Dealing with Challenges in Fully Appraising Policies: Using the Framework as a Heuristic Tool

with regions that are simply not viable, but their tools to sort out what is feasible and then implement policy are bounded. Identifying “doable” combinations of policies becomes as important as designing policies that, if perfectly implemented, would yield the highest returns.

Dealing with Challenges in Fully Appraising Policies: Using the Framework as a Heuristic Tool

Ideally, even the simplest road project would have a full appraisal that would allow a solid ranking of projects by their social value added. This would offer some disciplining of the often-formidable pressures to “do something” to either reverse the declining fortunes of an area or kick-start a long-standing laggard. However, while the direct effects can often be quantified, doing the same for the indirect effects is expensive, time consuming, and and it may be too complex a challenge even for the governments in advanced economies. Often simpler rules of thumb are employed, sometimes based more on the symptoms than a careful diagnosis of the underlying disease. For example, to be eligible for the local economic growth initiative in the United Kingdom, a local area had to rank fiftieth or worse against any of six indexes of multiple deprivation in 2000 or 2004. Likewise, the French urban enterprise zones program also selects lagging areas based on an “index” measuring socioeconomic conditions in the area (Mayer, Mayneris, and Py 2017). But none of these focus on viability per se or any attempt to quantify and value overall effects; by both measures, Kolmanskop might be a good target for revitalization efforts.

Given the challenges facing even well-established and competent bureaucracies such as those in the United Kingdom and France, it is probably better to view the above framework less as a mechanical valuation device and more as a heuristic tool that informs the dimensions that should be taken into account, that disciplines debate, and that surfaces some policy guidelines. In particular, the framework suggests eight guidelines for policy makers.

1. Clearly identify the relevant market failures and distortions. Even if the benefit of remedying market failures cannot be fully valued, identifying those failures is critical to designing an appropriate place-based policy. For instance, asking why capital and knowledge are not already flowing to a lagging region is a first step toward evaluating viability and likely returns to investment. If failures such as transport costs or policy distortions can be identified clearly, as in the cases of Kenya or Buenos Aires discussed in chapter 2, then the remedies may be straightforward. But if after objectively looking at the situation, the problems are more in the intrinsic viability of the region that could not be remedied through intervention, such as was the case in Bannack, Kolmanskop, and arguably many of today’s coal regions, then that should be a cautionary sign that policy makers should be looking at alternatives to place-based policies.

Of course, knowledge of what policies have been generally successful in overcoming such failures is central to the appraisal process. Fortunately, an increasing bank of experience has been accumulating. An invaluable reference is an exhaustive review of ex post evidence, primarily from advanced economies, archived by the What Works Centre for Local Economic Growth, headed by Henry Overman.4

2. Test the sensitivity of assumptions. Given the difficulty of quantifying many elements feeding into the appraisal, testing the sensitivity of the cost-benefit analysis to assumptions and presenting alternative scenarios is useful for ranking projects. For instance, if a road project would be worthwhile only if very large clustering effects emerge among local industry as an indirect effect, it may be ranked lower than a project whose risks are smaller.

3. Reduce dimensionality, tailoring the program to true shortfalls, and accept the possible. The limitations in governance capabilities dictate a clear-eyed view of the limits to project complexity given diagnostic and implementation constraints. This puts a premium on minimizing the dimensionality of a project. Identifying “doable” combinations of policies should become a critical part of the appraisal process. An internal review of the World Bank Africa

Region’s Financial and Private Sector Development portfolio undertaken in 2012 (World Bank 2012) and a study by the Center for Global Development of 20 World Bank projects focused on agglomeration (Gelb et al. 2015) reveal that simpler projects performed better. A strong inverse correlation was found between the number of project components and achievement of the project’s development objectives.

This exercise requires identifying what the most binding market failures and distortions are and which may be important in theory but less critical in practice. This task is made easier where some markets are functioning well, some infrastructure is already in place, and so on. Chapter 5 discusses how the Rural Development Investment Program in Colombia in its second phase shifted its focus to regions with more critical complements so it could reduce the number of coordinated interventions. Value chains, by virtue of linking more advanced firms, can fill in some missing markets or factors, such as entrepreneurial ability or financing. Thus, more focus can be placed, for instance, on building infrastructure, upgrading worker skills, and ensuring a better enabling environment for contracting and other critical activities. If a dispassionate appraisal of government capabilities, as shown in figure 6.1, suggests weaknesses, simplifying the program to something “suboptimal” but feasible makes sense. If such capabilities are extremely rudimentary, then the multidimensional investment package necessary to advance a region may not be possible and a region that in theory is viable becomes nonviable in practice.

4. Build on existing dynamic areas. Linking lagging areas to existing dynamic areas, which have already resolved some of the market failures or distortions, rather than attempting to kick-start lagging regions from zero improves the chance of avoiding investments in nonviable areas.

5. Partner with agents that can supply information, help resolve market failures, and provide credibility. Identifying and bringing in an anchor industry can improve understanding of what the binding constraints on local growth truly are, supply necessary technical knowledge and entrepreneurial expertise, and provide a fixed point around which agents can coordinate. Attracting a piece of a local or global value chain also provides evidence of the viability of a region, and will surface missing complements, such as worker training programs.5 On the other hand, if there is no private sector interest in a region, it probably suggests that the place is not viable.

6. Ensure explicit coordination among critical actors. Regional policies inevitably involve actors at various levels, including the national level. Vertical failure to synchronize among tiers of government can result in an oversupply or undersupply of public goods and services. Horizontal failures to join forces with the federal government may end up in beggar-thy-neighbor policies that pit one place against another (Bartik 2016); similarly, failing to attain buyin from all the relevant ministries may start bidding wars (Rodríguez-Pose and Arbix 2001). For instance, the local government in Indonesia was often not in sync with the center when implementing the Integrated Economic

Development Zones program (lack of vertical coordination) and did not have the capacity to undertake and manage many of the responsibilities (lack of horizontal coordination) (Hofman and Kaiser 2004). This experience illustrates the importance of developing credible mechanisms for both vertical and horizontal coordination.

International experience provides examples of different approaches to improving coordination. First, coordination mechanisms should suit their function.

■ Broad-based functions. Instruments may be required for the broad-based planning and management of a territory. For instance, regions, counties, and metropolitan authorities often coordinate a broad range of functions, due to the overlapping geographies and high complementarity of these functions. A metropolitan region may oversee transit, land use planning, local tax administration, environmental protection, and economic planning because high complementarity between these functions requires them to be planned together. ■ Narrow functions. Other coordination instruments serve much narrower functions. When the geography of functions differs substantially across areas, local authorities may form separate clusters for these functions. For example, the same

metropolitan region may need to cooperate with one cluster of local authorities along a river or coastline to manage pollution, and with another cluster to manage an economic corridor, or to synchronize regional water or health services. Where the geographies of different functions vary substantially, local authorities require instruments for flexible collaboration suited to specific functions.

Second, territorial systems can benefit from both bottom-up and top-down cooperation instruments, though the risks of each need to be managed.

■ Bottom-up approach. Partnerships formed on the basis of local authorities’ own demand may better reflect local needs and enjoy stronger local ownership compared with collaborations devised and imposed by a more distant central authority. Manizales Mas, for instance, was an initiative designed to rekindle industry in an entrepreneurial city in Colombia by upgrading its entrepreneurs, educational institutions, export facilitation, and other elements of the business climate in a multisectoral push. The initiative was bottom up in a relatively small city. However, this approach brings attendant risks. The multiplication of bottom-up agreements can create a complex national system, and partnerships may reflect the self-interest of the local authorities partnering at the cost of the national or wider regional interest (such as when certain localities are excluded based on political differences or lower economic development). Therefore, complementary procedures may be needed to ensure that the process is inclusive and that the national system is adequately streamlined. ■ Top-down approach. Some circumstances may demand imposed (top-down) coordination (such as by the central government) to ensure that less-advantaged localities are included in associations, territorial coverage is comprehensive, or the overall territorial structure is coherent and simple. Top-down partnerships, however, may require complementary procedures to increase ownership and cooperation of members (such as elections and devolution of powers),and mechanisms to strengthen responsiveness to local needs (such as the responsive adjustment of boundaries and powers).

Third, because functions span various geographic areas and coordinating bodies, it is beneficial to provide instruments that allow flexibility, according to the needs, including unforeseen ones. Without this, new instruments may need to be developed for new collaborative functions, leading to either reduced collaboration or a confusing multiplication of tools. Table 6.1 presents a typology to categorize some international instruments by narrow versus broad function and bottom-up versus top-down approaches.

Coordination failures can lead to waste and lost momentum. Box 6.1 provides a breakdown of the components of place-based expenditures in various nations in the Middle East and North Africa and compares them to selected other countries.

Establishing explicit protocols can help avoid coordination failures. Public expenditures reviews have been used in the fiscal and innovation context to track the flow of funds from different agencies by all instruments to all recipients. Public expenditure