Trailing places: #1 Solving regional disparities
Words by Katie Puckett
“We’ve ended up here because we don’t recognize the full value of those regions’ contribution. One way to challenge that is to think about the counter-factual: what would happen if they weren’t there at all?”
Vivienne Ivory, WSP
What if we don’t repair the bridge? That was the question that abruptly changed the tone of a meeting about the resilience of New Zealand’s transport corridors. A group of engineers, planners and researchers had gathered to explore how connections between its major cities could be maintained in the event of future storms and flooding. But it was a different kind of connection that came to the fore.
The bridge in question was in a rural region that had been steadily emptying out as younger generations moved to urban areas. “We talked about what would happen if it was cut off,” remembers Vivienne Ivory, a technical principal and transport equity researcher in WSP’s Te Whanganui-a-Tara Wellington office. “Should we just step away from investing in those areas? It will involve huge costs to keep that road network going but, if we don’t, we can’t get to entire regions. Suddenly people began talking about how important those small rural communities were to us as a culture. Everyone got it — it wasn’t just about getting freight across or employment, it was about what they added to the fabric of New Zealand life.”
That bridge in New Zealand could stand in for any piece of infrastructure in any number of small, shrinking regions around the world. And the question about its future will be echoed in many discussions about what to do about them, as traditional industries decline and the global population becomes ever more urbanized. Over the last two decades, income inequalities between countries have been on a downward trend, but inequalities within them have grown, apparently unstoppably, to reach historic highs. Today, two-thirds of the global population lives in countries where the gulf between rich and poor has widened, which includes most advanced economies. Cities are the scene of striking wealth disparities, but even more significant are the economic disparities between regions: a landmark OECD report found that the average gap between the most productive 10% and the bottom 75% widened by nearly 60% between 1996 and 2016, leaving GDP in leading regions 70% higher. To illustrate this, the International Monetary Fund pointed out that GDP per capita in the US may be about 90% higher than in Slovakia, but that GDP per capita in the state of New York is 100% higher than in Mississippi.
This is a problem for countries on many levels. Regional disparities hold back economies and individuals from reaching their full potential, and have negative consequences for living standards, health, social cohesion, even overall happiness. As we stand on the cusp of two major industrial transformations, the need to turn the tide has never been greater. The transition to a net-zero economy and leaps in robotics and AI threaten to entrench patterns of inequality that have already been exacerbated by the pandemic. Decarbonization will mean the loss of jobs in carbon-intensive sectors, while automation will replace humans for whole categories of tasks or force them into less secure working arrangements. Without intervention, both risk further polarizing the workforce and destabilizing societies — leaving depressed regions in terminal decline.
That’s where the bridge comes in, says Ivory. “We’ve ended up here because we don’t recognize the full value of those regions’ contribution. One way to challenge that is to think about the counter-factual: what would happen if they weren’t there at all? What does full urbanization look like, and do we want that? It’s been coming a long time and I think we’ve been ignoring it, at our peril. But I also think there are more opportunities than ever to address this, if we can have those conversations about what’s really important to us and start planning for it.”
How did we get here?
Regional disparities have proved stubbornly resistant to policymakers’ attempts at levelling up, and to overall increases in national prosperity. They have grown most strongly in some of the world’s richest countries. Over the last three decades, globalization and advances in communications technology have led to the formation of highly successful clusters, typically focused around the high-growth, high-margin knowledge industries. Companies based in Silicon Valley, Bangalore or London’s financial district can serve a global market, while benefiting from the agglomeration of capital, labour and associated services that grows up around them. These centres have become the engines of the world economy, but their irresistible, all-consuming growth has sucked wealth and talent from an ever-wider radius and made it all but impossible for less-favoured regions to compete.
"Every time there has been an advance in communications technology, people have predicted that cities are over. And not only does that not happen, actually the opposite happens"Anthony Breach, Centre for Cities
Whereas regional disparities used to be characterized by broad strokes and compass points, today the pattern is much more fragmented. Rather than divides between, say, north and south, they are predominantly a rural-urban phenomenon. In the OECD’s most recent analysis, released in 2020, deepening polarization is most apparent at a sub-regional level. In the decade following the 2008 financial crisis, places in the orbit of major cities saw modest growth in GDP per capita, while those near smaller cities or in remote areas experienced a much steeper decline.
This trend for agglomeration coexists with a post-Covid gut reaction against inner cities, according to John Loughran, an urban planner who leads WSP’s transit-oriented development practice in the US. There, a wave of decline swept down from north-eastern Rust Belt towns like Detroit and Pittsburgh, as industry moved in search of cheaper labour, first south and then offshore. But today the country is a patchwork, with fast-growing metro areas in depressed regions and pockets of deprivation in richer states. “Downtown Dallas may not be attracting all the residents it could, but within Texas, it’s the Dallas metro area that’s growing,” he says. “Florida is a big agriculture state, but the growth is targeted in metros like Miami and Orlando. Similarly in Georgia, the growth is not across the state, it’s in Atlanta — not necessarily the city itself, but the wider region.” The result is suburban sprawl, while smaller towns and rural areas dwindle.
When Covid brought an overnight switch to remote working, and widespread adoption of video conferencing, there was hope that the stranglehold of clusters would be broken. Office workers would be able to move out of crowded cities and investment would follow them to rejuvenate the regions. But clusters have seen off this kind of challenge before, says Anthony Breach, senior analyst at Centre for Cities, a UK think tank. “Every time there has been an advance in communications technology, people have predicted that cities are over, that work is going to become far more dispersed over the country and no one will have to commute. And not only does that not happen, actually the opposite happens. Cities become more important to national economies and to the global economy.”
In fact, as the cost of exchanging information over distance diminishes — to close to zero today — information that can only be exchanged face to face becomes relatively more valuable. “As a result, those places where you have those face-to-face interactions then also become much more valuable. It may be the case that with Zoom or Teams you can replicate more of that face-to-face interaction without needing to be in the same place, but if you look at history, advances in technology make cities more important, not less. Even in a world where remote working becomes much more common, I don’t think it’s obvious that the agglomeration effect from cities then declines.” It could even exacerbate regional disparities, he warns, as specialized, higher-value roles are drawn back into cities, but more routine, lower-skilled tasks are displaced out.
The agglomeration effect has been complemented by deregulation and a prevailing orthodoxy that markets should be left to work unimpeded. But clusters have proved to be highly resilient, even in the face of market failure. As it becomes clear that a laissez-faire approach won’t deliver inclusive growth, there is a recognition that governments need to step in, and that some kind of geographically targeted intervention will be necessary.
"Covid has deepened socioeconomic inequalities, but it’s also illustrated that economic prosperity in a pure sense is not enough"Jim Coleman, WSP
“We’ve had several decades of letting the market dictate, because markets are supposed to be efficient,” says Jim Coleman, head of economics at WSP, based in London. “But they can also be quite inefficient — look at the state of the housing market. Covid has deepened socioeconomic inequalities, but it’s also illustrated that economic prosperity in a pure sense is not enough. We need a much, much broader idea of our personal wellbeing and how we care for each other in society.”
Another reason that regional disparities appear to be so intractable is that many of the proposed remedies are very expensive or politically unpalatable, especially within short-term electoral cycles — big-ticket infrastructure investment, for example. While connectivity is undoubtedly important, there are many other solutions available to policymakers that are low-cost or even cost-neutral.
We can unlock these by thinking about regions in a different way, and viewing the problem through a decarbonization lens. “The challenge is not to find the solution, it’s to fund and enact the solution,” says Coleman. “Fundamentally, the way to address economic challenges is to create good jobs and to get people into those jobs. We’ve been trying to do this for decades, but now there are new mechanisms available to us — if we can grab on to the possibilities afforded by technology and hybrid working and net-zero.”
So, how do we do that? In this four-part series, The Possible explores how we can reverse the decline, from making infrastructure investment stack up in low-demand areas, to catalysing green job growth, to using decarbonization to revolutionize rural services …
Read the next part of the series: Why invest in transport where there’s no traffic?
Sidebar: The economic case for action
How regional disparities hold back national prosperity — and threaten national harmony
Regional disparities are bad for countries on many levels. Those trapped in lagging regions suffer from worse living standards and poorer health and education outcomes, but inequality damages countries’ overall prosperity too. A 2021 working paper published by the International Monetary Fund examined whether they were a necessary by-product of economic success: if market forces don’t lead to convergence, does that mean regional disparities are efficient? Should governments just accept that some places will lag behind and focus on encouraging outward migration and channelling funds to prop up the welfare of those who remain?
No, they concluded. Economic orthodoxy says that markets should work to distribute wealth efficiently — firms will locate where it is most profitable for them to do so, and workers will migrate to where they can earn higher wages. Once a cluster becomes too overheated, activity should disperse to lower-cost destinations. In reality, however, the authors found various factors stop these mechanisms from working effectively in agglomeration economies. Firms don’t move out because there is a “first-mover” or coordination problem. Wages are higher in clusters, but so is productivity: “No firm wants to leave an existing cluster and forego the associated productivity benefits. Coordinated movement by many firms might be collectively profitable, but the market mechanism cannot achieve this.”
Meanwhile, even if people in less successful regions are willing and able to move away from social networks and other amenities, the wages in clusters don’t always cover the higher living costs, especially for lower-skilled jobs. It’s the older, less skilled workers who tend to be left behind by the brain drain. While prices soar and commutes lengthen in congested urban centres, underperforming regions are trapped in a downward spiral. Falling tax revenues and property prices make it harder to fund public services and improvements, so areas become progressively less attractive to younger, in-demand talent and inward investment. The result is a dissatisfactory spatial equilibrium, in which potential is underutilized and overall growth constrained.
At a social level, regional disparities not only contribute to inequality today, they entrench it for the future by limiting opportunities and intergenerational mobility for those stuck in the wrong place, say the authors of the IMF paper. They cite the Equality of Opportunity project in the US, which found that a child born in San Francisco in the bottom 20% of national income distribution has twice as much chance of ending up in the top 20% as a child born in Detroit.
More broadly, they warn, “regional disparities … can fuel social tensions and promote political polarization, increase populism and resentment towards urban elites, threaten countries’ social fabric and national cohesion and, in extreme cases lead to conflict, particularly where the disparities reinforce existing ethnic, racial, linguistic or religious divisions.”
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Can we stimulate growth without major investment?
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