# **3.3.   Lagging regions**

Economic development is inherently spatially uneven. Some regions lead development and others lag; indeed, it would be remarkable if all regions were to develop at the same rate. In the absence of policy, what happens to regions that are lagging? They often catch up as activity spreads out of an economic core – or spreads inland from the coast – as is documented in WDR (2009). But in some cases, they fail to converge in this way. Many countries have regions with chronic problems, such as Brazil’s Nordeste, China’s Xinjiang region or India’s state of Bihar, to name just a few.

What are the economic issues that prevent catch-up from being the usual outcome? There are two main factors at play. First, as discussed in section 2, factor mobility and intra-country institutional factors limit the magnitude of interregional factor price differentials, implying that the principal mechanisms of comparative advantage do not operate. Interregional price differentials will open on prices of immobile factors of production (land and housing) but much less so on labor and capital and may be jointly insufficient to attract new investment. Adjustment then takes the form of labor moving out of lagging areas. Notice that there is no market failure directly associated with this mechanism. In these circumstances, it is efficient to let the region contract.

The other economic issue preventing catch-up is the propensity of activity to cluster and the difficulties of starting new centers of activity. As we saw in section 2, the productivity gains from clustering are a positive externality, although coordination failure can mean that economic centers become too large. These market failures mean that the equilibrium is inefficient, despite net gains from clustering. However, while these considerations suggest a case for decentralizing activity from a congested city to a secondary or satellite-city, they do not make the case for decentralizing to a remote region.

Given this, what is the case for policy intervention? It typically rests on one or more of the following arguments. First, the negative impact on people left behind. This can be acute in areas of absolute decline where out-migration of the young (and possibly more skilled) leads to demographic imbalance and severe social deprivation. More generally, persistent inequalities raise issues of spatial equity. Beyond these normative considerations, we note that profound spatial disparities may lead to distributional conflicts and other political ailments. Second, the argument is made in terms of excess (or over-rapid) expansion of booming areas, leading to congestion and pressure on housing and other assets. However, as suggested above, better policy response to this is likely to be policy within the booming region, rather than in some other region. Third, some particular market failures may be holding a region back. Although these market failures may occur everywhere, they be may be particularly harmful in lagging regions. A stronger version of this argument is that lagging regions may be stuck in a poverty trap.

Any case for policy intervention ultimately depends (one hopes) on a belief that policy can be effective, and it is important to be clear about what success means in this context. For purposes 31