Three Arguments Often Used to Support Place-Based Policies for Nonviable Regions

flood losses in 2050 are projected to be approximately US$52 billion. Investment can forestall nonviability, but as with any investment, the cost of building prophylactic measures such as seawalls needs to be weighed against long-term economic potential, fiscal capacity, and governance capabilities. Not all regions will pass the test.

Over the short to medium term, fiscal transfers and service provision will contribute to reducing the welfare gap between leading and lagging regions. Over the longer term, moving people out of unviable regions—investing in people instead of places, as suggested by the 2009 World Development Report (World Bank 2009)—may be the best course. Place-based policies in certain lagging areas are inevitably used to serve a fundamentally person-based motive: supporting poor households. Addressing this goal would be more efficiently achieved by making the tax system more progressive (as in France) or strengthening means-tested transfer programs (Kline and Moretti 2014).4 Equity per se is not a sufficient motivation for spatial policies, as Bartik (2020) and Neumark and Simpson (2015) note.

Three Arguments Often Used to Support Place-Based Policies for Nonviable Regions

The political unpalatability of the conclusion that some regions are not viable is often enough to goad governments to embrace place-based development projects, despite frequent arguments about the superiority of other policy packages. Three countervailing arguments are often employed. Their validity depends heavily on context.

Argument 1. Excessive Expansion of the Leading Areas Increases Congestion Costs and Puts Excessive Pressure on Real Estate Prices

Mass movements to cities can create a host of other problems. As Paul Krugman (1999) noted, “I am quite sure in my gut, and even more so in my lungs, that Mexico City is too big.”5 The same could be said of Mumbai or Jakarta or Los Angeles or any number of other cities. Political access, poor services in the rural areas, or the concentration of certain natural endowments may lead to overly large cities that are less productive than crowded, as chapter 2 discusses.

However, problems in the major agglomerations are not somehow an argument for decentralizing to distant lagging areas. As Duranton and Venables (2018, 2020) note, the better policy response to this is likely to be policy within the booming region, as discussed in chapter 7 on cities and zones. In the case of China, for instance, Desmet and Rossi-Hansberg (2013) argue that reallocation of population to other cities could lead to large increases in national welfare. If all cities had the same level of efficiency, welfare would increase by 47 percent. If all cities had the same level of amenities, welfare would increase by 13 percent. However, the exercise is entirely about reallocation among cities, not to lagging regions. Further, they argue that improving the overall low

levels of amenities in the large cities would lead to even larger cities. Some countries, such as the Republic of Korea, have tried to resolve the coordination failures of breaking up mega-cities by establishing secondary cities and then seeding them with government ministries as a form of coordination. The wisdom of this course in the end depends on the relative productivities and amenities of the secondary versus primary cities.

Argument 2. Mobility Is Imperfect

As chapter 3 discusses, migration may not offer pathways out of poverty in lagging regions of low-income countries. The evidence suggests that migration increases with economic development; yet the lack of structural transformation in many developing countries impedes productive reallocation to urban areas from lagging regions. Mobility is also hindered by workers’ age, lack information on destinations, access to finance, skills, or the fear of discrimination in potential destinations. It may also be explained by preferences to stay in vastly depreciated real estate, or simply an attachment to a place. Hence, sizable residual populations may be anchored in lagging regions or in areas experiencing adverse shocks. In the United States, even long-standing job loss has generated only limited out-migration. For instance, shocks to local manufacturing induced by trade with China have not led to substantial changes in population, Autor, Dorn, and Hanson (2013) find. Chapter 3 suggests the same is true in Brazil, with substantial welfare losses.

As always, ideally, the policy response is best directed at the distortion. If mobility is limited by information or lack of credit to move, or skills mismatches that can be remedied, then policy needs to be directed there to facilitate migration or provide appropriate training. If the issue is, however, one of infirmity or cultural frictions (see box 5.3), then the options are less clear—but do not necessarily dictate place-based policies. As the 2009 World Development Report (World Bank 2009) and others have argued, income transfer policies are likely to be more efficient ways to support individuals than complex and expensive spatial development plans.

Argument 3. Employment Rates Differ

In the presence of differential shocks and weak mobility, the resulting differential employment rates may reflect different social values of the additional job created, Bartik (2020) and Austin, Glaeser and Summers (2018) argue. Joblessness is compounded by associated problems (negative social externalities) such as regional crime and mental illness, as well as increases in alcohol and drug use and opioid deaths (Autor, Dorn, and Hanson 2016).

These problems provide a rationale for what Bartik (2020) calls “place-based jobs policies.” Because only the private sector can create sustainable jobs, this necessarily implies policies that seek to expand firms or relocate them to areas with a lower supply