Place Based Policies:
Tony Venables
University of Oxford
& International Growth Centre
Introduction
Place-based policies: context & instruments
•
Lagging regions
•
Urban policy
•
Corridors
•
Special economic zones
Important because:
•
Responding to spatially concentrated shocks
•
•
Why is the system not good at self-correcting?
Long run economic development
•
Spatial inequalities are an aspect of under-development
•
‘Lumpy’ investments cannot be spread evenly across space
This talk:
•
Objectives and issues
•
The non-tradables trap: a model
•
Place based policy & economic development
•
Responding to shocks
PBP: Objectives and issues
I: Objective of PBP is to stimulate private sector investment.
•
Large, lumpy and sunk
II: Context of absolute not comparative advantage
•
Comparative advantage brings competitiveness only if prices (wages)
can differ between places.
•
Regional economics:
•
•
Labour is mobile  real wages linked across regions
•
Absolute productivity differences less easily offset by wage
differences
Where is the price/ wage flexibility?
•
Land prices: (zero lower bound: rents vs capital values)
•
Other ‘urban costs’ (often a function of city size).
•
•
Higher costs in larger cities
Some impact on nominal wages, even if real wages equalised
across a jurisdiction
PBP: Objectives and issues
III: Multiple conditions are necessary to stimulate private investment
•
Access to markets
•
Access to inputs: low elasticity of substitution between
• Labour
• Skills
• Local housing stock
•
Capital
•
Land:
•
•
Assembly of suitable parcels
Intermediates
• Utilities: power
• Business services
• Intermediate goods
privately
provided
Developing economies:
•
Some of these inputs plentiful (cheap?) / elastic supply
•
Some .
.
.
scarce (expensive?) / inelastic supply
PBP: Objectives and issues
IV: Coordination failure
•
Multiple investments are required – with large sunk costs.
• Importance of expectations
•
Trivial coordination failure:
•
•
no one produces nuts (because no one produces bolts, and vice versa).
Broader level:
•
•
•
•
•
Returns to investment increasing with scale in a range of related activities
“
with proximity to intermediate goods and services
“
with proximity to market
“
with proximity to skills
“
with infrastructure
Developing economies:
‘Proximity’ has a particular force – no nearby suppliers.
•
Market failure: scale effects that cannot be internalised by a single investor
 Hard to start new activities
 Shocks not self-correcting
The non-tradables trap: a model
Set up demand and supply framework to think through implications
•
Spatial units: cities?
•
Labour demand from (potentially) two production sectors:
•
N: Non-tradable production
•
i.e. prices set ‘locally’ (town/ region/ country)
•
Demand from self, hinterland, tax, resource revenues….
 diminishing returns:
•
•
T: Tradable sector
•
Tradables have prices fixed on world market
•
Potentially increasing returns
Labour supply
•
Labour mobility equalises real wages across & within cities
•
Nominal wages higher (compensating differential) if:
•
city large
•
city ‘inefficient’ – construction/ infrast/ services
•
NB – embed standard urban model of commuting/ housing/construction
The non-tradables trap: equilibrium
Long run urban development:
•
Labour demand
•
Labour supply
•
Eq. M, produce only N
•
Eq. M’, produce N&T
•
Less likely to be in M’:
•
Lower is productivity in T
•
Higher is demand for N
(urban Dutch disease)
•
Less efficient (higher
cost) is the city
African cities: low real wage/ high price/ high cost/ high nominal wage/
no ‘footloose’ manufacturing
The non-tradables trap: increasing returns & multiple equilibria
•
Labour demand
•
Labour supply
•
Eq. M, produce only N
•
W > trigger point at
which T prodn. Starts
Eq. M’, produce N&T
•
•
Same real wage, but
urban land rents
higher
•
Multiple equilibria – dichotomy E. Asia / African cities
•
M has coordination failure between (potential) T producers
•
Need richer 2-period model to capture:
•
Expectations & sunk costs – of firms & builders/ developers
•
Building the wrong sort of city – 4 cases:
The non-tradables trap: 2-periods
4 cases:
I, II: M, M’: stationary 2period equilibria.
Suppose: Period 1, T sector
not available. Period 2, T
sector becomes available.
E
III: Build city expecting N,
i.e. at point M (low rent, lowrise, low density)
Period 2, eqm with T
production unattainable
IV: Build city expecting T
prodn, i.e. at point E
(expected higher future rent,
so build more and denser).
Message:
E < trigger point  period 2
has T prodn
•
Coordination failure across producers and developers
•
Possible to build the wrong sort of city – if designed for N,
then land-use is inefficient (high cost) for T.
Responding to shocks:
•
Many cities, some N, others N&T.
•
Economic shock: trade or technology
•
•
•
A city loses T production
Equilibrium response:
•
Fall in aggregate production of T, increase N, fall in price of N
•
Affected city and all other N cities contract: rents fall, nominal wages fall
•
N&T cities expand: rents increase, nominal wages rise
Policy response:
•
Attract a new T sector to affected city……….
•
Relocate some N from N&T cities to affected city
•
Allows expansion of T in N&T cities
•
Mitigates change in city size and nominal wage differential
•
Locks affected city into N production…….?
Concluding comments
•
Sector-based policies
• Deserved scepticism?
•
Place-based policies
• Places matter more than sectors?
• For people
• For politics
•
Can economists inform thinking and policy design?
• Developing countries:
• Development inherently spatially uneven
• Egregious policy failures in many developing cities
• Developed countries:
• Disappointing history of regional policies?
• Value added by the two things economists bring:
- Seeing the system as a whole & opportunity cost