There are two types of geography—first and second nature geography. First nature geography favors some regions by virtue of endowments of proximity to rivers, coasts, ports, and borders. Economic activity may concentrate in coastal urban areas because of proximity to the domestic and external markets, and better logistical link between foreign suppliers and customers, than can interior based industry. First level geography explains why some leading regions are located in coastal areas (Maharashtra, Gujarat, and Tamil Nadu in India; and Karachi in Pakistan). Real GDP per capita growth rates for the coastal states in India grew at 4.5 percent per annum during the 1990s compared to 2.5 percent for the land locked states. Second nature geography is determined by human made infrastructure. Physical infrastructure influences the interactions between economic agents. Improved infrastructure lowers transportation costs, encourages mobility of labor, goods, capital, and ideas, and increases the size of the market. These interactions give rise to scale economies. As agricultural productivity increases, it releases labor and capital from rural areas, which migrate to urban areas, to take advantage of agglomeration forces. Regions with a higher urbanization rate tend to have higher productivity. These forces can generate virtuous circles of self-reinforcing development. Empirical studies identify the second nature geography--physical infrastructure--as a _key_ causal factor in explaining level and trend in regional disparities (see Kanbur and Veneables 2005a). Clearly, South Asia is yet to take advantage of the growth benefits of its demography and geography.

In addition to the lagging regions problem, South Asia also exhibits growing income inequality. Figure 7 shows economic inequality as measured by the Gini coefficient.<sup>6</sup> Inequality in South Asia is rising but less than in East Asia **.**<sup>7</sup> This is apparent when comparing the growing inequality between the rich and the poor in India compared to China. Nepal and Sri Lanka have the highest levels of inequality in South Asia. They also have the highest growth in inequality. Pakistan and rural India have the lowest levels of inequality. Is inequality between regions, i.e. spatial inequality, also rising?

For most countries, growth in inequality across leading and lagging regions is rising faster than growth in inequality across individuals. Figure 8 reports regional inequality at the sub-national level using the Theil inequality measure.<sup>8</sup> The figure shows that _regional_ inequality is rising at a much faster pace than _pure inequality_ in all countries except for Nepal and, to some extent, India. Regional inequality generally increases as an economy shifts from agriculture to manufacturing. There are some signs

> 6 We are grateful to Nobuo for this work.

> 7 Based on their survey of evidence of over 50 developing nations, Kanbur and Venables (2005a, 2005b) argue that the uneven spatial impact of trade and globalization played a major role in the increase in regional and urban spatial inequalities in developing countries in recent years. Moreover, they argue that, in addition to geographic remoteness, the backward regions and rural areas suffered from an inequitable distribution of infrastructure, public services and policies that constrained the free migration of peoples from backward places.

> 8 The Theil inequality measure has a convenient property: it can be decomposed into inequality across areas, or “ _regional_ inequality”, and inequality between individuals, after controlling for the former, or “ _pure between_ - _individual_ inequality”.

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