History shows that severe crises can cause nations to become inward-looking, sometimes with negative consequences. The World Development Report 2009: Reshaping Economic Geography, released on Friday, argues that the most effective policies for promoting long-term growth are those that facilitate geographic concentration and economic integration, both within and across countries.

"The world's most geographically disadvantaged people know all too well that growth does not come to every place at once," says Indermit S. Gill, director of the World Development Report (WDR) and ehief economist, Europe and Central Asia. "Markets favor some places over others. To fight this concentration is tantamount to fighting prosperity. Governments should facilitate the geographic concentration of production. But they must also institute policies that make the provision of basic needs -- of schools, security, streets, and sanitation -- more universal."

"Lagging and leading places can be brought closer economically by unleashing the market forces of agglomeration, migration and specialization, as we have seen in North America, Western Europe, and East Asia, where intra-industry trade has powered prosperity," said Justin Lin, World Bank chief economist and senior vice president, Development Economics. "How well markets and governments work together to harness these forces will determine the wealth of cities, provinces, and nations."

The new World Development Report challenges the assumption that economic activities must be spread geographically to benefit the world's most poor and vulnerable. Trying to spread out economic activity can hinder growth and does little to fight poverty. For rapid, shared growth, governments must promote economic integration which, at its core, is about the mobility of people, products, and ideas.

"Throughout history, mobility has helped people escape the tyranny of poor geography or poor governance," said Gill. "The report sees this as part of a vital process of economic integration, since mobile people and products form the cornerstone of inclusive, sustainable globalization."

Integration should be the pivotal concept in the policy discussions involving the location of production, people and poverty -- in particular, the debates on urbanization, regional development, and globalization. Instead, all three overemphasize place-based interventions.

"In a world where economic concentration is a fact of life, governments should improve land policies, provide basic services everywhere and invest efficiently in infrastructure," said Katherine Sierra, vice president, Sustainable Development. "As the WDR shows, incentives intended to attract industry to lagging areas should be used sparingly."

The WDR reframes the policy debates to include all the instruments of integration -- common institutions, connective infrastructure, and targeted interventions. By common institutions, the report means regulations affecting land, labor and commerce, and social services such as education and health financed through taxes and transfers. Infrastructure refers to roads, railways, ports, airports, and communications systems. Interventions include slum clearance programs, special tax incentives to firms, and preferential trade access for poor countries.

Geography matters greatly in deciding what is needed, what is unnecessary, and what will fail, argues the report. By calibrating the blend of these policies, developing nations can reshape their economic geography, much as today's high income economies did in the past. If they do this well, the report concludes, their growth will still be unbalanced, but their development will be inclusive.

Background/Key facts

• Economic activity concentrates as places prosper. Half the world's production fits onto less than 5 percent of its land, an area smaller than Algeria. Tokyo, the world's largest city, is home to 35 million -- a quarter of Japan's population -- but stands on just 4 percent of its land. Cairo produces more than half of Egypt's GDP, using just 0.5 percent of its area. Brazil's three south-central states comprise 15 percent of its land, but more than half its production. North America, the EU and Japan -- with less than a billion people -- have about two-thirds of the world's production.

• Living standards converge with development. Rural poverty rates are almost everywhere higher than in cities. In Brazil, China, and India, lagging states have poverty rates more than twice those in leading states. Countries home to the "bottom billion" -- mostly in Sub-Saharan Africa and South and Central Asia -- have 12 percent of the world's population but less than 1 percent of its GDP. But location matters less and less for living standards as nations prosper. Estimates from over 100 living standards surveys show that households in the most prosperous areas of developing countries like Ghana and Indonesia have an average consumption nearly 75 percent higher than that in their lagging areas. In wealthy countries, this difference is less than 25 percent.

• Growth requires geographic transformations. Rising density as cities grow, shorter distances as people migrate and transport costs fall, and lower divisions as nations 'thin' their economic borders -- these are all ingredients for rapid and shared growth. While cities are much larger today, the pace of urbanization seen in developing countries is not unprecedented. Meanwhile, coastal provinces have boomed relative to less accessible areas as the share of global exports to world GDP has risen from 6 to 26 percent during the 20th century. The number of international borders has increased from 100 to more than 600 since 1900. But what matters for economic growth is the 'thickness' of economic borders, which depends on the restrictions on the flow of goods, capital, people, and ideas. Borders between countries in Western Europe are now about one-fourth as thick as those in Western Africa.

• Prosperity demands mobile people and products. Korea went from more than 80 percent rural to more than 80 percent urban between 1950 and 1990, as its per capita income grew from present-day Benin's to more than Portugal's. The United States, the world's largest economy, is also among the most mobile, with about 35 million people changing their place of residence every year. In China, more than 150 million people moved to coastal areas during the late 1990s. Falling transport costs encourage specialization and trade between economies at similar stages of development. Intra-industry trade -- the exchange of broadly similar goods and services -- is now half of global trade, up from about a quarter in the 1960s. Because this trade is especially sensitive to transport costs, East Asia, North America, and Western Europe account for much of it.

(China Development Gateway November 7, 2008)