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Globalization and Regional Growth within Countries
lowered trade costs, with dual effects. They permit dispersion of routine activities, while encouraging agglomeration of complex productive activities by improving matching between producers and consumers.
For instance, merchants in the 3,202 “Taobao villages” across 24 provinces, municipalities, and autonomous regions of China sell clothing and other consumer items, mostly obtained from small local factories, on Alibaba platforms. Broadband access is viewed as a new source of productivity and jobs for displaced workers, from coal miners in the US state of West Virginia to the farmers in the Sahel region. The COVID-19 (coronavirus) experience has shown the potential of new technologies to enable teleworking from regions that were previously excessively remote—such that some observers have even forecast the demise of the city.
However, the “dislike of distance” remains a potent force. For instance, the banks of servers undergirding the digital network in the United States remain concentrated around established cities, even though they could be more economically located near cheap energy and in colder climes, Greenstein and Fang (2020) show.
This chapter first examines the implications of globalization for the allocation of growth within regions of countries (what this chapter calls regional growth). It next examines the role of trade costs, infrastructure conditions, and supporting institutions within countries in limiting the extent to which gains from trade can reach distant places. Finally, the chapter considers the role of digital connectivity in mitigating spatial disparities.
As discussed in chapter 2, even in the least developed countries, industry and services tend to be concentrated in dense metropolitan areas, and productivity rises with the density of economic activity. The centripetal forces of agglomeration economies can drive a virtuous cycle of economic concentration and higher productivity (Duranton and Puga 2020). In this context, globalization has powerful, and varied, impacts on agglomeration forces within countries.
This section examines the implications of globalization for the spatial allocation of activity within countries. In particular, it discusses recent evidence developed as part of this project, centering on global value chains (GVCs) (Grover and Lall 2021). Anecdotal evidence suggests that cross-country cooperation in GVCs may provide opportunities for secondary cities and help disperse economic activity. For instance, collaboration on integrated supply chains in manufacturing, whereby each city is assigned a specialized role in production, could boost the global competitive advantage of secondary cities. The successful cooperation between Singapore and secondary cities in Malaysia (Johor Bahru) and Indonesia (Batam and Bintan) offers one such example (Toh 2006).
In this context, new research for this volume by Grover and Lall (2021) examines regional growth opportunities using the lens of participation in GVCs. Their focus is on trade in intermediates. This process has gone by different names: “trade in middle products” in the 1980s (Sanyal and Jones 1982); “fragmentation” (Deardorff 1998; Venables 1999) and “production sharing” (Yeats 2001) in the 1990s; “vertical specialization” (Hummels, Ishii, and Yi 2001), “offshoring,” and “trade in tasks” (Grossman and Rossi-Hansberg 2008) in the 2000s; and “trade in value added” or “global value chains” (Baldwin 2011a, 2011b) in the 2010s.
Grover and Lall first estimate a measure of the distribution of city size for each country and year using demographic data on urban agglomerations. By regressing the log rank of each urban agglomeration in a given country on the log of the agglomeration’s population size, they estimate the country’s Zipf coefficient, a parameter generally used as a summary statistic of city size distribution. Next, they examine the determinants of city size distributions, with a focus on participation in GVCs. Data on GVC participation come from the Trade in Value Added database compiled by the Organisation for Economic Co-operation and Development (OECD).
Grover and Lall (2021) find that participation in GVCs is negatively correlated with spatial dispersion; that is, as countries become more globally integrated, economic activity within the country becomes even more concentrated. Specifically, a unit standard deviation increase in domestic value added (DVA) in exports of intermediate products is associated with a 0.1 standard deviation decline in the Zipf coefficient, a statistical index measuring spatial dispersion. Spatial concentration is even more strongly and positively correlated for GVCs involving high-tech manufacturing (figure 4.1, panel a). As for low-tech manufacturing, the correlation with spatial dispersion is negative, albeit not statistically significant, implying that participation in GVCs does not help with the spatial dispersion of economic activity. The correlation of participation in services GVCs, especially the knowledge-intensive services (such as other business services and R&D services), with spatial concentration is larger in magnitude (panel b). Using reimported DVA as a measure of participation in GVCs,1 Grover and Lall (2021) find that in aggregate a unit standard deviation increase in GVC participation is associated with a 0.033 standard deviation decline in the Zipf coefficient, while the corresponding decline for services is even higher, at 0.042.2 These findings are particularly important for public policy given the rising shares of services in GVCs.
These findings are consistent with an emerging body of evidence showing that economic integration across borders is associated with greater spatial concentration within national borders (Fajgelbaum and Redding 2018; Coşar and Fajgelbaum 2016). For instance, in India, trade liberalization in the early 1990s enhanced economic concentration in intermediate secondary cities (defined as those located between 200 kilometers and 400 kilometers from the nearest ports) relative to those in primary regions closer to ports. However, it had no effect on interior hinterland districts located farther than 400 kilometers from the ports, Dasgupta and Grover (2021) show (figure 4.2).
