Lessons from World Bank Evaluations of Projects to Enhance Agglomeration

BOX 6.2 A Proposal for Spatial Public Expenditure Reviews (continued)

Spatial PERs would focus on the individual place-based policy instrument as the unit of analysis, which would allow the evaluators to identify what is spent with which objectives, and therefore assess efficiency and effectiveness at a more detailed level. Spatial PERs could help support the following objectives: ■ Redesigning and shaping place-based policies by using data and information about existing instruments ■ Improving the ability of governments to coordinate by evaluating the design and implementation process and assessing the quality of the monitoring and evaluation system ■ Adopting good practices in design, implementation, and coordination of place-based instruments by benchmarking instruments across countries (where appropriate) ■ Formulating policy recommendations to eliminate redundancies and leveraging complementarities across the portfolio of instruments.

8. Weigh the costs and benefits of a place-based policy relative to migration or transfertype policies. Any project should make a strong case that it provides the most cost-effective way to solve the main problem described in the narrative. Diverting resources to a region with limited potential for growth from high-potential regions may address equity, but could reduce national growth and welfare over the longer term relative to, for example, providing incentives for people or firms to move or making targeted fiscal transfers.

Lessons from World Bank Evaluations of Projects to Enhance Agglomeration

A recent review of 20 World Bank projects focused on agglomeration such as special economic zones, growth poles, and industrial clusters over the period 1998–2014 (Gelb et al. 2015) underscores the relevance of many elements of the proposed framework and further illustrates the challenges of pulling these together for appraisal.

Most of these projects aim at increasing growth or economic activity, as well as promoting inclusive development focusing on rural areas or micro, small, and medium enterprises and increasing jobs, employment, or both. There are three types of projects:

■ Twelve projects focus primarily on within-industry economies. They specifically identify particular industries within which they plan to intervene (such as

Burkina Faso Bagre Growth Pole, Brazil Ceara Regional Economic Development,

Cameroon Competitive Value Chains, and Ethiopia Sustainable Tourism

Development).

■ Five projects support the development and functioning of industrial zones (Afghanistan Private Sector Development Project, Bangladesh Private Sector

Development Support Project, Togo PSD Support Project, Ethiopia Competitiveness and Job Creation Project, and Ghana Gateway Project). The primary objective is improving spatial economies. Within-industry economies are not identified. ■ Three projects combine both within-industry and spatial economies (growth pole projects in the Democratic Republic of Congo, Madagascar, and

Mozambique). The particular activities of the agglomeration-focused interventions vary according to the constraints seen as being “binding.” These include efforts to improve infrastructure services, provide capacity building support to public sector agencies and firms, strengthen public-private coordination or consultation mechanisms, and provide financial support to “first movers.”

There are several challenges in appraising or evaluating the ability of such projects to achieve the stated outcomes. Because the outcomes are not concrete achievements, such as miles of pavement laid, but depend on the response of private entities, it is challenging to confidently attribute the actual impact of the program. Further, interventions are often coordinated with large anchor investors, such as a resource company (Rio Tinto) in the case of the Madagascar Growth Poles Project. This anchor both intervenes and affects demand. Thus, disentangling the impact of the government policy is difficult. In addition, most of these projects have multiple interventions. The most complex project (in Madagascar) had five interventions. Thus, measuring the impact of any particular intervention is difficult. Finally, other donors sometimes provide complementary support to governments. For example, the Nigeria Growth and Employment project was complemented by substantial activity by the UK Department for International Development.

The review makes several suggestions based on the project documents that nest well within the framework offered by this volume.

1. Understand investor behavior. The projects pursued a linear approach from “input to output to outcome” that assumed that increased agglomerations would ease coordination failures in sectors and locations and thereby induce a critical mass of firms to enter. However, the projects did not consult sufficiently with the private sector in the planning stage to determine the potential “distance from the threshold” where costs and risks would justify such entry, as well as the uncertainty surrounding private sector responses and the likely discontinuous nature of payoffs around the threshold. In the framework offered by this volume, this can be seen as a combination of insufficient understanding of the market failures and distortions as well as the intrinsic viability of the chosen locales. For instance, the agglomeration-related component of projects in Ghana and Afghanistan included building industrial parks. In the former, restrictions on

access only to export-oriented firms led to deficient demand, which raises the question of what was necessary, in terms of complements or location, to attract them. In the Afghanistan project, insufficient attention was paid to ensuring power—generators were too costly and connection to the public grid was not implemented—which eventually hobbled the project relative to its initial design.

2. Streamline projects. Many projects involved multiple locales, interventions, and ministries—and many of these projects had unsatisfactory outcomes. No project seriously considered the need to manage complexity. As this volume’s framework emphasizes, it is necessary to document the number of activities and institutions involved, as well as identify the need for institution-building and to embed flexibility into the project design. If the nature of the complementarities permits interventions to be sequenced, then the complexity of any one component can be diminished.

3. Strengthen mechanisms to deal with complexity. Especially in countries without a very strong central direction of economic and development policy, projects need to include mechanisms to ensure a common interest in the project and to sustain pressure to move forward through the inevitable snags in implementation that will accompany even well-conceived projects. Projects need to include mechanisms that ensure buy-in of key players from the start to ensure forward momentum, including understanding the incentives and constraints that they face. Further, ensuring local government capabilities is key: part of the challenge in adapting the industrial park design in the Ghana and Afghanistan projects arose from the limited expertise of the local implementing agency. The monitoring and evaluation framework for the project becomes particularly important, as it needs to provide accurate and timely reports that monitor progress and reasons for delays.

4. Take important secondary effects into account. In the terminology of this volume’s framework, all important indirect effects should be accounted for: both quantity and valuation effects. For instance, projects will often have an impact on the value of land as well as on land tenure security. This can arise from large purchases of land for industrial parks (Ghana and Afghanistan), or large investments in irrigation (Burkina Faso), or infrastructure that facilitates tourism and other commercial activities (Madagascar). An understanding of who controls the land and how well the land market functions is as much an issue of political economy as technical design—and is just as important.

Subsequent chapters will apply the framework in more detail to particular projects. In this context, box 6.3 sets out some of the challenges the World Bank has faced in assessing the planned place-based interventions.