Finally, another question is how to consider other dimensions of infrastructure that arguably have crucial implications for some of the key elements of the model, such as electricity, which supply is crucial for firms’ productivity, water, which is both an input for firms and a key consumption good for households, therefore having an impact among others on the cost-of-living dimension, and telecommunications. Regarding the latter, Baldwin et al. (2003) suggest that it may be proxied for by the degree of learning localization, in the sense that a better telecommunication infrastructure would allow spillovers between firms to span a larger geographical area. I return to the discussion of this aspect in the next section.

# **Urban Economics and the Role of Cities**

While this is to some extent a distinct literature, the study of urbanization, cities and growth should also provide interesting elements to incorporate in a discussion on the role of infrastructure policies in the context of development.<sup>26</sup> Indeed, most of the development-induced processes of urbanization result in large pressure being put on local city infrastructure services. However, as stressed by Henderson (2005), formal models that endogenize transport costs and the spatial structure both across and within cities meaningfully by considering infrastructure investment are still needed.

One aspect on which relatively little theoretical insights are available is what happens in the process of development. Is it the case, as first conjectured by Jeffrey Williamson (1965), that low-income countries first experience a process of concentration, industrialization and regional divergence and then, as congestion becomes more important in the main cities, a reversed path of deconcentration and regional convergence, sustained by regional investment and development? How important to such a story is the presumption often found in economic geography models that market failures lead to too big cities, both because of standard agglomeration forces and of political economy arguments? Implicit here is the idea that infrastructure investment is at first lagging and follows rather than precedes development, but when a certain stage of is reached, investment in infrastructure outside the main cities could literally pave the way for the deconcentration of the economy. We discuss the available empirical evidence that seems to support these views in the next section.

This discussion has very important implications in terms of policy priorities. In particular, it indicates that it may be optimal to invest massively in city infrastructure at low-income levels while concentration happens, to avoid jeopardizing growth prospects, for example by limiting cities’ capacity to attract investment (including from foreign sources). Additionally, given rapid rural-urban migration at that stage and the strong increase in urban concentration, such a policy is likely to have high welfare and poverty-mitigating payoffs. At some point, though, a shift toward measures aimed at connecting inner cities to their outside areas with large road and railroad corridors, telecommunications, etc., may be necessary to induce deconcentration.

> 26 See Henderson (2005) for a survey on Urbanization and growth, and Fujita and Thisse (2002) for a synthesis integrating this literature with the new economic geography models.

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