place until the returns are equalized (see Dupont and Martin 2003). Regional poli-
cies that subsidize capital in poor regions may imply transfers from the poor to the
rich region, as the increase in the return to capital will beneﬁt the region with the
highest share of capital ownership. Hence, even if they succeed in reducing regional
inequalities, such subsidies to capital can end up increasing inequalities between
individuals. This may be an extreme scenario, but it serves as a reminder that the
choice of instruments used by regional subsidies is extremely important.
To sum up, a large share of regional inequalities comes from individual inequali-
ties themselves produced by individual characteristics—in particular, differences in
the education level. This implies that regional policies that offer subsidies to ﬁrms
that locate in poor regions or that ﬁnance infrastructure projects in those regions
may have only limited effects on regional inequalities and that policies concentrat-
ing on education may be more efﬁcient.
THE GEOGRAPHY OF INEQUALITIES IN EUROPE | 255

Conclusions

Public economic intervention must be based on considerations of either efﬁciency
or equity. This paper has argued that the legitimacy of regional policies in Europe is
not strong on either ground. A major rethinking is required, based on simple prin-
ciples in economics. On the efﬁciency motive, we have argued that increasing
returns, which explain spatial economic concentration, also point to the efﬁciency
gains of this process. Recent econometric evidence shows, in the European context,
that these gains should be taken into account when deﬁning regional policies. In the
light of the recent enlargement, this is a crucial trade-off. On the equity motive, the
evidence suggests that national redistribution schemes (income taxes, social trans-
fers) that are not spatially deﬁned do reduce spatial inequalities (at least in the
French example), but they may not be sufﬁcient instruments to reduce social
inequalities.
Regional policies in Europe do not take into account the fact that richer coun-
tries can redistribute from rich to poor regions through national redistribution
more easily than poor countries. Corsica, even if it has the same GDP per capita as
some regions in poorer countries, beneﬁts heavily from transfers from Ile de France,
but this is not taken into account when designing European regional policies. Given
the existence of these transfers at the national level, it is not obvious why European
regional policies should focus on regional inequalities within nations. From this
point of view, the recommendation of the Sapir report to renationalize regional pol-
icies to focus the impact of structural funds on inequalities between countries makes
sense (Sapir, Aghion, and Bertola 2004). The priority, especially after the enlarge-
ment, should be to speed up convergence between countries in Europe. It might be
argued that this is at odds with the ﬁnding that European integration has fostered
convergence between countries, but not between regions inside countries, so that
regional policies are not necessary for global convergence, but they are necessary
for local convergence. However, inequalities between countries remain much larger,
in level, than inequalities between regions inside countries, and national redistribu-
tion policies are powerful instruments to reduce the latter.

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Notes

1. Of course, the ﬁrm could produce in two regions, a possibility that would complicate the
presentation without adding much.
2. The relation is given in log because it does not appear to be linear.
Part VII: Spatial Policy for
Growth and Equity
Cohesion and Convergence:
Synonyms or Two Different Notions?
GRZEGORZ GORZELAK

“Cohesion” has become one of the most important phrases in current policies
conducted within the European Union (EU) member states and the European Union
as such. It is a relatively new term: it was ﬁrst brought into the acquis communau-
taire of the European Communities in the Single European Act of 1986, which
emphasized the need to enhance the social and economic cohesion of the European
Community with a view to leveling regional disparities and their potential growth,
an anticipated result of the introduction of the single market. The notion of cohe-
sion did indeed take root in the Maastricht Treaty establishing the European Union.
Since then, especially after the cohesion fund was brought into being, cohesion
became one of the leading directives of the EU policies.
Cohesion as a policy directive has three dimensions: economic, social, and terri-
torial. The last has been formally approved only recently, in the Treaty of Lisbon,
which states, “It [the Union] shall promote economic, social, and territorial cohe-
sion and solidarity among Member States.”
Since the very beginning, cohesion has been understood simply as convergence.
These two terms have been used as synonyms, although cohesion is clearly viewed
in terms of its equalizing function. To reach a state of cohesion means to eliminate
territorial disparities in the level of economic development (economic cohesion) and
in the access to labor and income (social cohesion). Such an approach to cohesion
coincides with the regional policy of the European Union (formerly the European
Community), which allocates about 60 percent of its funding to support regions
with a low level of development—less than 75 percent of the EU average gross
domestic product (GDP) per capita, using purchasing power parity.
The member states, especially those that beneﬁt the most from structural funds
and cohesion funds, follow the commission’s principles in their own cohesion

Grzegorz Gorzelak is Professor of Economics and Director of the Centre for European Regional and Local Studies at
Warsaw University in Poland.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

259
260 | PETER NIJKAMP

policies. In most, if not in all, of them we also ﬁnd the synonymy between cohe-
sion and convergence.
Yet the goal of territorial convergence is hardly, if at all, achievable. This convic-
tion has emerged even within the Directorate-General for Regional Policies (at that
time DG 16), which wrote in the third report on regional policy that reaching a
state of cohesion within the community was a task the fulﬁllment of which was
rather distant in time (CEC 1987). With the passage of time, however, these reser-
vations were been reduced, and a general belief that achieving cohesion by imple-
menting convergence can constitute the basis for the regional policy of the EU has
spread widely among the commission, the governments, regions, and localities
within the European Union.
The empirical evidence demonstrates a strong persistence of historical regional
patterns, even if these patterns were to be changed by massive external assistance
rendered to the less well-off regions. Central Appalachia is still the internal periph-
ery of the United States in spite of the fact that it has enjoyed the greatest share of
the Appalachian Program. Mezzogiorno has not entered the path of fast growth and
has not demonstrated the abilities of the Third Italy that emerged without any help
from the Italian government and the EU. The most recent example of the former
German Democratic Republic dramatically shows that a massive inﬂow of ﬁnancial
and technical help from the outside leads nowhere and may be counterproductive by
killing individual motivation and attitudes of self-reliance and self-responsibility.
There are several positive cases of sudden advancement of some backward coun-
tries and regions. Ireland is the one most often quoted. But it is often forgotten that
the external assistance for the EU did not bring any reward until 1994, and then
the aid was coupled with massive inﬂow of foreign (U.S.) investment in computer
and pharmaceutical industries. Moreover, Ireland achieved national success at the
expense of growing internal regional differentiation, since most of the growth was
concentrated in the south, leaving the north behind.
Ireland is a clear example of a process of polarization that is a product of the
slow growth of lagging regions and the rapid advancement of metropolitan cores.
“Metropolises govern the world,” as Castells says. This is because they became the
nodes of the “economy of ﬂows,” to use another term publicized by Castells (see
Castells 1997).
This process is clearly pronounced in the countries that are undergoing acceler-
ated transformation: the Central and Eastern European (CEE) new member states.
There is a positive relationship between the initial level of development and its
dynamics (see ﬁgure 1).
Similar regional patterns can be found in CEE countries. Capital city regions
“escape” the rest of the country, and the regions that contain big cities follow them.
The border regions—both located at the external borders of the EU as well as those
located along the internal border—do display slow growth; at the same time, these
usually are the less developed regions in all CEE countries. Thus divergence is a
matter of fact, which may be attributed to relatively fast growth that is concen-
trated mostly in capital and big city regions.
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 261

FIGURE 1. GDP per Inhabitant, 1995, and GDP Growth, 1995–2004

GDP growth, 1995–2004
200

WAR

180
POZ

C-P
Metropolitan
160
RZE
KAL KRA
Advancing
GDA WRO
RAD PIO CZ_ST
PIL OL
_OM LUB KO SZ _ÓD
140 KIEL
BIA_ Traditional LEG
ELBL ZIEL R-J industries
E_ KON
NS BYD B-B C-_
S
O- W
TOR-
J-W GORZ
SZ
OPO
S_UP
120
Z
CH-
KRO
Stagnating East

BIAL
100
5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000
GDP per capita, 1995

Source: Bank of Regional Data, Central Statistical Ofﬁce, Warsaw. See also Bachtler and Gorzelak 2007.

The picture for the regions of the EU is more complicated. As indicated in the
fourth cohesion report (CEC 2007), there is a negative relationship between the
level of GDP per inhabitant and its dynamics. However, the national and regional
processes are not separated, and the overall pattern is a cross-product of these two
dimensions (see ﬁgure 2).
We therefore observe convergence on the national level and divergence on the
regional level. It is doubtful whether these two levels may parallel each other. It
may even be that regional divergence is a condition of national convergence, since
it does not seem that we can overcome the “equity-efﬁciency” dilemma, fundamen-
tal for regional policy.
So, what is wrong with a cohesion policy that aims to achieve convergence? Sev-
eral answers have been given to this question, and the most important ones are
found in classical papers by Boldrin and Canova (2001), Sapir and others (2003),
Rodriguez-Pose and Fratesi (2004), and the less known, but more critical of cohe-
sion policy, work by Ederveen, de Groot, and Nahuis (2006). Their arguments may
be summarized as follows (compare Bachtler and Gorzelak 2007):
262 | PETER NIJKAMP

• Cohesion policy is mostly social in meaning and does not contribute to growth
(Boldrin and Canova 2001).
• Traditional cohesion policy that concentrates on “hard” infrastructure and assis-
tance to firms does not increase the competitiveness of lagging regions (Rodriguez-
Pose and Fratesi 2004).
• This policy may even depress growth in countries with poor institutions, high cor-
ruption, and lack of openness (Ederveen, de Groot, and Nahuis 2006).
• Only assistance to education (Rodriguez-Pose and Fratesi 2004) and institution
building (Ederveen, de Groot and Nahuis 2006) may create grounds for long-
lasting development of such regions.
• To achieve these goals, the EU policies have to be remodeled, to increase outlays
for competitiveness and innovativeness, at the expense of the Common Agricul-
tural Policy and traditional regional policy (Sapir and others 2003).
For much of the past 20 years, the use of cohesion policy resources has been gov-
erned by the assumptions of “traditional” regional policies of the postwar period
originating in Keynesian doctrine and state interventionism in a resource-based

FIGURE 2. Growth of GDP per Capita, 2000–04, GDP per Capita, 2004, and
Hypothetical Regional Patterns of New and Old Member States

10
annual average % growth in real GDP per capita, 2000–04

9
8
7
6
5
4
3
2
1
0
21
22
0 25 50 75 100 125 150 175 200
GDP per head (PPS) in 2004 (EU-27 = 100)

regional patterns of new member states GDP per capita <75% of EU-27

regional patterns of old member states GDP per capita >75% of EU-27

Source: Based on ﬁgure 1.6 in fourth cohesion report (CEC 2007: 10).
Note: Three regions are beyond the scale of this chart: Brussels with an index of 248 and growth of 0.93 percent;
Luxembourg with an index of 251 and 1.9 percent; and Inner London with an index of 303 and growth of 1.7
percent. EU-27 average growth is 1.4 percent.
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 263

economy. Traditional regional policy was both formulated and pursued in what Cas-
tells (1997) dubs the “economy of places,” an economic reality where specialized
economic and urban systems functioned much more in isolation from one another
than is now the case. As a result of the shift to an open, knowledge-based economy
and from quantitative to qualitative development factors, traditional approaches
have become much less effective. Castells calls the current model the “economy of
ﬂows”—that is, a mutually interdependent system—with a dominant role for the
ﬂows of goods, people, capital, and, especially, information. In the current era, coun-
tries and regions will only gain lasting competitive advantage if they can produce
innovation on a steady basis. Exerting an inﬂuence on this new economic model
must take different forms than was the case under the previous paradigm.
The paradigm shift has been partly recognized by the European Commission in
its development of new assumptions for cohesion policy for 2007–13, drawing on
the Lisbon strategy (CEC 2006): “These strategic guidelines should give priority
to … investment in innovation, the knowledge economy, the new information and
communication technologies, employment, human capital, entrepreneurship, sup-
port for SMEs [small and medium enterprises], or access to risk capital ﬁnancing.”
It is instructive to note that the commission’s original version of the guidelines
(CEC 2005) was considerably more deﬁnitive in the need for a shift in policy focus
but was “diluted” at the insistence of the member states.
Maintaining such a direction in reforming cohesion policy also calls for recon-
sidering the concept of cohesion. Arguably, cohesion should be understood in func-
tional terms and not as an effort to reach convergence. Convergence is an
approximation of static states, whereas cohesion is dynamic by nature, being the
opposite of entropy. Moreover, convergence is difﬁcult to achieve, certainly with
the limited resources available at the EU level. Cohesion should be liberated from
its “equalization” underpinnings and should be understood rather as harmony and
collaboration (economy of ﬂows), lack of destructive pressures and irresolvable
conﬂicts, and the possibility for coexistence and cooperation between individual
components. Following this line of argument, an alternative understanding of the
individual aspects of cohesion would involve a policy focus on three elements:
economic cohesion, denoting the possibility for achieving effective cooperation
between economic agents, lowering transaction costs, and harmonizing relation-
ships between businesses and their institutional environment; social cohesion, elimi-
nating barriers to horizontal and vertical mobility by helping to overcome
differences in levels of education, career advancement, and material status; and ter-
ritorial cohesion, removing constraints on spatial development that restrict the
achievement of social and economic cohesion, such as eliminating barriers to trans-
port, connecting the major nodes of European and national space, and developing
research and business networks.
264 | PETER NIJKAMP

References

Bachtler, John, and Grzegorz Gorzelak. 2007. “Reforming EU Cohesion Policy: A Reap-
praisal of the Performance of the Structural Funds.” Policy Studies 28 (4): 309–26.
Boldrin, Michelle, and Fabio Canova. 2001. “Inequality and Convergence in Europe’s
Regions: Reconsidering European Regional Policies.” Economic Policy 16 (32): 205–53.
Castells, Manuel. 1997. The Information Age: Economy, Society, and Culture: The Rise of
Network Society, vol. 2. Oxford: Blackwell.
CEC (Commission of the European Communities). 1987. The Regions of the Enlarged
Community: Third Periodic Report on the Social and Economic Situation of the Regions
of the Community. Brussels: CEC.
———. 2005. Communication from the Commission Cohesion Policy in Support of Growth
and Jobs: Community Strategic Guidelines, 2007–2013. COM(2005) 0299. Brussels:
CEC.
———. 2006. “Council Decision of 6 October 2006 on Community Strategic Guidelines on
Cohesion.” In Ofﬁcial Journal of the European Communities. L291/11, 21 (October).
Brussels: CEC.
———. 2007. Growing Regions, Growing Europe: Fourth Report on Economic and Social
Cohesion. Brussels: CEC, Directorate-General for Regional Policies.
Ederveen, Sjef, Henri de Groot, and Richard Nahuis. 2006. “Fertile Soil for Structural
Funds? A Panel Data Analysis of the Conditional Effectiveness of European Cohesion
Policy.” Kyklos 59 (1): 17–42.
Rodriguez-Pose, Andrés, and Ugo Fratesi. 2004. “Between Development and Social Policies:
The Impact of European Structural Funds in Objective 1 Regions.” Regional Studies 38
(1): 97–113.
Sapir, André, with Philippe Aghion, Giusepe Bertola, Martin Hellwig, Jean Pisani-Ferry,
Dariusz Rosati, José Viñals, and Helen Wallace. 2003. An Agenda for a Growing
Europe: Making the EU Economic System Deliver. Report of an Independent High-
Level Study Group established on the initiative of the president of the European
Commission. Brussels: European Commission. http://www.euractiv.com/ndbtext/innova-
tion/sapirreport.pdf.
Regional Development as
Self-Organized Converging Growth
PETER NIJKAMP

Regional development is not only an efﬁciency issue in economic policy; it is also
an equity issue due to the fact that economic development normally exhibits a
signiﬁcant degree of spatial variability. Over the past decades this empirical fact
has prompted various strands of research literature, in particular, on the measure-
ment of interregional disparity, the causal explanation for the emergence or persis-
tence of spatial variability in economic development, and the impact assessment of
policy measures aimed at coping with undesirable spatial inequity conditions. The
study of socioeconomic processes and inequalities at meso and regional levels
positions regions at the core of policy actions and hence warrants intensive
conceptual and applied research efforts.
For decades, the unequal distribution of welfare among regions and cities has
been a source of concern for both policy makers and researchers. Regional develop-
ment is about the geography of welfare and its evolution. It has played a central
role in disciplines such as economic geography, regional economics, regional sci-
ence, and economic growth theory. The concept is not static in nature; instead, it
refers to complex space-time dynamics of regions (or an interdependent set of
regions). Changing regional welfare positions are often hard to measure, and in
practice we often use gross domestic product (GDP) per capita (or growth of GDP
per capita) as a statistical approximation (see, for example, Stimson, Stough, and
Roberts 2006). Sometimes alternative or complementary measures are also used,
such as per capita consumption, poverty rates, unemployment rates, labor force
participation rates, or access to public services. These indicators are more social in
nature and are often used in United Nations welfare comparisons. An example of a
rather popular index in this framework is the Human Development Index, which
represents the welfare position of regions or nations on a 0–1 scale using quantiﬁ-
able standardized social data (such as employment, life expectancy, or adult liter-

Peter Nijkamp is Professor in the Department of Spatial Economies at Free University of Amsterdam in
The Netherlands.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

265
266 | PETER NIJKAMP

acy; see, for example, Cameron 2005). In all cases, however, spatial disparity
indicators show much variability.
Clearly, the concept of a region is problematic in empirical research, as the spa-
tial scale of regions may exhibit much variation, ranging, for example, from the
larger U.S. states to relatively small regions in Europe, even sometimes down to the
municipal level. A key feature of any region—in contrast to a nation—is its relative
openness (see, for example, Blanchard 1991). From a statistical viewpoint, regions
are often administrative spatial units with a certain competence for socioeconomic
policy and planning. The relatively small scale of a region leads normally to a high
degree of heterogeneity and interaction with each other, as a result of locational
features such as local production factors, institutions, transport infrastructures, and
local market size (see also Armstrong and Taylor 2000).
Regional disparities may have signiﬁcant negative socioeconomic costs, for
instance, because of social welfare transfers, inefﬁcient production systems (for
example, due to an inefﬁcient allocation of resources), and undesirable social con-
ditions (see Gilles 1998). Given a neoclassical framework of analysis, these dispari-
ties (in terms of per capita income) are assumed to vanish in the long run, because
of the spatial mobility of production factors, which eventually causes an equaliza-
tion of factor productivity in all regions. Clearly, long-range factors such as educa-
tion, research and development (R&D), and technology play a critical structural
role in this context. In the short run, however, regional disparities may show rather
persistent trends (see also Patuelli 2007).
Disparities can be measured in various relevant categories, such as (un)employ-
ment, income, investment, and growth. Clearly, such indicators are not entirely
independent, as is, for instance, illustrated in Okun’s law, which assumes a relation-
ship between economic output and unemployment (see Okun 1970; Paldam 1987).
Convergence of regional disparities is clearly a complex phenomenon, which refers
to the mechanisms through which differences in welfare between regions may van-
ish (Armstrong 1995). In the convergence debate, we observe increasingly more
attention being paid to the openness of spatial systems, reﬂected inter alia in trade,
labor mobility, and commuting (see, for example, Magrini 2004). In a comparative
static sense, convergence may have varying meanings in a discussion of a possible
reduction in spatial disparities among regions, in particular (see also Barro and
Sala-i-Martin 1992; Baumol 1986; Bernard and Durlauf 1996; Boldrin and Canova
2001):

• β-convergence: a negative relationship between per capita income growth and the
level of per capita income in the initial period (for example, poor regions grow
faster than initially rich regions)
• σ-convergence: a decline in the dispersion of per capita income between regions
over time.
The convergence hypothesis in neoclassical economics has been widely accepted
in the literature, but it is critically dependent on two hypotheses (Cheshire and Car-
bonaro 1995; Dewhurst and Mutis-Gaitan 1995):
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 267

• Diminishing returns to scale in capital, which means that output growth will be
less than proportional with respect to capital
• Technological progress, which will generate benefits that also decrease with its
accumulation (that is, diminishing returns).
Many studies have been carried out to estimate the degree of β-convergence and
σ-convergence (see, for example, Barro and Sala-i-Martin 1991, 1992). The gen-
eral ﬁndings are that the rate of β-convergence is on an order of magnitude of
2 percent annually, while the degree of σ-convergence tends to decline over time,
for both U.S. states and European regions. Clearly, there is an ongoing debate
worldwide on the type of convergence, its speed, its multidimensional conceptual-
ization, and its causal signiﬁcance in the context of regional policy measures (see,
for example, Fagerberg and Verspagen 1996; Fingleton 1999; Galor 1996). Impor-
tant research topics in the current literature appear to be the role of knowledge
and entrepreneurship, spatial heterogeneity in locational or sociocultural condi-
tions, and institutional and physical barriers. An important new topic in the ﬁeld
has become group convergence (or club convergence; see, for example, Baumont,
Ertur, and LeGallo 2003; Chatterji 1992; Chatterji and Dewhurst 1996; Fischer
and Stirböck 2006; Islam 2003; López-Bazo and others 1999; Quah 1996; Rey
and Montouri 1999; Sala-i-Martin 1996). Thus the research ﬁeld of spatial dispar-
ities is still developing, giving rise to fascinating policy issues. The rest of this
paper addresses prominent policy questions as they have emerged over the years.

Spatial Disparities: Productivity Is the Key

Spatial disparities may manifest themselves at different geographic levels, ranging
from nations to urban districts. The lower the geographic scale, the larger the
geographic variation in the welfare variable(s) considered. This scale dependence of
spatial disparities calls for great caution in comparing the performance of nations
or regions. But in most cases, differences in spatial performance (for example,
income per capita or employment growth) are directly or indirectly related to differ-
ences in productivity among regions. Clearly, such differences may be ascribed to
physical geography, to inefﬁcient use of human resources, to inadequate availability
of physical or human capital, and to lack of resources, among others, but overall
deﬁciencies on the supply side of production factors—whatever the cause of these
deﬁciencies may be—lead to lower performance of the region concerned. And,
therefore, the measurement and evaluation of total factor productivity are of great
importance for understanding spatial welfare disparities.
The motives for measuring regional development are manifold. But a prominent
argument over the years is that welfare positions of regions or nations may exhibit
great disparities that are often persistent in nature (see Fingleton 2003). These trans-
late into large disparities in living standards. For example, in 1960, the world’s rich-
est country had a per capita income that was 39 times greater than that of the
268 | PETER NIJKAMP

world’s poorest country (after correcting for purchasing power), while by 2000 this
gap had increased to 91 (Abreu 2005). Not only do regions in our world have
signiﬁcant differences in welfare positions, but it sometimes takes decades or more
to eliminate them. As an illustration, take Tanzania (the world’s poorest country in
2000), which experienced on average a modest growth rate of 0.6 percent a year
over the period 1960–2000. In order to reach the world’s average per capita income
of US$8,820 per year at its current rate of growth, Tanzania would need another
485 years. Even if the annual growth rate were to increase to 1.8 percent (the world’s
current average), Tanzania would need 161 years to close the gap. And if it were to
grow at the rate of the Republic of Korea (the fastest grower over the period con-
cerned), it could close the gap in just 49 years. Persistent regional welfare disparities
are a source of frustration for both economists and policy makers (Lucas 1988).
Regional development is clearly a multidimensional concept with a great variety
that is determined by a multiplicity of factors such as natural resource endowments,
quality and quantity of labor, capital availability and access, productive and overhead
investments, entrepreneurial culture and attitude, physical infrastructure, sectoral
structure, technological infrastructure and progress, public support systems, and so
forth (see Blakely 1994). By focusing the attention on regional differences in welfare,
we touch on a centerpiece of the evolution of growth in and between regions.
In the past half a century, we have witnessed an avalanche of studies in regional
differences in welfare. The literature on regional development has usually centered
around two dominant issues: how is regional welfare created, and how can we cope
with undesirable interregional welfare discrepancies? The ﬁrst question, normally
referred to as “allocative efﬁciency,” addresses the optimal use of scarce resources
(that is, inputs such as capital, labor, physical resources, and knowledge) to generate
a maximum value of output. The second question is sociopolitical equity in nature
and addresses the mechanisms and conditions (economic, policy interventions) that
may help to alleviate undesirable development disparities in the space economy.
Normally, regions that operate efﬁciently tend to grow faster than regions that have
less favorable development conditions, so that there is a built-in tension between
efﬁciency and equity within a system of regions, at least in the short run. The efﬁ-
ciency-equity dilemma is without doubt one of the most intriguing issues in regional
development policy (Baldwin and others 2003; Brakman, Garretsen, and van Mar-
rewijk 2001; Fujita and Thisse 2003; Puga 1999). But have we gained sufﬁcient new
insight in order to assist regional development policy?
The policy response to undesirable discrepancies in international welfare has
usually been to start a subsidy program, in the form of either infrastructure provi-
sion (and other regional development factors) or social welfare transfers. In many
cases, the size of these transfers exceeds by far regional development expenditures,
but these transfers are only of a consumptive nature (for example, short-term
income subsidies) and do not have a productive meaning; their long-range impact
on the reinforcement of regional economic structures is almost negligible.
There is another striking fact. The great many studies on the effect of regional
policy measures on regional welfare are often not leading to conclusive ﬁndings
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 269

that would warrant an intensiﬁcation of regional development policy. Of course,
there may be many reasons for this disappointing observation, such as the long-
term nature of regional development efforts in which a time span of one generation
is not unusual, the lack of distinction between static allocation effects and long-
range dynamic generative effects, the insufﬁcient attention given to the difference
between internal and external border areas, and the methodological ﬂaws inherent
in tracing the effects of individual projects or programs on a total regional econ-
omy. In addition, the focal point of regional policy is not always clear, as it might
differ according to spatial unit, sector, or socioeconomic target group.
Regional development policy clearly is fraught with many uncertainties. This
paper aims to shed light on the complexity of regional development. It starts from
the heart of regional economics—location and allocation theory—and includes an
exposition on neoclassical factor endowment and infrastructure theory. Next, a
more contemporaneous contribution is offered on the modern drivers of regional
development—knowledge and entrepreneurship—while also paying attention to
recent advances in endogenous growth and the new economic geography. It then
pays attention to an important and often less tangible issue—the effect of social cap-
ital—and addresses more explicitly the so-called convergence debate and the role of
governments in regional development policy. It concludes with some retrospective
and prospective remarks on the future of regional development policy and research.

Spatial Accessibility: A Prominent Competitive Factor

In the history of economic development, we have observed that spatial accessibility
offers many opportunities for economic progress. Riverbanks and coastal areas were
often forerunners in acquiring welfare gains. Indeed, the history of mankind has
exhibited a dynamic geographic pattern, where accessibility through proper infra-
structure and favorable physical-geographical conditions (climate) were decisive
factors for the settlement of people and ﬁrms. These areas created the foundations
for large agglomerations (such as Cape Town, London, New York, Tokyo, or
Venice). Regional development appeared to ﬁnd favorable breeding places in acces-
sibility and large economic attraction poles. It is evident that differences in
geographic accessibility ultimately caused spatial disparities. Even nowadays, persis-
tent discrepancies in regional welfare have historical roots in the locational condi-
tions of such high-potential areas. The present ﬁgures of our world are striking:
approximately 1 billion people live on less than a dollar a day, while more than
2 billion people have no access to adequate sanitation. And the gap between poor
and rich is formidable and even increasing. For example, the top 20 percent of the
world’s population consumes about 85 percent of the world’s income, while the
bottom 20 percent lives on approximately 1.5 percent of the world’s income. And
things get worse: a generation ago, people in the top 20 percent were 30 times richer
than those in the bottom 20 percent; nowadays, they are more than 70 times richer
270 | PETER NIJKAMP

(see Serageldin 2006). In general, the more prosperous places are those with a high
degree of accessibility.
The dispersion of economic activity in our world shows a great variation. And
hence, location theory has played a central role in explaining not only the spatial
distribution of economic activity, but also the dispersion of welfare among regions
or cities. Consequently, regional development theory is deeply rooted in location
theory (Martin and Ottaviano 2001). Location theory has a long history in regional
economics and economic geography. Starting off from path-breaking ideas set forth
by Von Thünen, Christaller, Lösch, Isard, Hoover, and many others, modern loca-
tion theory has moved into a strong analytical framework for regional economics
and economic geography. Cost minimization and proﬁt maximization principles are
integrated in a solid economic setting, in which both partial and general spatial
equilibrium studies on the space economy highlight the geographic patterns of
industrial and residential behavior. Furthermore, the theory encapsulates the impact
of public actors, for instance, through the provision of space-opening or accessibili-
ty-enhancing infrastructure (as can be observed in regional development policy).
Thus the fundamentals of classical location theory are made up of a blend of physi-
cal geography (determining the accessibility of a location and the availability of
resources) and smart economic behavior (through a clever combination of produc-
tion factors and market potentials in space; for a review, see Capello 2006; Davis
and Weinstein 1999; Fujita and Thisse 2002). Location and accessibility are essen-
tially two sides of the same coin.
However, location patterns are never static; instead, they have an endogenous
impact on newcomers (residents and ﬁrms) in addition to various spatial externali-
ties. Thus incumbent ﬁrms may attract others through scale, localization, and
urbanization advantages (for example, in the form of spatial-economic externalities
in a Marshallian district; see Asheim 1996). Consequently, agglomerations tend to
become self-reinforcing spatial magnets affecting the entire space economy. Such
concentrations of economic activity create welfare spin-offs for a broader regional
system and thus determine the geographic patterns of welfare and regional develop-
ment. Seen from this perspective, a blend between location theory and urban eco-
nomics (or urban geography) is plausible (see also the so-called new economic
geography; Fujita, Krugman, and Venables 1999; Hanson 1996).
In the past decades, we have witnessed the emergence of the digital economy
through which actors can be networked worldwide. As a consequence, the interac-
tion between industrial networks and location as well as the access to networks
have gained much interest (see Nijkamp 2003 for a review). Locations that offer
the best available network services are the proper candidates for many ﬁrms in the
information and communication technology (ICT), high-tech, and high-services sec-
tors and are able to generate a high value added for regional development. Despite
many statements on the “death of distance,” physical distance still matters. ICT
may enhance spatial productivity of actors by expanding their action radius, but
evident substitution mechanisms have so far not been found (with a few exceptions
on a local scale).
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 271

The availability of and access to infrastructure are critical factors for successful
regional development (Davis and Weinstein 1999). In addition to the impact of labor
as capital on traditional factor inputs, interest is growing in measuring the impact of
infrastructure on regional development. Especially in a world with shrinking dis-
tance, space-time accessibility of regions becomes a critical determinant of relative
regional-economic positions. Transport economics and transport geography have
offered an abundance of theoretical and empirical evidence on the importance of
physical infrastructure for regional growth. An extensive review can be found in
Nijkamp (2003). The uneven provision of infrastructure has also been identiﬁed as a
key determinant of regional income disparities in less developed countries (World
Bank 2006: 168–74). However, it is not the pure supply of infrastructure, but rather
its effective use that determines its productivity-enhancing potential.

Entrepreneurship, Innovation, and the Knowledge Economy

Spatial dynamics (including the emergence of spatial disparities) is the result of
changing patterns in the activity of people and ﬁrms, including geographic
mobility. Since the good old days of Marshall, Schumpeter, and Kirzner, we know
that innovation and entrepreneurship are the driving factors behind economic
growth. There is an avalanche of literature on the importance of entrepreneurship
for enhancing the innovative capacity and growth potential of regions (see, for
example, Acs, Carlsson, and Karlsson 1999; Audretsch and others 2002). Entre-
preneurs are change agents with a high potential for innovation.
In recent years, we have witnessed increasing interest in entrepreneurship.
Entrepreneurship is a complex, multifaceted phenomenon that ﬁnds its roots in
risk-taking behavior of proﬁt-seeking individuals in a competitive economy. But its
determinants also have clear correlations with gender, age, education, ﬁnancial
support systems, administrative regulations, risk tolerance, and market structures
(Kirchhoff 1994; Storey 1994). Entrepreneurship lies at the heart of innovation as
the art of doing creative things for the sake of achieving a competitive advantage in
an open economy. The debate on entrepreneurship and innovation has, from a
geographic perspective, prompted the emergence of new concepts such as innovative
regions, innovative milieus, learning regions, or knowledge-based regions (see, for
example, De Groot, Nijkamp, and Stough 2004; Florida 1995; Malecki 2000;
Simmie 1997). Innovation is the factor critical to survival in a competitive space
economy and determines the direction and pace of regional development. A key
aspect of innovation in a modern space economy is the use of and access to the ICT
sector. Consequently, ICT infrastructure is increasingly seen as a necessary resource
for regional development with a high degree of productivity-enhancing power.
The emergence of ICT has prompted speculative ideas on e-economics, e-societ-
ies, e-governments, or e-ﬁrms. Indeed, it goes almost without saying that ICT is a
necessary ingredient of a modern knowledge-based economy. And that also holds
for regions and cities. Clearly, knowledge is a composite good with many facets,
272 | PETER NIJKAMP

but from an economic perspective knowledge serves to enhance productivity and
induce innovations. There is indeed an ongoing debate on the unidirectional or cir-
cular relationship between knowledge and development, and this forms one of the
central issues in endogenous growth theory (see also Krugman 1991; Markusen
1985). Endogenous growth theory seeks to offer a microeconomic foundation for
economic dynamics where traditional ﬁxed factors are seen as a result of intrinsic
economic forces.
Endogenous growth theory has played a central role in the growth debate since
the 1990s. The main idea of these new contributions is that technological prog-
ress is not exogenously given, but rather an endogenous response of economic
actors in a competitive business environment. Consequently, in contrast to earlier
macroeconomic explanatory frameworks, the emphasis is much more on the eco-
nomic behavior of individual ﬁrms (see, for example, Aghion and Howitt 1998;
Barro and Sala-i-Martin 1997). In this way, it can be demonstrated that regional
growth is not the result of exogenous productivity-enhancing factors but is the
result of deliberate choices of individual actors (ﬁrms and policy makers). This
implies that governments are not agents “above the actors,” but rather agents
“among the actors” in a dynamic economy.
Furthermore, the importance of knowledge for innovation and entrepreneur-
ship is increasingly recognized. The spatial distribution of knowledge and its spill-
overs are considered as an important factor for successful regional development
in an open, competitive economic system. Thus the geographic patterns of knowl-
edge diffusion as well as the barriers to access to knowledge are decisive for
regional development in a modern, global, and open space economy. Conse-
quently, knowledge policy—often instigated by ICT advances—is a critical factor
for the creation of regional welfare (see, for example, Acs, de Groot, and Nijkamp
2002; Döring and Schnellenback 2006; Keeble and Wilkinson 1999). With more
economies depending on knowledge-intensive products, the importance of a dedi-
cated knowledge policy is increasingly recognized.
Regional development policy appears to move increasingly toward knowledge
and innovation policy (see Asheim and Gertler 2005 for a comparative study). This
argument is reinforced in a recent study by Stimson, Stough, and Salazar (2005),
where the authors demonstrate that leadership and institutional qualities have a
great impact on regional welfare, in particular, when the role of leadership is linked
with innovation and knowledge creation. To the same extent that innovative entre-
preneurship is critical for long-term regional welfare growth, governance and lead-
ership are essential for balanced regional development (Martin 1999). Leadership
presupposes proactive behavior, visions for future development, awareness of insti-
tutional and behavioral processes, responses and bottlenecks, as well as acceptance
by the population. Awareness of the importance of leadership and entrepreneurship
lies with the recognition of creative actions and learning actors. Studies on regional
leadership are rare, but can be found, among others, in Heenan and Bennis (1999),
Hofstede (1997), Judd and Parkinson (1990), and Stimson, Stough, and Salazar
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 273

(2005). This is a promising and important new ﬁeld of research, for both policy
making and industrial organization.
Finally, in recent years, we have witnessed the emergence of a new strand of lit-
erature, coined the “new economic geography,” in the vein of endogenous growth
theory (see Brakman, Garretsen, and van Marrewijk 2001; Krugman 1991; Neary
2001). Although the term “new economic geography” is arguably not appropriate
(most concepts can already be found in the regional economics and regional science
literature since the 1950s), this seemingly new approach has attracted quite some
attention within the neoclassical economics literature. It marries the increasing-re-
turns monopolistic competition model (à la Dixit and Stiglitz 1997) with the micro
foundations of spatial-economic behavior, including interregional trade (see Fujita,
Krugman, and Venables 1999; Fujita and Thisse 2002; Krugman 1991; Naudé
2005; Redding and Venables 2004; Rivera-Batiz 1998; Romer 1986). This recent
approach emphasizes the importance of agglomeration externalities (caused by
increasing returns to scale) for regional welfare creation, in the context of global
competitive forces where trade (between regions or countries) plays a critical role.
Thus regions are part of a global competitive network system. Recent contributions
within this literature have found that agglomeration can be a welfare-improving
outcome for workers in both core and peripheral regions, for instance, if agglomer-
ation raises the rate of innovation (see Fujita and Thisse 2003). This result provides
theoretical support for regional development policies destined to support and
enhance existing clusters of specialization, which may show a resemblance to Mar-
shallian districts.

The Human Factor in Regional Development: Social Capital

Regional development is the outcome of socioeconomic processes and decisions, in
particular the smart combination of various production factors and local resources
that are decisive for the productivity-enhancing potential of various agents involved.
Previous sections addressed locational decisions, factor mix decisions, and innova-
tion and R&D decisions of ﬁrms as critical conditions for regional growth. Institu-
tional support systems and leadership talents were also mentioned as ﬂanking
incentives that might spur economic development of regions or cities. Textbook
economics has paid extensive attention to the conditions under which these factors
might lead to accelerated growth, with sometimes signiﬁcant variation among
regions (for example, increasing returns to scale, product heterogeneity, and special-
ization). All these elements affect the welfare and productivity pattern of regional
economic systems and may be a source of divergent economic achievements among
various regions of the space economy. Nevertheless, the analysis of spatial-economic
disparities often does not provide us with a complete picture of all relevant back-
ground factors. In other words, many models trying to explain regional growth and
spatial differences are semantically insufﬁciently speciﬁed. In various cases, there-
fore, economists have resorted to the introduction of complementary explanatory
274 | PETER NIJKAMP

factors, such as X-efﬁciency factors, which refer to often intangible factors (for
example, personal devotion, altruistic behavior, concern about the future or nature,
social engagement) and may offer additional explanations for the performance of
various agents (for example, regions, administrations, entrepreneurs, employees).
The search for such new complementary explanatory frameworks has induced
increasing interest in the contribution of “social capital” to regional development.
Bourdieu (1986: 243) deﬁnes social capital as “an attribute of an individual in a
social context. One can acquire social capital through purposeful actions and can
transform social capital into conventional economic gains. The ability to do so,
however, depends on the nature of the social obligations, connections, and net-
works available to you.” Social capital can assume different forms such as social
skills, charisma, cooperative nature, or care for others that may create various ben-
eﬁts for the individual or his or her social environment. They are essentially a form
of social externalities, with positive revenues for all actors involved (see Baldwin
1999; Benhabib and Spiegel 1994; De la Fuente and Doménech 2006; Glaeser, Lai-
bson, and Sacerdote 2000; Sobel 2002). Social capital is thus a productive resource
at the interface of individual and collective interest (see Dasgupta and Serageldin
1999; Putnam 2000) and serves as an intangible (often hidden) source of well-being
in an individualistic modern society.
Social capital is essentially based on the notion of trust (see Fukuyama 1995)
and was introduced in the urban planning literature several decades ago by Jane
Jacobs (1961). It has emerged in a new form as a productive factor that may stim-
ulate regional (or urban) development. An interesting study from this perspective
was undertaken by Westlund and Bolton (2003) and Westlund and Nilsson (2005).
The authors argue that social capital has several manifestations:
• Capital in an economic sense (with a productivity-enhancing potential, with a
blend of supporting factors, with accumulation and depreciation features, with
a mix of private and public goods characteristics, and with various spatial and
group levels)
• Generator of producer surplus (with a quality-generating potential, with an area-
specific social benefit, and with a decline in transaction costs)
• Facilitator of entrepreneurship (with a combination of skills, risk-taking attitude,
market insights, and goodwill trust).
Social capital clearly plays a prominent role in a networked society, where reli-
ability, trust, standardization, and efﬁcient interactor operations are the keys to
success and competitive performance. Socioeconomic interaction in networks and
conﬁdence and trust among network actors are closely related phenomena (see also
Dyer 2000).
A ﬁnal remark is in order here. There has been a rapidly rising volume of studies
on social capital and trust, from the side of both economists and sociologists (see
also Chou 2006). Unfortunately, the number of applied studies that operationalize
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 275

trust and social capital is disappointingly low. There is further scope for innovative
empirical research on social capital, in particular in the context of regional develop-
ment where local resources such as social capital play a prominent role. Applied
research on the signiﬁcance of social capital is once more warranted, as differences
in social capital among regions may contribute to widening spatial disparities.

Spatial Disparities and Convergence

Regions and cities are not static socioeconomic entities, but always in a state of
ﬂux. Regions and nations in our world show complex patterns of development
(Englemann and Walz 1995; Evans 1996; Grossman and Helpman 1990). Textbook
economics would teach us that under conditions of free competition, homogeneity
of preferences and technology parameters, and free mobility of production factors
across all regions in the space economy, income per capita would tend to converge
to the same growth rate. In neoclassical economic growth models, convergence
between regions takes place through capital accumulation. Regions that are farther
away from their states grow faster in the short run, but in the long run diminishing
returns to capital set in, and the growth rate drops to the exogenous growth rate of
technological progress. This tends toward a situation where the growth rate of GDP
per capita falls and becomes constant (that is, it becomes equal to the exogenously
determined technological growth rate). The neoclassical growth models therefore
predict that in the long run countries and regions will converge in terms of per
capita income levels, if one controls for the effects of differences in initial condi-
tions. However, these theoretical-conceptual ﬁndings are often contradicted by
empirical results.
A basic problem in this neoclassical explanation of the world is that technologi-
cal progress is not exogenous “manna from heaven.” It is part of the complex
architecture of a regional economy and is determined by both internal and external
R&D investments, on-the-job training, learning by doing, and spillovers from uni-
versity research. Spillovers resulting from R&D expenditures and other activities
generate increasing returns to scale for reproducible production factors (Lucas
1988; Romer 1990), the existence of which implies the possibility of long-run diver-
gence in per capita income levels. Thus the use of new technologies may aggravate
regional disparities.
The conﬂicting predictions of the neoclassical and endogenous growth models
have generated intense scrutiny and a plethora of empirical studies, known collec-
tively as the “convergence debate” (see Durlauf and Quah 1999; Islam 2003; Tem-
ple 1999). The literature has generally found that, while per capita income levels
between the poorest countries (of Sub-Saharan Africa) and the richest countries
(Europe and the United States) have diverged over the past few decades, there is
convergence among countries that are similar in terms of initial conditions and pol-
276 | PETER NIJKAMP

icies, for instance, among the countries of the European Union or the fast-growing
East Asian economies (a phenomenon known as “conditional convergence”). The
evidence also suggests that per capita income levels among regions within countries
have diverged markedly in recent years, particularly in large, diverse countries such
as China and India. An increase in regional disparities in fast-growing regions such
as China and India is not necessarily bad news, however. Improvements in living
standards in vast countries such as these imply that global inequality as a whole
may be decreasing (in tandem with improvement in living standards in these coun-
tries). Moreover, economic theory suggests that an increase in agglomeration forces
may lead to further improvements in the long run, as knowledge spills over into
other regions and sectors of the economy. The ﬁndings of the convergence literature
therefore highlight the key role of regional development policies in promoting eco-
nomic growth and human development. At the same time, they call for serious
empirical work and comparative study.

Epilogue

Balanced development is a complex phenomenon in any policy attempt aimed at
reducing spatial disparities. It calls for a through analysis of its driving forces. An
important contributor to regional development is technological progress, an exten-
sively studied topic in the recent economic growth literature. From a geographic
(regional, urban, or local) perspective, much attention has been paid to the spatial
conditions that induce technological progress (for example, entrepreneurial climate,
availability of venture capital, and incubator facilities). Furthermore, the spatial
diffusion of technology has received much attention, in particular in the geography
literature. A particular case of knowledge and technology diffusion can be found in
foreign direct investment (FDI). Several studies have demonstrated that FDI offers
access to foreign production processes, so that interregional or multinational tech-
nology spillovers may occur (see, for example, Carr, Markusen, and Maskus 2001;
Coe and Helpman 1995; Findlay 1973; Markussen 2002; Xu 2000). These studies
demonstrate clearly that the region is a dynamic player in an intricate web of
spatial-economic interactions that have an impact on spatial disparities.
With more regional dynamism and a trend toward an open world, regional dis-
parities tend to increase, at least in the short and medium term. There is a clear rea-
son for more solid, empirically based modeling work to identify the key drivers of
disparities in regional development. Meta analysis—a systematic set of tools to
identify key drivers from a quantitative angle—may be a fruitful tool with which to
arrive at a better understanding of the causes of spatial disparities.
Any attempt to cope with undesirable spatial disparities has to recognize the com-
plex force ﬁeld within which regional development—and differences therein—is
shaped. Regional development policy is not a simple, one-shot activity, but the result
of endogenous forces in the space economy itself. It is based on the self-organizing
potential of regions, with a multiplicity of actors and change agents involved. A
COHESION AND CONVERGENCE: SYNONYMS OR TWO DIFFERENT NOTIONS? | 277

fruitful way to analyze spatial disparities from a long-range strategic perspective may
be to adopt an evolutionary economic perspective (see, for example, van den Bergh
and others 2006), in which notions like spatial diversity, mutation, stability and
resilience, path dependence, bounded rationality, and selection environment play a
prominent role. Interesting recent contributions from an evolutionary viewpoint to
the ﬁeld of regional planning and development policy can be found in Bosschma and
Lambooy (1999) and Cooke, Uranga, and Extebarria (1998), among others. Further
development of evolutionary thoughts on differences in regional development need
foremost solid and applied research work, making use of quantitative comparative
analysis of the evolution of regions in a complex space economy.

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Africans Need Not Miss Out
on the Beneﬁts of Globalization
FEDERICO BONAGLIA, NICOLAS PINAUD, AND LUCIA WEGNER

Globalization—the deepening of ﬁnancial and trade integration associated with
technological progress and multilateral liberalization—is creating unprecedented
opportunities for developing countries to accelerate growth and lift millions of
people out of poverty. African countries need to be among the beneﬁciaries. The
rapid growth of the Asian emerging economies can offer this opportunity, as it is
raising demand for Africa’s commodities (oil, metals, and precious stones) and
resulting in improved terms of trade. There are still risks and uncertainties, but they
can be reduced by strengthening the internal capacities of African countries and
nurturing the private sector.

Continuous Strong Performance

Africa grew 5.5 percent in 2006—well above the long-term trend and for the fourth
consecutive year. Gross domestic product (GDP) per capita grew about 3.5 percent.
Growth also appears set to accelerate somewhat on average in 2007 and to remain
buoyant in 2008.
The challenge is to ensure that a large proportion of the proceeds from the min-
erals sector is invested in infrastructure and human capital development to support
the medium- and long-term need for diversiﬁcation. Temporary windfall gains make
the reorientation of government budgets urgent. Enhancing transparency and com-
bating corruption are keys to realizing this transformation and maintaining growth.
The continuation of sound macroeconomic polices in most countries on the conti-
nent, for example, has increased business conﬁdence, leading to a pickup in private
investment generally.

Lucia Wegner is Senior Economist of the African Economic Outlook, at the OECD Development Centre, Organisation
for Economic Cooperation and Development (OECD) in Paris.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

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284 | FEDERICO BONAGLIA, NICOLAS PINAUD, AND LUCIA WEGNER

Oil-importing countries will need to contain inflationary pressures, now running
into double digits as a result of oil price increases, and to finance or contain increases
in their current account deficits.
The economic gains of the oil producers are largely due to expanded oil produc-
tion and sustained high prices. New producers (Chad, Equatorial Guinea, and Mau-
ritania) and those opening up new ﬁelds (like Angola, which has more than doubled
its production since 1990 to 1.4 million barrels a day in 2006) have been able to take
advantage of the soaring world demand. The resulting windfall gains could set such
countries ﬁrmly on the road to development.
The oil-importing countries have not been left behind. Metals producers also have
proﬁted from higher world prices and, to a lesser extent, higher export volumes.
Mozambique, Namibia, South Africa, and Zambia all made up for the dearer oil
with their aluminum, iron, copper, and platinum exports.
The price of agricultural exports has been falling, hurting countries dependent
on them, but 2006 turned out not to be too bad. Rubber, coffee, and seafood
exporters enjoyed good prices that strengthened trade balances. Some producers,
despite weak world prices (of cotton, for example), managed to boost exports sub-
stantially, thanks to good weather, and some in Central and East Africa (Madagas-
car, Rwanda, and Tanzania) and West Africa (Benin, Burkina Faso, Ghana, and
Mali) achieved high export growth as well. A number of diversiﬁed exporters also
exhibited strong growth in the volume of exports (Arab Republic of Egypt, Mauri-
tius, and Morocco).
High energy prices may be good for exporters of oil, but they can be bad for
controlling inﬂation, and the continent as a whole saw inﬂation rise to 9.1 per-
cent in 2006. This continental average masks important differences between net
oil exporters and net oil importers, whose inﬂation rate rose from 8.4 percent in
2005 to 12 percent in 2006. Further increases, to 12.7 percent in 2007 and to
12.9 percent in 2008, are expected. Continuing high oil prices, which seem likely,
are a major medium-term risk for the continent’s net oil importers and may
endanger their efforts to maintain macroeconomic stability if the ﬁnancing of the
larger current account deﬁcits leads to a buildup of unsustainable debt levels
once again. It also makes poverty reduction even harder by putting pressure on
government budgets.
African countries need to husband their resources much more carefully to pay
for the key goals of reducing poverty and raising the quality of life for their popula-
tions. This remains true for both oil-exporting and oil-importing countries. The
temptation for the former is to waste resources through inefﬁciency and corruption,
while for the latter, the challenge is to implement policies to sustain and diversify
the economy in the face of variable world prices.

Does Africa Benefit from Globalization?

Africa has signiﬁcantly increased its openness to international trade: merchandise
trade as a share of GDP rose from 43 to 50 percent between 1980–95 and 1996–
AFRICANS NEED NOT MISS OUT ON THE BENEFITS OF GLOBALIZATION | 285

2005. Foreign direct investment (FDI) inﬂows have surged, growing faster than in
other developing regions and tripling their level between 2001 and 2005 (reaching
US$30.6 billion).
Yet Africa’s share in world trade remains minimal, at about 1.5 percent, and
exports are concentrated in a narrow range of primary commodities. Albeit increas-
ing in absolute terms, FDI heading for Africa accounts for less than 4 percent of the
world total and is distributed unequally, with northern Africa, South Africa, and
the largest Sub-Saharan oil producers being the main recipients by far. This reﬂects
dependence on natural resources. The private sector is only marginally involved in
international production networks, mainly in assembly at the bottom end of the
value chain. The post–Multi Fiber Agreement closure of several foreign-owned
clothing factories in southern and eastern Africa shows their vulnerability.

Is History Repeating Itself?

Commodity booms and busts have driven most of African postcolonial develop-
ment, but a new landscape is emerging, and globalization is bringing new actors to
Africa and opening up new markets, which could beneﬁt the continent and prevent a
rerun of the past. There are still risks and uncertainties, but they can be reduced by
strengthening the internal capacities of African countries and nurturing the private
sector better in order to realize fully the opportunities that globalization creates,
while adequately coping with its risks.
The rapid growth of the Asian emerging economies is raising demand for Afri-
ca’s commodities (oil, metals, and precious stones) and has resulted in improved
terms of trade (exports to China reached around US$25 billion in 2006, twelve-
fold their level in 1995). The downside is that African exporters could be pushed
further into specializing in exports of raw materials. Asian domination of labor-
intensive industries, which are often considered potential avenues for the diversi-
ﬁcation of African economies, poses an additional challenge.

New Business Opportunities in a Changing World

In agriculture, despite high potential and market opportunities, sluggish produc-
tivity growth hinders the ability of Africa’s producers both to feed its people
adequately—42 countries are classiﬁed as net food importers—and to respond to
the opportunities now available in global markets. Africa’s share of global agricul-
tural trade is less than 6 percent. With new investors, including Chinese, Indian,
and southern and northern African operators, patterns of FDI have started to diver-
sify into agriculture, manufacturing, construction, and services. Also, portfolio
investors have started to regard Africa as a promising destination because of the
higher potential yields on investment compared to traditional emerging markets.
286 | FEDERICO BONAGLIA, NICOLAS PINAUD, AND LUCIA WEGNER

The real story, however, remains in minerals, partly because poor governance and
difﬁcult business environments hamper FDI in sectors other than extraction.

From a Passive to an Active Player in Globalization

For African economies to realize the full beneﬁts of globalization, conventional
policy prescriptions, such as maintaining macroeconomic stability and improving
the business environment, still hold. But equally important, external resources must
be used more strategically. On one side, this implies capitalizing on oil and mineral
windfall gains. On the other, it means exploring the potential of aid as a catalyst
more systematically, especially as aid is expected to increase in the coming years
(aid to Africa is expected to reach US$51 billion by 2010 from US$40 billion in
2006). “Aid for trade”1 should be used more effectively as an instrument for
strengthening productive capacities and promoting private sector development and
trade-related infrastructure, thereby facilitating Africa’s integration into the global
economy. Funding for this has signiﬁcantly expanded since the 2001 World Trade
Organization (WTO) ministerial conference in Doha. In 2005 Africa was the largest
recipient of trade-related technical assistance, receiving US$1.03 billion (about one-
third of the world total), and the second largest recipient, after Asia, of aid to infra-
structure, receiving US$3.8 billion. Aid for trade represented a ﬁfth of global ofﬁcial
development assistance in 2001–04, but it needs to be expanded further, and its
effective implementation requires stronger actions by African governments in iden-
tifying priorities and better coordinating the efforts of donors. Supporting aid for
trade initiatives in Africa is especially important, as the continent is in the ﬁnal
stage of negotiating with the European Union (EU) the critical Economic Partner-
ship Agreements, which represent an important opportunity to integrate further
efforts at promoting trade development and regional integration in Africa. At the
same time, they also challenge African countries to tackle structural weaknesses in
their economies.

Notes

1. Aid for trade refers to aid that is aimed at helping developing countries to beneﬁt from
trade liberalization at multilateral, regional, and unilateral levels. Its scope has been
broadened by adding to the traditional categories of trade-related technical assistance
(trade policy and regulations and trade development) four new categories: (1) trade-re-
lated infrastructure, (2) efforts to build productive capacity, (3) trade-related adjustment,
and (4) other trade-related needs.
Part VIII: Wrap-Up Discussion
and Closing Remarks
Implications for WDR 2009
INDERMIT GILL

Almost the entire team is here, and they have been listening to you. On behalf of
them, I can say that we have learned a lot. This learning is going to continue to take
place as we continue to discuss these issues. It would be hard to summarize what we
have learned. In fact, it would be unfair to try to do it right now. I cannot think of a
single lousy presentation other than perhaps the ﬁrst one, which was mine.
I would like to thank all of you for giving so many of your ideas and so much of
your time and for doing so cheerfully. As they say, no good deed ever goes unpun-
ished, so we will be coming back to you for more ideas, more thoughts, and more
help as we work on the report. For the next few months, at least, our motto will
be, “Ask not what the World Development Report (WDR) will do for you; ask
what you can do for the WDR.” Once we are done with that, you should ask the
question, “What can the WDR do for you?”
For now I will try to do two things: the ﬁrst one is to share with you a few of
the ideas that I took away: just a few; I am not offering a summary. In general,
what I took away was that most of you did not mind the skeleton that we put
forward for the overall structure of the report, but many of you had questions
and also suggestions of how to put the ﬂesh on that skeleton. And I think there
were even some suggestions about making sure that we did not have a hand where
a foot should be and so on. As we go back, we will look at the skeleton again,
but we will also consider how to ﬂesh out the body. We shared a lot of good ideas
on all three sets of policy issues. For example, on the issue of urbanization, I do
not know if Mantang Cai agrees with me, but I think that we might take away
the idea that large and small cities should be seen as complements, not substitutes,
and rural areas and large and small cities should also be seen as complements, not
as substitutes. We are still trying to work through other issues, but the salient
issue is to understand how the rural-urban transformation is related to the trans-

Indermit Gill is Director, World Development Report 2009. The World Bank, Washington D.C.
Berlin Workshop Series 2009
© 2009 The International Bank for Reconstruction and Development/The World Bank

289
290 | INDERMIT GILL

formation that happens on the sectoral side. The sectoral transformation in the
early stage of urbanization and the occupational transformation and specialization
in the later stage are closely related to how cities evolve and what they do.
Another issue of importance pertains to the delivery of social services, especially
in areas where economic mass is not concentrating. On regional policy, Ángel de
la Fuente Moreno made an interesting point. I do not know if I am paraphrasing
this well or not, but one of the things that he said is that, even if the analysis
shows that there are poor places and not just poor people, the policies that are
designed to address poverty ought to focus on the welfare of the people, not the
place. And if one keeps this in mind, it should be possible to come up with a set
of principles that might help to clarify the debate that we had at the end. Policies
ought to target the welfare of people. The case studies on Poland, South Africa,
Brazil, China, Ireland, and others offer many good lessons.
I appreciate the discussion about what has been happening in the European
Union (EU) with regard to regional integration. One insight that I took away from
Philippe Martin, for example, is that Ireland has done well because it saw the
regional structural funds as an opportunity to catch up internationally, not just as a
way to address economic issues at the subnational level. My sense is that, in
Europe, regional development policy has not worked that well, but regional inte-
gration has. This brings me to the regional integration part: we know how other
regions of the world integrated—North America, Western Europe, and East Asia—
but we do not know how these lessons help us to determine what will work in
Sub-Saharan Africa (SSA). What we would like to do in the WDR is to build up to
the problem of Africa by saying that there are problems that every region of the
world faces, but Africa seems to have a multiplicity of them. One issue that I believe
will ﬁnd its way into the report is that one should not think of Sub-Saharan Africa
as one neighborhood, but rather as several neighborhoods. Asia was not one neigh-
borhood: not only was East Asia a neighborhood, but so were Northeast Asia and
Southeast Asia. There is hardly any reason to expect, as Paul Collier pointed out,
50 countries to get together all at once. It is enough to get a few countries to work
together and then allow the approach to spread.
I am immensely grateful to the organizers of this workshop. This is one of the
most ﬂawlessly organized workshops that I have ever attended, and I have been
attending workshops in India and in East Asia, where things go very well indeed.
This was superb. Thank you very very much.
The New World Bank Ofﬁce in Berlin

CLAUDIA VON MONBART

The World Bank has dealt with spatial disparities only indirectly. I would like to
address the Bank’s presence and present distribution and density in Europe. We
have been working out of Paris, where we have a small embassy for all of the
European donor countries, for the Organisation for Economic Co-operation and
Development (OECD), and for Europe. We also have a small presence in London,
Brussels, and Geneva and a very small presence for the World Trade Organization
(WTO) in Rome. It is no wonder that Berlin felt that the World Bank should be
present here, and ﬁnally we are, as we have just opened a small ofﬁce in Berlin.
We understand our role as that of facilitator. We want to bring a larger World
Bank presence here, but we also want to have more exchange of ideas and
improve our mutual understanding. We want to seek political, intellectual, and
ﬁnancial support, of course, and to bring a little bit of what Michael Hoffmann
yesterday called “continental European thinking” to the table.
I want to congratulate you as well. This workshop has been an excellent model
and example for what we will strive to do in the future. Thank you very much.

Claudia von Monbart is Senior Counsellor, External Affairs, for The World Bank in Paris and Berlin.
Berlin Workshop Series 2009
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Appendix 1: Program
APPENDIX 1: PROGRAM | 295

International Policy Workshop

SPATIAL DISPARITIES AND
DEVELOPMENT POLICY

in preparation for the

WORLD DEVELOPMENT REPORT 2009

convened by

the Development Policy Forum of
InWEnt - Capacity Building International, Germany
on behalf of the Federal Ministry for
Economic Cooperation and Development (BMZ) and in
cooperation with The World Bank

September 30–October 2, 2007 Berlin

Program
296 | APPENDIX 1: PROGRAM

Sunday, September 30, 2007

INTRODUCTION

6.00 p.m. Opening Addresses:

Opening Keynote:
Astrid Kuehl
Director
Development Policy Forum
InWEnt Capacity Building International
Germany

Boris Pleskovic
Research Manager
The World Bank
Washington D.C.

Indermit Gill
Director
World Development Report 2009
The World Bank
Washington D.C.

7.30 p.m. Dinner Buffet at the Grand Hyatt Hotel

UNDERSTANDING SPATIAL TRENDS: PERSPECTIVES AND MODELS

9.00-10.30 a.m. Session I:
“Macro-trends: Spatial Patterns of Economic Activity,
Income and Poverty”
• Are there typical patterns of income disparities within
countries and regions during similar stages of the
development process?
• Where are the poor – urban, rural, large or small cities?
• How does all of this differ across regions, MICs, LDCs?

Chair: Manfred Fischer
Professor of Economic Geography
Vienna University Austria

Co-Chair: Astrid Kuehl
Director
Development Policy Forum
APPENDIX 1: PROGRAM | 297

InWEnt Capacity Building International
Germany
Speakers: Steve Haggblade
Professor
International Development
Department of Agricultural Economics
Michigan State University
United States

Peter Lanjouw
Lead Economist
Development Research Group (DECRG)
The World Bank
Washington D.C.

10.30-11.00 a.m. Coffee break

11.00 a.m.-1.00 p.m. Session II:
“New Economic Geography and the Dynamics of
Technological Change – Implications for LDCs”
• State of the art in theoretical and empirical analysis
• How do these dynamics account for the patterns of
urbanization and economic activity, intra and inter-
countries?
• What do they suggest in terms of directions, constraints
and pre-conditions for development policy in LDCs?

Chair: Ludwig Schaetzl
Professor of Economic Geography
Scientiﬁc Advisory Council Federal Ministry for Economic
Cooperation and Development (BMZ)
Germany

Co-Chair: Astrid Kuehl
Director
Development Policy Forum
InWEnt Capacity Building International
Germany

Speakers: Eduardo Haddad
Associate Professor
Faculty of Economics Administration and Accounting
University of São Paulo
Brazil
298 | APPENDIX 1: PROGRAM

Diego Puga
Research Professor of Economics
Madrid Institute for Advanced Studies (IMDEA)
Universidad Carlos III de Madrid
Spain

Ingo Liefner
Professor of Economic Geography
University of Giessen
Germany

1.00-2.30 p.m. Lunch

2.30-4.00 p.m. Session III:
“Perspectives:
Rural-Urban Transformation: Leading, Lagging and
Interlinking Places”
• What are the pace and patterns of urbanization in LDCs?
• How does the organization of economic activity in the
countryside affect the pattern and outcomes of
urbanization?
• What are the challenges for lagging regions?

Chair: Michael Hofmann
Director General Global and Sectoral Policies – European
and Multilateral Development Policy Africa Middle East
Federal Ministry for Economic Cooperation and
Development (BMZ) Germany

Co-Chair: Marisela Montoliu Muñoz
Head Spatial and Local Development Team Sustainable
Development Network The World Bank Washington D.C.

Speakers: “Rural Perspective”
Mantang Cai
Deputy Director and Associate Professor Beijing
Development Institute Peking University People’s Republic
of China
APPENDIX 1: PROGRAM | 299

“Urbanization Perspective”
Frank van Oort
Professor of Urban Economics and Spatial Planning Utrecht
University The Netherlands

“Interlinkages and the Challenge of Lagging Regions”
Lee Boon Thong
Professor Department of Geography University of Malaya
Malaysia

4.00-4.30 p.m. Coffee break

4.30-6.00 p.m. Session IV:
“Spatial Disparity and Labor Mobility”
• The policy dilemma: People v.s. place prosperity
• Rural-Urban migration – motivations, pace, modalities
and outcomes
• Human capital investments to promote regional
convergence: Can they be effective?
• Labor assimilation in receiving regions: What’s the
evidence?
• The role of remittances in promoting growth in locations
of origin

Chair: Boris Pleskovic
Research Manager
The World Bank
Washington D.C.

Co-Chair: Juergen Zattler
Head of Division
World Bank Group – IMF – Debt Relief – International
Financial Architecture
Federal Ministry for Economic Cooperation and
Development (BMZ)
Germany

Speakers: Angel de la Fuente Moreno
Associate Professor
Universitat Autònoma de Barcelona
Spain
300 | APPENDIX 1: PROGRAM

Adama Konseiga
Afﬁliate
African Population & Health Research Center (APHRC)
Kenya
Research Afﬁliate
GREDI (Research Group in Economics and International
Development)
Faculty of Administration
University of Sherbrooke
Canada

Roman Mogilevsky
Executive Director
Center for Social and Economic Research (CASE)
Kyrgyzstan

6.45 p.m. Departure by bus and guided city tour

7.30-10.00 p.m. Dinner

Venue: Restaurant h.h. mueller
Umspannwerk Kreuzberg
PaulLinckeUfer 20/21
10999 Berlin

Dinner Speech

“Megacities”
Frauke Kraas
Professor for Human Geography
Institute of Geography
University of Cologne
Germany

10.00 p.m. Return to the Hotel

Tuesday, October 2, 2007

8.30-8.40 a.m. Address:
Gudrun Kochendörfer-Lucius
Managing Director InWEnt – Capacity Building
International Germany
APPENDIX 1: PROGRAM | 301

COUNTRY REALITIES AND POLICY OPTIONS

8.40-10.00 a.m. Session V:
“Africa: Rethinking Growth and Regional Integration”
• Spatial development patterns in selected African countries
(South Africa, Nigeria)
• Agglomeration without growth?
• Is it realistic to implement successful elements of
economic development of East Asian countries
in Sub-Saharan Africa?
• What are the fundamental socioeconomic and cultural
differences between East Asian and African countries?
• Is export-orientated industrialization an appropriate
strategy for Africa?
• How does China’s engagement in Africa contribute to the
development of African countries?

Chair: Robert Kappel
Professor
President
German Institute of Global and Area Studies
Germany

Co-Chair: Aehyung Kim
Consultant
The World Bank
Washington D.C.

Keynote: Paul Collier
Professor of Economics
Department of Economics
Oxford University
Director
Centre for the Study of African Economies
United Kingdom

Speakers: Hassen Mohamed
Chief Director
Planning, Policy Coordination and Advisory Unit
The Presidency
South Africa
302 | APPENDIX 1: PROGRAM

Wim Naudé
Senior Research Fellow
UNUWIDER
Finland

10.00-10.15 p.m. Coffee break

10.15-11.45 a.m. Session VI:
“Learning from Europe's Efforts at Integration and
Convergence”
• Lessons from the allocation and implementation of
convergence funds: Preconditions for success, variations
across countries
• Lessons and replicability in LDCs

Chair: Tanja A. Boerzel
Professor of Political Science
Chair
Centre for European Integration
Free University of Berlin
Germany

Co-Chair: Boris Pleskovic
Research Manager
The World Bank
Washington D.C.

Speakers: Nicola de Michelis
Head of Unit
Development of Cohesion Policy
European Commission
Brussels

Rolf J. Langhammer
Professor
VicePresident
Kiel Institute of World Economics
Germany

Philippe Martin
Paris School of Economics
Université Paris 1 Panthéon Sorbonne
France
APPENDIX 1: PROGRAM | 303

11.45-12.00 Coffee break

12.00-1.30 p.m. Session VII:
“Spatial Policy for Growth and Equity”
• When does it make sense to invest on convergence – Is
there a workable typology?
• What policies and investment options have worked and
what haven’t and why?
• Are there clear regional distinctions?
• Impact of the political economy, institutions, ethnicity,
conﬂict.
• Evaluation of experience and outcomes of different
options:
— connectivity to markets
— development of local competitive advantages
— longerterm investment in human capital
— investments in labor assimilation in cities
— subsidizing lagging regions’ growth.
• What are the potentially fruitful areas for policy
exploration?
• Infrastructure pre-conditions to national growth and
multi-country corridors for regional integration.

Chair: Indermit Gill
Director
World Development Report 2009
The World Bank
Washington D.C.

Co-Chair: Astrid Kuehl
Director
Development Policy Forum
InWEnt Capacity Building International
Germany

Speakers: Grzegorz Gorzelak
Professor of Economics
Director
Centre for European Regional and Local Studies
Warsaw University
Poland
304 | APPENDIX 1: PROGRAM

Peter Nijkamp
Professor
Department of Spatial Economies
Free University of Amsterdam
The Netherlands

Lucia Wegner
Senior Economist
African Economic Outlook
OECD Development Centre
Organisation for Economic Cooperation and
Development (OECD)
Paris

1.30-2.00 p.m. Wrap-up discussions and implications for WDR 2009

Closing and Outlook: Indermit Gill
Director
World Development Report 2009
The World Bank
Washington D.C.

Closing Words: Astrid Kuehl
Director
Development Policy Forum
InWEnt - Capacity Building International
Germany

The New World Claudia von Monbart
Bank Ofﬁce in Senior Counsellor
Berlin: External Affairs
The World Bank
Paris and Berlin

2.00 p.m. Farewell Buffet

Venue Hotel Grand Hyatt Berlin
Library
Marlene-Dietrich-Platz 2
10785 Berlin
Germany
T +49 30 2553 1234
F +49 30 2553 1235
berlin@hyatt.de
http://berlin.grand.hyatt.de
Appendix 1: Participants
306 | APPENDIX 2: PARTICIPANTS

Tanja Boerzel Nicola De Michelis
Professor of Political Science Head of Unit
Chair Development of Cohesion Policy & Accession
Centre for European Integration Negotiations
Freie Universitaet Berlin (FU) Directorate General (DG) for Regional Policy
Ihnestrasse 22 European Commission
14195 Berlin Avenue de Tervuren 41
Germany 1049 Brussels
fon: 0049 30 8385-4830 Belgium
fax: 0049 30 8385-5049 fon: 0032-2/2955230
e-mail: boerzel@zedat.fu-berlin.de fax: 0032-2/29 94684
0032-2/29 63271
Mantang Cai
e-mail: Nicola.De-Michelis@ec.europa.eu
Deputy Director and Associate Professor
Beijing Development Institute Manfred Fischer
Peking University Professor of Economic Geography
5 Yiheyuan Lu Institute for Economic Geography and
Haidan District GIScience
Beijing Vienna University of Economics and
People's Republic of China Business Administration
fon: 0086 10 82529560 Nordbergstr. 15/4/Sector A
fax: 0086 10 82529538 1090 Vienna
e-mail: mtcai@pku.edu.cn Austria
fon: 0043 1 313364836
Paul Collier
fax: 0043 1 31336 703
Professor of Economics
e-mail: manfred.ﬁscher@wu-wien.ac.at
University of Oxford
Director Indermit Gill
Centre for the Study of African Economies Director World Development Report 2009
(CSAE) The World Bank
Professorial Fellows 1818 H Street, NW
St Anthony's College 20433 Washington, D.C.
Manor Road Building, Manor Road USA
OX1 3UQ Oxford fon: 001 202 4733449
United Kingdom fax: 001 202 5220308
fon: 0044 186527-1089 e-mail: igill@worldbank.org
fax: 0044 186527-1094
Grzegorz Gorzelak
e-mail: paul.collier@economics.ox.ac.uk
Director
Angel de la Fuente Moreno Centre for European Regional and Local
Associate Professor Studies (EUROREG)
Institute of Economic Analysis (IEA) Professor of Economics
Higher Council of Scientiﬁc research (CSIC) University of Warsaw
Universitat Autònoma de Barcelona (UAB) Krakowskie Przedmiescie 30
08193 Bellaterra, Barcelona 00-927 Warsaw
Spain Poland
fon: 0034 9 35806612 fon: 0048 22 82616-54
fax: 0034 9 35801452 0048 22 5520-106
e-mail: Angel.DeLaFuente@iae.sisc.es fax: 0048 22 82621-68
Angel.DeLaFuente@uab.es e-mail: ggorzelak@uw.edu.pl
gorzelak@post.pl.
APPENDIX 2: PARTICIPANTS | 307

Eduardo Haddad Aehyung Kim
Associate Professor Consultant
Department of Economics The World Bank
University of São Paulo 1818 H Street NW
Av. Professor Luciano Gualberto, 908 20433 Washington, D.C.
05508-900 São Paulo USA
Brazil fon: 001 202 4588853
fon: 0055 11 3818 1444 fax: 001 202 5220304
fax: 0055 11 3032 8334 e-mail: akim3@worldbank.org
e-mail: ehaddad@usp.br
Gudrun Kochendörfer-Lucius
Steven Haggblade Managing Director
Professor of International Development InWEnt – Capacity Building International
Department of Agricultural Economics Friedrich-Ebert-Allee 40
Michigan State University 53113 Bonn
202 Agriculture Hall Germany
MI 48824-1039 East Lansing fon: 0049 228-4460-1522/
USA 0049 30-43996-338
fon: 001 517 355-0257 fax: 0049 228-4460-1529
fax: 001 517 432-1800 e-mail: gudrun.kochendoerfer@inwent.org
e-mail: blade@msu.edu
Adama Konseiga
Michael Hofmann Lecturer
Director-General Research Aﬁliate
Global and Sectoral Tasks - European and Economics Department
Multilateral Development Policy - Africa - GREDI (Research Group in Economics and
Middle East International Development)
Federal Ministry for Economic Cooperation Faculty of Administration
and Development (BMZ) University of Sherbrooke
Stresemannstrasse 94 2500 Boulevard Université Sherbrooke
10963 Berlin (Quebec)
Germany J1K 2R1 Quebec
fon: 0049 1888 535-2800 Canada
fax: 0049 1888 535-4800 fon: 001 819 821-7000/ -61940
e-mail: michael.hofmann@bmz.bund.de 001 418 266 1223
fax: 001 819 5801342
Robert Kappel
001 418 2661225
Professor
e-mail: akonseiga@aphrc.org
President
Adama.Konseiga@USherbrooke.ca
GIGA German Institute of Global and Area
akonseiga@yahoo.com
Studies
Neuer Jungfernstieg 21 Frauke Kraas
20354 Hamburg Professor for Human Geography
Germany Chair for Urban and Cultural Geography
fon: 0049 40 42825-501 Department of Geography
fax: 0049 40 42825-547 University of Cologne
e-mail: kappel@giga-hamburg.de Albertus-Magnus-Platz
50923 Köln
Germany
fon: 0049 221 470-7050
fax: 0049 221 470-4917
e-mail: f.kraas@uni-koeln.de
308 | APPENDIX 2: PARTICIPANTS

Astrid Kuehl Philippe Martin
Director Professor of Economics
Development Policy Forum Paris School of Economics
InWEnt - Capacity Building International, Maison des Sciences Economiques
Germany Bureau 309
Stresemannstr. 92 106-112, boulevard de l’Hôpital
10963 Berlin 75013 Paris
Germany France
fon: 0049 30 43996-311 fon: 0033 1 44078265
fax: 0049 30 43996-250 e-mail: Philippe.Martin@univ-paris1.fr
e-mail: astrid.kuehl@inwent.org
Roman Mogilevsky
Rolf J. Langhammer Executive Director
Professor Center for Social and Economic Research
Vice-President (CASE)-Kyrgyzstan
Kiel Institute for the World Economy Apt. 1, House 21
Duesternbrooker Weg 120 Microrayon 3
24105 Kiel 720064 Bishkek
Germany Kyrgyz Republic
fon: 0049 431 8814203 fon: 00996 312 492504
fax: 0049 431 8814524 fax: 00996 312 595663
e-mail: rolf.langhammer@ifw-kiel.de e-mail: rmogilevsky@hotmail.com
Peter Lanjouw Hassen Mohamed
Lead Economist Chief Director
Development Economics Research Group Planning, Policy Coordination and
(DECRG) Advisory Unit
The World Bank The Presidency
1818 H Street NW The Presidency Private Bag X 1000
Washington, D.C. 0001 Pretoria
USA South Africa
e-mail: planjouw@worldbank.org fon: 0027 12 300-5455
fax: 0027 86 683-5455
Ingo Liefner
e-mail: hassen@po.gov.za
Professor
Department of Economic Geography Marisela Montoliu Muñoz
Institute of Geography Senior Adviser and Head
Justus Liebig University Giessen Spatial and Local Development Unit
Senckenbergstr. 1 Sustainable Development Network (SDN)
35390 Giessen The World Bank
Germany 1818 H Street NW
fon: 0049 641 9936220 Washington, D.C.
fax: 0049 641 9936209 USA
e-mail: ingo.liefner@geogr.uni-giessen.de fon: 001 202 4737583
fax: 001 202 5223481
e-mail: Mmontoliumunoz@worldbank.org
APPENDIX 2: PARTICIPANTS | 309

Wim Naudé Ludwig Schaetzl
Senior Research Fellow Professor Emeritus of Economic Geography
UNU-WIDER Leibniz University of Hannover
Katajanokanlaituri 6 B Member of the Scientiﬁc Advisory Council
00160 Helsinki Ministry for Economic Cooperation and
Finland Development (BMZ)
fon: 00358 9 61599-236 Schneiderberg 50
fax: 00358 9 61599-333 30167 Hannover
e-mail: Wim@wider.unu.edu Germany
fon: 0049 511 762 - 3536
Peter Nijkamp
- 4496
Professor in Regional Economics and
fax: 0049 511 7623051
Economic Geography
e-mail: schaetzl@wigeo.uni-hannover.de
Department of Spatial Economics
Faculty of Economics and Business Lee Boon-Thong
Administration Professor
Free University of Amsterdam (VU) Department of Geography
De Boelelaan 1105 University of Malaya
1081 HV Amsterdam 50603 Kuala Lumpur
The Netherlands Malaysia
fon: 0031 20 5986090 fon: 0060 3 79675605
fax: 0031 20 5986004 fax: 0060 3 79675457
e-mail: pnijkamp@feweb.vu.nl e-mail: leebt@um.edu.my
Boris Pleskovic Frank van Oort
Research Manager Professor of Urban Economics and
The World Bank Spatial Planning
1818 H Street NW Department of Economic Geography
20433 Washington, D.C. Faculty of Geosciences
USA Utrecht University
fon: 001 202 4731062 P.O. Box 80115
fax: 001 202 522 0304 3508-TC Utrecht
e-mail: bpleskovic@worldbank.org The Netherlands
fon: 0031 30 253 4437
Diego Puga
mobile: 0031 654 998 5553
Research Professor of Economics
fax: 0031 30 254 0604
Madrid Institute for Advanced Studies
e-mail: f.vanoort@geo.uu.nl
(IMDEA)
Universidad Carlos III Anthony Venables
Madrid 126 Professor of Economics
28903 Getafe University of Oxford
Spain Chief Economist
fon: 0034 93 542-2871 Department for International Development
fax: 0034 93 542-1860 (DFID)
e-mail: diego.puga@imdea.org 1 Palace Street
SW1E 5HE London
United Kingdom
fon: 0044 20 70230522
fax: 0044 20 70230636
e-mail: A-Venables@dﬁd.gov.uk
tony.venables@economics.ox.ac.uk
310 | APPENDIX 2: PARTICIPANTS

Claudia von Monbart Observers:
Senior Counsellor
External Affairs
The World Bank Annette Baehring
Paris and Berlin Head of Unit
66, avenue d'Iéna Regional and Local Governance,
75116 Paris Decentralisation
France Gesellschaft für Technische Zusammenarbeit
fon: 0033 1 40693014 (GTZ)
fax: 0033 1 47237436 Dag-Hammarskjöld-Weg 1-5
e-mail: cvonmonbart@worldbank.org 65760 Eschborn
Germany
Lucia Wegner fon: 0049 6196 791660
Senior Economist fax: 0049 6196 79801660
African Economic Outlook e-mail: Annette.Baehring@gtz.de
OECD Development Centre
Organisation for Economic Co-operation and Souleymane Coulibaly
Development (OECD) Young Professional
2, rue André Pascal DECWD
75775 Paris Cedex 16 The World Bank
France 1818 H Street NW
fon: 0033 1 4524-9606 20433 Washington, D.C.
fax: 0033 1 44306150 USA
e-mail: Lucia.Wegner@oecd.org fon: 001 202 473 9845
fax: 001 202 640 8363
Juergen Zattler e-mail: scoulibaly2@worldbank.org
Head of Division
World Bank Group - IMF - debt relief - Uwe Deichmann
international ﬁnancial architecture Senior Environmental Specialist
Federal Ministry for Economic Cooperation Development Research Group
and Development (BMZ) Infrastructure and Environment
Stresemannstrasse 94 The World Bank
10963 Berlin 1818 H Street NW
Germany 20433 Washington, D.C.
fon: 0049 1888 535-2709 USA
fax: 0049 1888 535-2632 fon: 001 202 473-6400
e-mail: zattler@bmz.bund.de fax: 001 202 522-0308
e-mail: udeichmann@worlbank.org
Paul Dorosh
Senior Economist
Rural and Spatial Development
Spatial and Local Development Team
The World Bank
1818 H Street NW
20433 Washington, D.C.
USA
fon: 001 202 458-4419
fax: 001 202 522-3481
e-mail: pdorosh@worldbank.org
APPENDIX 2: PARTICIPANTS | 311

Gerd Fleischer Somik Lall
Senior Policy Advisor Senior Economist
Division Agriculture, Fisheries and Food Spatial and Local Development
Gesellschaft für Tecnische Zusammenarbeit Sustainable Development Network
(GTZ) The World Bank
Dag-Hammarskjöld-Weg 1-5 1818 H Street NW
65760 Eschborn 20433 Washington, D.C.
Germany USA
fon: 0049 6196 791432 fon: 001 202 4585315
fax: 0049 6196 797170 fax: 001 202 5223481
e-mail: gerd.ﬂeischer@gtz.de e-mail: slall1@worldbank.org
Maria Emilia Freire Khulekani Mathe
Senior Adviser Senior Policy Analyst
Sustainable Development Network The Presidency
The World Bank Private Bag X 1000
1818 H Street NW 0001 Pretoria
20433 Washington, D.C. South Africa
USA fon: 0027 12 300-5383
fon: 001 202 473-9508 fax: 0027 86 683-5383
e-mail: mfreire@worldbank.org e-mail: khulekani@po.gov.za
Chorching Goh Nils-Henning Meyer
Senior Economist Principle Sector Economist
Develoment Report 2009 Agriculture and Environment
Development Economics KfW Entwicklungsbank (KfW
The World Bank Development Bank)
1818 H Street NW Palmengartenstr. 5-9
20433 Washington, D.C. 60325 Frankfurt am Main
USA Germany
fon: 001 202 4580123 fon: 0049 69 7431-2364
fax: 001 202 5220308 fax: 0049 69 7431-3605
e-mail: cgoh@worldbank.org e-mail: nils.meyer@kfw.de
Vivian Hon Ulrich Nitschke
Senior Economist Head of Division
Spatial and Local Development Team Development Education Service Agency
Sustainable Development Network Communities in One World
The World Bank InWEnt - Capacity Building International
1818 H Street NW Friedrich-Ebert-Allee 40
20433 Washington, D.C. 53113 Bonn
USA Germany
fon: 001 202 473-3429 fon: 0049 228 4460-1634
fax: 001 202 522-3481 0049 228 4460-2634
e-mail: vhon@worldbank.org fax: 0049 228 4460-1635
e-mail: ulrich.nitschke@inwent.org
Andreas Kopp
Lead Transport Economist
ETWTR
The World Bank
1818 H Street NW
20433 Washington D.C.
USA
e-mail: akopp@worldbank.org
312 | APPENDIX 2: PARTICIPANTS

Truman Packard
Senior Economist
Human Development Economics Europe and
Central Asia
Regional Ofﬁce
The World Bank
fon: 0044- 207-592-8406
Cell: 0044- 7814-600905
WB Tieline: 5783-8406
e-mail: tpackard@worldbank.org
Gerhard Ressel
Desk Ofﬁcer
Division 301: World Bank Group; IMF; debt
relief; international ﬁnancial architecture
Federal Ministry for Economic Cooperation
and Development (BMZ)
Stresemannstrasse 94
10963 Berlin
Germany
fon: 0049 30 18535-2786
fax: 0049 30 1810535-2786
e-mail: Gerhard.Ressel@bmz.bund.de
Guenther Taube
Director
Dep. 2: Intern. Regulatory Framework / Good
Governance / Economic Policy
InWEnt – Capacity Building International
Friedrich-Ebert-Allee 40
53113 Bonn
Germany
fon: 0049 228 44601 – 800
0049 30 43996 – 200
fax: 0049 228 44601 – 090
e-mail: guenther.taube@inwent.org
Hirotsugu Uchida
Assistant Professor
University of Rhode Island
Consultant
The World Bank
1818 H Street NW
20433 Wahington, D.C.
USA
fon: 001 202 458-1656
e-mail : huchida@worldbank.org
ECO-AUDIT
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Themes for the
11TH ANNUAL BERLIN WORKSHOP SERIES

Berlin, Germany

“CLIMATE GOVERNANCE AND DEVELOPMENT”

September 28–30, 2008

Climate Change as a Development Priority

Energy and Development: Policies and Technologies

Natural Resource Governance for Adaptation, Migration, and Development

Development, Non-State Actors, and Climate Governance: Private Sector
and NGOs

Financing Adaptation and Mitigation in an Unequal World

Changing Climate, Changing Institutions of Governance
T
he Berlin Workshop Series 2009 presents selected papers from meetings held from
September 30 – October 2, 2007, at the tenth annual forum co-hosted by InWEnt and
the World Bank in preparation for the Bank’s World Development Report. At the 2007
meetings, key researchers and policy makers from Europe, the United States, and developing
countries met to identify and brainstorm on spatial disparities and development policy, which
are later examined in depth in the World Development Report 2009.

This volume presents papers from the Berlin Workshop sessions on issues relating to under-
standing spatial trends: perspectives and models; new economic geography and the dynamics
of technological change: implications for developing countries; perspectives on rural-urban
transformation: leading, lagging and interlinking places; spatial disparity and labor mobility;
country realities and policy options; learning from Europe’s efforts at integration and conver-
gence; and spatial policy for growth and equity.

IN THIS VOLUME:
Introduction by Gudrun Kochendörfer-Lucius and Boris Pleskovic; keynote addresses by
Indermit Gill, Anthony Venables, and Paul Collier; papers by Steven Haggblade; Peter Lanjouw;
Eduardo Haddad; Ingo Liefner; Mantang Cai; Frank van Oort and Philip McCann; Ángel de la
Fuente Moreno; Adama Konseiga; Roman Mogilevsky and Aziz Atamanov; Hassen Mohamed;
Wim Nuadé; Nicola de Michelis; Rolf J. Langhammer; Philippe Martin; Grzegorz Gorzelak; Peter
Nijkamp; and Federico Bonaglia, Nicolas Pinaud, and Lucia Wegner. Closing remarks by
Indermit Gill and Claudia von Monbart.

ISBN 0-8213-7723-9

SKU 17723