In the past generation, there has been a slow revolution in economic thought, brought about by the recognition of imperfectly competitive markets, due mainly to increasing returns to scale, spillovers, and circular causation. A new way of thinking has transformed the classical analysis of industrial organization, economic growth, and international trade, and has delivered what were at first controversial, but now widely accepted, implications for the progress of developing countries. Part two of the Report illustrates the interplay between scale economies, factor mobility, and transport costs to explain the formidable forces that shape the spatial transformation described in part one. Chapters 4, 5, and 6 are the stops in a tour of the “engine room,” each spotlighting a different facet of the interactions among agglomeration, migration, and specialization.

This chapter summarizes the experience of entrepreneurs over the last two centuries in exploiting economies of scale in production. It focuses on “agglomeration economies,” whose exploitation requires locating in areas densely populated by other producers. It next provides a brief synopsis of about two decades of work by economists seeking to understand these scale economies— work that has diminished the disconnect between research and the real world, and that yields valuable policy insights. It then assesses whether policy makers in the developing world have been learning from this experience a 126 nd analysis.

This chapter is about the mobility of labor and capital, how their movements help to concentrate economic activity, and how these fl ows mitigate differences in welfare that can accompany economic concentration. It emphasizes movements of labor, especially, for two reasons. First, although many countries and regions are still thirsty for investment, national reforms and international agreements since the 1970s have eliminated most restrictions on the fl ow of capital. The scarcity of capital in some places now has less to do with actual barriers and more to do with unfavorable investment conditions.
In a globalizing economy capital is mobile and will move quickly. Labor, by contrast, tends to be less mobile for cultural and linguistic reasons. Second, a strong policy consensus supports the free fl ow of capital for foreign direct investment, even if this consensus is not always fully manifested in the policies of the many countries where external and internal obstacles remain. Relative to capital, labor is subject to more political restrictions and to explicit and implicit barriers. Some novel insights come from considering agglomeration economies and human capital together. Based on these insights, this chapter makes a case for facilitating the voluntary movement of people.

The sharpest insights sometimes come from piecing together bits of information that separately can be innocuous and unsurprising. In the mid- 1970s overseas transport costs had fallen to a fraction of what they were in 1900, thanks to such inventions as steam power and the telegraph. And the share of trade between neighboring countries in Europe had risen relative to their trade with countries more distant. In 1910 British exports were spread quite evenly between Europe (35 percent), Asia (24 percent), and other regions (31 percent). By 1996, 60 percent of Britain’s exports went to Europe and only 11 percent to Asia.
Singly, neither fact is surprising. Together, they are exactly the opposite of what standard economics would predict. After all, transport costs should be a larger part of the cost of goods shipped from half a world away than for goods traded with neighbors. So a fall in transport costs should have meant more trade with distant partners than with neighbors, not less. What had happened?

When Admiral Zheng He brought a giraffe to Nanjing in 1415, it was believed to be a heavenly beast, associated with great peace and prosperity. It also marked the heyday of Chinese influence in East Asia and the region’s wealth relative to the rest of the world. China at the time was probably the world’s largest economy, enjoying the highest standard of material, living with flourishing art and education and advances in a range of technologies. Its naval skills had enabled voyages to places as far away as Africa.

Can crowded cities in developing countries pull people in and power them out of poverty? Does migration help those who move and those left behind? How can trade help the world’s wealthy and most destitute? What can policy makers do to address the three big challenges facing the developing world—a billion slum dwellers, a billion people living in remote and underserved areas, and the “bottom billion”? Part three of the Report provides the answer: economic integration. How? By using spatially blind institutions, spatially connective infrastructure, and spatially targeted incentives and calibrating the response to the diffi culty of integration. Chapter 7 explains what economic integration means for metropolises, cities, towns, and villages. Chapter 8 proposes how integration between economically leading and lagging areas can benefi t everyone. Chapter 9 lays out the diffi cult steps needed to successfully integrate the world’s most isolated countries. In doing so, the chapters in part three revisit and reframe long-standing policy debates on urbanization, territorial development, and international integration.

A team of urban experts, as part of a routine exercise in 1974, forecast the size of the world’s most populous cities in 2000. Kinshasa, the Democratic Republic of Congo’s capital, would grow to 9 million, more than London today. Pakistan’s Karachi would expand to 16 million, almost as large as New York City. The forecasts were way off (see figure 7.1). Kinshasa’s population is about half of London’s today, Karachi’s about half of New York City’s. Why were the experts, generally good at forecasting national populations, so wrong in predicting city sizes? The reason: forecasting the spatial distribution of people in a country is not the same thing as predicting the size of its population. As shown in earlier chapters, spatial transformations—the growth of cities and leading areas—are linked closely to changes in the economy, especially the sectoral transformations that accompany growth and the opening of an economy to foreign trade and investment. So predicting the size of a city is economic forecasting, a hazardous occupation.

Globalization and liberalization may rearrange production within countries, leaving people concentrated in places no longer favored by markets. In Brazil, China, India, and the Russian Federation, changes in both markets and policies over the last century have altered the fortunes of places. Geographic differences in economic activities encourage migration from lagging areas, concentrating people— including the poor—in leading areas. But geographic unevenness in living standards, by creating or deepening divisions within countries, can also lead to confl ict, slowing social and economic development. Building on the fi ndings and analysis in earlier chapters, this chapter discusses the policy responses to widening or persistent differences in living standards between areas of a country that markets favor with greater economic mass and those that they do not. As in the rest of this report, the term “area” is synonymous with a subnational region or territory, so this chapter deals with the “regional development” (also referred to as the “territorial development”) debate. Logic and experience indicate that policy makers should calibrate their responses to the severity of the challenge.

Many leaders in Africa called for a political union of the continent at the time of independence. Félix Houphouët-Boigny, Côte d’Ivoire’s fi rst president, was more pragmatic, promoting a gradual increase in economic cooperation with neighboring countries. He proposed one of the fi rst regional economic agreements in Africa, the “Conseil de l’Entente,” backed by a solidarity fund provided mainly by Côte d’Ivoire. The key elements of the Entente were free trade and free movement of people.
The preferred destination of migrants was, naturally, Côte d’Ivoire. Its share of foreigners increased from 5 percent in 1950 to 26 percent of its 16 million people in 1998—making the country one of the top dozen destinations for international migrants in the world. Côte d’Ivoire benefi ted as foreign workers contributed to export-led growth in industry and agriculture. Sending countries—especially Benin, Burkina Faso, Niger, and Togo—benefi ted from remittances and increased trade. The political crisis triggered by a coup in 1999 affected the entire region. But Houphouët- Boigny had vested his country’s neighbors in its future, earning the nickname of “The Sage of Africa.”

In November 1884, Chancellor Otto von Bismarck of Germany convened a meeting of 14 European colonial powers in Berlin. After four centuries of competition and hostility, the time had come to negotiate and settle territorial claims. Britain, France, Germany, and Portugal were the main players; no Africans were invited. Four months later, the borders of African countries had been charted in a pattern still recognizable today (see map G4.1). Bismarck’s disciplined solution remained until the end of World War I, when the League of Nations confi scated Germany’s four colonies and gave other colonizers the mandate of governing them. At independence in the 1950s and 1960s, Sub-Saharan Africa had almost 50 countries, many of them called “artifi cial states,” with borders cutting across physical geographic features and partitioning ethnic groups into more than one country

Table A1 Geography and access
Table A2 Urbanization
Table A3 Territorial Development
Table A4 International integration
Table A5 Other indicators
Sources and definitions

Data sources and methodology
Classification of economies and summary measures
Terminology and country coverage
Classification of economies by region and income, FY2009
Table 1 Key indicators of development
Table 2 Millenium Development Goals: eradicating poverty and improvingg lives
Table 3 Economic activity
Table 4 Trade, aid and finance
Table 5 Key indicators for other economies
Technical notes