metadata: authors: 0: author: Rodríguez-Pose,Andrés
1: author: Bartalucci,Federico
2: author: Lozano Gracia,Nancy
3: author: Davalos,Maria Eugenia
count: World
docna: 0: docna: Overcoming Left-Behindedness : Moving beyond
            the Efficiency versus Equity Debate in Territorial Development
docty: Policy Research Working Paper
theme: Spatial Growth,Job Creation,Data Development and Capacity Building,Economic Policy,Economic Growth and Planning,MSME Finance,Finance,Private Sector Development,Public Sector Management,Jobs,Data production, accessibility and use,Spatial Growth,Structural Transformation and Economic Diversification,Inclusive Growth,Financial Infrastructure and Access,Mitigation,Job Creation,Data Development and Capacity Building,Economic Policy,Rural Development,Economic Growth and Planning,Environment and Natural Resource Management,Private Sector Development,Public Sector Management,Climate change,Urban and Rural Development,Jobs,Adaptation,Geospatial Services,Data production, accessibility and use
abstracts: cdata!: Territorial development theory and
            practice have witnessed significant change in recent times.
            This change has increasingly put the spatial dimension at
            the center of development policies. Although
            agglomeration-focused policies derived from urbanization and
            agglomeration economics were once prominent, their empirical
            limitations have become increasingly apparent. Greater
            territorial polarization and pervasive left-behindedness
            have underscored the need for a more inclusive territorial
            development approach, prompting increased interest in
            understanding and addressing regional disparities to ensure
            more equitable economic growth. This paper synthesizes the
            growing interest in territorial development, which has
            driven the adoption of what are increasingly place-based and
            place-sensitive approaches to development. The paper also
            emphasizes the need for complementarity between
            efficiency-driven and equity-focused interventions, while
            highlighting emerging topics in regional economics research,
            including the role of institutions, agency, and external
            megatrends such as the green transition. The paper concludes
            by advocating a place-sensitive approach that tailors
            policies to regional challenges, promoting economic
            potential, diversification, and inclusivity across all regions.
display_title: Overcoming Left-Behindedness :
            Moving beyond the Efficiency versus Equity Debate in
            Territorial Development
listing_relative_url: /research/2024/03/34288443/overcoming-left-behindedness-moving-beyond-efficiency-versus-equity-debate-territorial-development
topicv3: Growth and Lagging Regions m1326921 462,Local and Regional Economic Development
            m1326938 798,Spatial Inequality m1327181 1166
publishtoextweb_dt: 2024-03-26T00:00:00Z
dois: 10.1596/1813-9450-10734
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 27
author_keys: 0: author_key: NA
1: author_key: 2151586
2: author_key: 611031
3: author_key: 1127099
model_extractions: Policy Research Working Paper 10734

# Overcoming Left-Behindedness

Moving beyond the Efficiency versus Equity Debate in Territorial Development _Andrés Rodríguez-Pose Federico Bartalucci Nancy Lozano-Gracia María Dávalos_ Urban, Disaster Risk Management, Resilience and Land Global Practice & Poverty and Equity Global Practice March 2024
Policy Research Working Paper 10734

# **Abstract**

Territorial development theory and practice have witnessed significant change in recent times. This change has increasingly put the spatial dimension at the center of development policies. Although agglomeration-focused policies derived from urbanization and agglomeration economics were once prominent, their empirical limitations have become increasingly apparent. Greater territorial polarization and pervasive left-behindedness have underscored the need for - a more inclusive territorial development approach, prompt ing increased interest in understanding and addressing regional disparities to ensure more equitable economic growth. This paper synthesizes the growing interest in territorial development, which has driven the adoption of what are increasingly place-based and place-sensitive approaches to development. The paper also emphasizes the need for complementarity between efficiency-driven and equity-focused interventions, while highlighting emerging topics in regional economics research, including the role of institutions, agency, and external megatrends such as the green transition. The paper concludes by advocating a place-sensitive approach that tailors policies to regional challenges, promoting economic potential, diversification, and inclusivity across all regions.

This paper is a product of the Urban, Disaster Risk Management, Resilience and Land Global Practice and the Poverty and Equity Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at nlozano@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
<!-- Start of picture text --> Overcoming Left-Behindedness:<br><!-- End of picture text --> <!-- Start of picture text --> JEL classification: 018, R10, R58<br><!-- End of picture text -->
<!-- Start of picture text --> Introduction<br>significant transformation. In 2005, Thomas Friedman introduced the concept of a ‘flat world,’<br>suggesting that globalization had created a level playing field through trade expansion,<br>internationalized firms, outsourcing, and global knowledge networks (Friedman, 2005). This notion<br>As a result, traditional development policy shifted towards providing equal opportunities irrespective<br>of location (Rodriguez-Pose & Crescenzi, 2008). Territorial development policy put the emphasis on<br>spatially-blind approaches, postulating policies aimed at improving the conditions and opportunities<br>of people regardless of where they lived, while recognizing the need for spatial differentiation (World<br>policy design. In a globalized world, location greatly influences regional outcomes, while assumptions<br>about knowledge spillovers and the diffusion of economic activity, well-being, and prosperity have<br>encompassing not only physical proximity, but also geographical, cognitive, organizational, and<br>institutional aspects— plays a vital role in facilitating knowledge transfer from prosperous regions to<br>Agglomeration matters enormously for the generation and diffusion of economic activity not only at<br>the diffusion of the prosperity linked to agglomeration economies also faces numerous barriers that<br>falling behind ones. Issues such as institutional shortcomings, weak regional leadership, deficient<br>innovation systems, and the inability of many regions to adapt to emerging structural<br>transformations obstruct the diffusion of economic activity and prevent a more equitable<br>distribution of economic gains (Milanovic, 2005). These barriers can contribute to deepening and<br>perpetuating spatial inequalities, incurring significant economic and social costs. Spatial imbalances<br>are not just an equity and social problem, but also lead to missed economic potential, social<br>forces like globalization, trade, and technology (Krugman, 1991), attention has increasingly shifted to<br>drivers. Factors such as institutions, productivity, employment opportunities, agents of change,<br>regional economic dynamism (Coenen et al., 2012; Martin, 2012; Rodriguez-Pose, 2013; Boschma,<br>This paradigm shift has given rise to more localized development interventions to deal with<br>harnessing economic potential and left-behindedness, starting with place-based and, more recently,<br>place-sensitive approaches (lammarino et al., 2019). While a consensus on the effectiveness of place-<br>based policies is still evolving, recent work highlights the importance of evaluating pre-existing<br><!-- End of picture text -->
<!-- Start of picture text --> territorial strengths before implementing such interventions (Duranton & Venables, 2018). Under the<br>right conditions, they have demonstrated welfare gains within cities and peripheral rural regions<br>they build upon existing competitive advantages but may result in inefficiencies without proper<br>assessment of both their potential direct and indirect impacts. However, assessing the welfare gains<br>and conducting cost-benefit analyses of place-based and place-sensitive policies still face challenges<br>in incorporating all the potential costs of non-intervention, including lost economic opportunities,<br>long-term human capital losses, and social and political discontent.<br>Recent evidence underscores the potential of locally tailored territorial development policies.<br>However, there is still a need to synthesize various strands of literature to navigate the multitude of<br>approaches and assist decision-makers in adopting comprehensive frameworks for greater regional<br>economic growth. This paper aims to contribute to fill this gap. It reviews recent theoretical and<br>empirical developments in territorial and regional science. It then explores the role of institutions,<br>new theoretical advancements, and evidence related to the role of institutions, resilience, agency,<br>and leadership. It later addresses territorial development in the context of sustainability transitions<br>and the socio-economic costs of regional inequalities. Finally, the paper synthesizes key insights and<br>lessons from the scholarly literature and offers policy implications and future directions for territorial<br>development interventions.<br>Early theories on economic geography viewed spatial inequalities as a temporary phenomenon that<br>agglomeration in cities were expected to spread in time from the core to the periphery. Encouraging<br>agglomeration in the core was seen as a way to generate positive externalities, such as increased<br>innovation capacity and lower knowledge-sharing costs, which would drive the dynamism and<br>economic growth of mega-cities (Fujita et al., 1999; Duranton & Puga, 2001). Urban economists<br>echoed this sentiment, viewing urban density as the path from poverty to prosperity (Glaeser, 2011:<br>that exist. Empirical evidence points to the many benefits from agglomeration in cities. Making cities<br>work can boost productivity and inclusion at various stages of development, for instance in the early<br>and medium phases of structural transformation (Grover et al, 2022). However, negative externalities<br>in large cities, such as congestion costs, pollution, labor crowding, and a high cost of living, can act as<br>significant barriers to economic growth and may dampen economies of agglomeration, making<br>further investments in large cities costly and sometimes inefficient (Dijkstra et al., 2013), giving rise<br>to ‘sterile’ agglomeration economies (Grover et al., 2022). Large congestion cost may hamper the<br>economic dynamism of large cities. With this in mind, scholarly research has also pointed at cases<br>where mid-size cities, intermediate ones, and some rural areas have shown considerable dynamism,<br>despite what can be regarded as less favorable conditions for the flourishing of economic activity<br>megacities in growth rates during the late 2000s and early 2010s, citing congestion costs, pollution,<br>labor crowding, and high living expenses as constraints on further agglomeration (Dijkstra et al.,<br>2013). A similar trend was observed in developing countries like China, where urbanization did not<br>mega-cities has been attributed to a dependence on resource exports rather than industrialization<br><!-- End of picture text -->
<!-- Start of picture text --> compared to production cities (Gollin et al., 2015).<br>Second, there are important barriers that may limit the positive spillovers from large cities to<br>surrounding regions. For countries to fully harness the advantages and potential of their major cities,<br>from agglomeration economies are needed. While economic theory posits that agglomeration<br>fosters innovation, benefiting left-behind regions through knowledge spillovers, research shows that<br>these spillovers are weaker than agglomeration forces, leading to strong distance decay effects and<br>limiting the impact of innovation and new economic activity generated in core areas on lagging<br>and functioning transmission channels (Boschma, 2005; D’Este et al., 2013; lammarino, 2018).<br>Moreover, automatic adjustment mechanisms, like labor migration and firm investment responses to<br>price signals, are not always functioning as expected. Barriers to migration and the stickiness of firm<br>locations, benefiting from agglomeration effects, hinder the benefits of knowledge spillovers towards<br>lagging areas (Floerkemeier et al., 2021). Left- and lagging-behind places struggle to establish the<br>necessary connections to absorb new knowledge and innovation, hampering the replication of<br>economic success (Farole et al., 2011). Weak institutions and limited local innovation and skill<br>accumulation further hinder convergence.<br>become more evident in recent years, as within-country inequalities have risen in both advanced and<br>2008) and the need to ensure that efficiency and equity objectives are tackled together has become<br>Consequently, the adoption of efficiency-driven approaches has failed to bring most left-behind<br>territories out of their left-behindedness, meaning that within-country inequalities have generally<br>continued to rise in both advanced and emerging economies The outcome has been rising<br>polarization, with many poor regions remaining trapped in a low-income equilibrium and incapable<br>of adapting to changes in economic trends and to transition towards more integrated and open<br>This situation has always had considerable economic costs. However, the hitherto neglected social<br>and political costs of regional inequality are in recent times becoming far more evident and costly.<br>limited economic opportunities, has led to increasing discontent, the rise of populism and, in some<br>cases, it has also resulted in violent protests (Rodriguez-Pose, 2018). Disparities have become<br>politicized in various countries (Hewison, 2014; Rodriguez-Pose, 2018; Dijkstra et al., 2020) in ways<br>that are also provoking considerable harm to the overall performance of national economies.<br>To address regional polarization and its associated social, political, and economic risks, governments<br>have traditionally employed two approaches. Firstly, they resorted to large-scale projects in lagging<br>and left-behind regions, often resulting in expensive initiatives with limited development gains due to<br>weak socio-economic and institutional foundations (Flyvbjerg, 2009; Crescenzi et al., 2016). Secondly,<br>they relied on redistributive transfers, which sometimes sustained stagnant economies, creating<br>‘sheltered economies' (Fratesi & Rodriguez-Pose, 2016) (Figure 1). However, the effectiveness of<br>these policies has varied depending on the policy adopted and the conditions of the target territory,<br><!-- End of picture text -->
with some suggesting that transfers can generate equity gains outweighing efficiency costs (Gaubert : Schematic representation of barriers to spillovers and efficiency gains in lagging regions.

<!-- Start of picture text --> hinderedby<br>WEAK ECONOMIC REGIONAL<br>INSTITUTIONAL(QUALITY AND (DECLINESTAGNATIONIN LAGGINGAND geroniomrtiaRESILIENCE VULNERABILITYEXTERNAL TO<br>CAPACITY REGIONS MEGATRENDS<br><!-- End of picture text --> : Author’s elaboration based on Coenen et al., 2012; Martin, 2012; Rodriguez-Pose, 2013; The increasing realization, amid rising territorial inequality and social discontent, of the need to tackle the barriers to spillovers and efficiency gains in lagging areas has prompted a re-evaluation of existing territorial development policies. This has been conducive to expanding the focus of research into the areas of institutional quality, regional development paths, agency and resilience, and sustainable development practices (Rodriguez-Pose & Ketterer 2020; Venables, 2023). Research in these areas has become far more prominent and an important source of reflection to improve development interventions and design far more efficient territorial policies. In the following sections 3. The role of institutions in territorial development Until the turn of the century, territorial development primarily relied on two models: neoclassical offered policy makers a limited range of development strategies, primarily focusing on investing in physical capital (e.g., infrastructure) and promoting innovation and human capital. Even the more recent New Economic Geography highlighted the value of enhancing connectivity through
approaches have struggled and continued to struggle to deliver consistent regional development To address this, researchers have turned their attention to institutions, a dimension traditionally 2001; Rodrik et al., 2004). Consequently, institutions, especially regional ones, have gained tradition considered as the main drivers of development, like infrastructure, human capital, and innovation. Poor institutions generally represent the main cause of persistent left-behindedness. Table 1 summarizes key channels through which institutions can have an impact on regional growth.

The case for investing in institutions is becoming stronger, in particular for two reasons. First, institutions themselves influence economic performance by shaping networks and processes that drive economic activity. Formal institutions that combat corruption and informal networks fostering trust among economic actors offer substantial socio-economic benefits (Annoni & Dijkstra, 2013; Ganau & Rodriguez-Pose, 2019). Institutions can affect regional growth directly and indirectly. Directly, they influence economic actors' interactions within a region, impacting growth, employment, and productivity. They reduce transaction costs, increase labor productivity, and drive innovation (Ganau & Rodriguez-Pose, 2019). Effective institutions promote innovative performance, while ineffective and corrupt institutions hinder innovation, especially in less developed regions regions (Ma et al., 2023; Rodriguez-Pose & Ketterer, 2020). Institutions also play a crucial role in establishing regional entrepreneurial ecosystems, alongside traditional factors like infrastructure Summary of direct and indirect impacts of institutions on regional economic Contribution to regional economic performance Reducing transaction costs, rendering economic institutions productivity levels in innovative measured through patenting, especially when corruption and government effectiveness are taken
Attracting greenfield FDI from the most productive multinational companies. Acting as a mediator of public policy interventions Affecting the economic returns of policies on promotion of innovation Facilitating the diffusion of innovation and Conditioning the economic impact of political processes, such as _ decentralization and the devolution of authority to subnational levels. Contributing to render a region attractive as a migration destination.

efficient institutions enhance the effectiveness of policies targeting human capital and regional innovation (Crescenzi et al., 2016). In this respect, institutions mediate all local or regional public interventions. They affect policy outcomes, including the allocation of European Union impact of political processes like decentralization (Muringani et al., 2019; Jong et al., 2021). Weak institutions contribute to perpetuate regional disparities during decentralization, as seen in Argentina (World Bank, 2020a). Moreover, the quality of regional institutions shapes a region's attractiveness Second, subpar institutional quality at the local and regional levels can undermine even the most carefully designed development efforts. This is because institutions mediate the economic returns of public interventions aimed at revitalizing regional economies. A clear understanding of institutions and institutional quality, encompassing formal and informal elements, is therefore essential for shaping effective policy actions. Formal institutions include rules, laws, and organizations, while informal institutions involve individual habits, group routines, and social norms (Amin, 1999). Formal institutions, often referred to as ‘hard’ institutions, represent elements like the rule of law, property rights, and competition law. Informal institutions, or ‘soft’ institutions, encompass social interactions that generate trust, including norms, traditions, relationships, and conventions (Rodriguez-Pose & Storper, 2006). This categorization facilitates a better measurement of institutional quality at the subnational level, revealing variations within and between countries (Charron et al., 2014). However, despite considerable improvements in our understanding of how institutions shape economic development, significant knowledge gaps persist. Most of the existing research on institutions and institutional quality remains primarily focused on developed countries, limiting
institutions’ role in developing countries (Iddawela et al., 2021; Hussen & Cokgezen, 2022; Aroca & Atienza, 2016). Additionally, informal institutions and their impact on regional development warrant more attention. Finally, translating institutional research into actionable policies is a considerable challenge. Institutional reforms remain underrepresented in development interventions, despite their importance (World Bank, 2020b). To bridge this gap, policy actions should focus on improving regional policy design and enhancing subnational government capacity to implement policies effectively (Figure 2).

Summary of main areas of intervention for institutional development policies <!-- Start of picture text --> pane alIMPLEMENTATION<br>Addressing capacity and<br>Strengthening horizontal Tene renee oer<br>accribaiion Heidel Weta inter-regional councils<br>ministerial bodies INSTITUTIONAL Ensuring fiscalspace through<br>Innproving vertical coordination DEVELOPMENT POLICIES 7 eee ees<br>through multi-leveloncoordination Consolidatingthe supporting role<br>of regional development agencies<br>StrengtheningFrntarseadvi bet d ee<br>government<br>Improving performance<br>monitoring systems<br><!-- End of picture text --> In summary, while institutions are not an all-encompassing solution for territorial development, recent research has highlighted how incorporating them into development strategies can yield significant benefits. Neglecting institutions may result in short-term gains but leave regions worse off in the long run and perpetuate left-behindedness. A balanced approach that considers institutions 4. Regional diversification and avoiding development traps But dealing with institutions, while important, is not enough to navigate the policy challenges delving into the intricate interplay between innovation, economic dynamism, regional diversification, literature on evolutionary economic geography—underscores that regions exhibit varying capacities
<!-- Start of picture text --> to confront and harness global megatrends, like digitalization or the green transition for<br>diversification. However, weak innovation systems and productivity have presented significant<br>obstacles to transferring efficiency gains to left-behind regions through these market adjustment<br>mechanisms, frequently resulting in economic stagnation and decline and obstructing diversification<br>The evolutionary economic geography literature stresses the significance of regional diversification<br>paths in facilitating efficiency gains in lagging regions and the role of endogenous factors in<br>explaining the presence or absence of automatic adjustment mechanisms related to capital and labor<br>mobility from more dynamic core regions to lagging- and left-behind areas. Hence, territorial<br>vary significantly based on factors like income level, urbanization, industrial history, and the<br>conditions of local ecosystems (Pinheiro et al., 2022). Recognizing these differences among regional<br>development contexts is vital for designing and implementing effective policies tailored to specific<br>diversification trajectories.<br>Research on regional diversification has primarily concentrated on a region's capacity to venture into<br>new technologies, industries, and occupations based on its local capabilities (Neffke et al., 2011).<br>Each regional economy possesses distinct diversification opportunity spaces shaped by its unique<br>capabilities (Pinheiro et al., 2022). Understanding the emergence of these opportunity spaces<br>becomes particularly relevant as the lack of diversification paths can present significant barriers to<br>disseminating efficiency gains from core areas to lagging regions, thereby perpetuating regional<br>Various factors influence diversification and path emergence. Regions typically diversify based on<br>their existing capabilities, with technological, industrial, and skill capabilities serving as key<br>more complex technologies often experience higher GDP growth rates and employment (Rigby et al.,<br>2022). However, regions aspiring to leapfrog into higher value-added activities often encounter<br>challenges due to deficiencies in local capabilities, a phenomenon observed in both developed and<br>Five key aspects have been identified as key for shaping regional specialization and diversification<br>trajectories, allowing regions to escape left-behindedness. First, technological specialization<br>determines the local availability of relevant technological capabilities. This is crucial for regional<br>competitive advantage (Montresor and Quatraro, 2019; Van den Berge et al., 2020; Santoalha and<br>Boschma, 2021). The presence of local scientific capabilities —and, particularly, of knowledge<br>derived from universities— is also a fundamental source of regional innovation (Balland & Boschma,<br>2021). Just as important are the institutional capabilities available. Solid institutions can encourage<br>and ease the implementation of new initiatives, mobilizing resources, and promoting reforms,<br>thereby enhancing diversification opportunities (Garud et al., 2002; Cortinovis et al., 2017).<br>Moreover, diversification in lagging regions often relies on their capacity to set up external linkages,<br>providing complementary capabilities (Fitjar and Rodriguez-Pose, 2013; Balland & Boschma, 2021).<br>diversification (Neffke et al., 2018; Cortinovis et al., 2020; Miguélez & Morrison, 2022). The role of<br>multinational enterprises and migrant inventors is fundamental in this respect. Figure 3 provides an<br>overview of the main factors driving diversification at the regional level.<br><!-- End of picture text -->
Schematic representation of factors driving the emergence of regional specialization and diversification paths.

<!-- Start of picture text --> EXTERNAL<br>CAPABILITIES CAPABILITIES. CAPABILITY | INNOVATION (e.g. AGENTS<br>MNEs)<br><!-- End of picture text -->

In addition to the emphasis on institutions, development paths, and diversification, the ‘regional development trap' has emerged as a concept to identify regions struggling to keep pace with dynamism in income, productivity, and employment, while simultaneously underperforming relative to their national (and European) peers (Diemer et al., 2022: 489). This concept is akin to the middleincome trap in international economics, where countries experience bursts of growth followed by stagnation or decline (Kharas & Kohli, 2011). Regional development traps can affect regions at various levels of development, adding complexity to their identification and analysis (Diemer et al., 2022). In particular, in the case of European regions the highest incidence of regions caught ina Empirical applications of the concept reveal common characteristics among left-behind places, such as a lower share of manufacturing industry, higher dependency ratios, lower educational attainment, and weaker innovation capacity. These patterns hold across regions at different income levels, underscoring the importance of these factors in understanding left-behindedness (Diemer et al., While the theory of regional development traps is relatively recent, empirical evidence and the development of indices to identify trapped regions have been applied in developed countries, such as those in the European Union (Diemer et al., 2022). The application of these indices to developing countries remains an area for further exploration, given the gaping regional disparities in these nations. But, overall, the consequence of the realization of the existence of development traps is
<!-- Start of picture text --> pushing policy makers more towards recognizing the need to address stagnating regions alongside<br>lagging-behind and poor regions, thus promoting more inclusive territorial development.<br>These elements influence the spread of efficiency gains from core to lagging- and left-behind-regions,<br>traditionally operated separately, their integration within research in territorial development is<br>contributing to shift the analytical attention toward the local context and the specific factors that<br>facilitate or impede endogenous regional economic growth and, thus, overcoming left-behindedness.<br>This paradigm shift holds crucial implications for policy makers.<br>The interest in the role of agency in regional structural changes has grown in recent times. Research<br>result from intentional actions of various actors, influenced by internal and external forces<br>(Sotarauta, 2016). Three types of transformative agency—innovative entrepreneurship, institutional<br>regional path emergence. Innovative entrepreneurship is linked to technological advancements and<br>new industrial paths, while institutional entrepreneurship shapes the rules of the game, and place-<br>based leadership guides complex multi-actor processes (Grillitsch and Sotarauta, 2020; Grillitsch et<br>including understanding the contextual conditions facilitating or hindering change agency and<br>potential negative consequences.<br>The concept of regional resilience—initiated by evolutionary economic geographers—is another one<br>that has gained increasing attention. Regional resilience refers to a region's ability to anticipate,<br>al., 2010). Resilience approaches recognize the potential for regions to withstand and recover from<br>economic crises, providing an alternative perspective to the traditional focus on efficiency and<br>specialization. Resilience is associated with diversification and adaptability, enabling regions to<br>navigate economic transitions and shocks (Martin and Sunley, 2020).<br>acknowledged. This perspective underscores the value of diversified regional economies, flexible<br>labor markets, social safety nets, and targeted investments in innovation and education. Resilience-<br>changing economic conditions. This contrasts with policies that might focus solely on promoting<br>specialization and efficiency, providing a richer, albeit more complex, framework for policy makers to<br>design and implement strategies that are adapted to the specific conditions of every territory. Such<br>shift in policy focus can contribute to mobilize more local resources and potential, while promoting a<br><!-- End of picture text -->
<!-- Start of picture text --> Key takeaways from the shift in focus of research on territorial development include the recognition<br>that diversification paths are influenced by a region's unique capabilities, and policies should be<br>tailored accordingly (e.g. Neffke et al., 2011 and Pinheiro et al., 2022). Research has also established<br>that development traps can hinder regions' ability to keep pace with national peers and that agency<br>crucial area of interest for navigating economic shocks and transitions (Crescenzi & lammarino,<br>from dynamic centers to extolling the virtues of more and better territorially-targeted interventions<br>(Storper, 2018; lammarino et al., 2019). These new types of place-based and place-sensitive<br>resources and make the most of the economic potential of every place and, as a consequence, of<br>Consequently, new territorial development policies are increasingly putting far greater weight than<br>previous ones on the need of adopting more holistic approaches through complementary policies<br>that balance market dynamics while removing that development barriers are lifted and local<br>advantages and strengths leveraged. They focus more on institutions, regional development<br>one-size-fits-all approach to economic development is often insufficient to address the diverse<br>6. Policy implications for inclusive territorial development<br>In this paper we have outlined the main theoretical and empirical recent developments emphasizing<br>the significance of place-specific attributes in territorial development. How are these shifts translated<br>into policies that help transform the future of dynamic and left behind places alike?<br>The understanding that local conditions shape regional socio-economic development has not only<br>up and place-based approaches. While traditional development strategies have been top-down, with<br>national governments setting the vision and controlling policy design and implementation,<br>contemporary regional policies are increasingly shifting towards bottom-up or multi-level<br>interventions. In this approach, subnational governments and other local actors play a fundamental<br>part in identifying local needs, formulating strategies, and implementing and monitoring<br>development initiatives (Crescenzi & Guia, 2016; lammarino et al., 2019). This has represented a<br>fundamental change in the foundations for inclusive territorial development, leading to significant<br>changes in the theoretical design and empirical implementation of policies, and, as a consequence,<br>the implementation of far more place-based and place-sensitive development strategies. We treat<br>these three dimensions in turn in the following subsections.<br>6.1 Foundations for Inclusive Territorial Development<br><!-- End of picture text -->
<!-- Start of picture text --> One of the main transformations in development policies in recent years is that the focus of place-<br>based policies has clearly evolved. Increased attention on recent territorial development policies is<br>paid to harnessing local potential and promoting economic activity by capitalizing on local strengths<br>becoming tapping into untapped local resources and potential. The variations in local endowments<br>require localized development approaches tailored to specific communities or territories. For<br>example, the European Union undertook a profound reform of its Cohesion Policy in 2014, shifting<br>Specialization Strategy (S3). S3 aims to support regions in prioritizing innovative sectors and<br>strengths (Foray et al., 2009). This shift has empowered subnational public authorities as central<br>exercises (Crescenzi & Guia, 2016). A similar, though less comprehensive, place-based initiative in the<br>United States is the more recent Empowerment Zone program, which identifies economically<br>distressed areas eligible for tax incentives, tax credits, and grants to stimulate economic activity in<br>The place-based approach embodied in Smart Specialization strategies and the Empowerment Zones<br>initiatives in, among others, many Latin American countries like Mexico, Chile, Colombia, and<br>Argentina. However, while place-based interventions hold promise, assessments of their<br>effectiveness remain mixed and incomplete. Early evidence suggests that these policies can build<br>trust and local support, reducing resistance to top-down interventions during implementation.<br>Nonetheless, challenges such as coordination issues and inadequate institutional capacity can<br>prevent place-based strategies from reaching their full potential (Crescenzi & Guia, 2016; Morisson &<br>Doussineau, 2019; Rodriguez-Pose & Ketterer, 2020). Research indicates that spatially targeted<br>interventions may be ineffective and inefficient if the territory lacks fundamental endowments, like<br>viable firms (Duranton & Venables, 2018; Grover et al., 2022) or adequate institutions (Aresu et al.,<br>2023). Additionally, the presence of inherent competitive advantages in certain regions has been<br>emphasized in scholarly research (Barba Navaretti & Markovic, 2021).<br>Place-based approaches are, however, not a replacement for the need to address national-level<br>constraints; instead, they should complement nationally-driven strategies and help remove<br>development barriers at the local level. Exclusive focus on equity objectives without considering<br>efficiency can lead, once again, to a mere redistribution of existing economic activity, with limited<br>overall welfare gains (Kline & Moretti, 2014). Moreover, the success of place-based approaches<br>varies considerably depending on the local conditions of the places where it is implemented (e.g.,<br>Ahlfeldt et al., 2017; Koster & Van Ommeren, 2019; Bartik, 2020; Gruber et al., 2023). But early<br>(Brachert et al., 2019; Blouri & Ehrlich, 2020). Similar positive net welfare effects seem to be<br>In response to local challenges, place-based policies often intend to enhance the efficiency of local<br>and regional government structures and establish capacity-building initiatives. These efforts<br>frequently include the introduction of e-government services, e-voting, and capacity-building<br>interventions specifically tailored to local needs. The choice of reforms is often influenced by pre-<br>existing local endowments, such as the presence of high-quality education providers, internet<br><!-- End of picture text -->
<!-- Start of picture text --> penetration rates, and levels of social capital before policy implementation (e.g., Vassil & Weber,<br>2011; Orkestra, 2021). Additionally, in the US context, place-based policies in the form of fiscal<br>redistribution and incentives have, under certain circumstances, been found to achieve significant<br>However, place-based policies can also become too place specific, undermining the potential<br>interconnectivity of a more integrated economy. Hence, a pure place-based development approach<br>economic potential of every place. Different places have different endowments and starting points<br>and the type of development intervention to fully tap into untapped potential requires considering<br>the commonalities and challenges affecting different groups of economies. Place-sensitive<br>the specific conditions and challenges of different groups of regions (lammarino et al., 2019: 290)—<br>are guided by three principles. First, they acknowledge the need for differentiation between different<br>types of regions (and, specifically, core and peripheral ones), allowing governments to identify the<br>oversimplification and promotes tailored strategies based on the characteristics of each region.<br>Second, coordination is crucial. Effective place-sensitive strategies require synthesis between<br>different approaches, combining top-down and bottom-up efforts, as well as coordination between<br>different levels of institutions, including central and subnational governments. This integration<br>represents the essence of place-sensitive strategies (Rodriguez-Pose & Wilkie, 2017). Third,<br>integration is essential. Instead of focusing solely on one development axis, balanced place-sensitive<br>institutional aspects to foster regional economic dynamism (Barca et al., 2012; Phan & Coxhead,<br>Further research is needed to explore the effectiveness of place-sensitive policies. While early<br>studies indicate their potential to reduce regional disparities, more investigation is required to<br>understand their full impact. Evidence suggests that these policies can reduce inequalities in social<br>service provision and social outcomes across regions, enhance investment attractiveness for less<br>developed areas, and promote SME innovation. Moreover, place-sensitive policies can become<br>crucial for the growth of intermediate cities, which have often been overlooked in traditional<br>6.2 From Theoretical Design to Empirical Implementation: Regional Clubs and the<br>In practice, implementing place-sensitive policies often involves club theory, which stems from<br>recent research on regional development traps. Identifying regional development clubs allows for<br>differentiated approaches that support prosperity in leading regions while enhancing it in others<br>In higher-income and overperforming regions, maintaining specialization in high-wage activities is<br>often what makes a difference for development. These regions often face dynamics that reduce their<br>value-added contributions over time, such as the routinization of activities and the diffusion of<br><!-- End of picture text -->
innovative capabilities. To sustain economic dynamism, these regions must either generate innovations within their specialized sectors or transition to related economic activities.

Middle-income regions, which have incomes close to the national average, often face development productivity by enhancing education and labor force participation to bridge the gap with the bestrelocation of activities to emerging countries with even lower production costs. These regions may require investments in basic infrastructure, labor market policies, education, and government quality to promote economic development and reduce talent outflow (lammarino et al, 2019).

The complexity and breadth of policy interventions in each development club may vary (Figure 4). Regions at early development stages may benefit from targeted interventions addressing basic deficiencies like infrastructure. As the level of development increases, more complex interventions, including institutional reforms and cluster policies, become necessary. Choosing the appropriate policy interventions based on the local context and endowments of each territory is therefore crucial to ensure that any development intervention works.

Conceptual framework for the adaptation of regional development strategies to the <!-- Start of picture text --> =<br>ro Foundational:<br>= Precisely and<br>iyY targetedaddressinterventions debilitating<br>2 asi and<br>inadequacies<br><!-- End of picture text --> <!-- Start of picture text --> Degree of<br>Broad-based,<br>to socioeconomicupgrading andand<br>ras : 3<br>Ex. Promotion of<br>knowledge, knowledge<br>intensive activities and<br><!-- End of picture text --> <!-- Start of picture text --> precision<br>SS<br>Ex. Cluster<br>inward<br>institutional —<br>Parsi of<br>development<br>Precisely and<br>targeted<br>address<br><!-- End of picture text --> <!-- Start of picture text --> policies/attraction of<br> and activities<br>><br>objectives:<br> narrowly-<br>to<br>and/or<br><!-- End of picture text --> <!-- Start of picture text --> Ex. Infrastructure<br>expansion<br>Pd =<br><!-- End of picture text --> <!-- Start of picture text --> the cultivation of<br>conditions to support it<br>a<br><!-- End of picture text --> <!-- Start of picture text --> achieve more<br>objectives<br> Institutional reform<br><!-- End of picture text --> <!-- Start of picture text --> specific<br><!-- End of picture text --> <!-- Start of picture text --> Level<br><!-- End of picture text --> <!-- Start of picture text --> of development<br><!-- End of picture text --> Level of development
<!-- Start of picture text --> 6.3 The Limitations of Infrastructure Projects for a Place-Sensitive Approach to<br>traditionally been the preferred form of development intervention by policy makers to revitalize local<br>economies. These projects have gained attention as tools to drive growth across a country. They are<br>distributed across regions, creating winners and losers. The returns on such projects can be highly<br>dependent on local endowments, such as variations in the quality of institutions. Weak institutional<br>contexts can lead to lower-than-expected returns (Crescenzi et al., 2016). The effectiveness of a<br>transport project is influenced by local institutions, especially the local government, and is<br>susceptible to political intervention.<br>infrastructure endowments (Rodriguez-Pose & Ketterer, 2020). Moreover, greater connectivity from<br>peripheral regions to urban areas may lead to the reallocation offirms and labor, negatively affecting<br>less developed territories. Therefore, complementary interventions, including institutional<br>investments into effective regional development projects.<br>This paper has aimed to offer a comprehensive overview of the theoretical and empirical<br>advancements in territorial development policies to overcome left-behindedness and improve<br>opportunities, and knowledge spillovers from core to peripheral regions. This increased attention has<br>been driven by a growing body of research stressing the existence of multiple barriers to regional<br>convergence and pointing at the importance of tackling regional inequalities for economic growth,<br>poverty reduction and inclusion, and long term stability (McCann & Rodriguez-Pose, 2011). Today,<br>accessibility, but also human capital, competitiveness and innovation, and, last but not least,<br>institutions. They also take into consideration other factors such as the presence of regional<br>development traps, the resilience of different places, agency, and sustainability transitions. In<br>particular, the significance of institutional quality and its direct and indirect impact on regional<br>economic growth has gained prominence, as has the recognition of the need for suitable<br>prerequisites to benefit from sustainability transitions. These theoretical and empirical developments<br>are leaving their mark on territorial policies worldwide, prompting a shift from spatially-blind<br>approaches to more place-based strategies and, more recently, place-sensitive approaches. However,<br>these new approaches are still very much works in progress in various geographic contexts, spanning<br>both developed and developing countries, with their effectiveness under ongoing evaluation.<br>traps and the new insights into the socio-economic costs of regional inequalities. Evidence from<br><!-- End of picture text -->
<!-- Start of picture text --> these domains has led to two significant shifts in policy-making paradigms. First, there is a move<br>away from conventional static measures of regional backwardness toward a dynamic understanding<br>of development traps, impacting both lagging and higher-income regions. Customized policy<br>interventions are deemed essential for rejuvenating territories that have experienced stagnation or<br>decline in recent years. Second, regional inequalities, once viewed as a temporary byproduct of rapid<br>driven interventions in isolation have effectively addressed the profound spatial disparities observed<br>in many countries. Consequently, place-sensitive approaches, which aim to reduce regional<br>approaches. Mobilizing economic potential and overcoming left-behindedness requires certain<br>acknowledge that place-specific conditions profoundly shape the outcomes of development<br>interventions in specific areas. This implies that spatially-blind policies must be adaptable to the<br>distinct ecosystems in which they are implemented, taking into account factors such as institutional<br>quality, leadership and agency, and a region's historical development trajectory. This adaptive<br>framework closely aligns with place-sensitive strategies (lammarino et al., 2019), which aim to unlock<br>the growth potential of each territory, regardless of its initial position on the development spectrum,<br>while leveraging existing local endowments to chart future development paths.<br><!-- End of picture text -->
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