The development experience of South Asia, where rapid GDP growth has been accompanied by high regional disparities, contrasts with the regional experience of high income market economies. There is evidence for strong convergence among regions in US, Japan, and European Union<sup>4,5</sup> . The income gap between the leading and lagging regions in South Asia is much larger compared to the spatial disparities in developed countries. In India, GDP per head in the state where it is highest (Haryana) is 5 times greater than in the state where it is lowest (Bihar). In the USA, the difference is only 2.5 times, and in Japan only two times. Regional disparities are indeed expected to change over time with the level of development. The big issue is whether future developments in South Asia will bring about convergence or divergence between the leading and lagging regions.

Given the strong negative relationship between income and poverty illustrated in figure 3 above, it is hardly surprising that with few exceptions, most lagging regions also show higher than average rates of poverty (figure 6). Nearly half a billion people live in the lagging regions of South Asia. Nearly 60 percent of the poor in India live in the lagging states. Every seventh poor Indian lives in Bihar, a lagging state. Sri Lanka shows disturbing regional disparity in poverty rates between the Western region (a leading region) and the rest of the country. Nepal’s Western region (lagging region) has a substantially higher poverty incidence than the more prosperous Kathmandu valley. In Pakistan, inter-provincial disparities in poverty incidence between the leading regions (Sindh and Punjab) and the lagging regions (NWFP and Balochistan) are huge.

Why some areas develop and others remain underdeveloped is determined by three key drivers: movement of productive factors, transportation costs, and scale economies. This is derived from spatial economics–the study of where economic activity takes place and why (see Fujita, Krugman and Veneables 1999; World Bank 2008d). Drawing on these works, an ongoing World Bank study is looking at the interactions between geography, institutions and trade, and how they promote or constrain growth in the lagging regions of South Asia<sup>.</sup> . Geographic, institutional, and trade differences are larger in South Asia compared to Japan, Europe and USA. In Japan, nearly 97 percent of people live within 100 kms of the coast. In Europe, more than half the population lives within 100 km of the coast or an ocean navigable waterway. USA is more like India with a large proportion of the land area away from coast. But because of high labor mobility and an efficient agriculture in USA, a high proportion of the population lives close to the coast. In India, factor mobility has not been able to arbitrage geographical disparities. Disparities between the leading and lagging regions are high not because of geography but because of poor market integration due to high transportation costs; poor connectivity between regions and countries; low factor mobility; and regulatory restrictions that prevent firms from taking advantage of the scale economies.

> 4 See Barro and Sala-I-Martin, 1995, chapter 11.

> 5 See European Union 2007, which provides evidence on convergence occurring both at the national and regional levels within European Union

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