Spatially differentiated effects of the

Somik V. Lall Global Lead, Territorial Development, World Bank Group

International Transportation and Economic Development Conference, June 6, 2018 SOURCE: Adapted from -Britain Business Council, “One Belt-One Road” using Open Street Map and UN Urbanization Prospects Map produced by Alexander Trubetskoy Spatially differentiated effects of the Belt and Road Initiative

. Economic effects of the BRI transport infrastructure and trade openness proposals

. Complementary policies and institutions to maximize the gains

. Complementary policies and institutions to manage the risks . Rising spatial disparities

3 Economic effects of the BRI transport infrastructure and trade openness proposals . Spatial perspective: . Proximity is valuable . Economic activity clusters and is unevenly distributed across places (map of night lights – next slide)

. Two drivers . Direct efficiency saving of being close together . Agglomeration economies

. Planned and ongoing analytic work . Construct and calibrate ‘new economic geography’ style models of spatial interaction to explore the possible effects of BRI on locations along the China- corridor

4 & China Nighttime light distribution 2013 (1-km Grid), the Silk Road Economic Belt, & the 21st-Century Maritime Silk Road

Russia

Kazakhstan

The Silk Road Economic Belt China

India

Data Source: WorldPop (2017) * Data is available only within the extent specified; World Bank Official Borders Analytic Framework

. Assess likely impacts of policy change/ infrastructure development to bring significant relocations of economic activity within and between countries.

. Two inter-related yet distinct approaches . Economic geography with many countries, all of which are divided into subnational units (cities or regions). . Economic geography within each country, where internal geography responds to external integration and domestic transport investments.

. Complements analytic work on trade • Trade models provide insights at the country level, the work on spatial effects looks at the impact of the BRI at the subnational level.

6 Global experience shows that internal economic geography responds to external integration . E.g. Mexico and NAFTA (Hanson 1998) – increasing concentration around trade gateways

. E.g. Argentina in the 19th century (Fajgelbaum and Redding 2014) Mexico - regional share of manufacturing employment 50 45 40 35 30 25 Percent 20 15 10 5 0 Broder North Center Mexico City South Sub National Region

1970 1980 1985 1993

Hanson, Gordon. 1998. “North American Economic Integration and Industry Location.” 7 Oxford Review of Economic Policy 14 (2). Oxford University Press: 30–44. Application: Examining economic geography within a country

. 3 corridors of interest: . New , . China-- . Central Asia-

. Assess the current transport network and transport costs

. Develop an economic geography model for locations with several economic sectors and opportunities to trade based on the existing transport network (between locations and/or between countries).

. Assess how changes in transport costs will affect the demographic and socio-economic outcomes - - produce counterfactuals 8 Features of the modeling/ analytic approach

. Economic Geography Model (Based on Fajgelabum and Redding 2014): . Several locations (districts) with production and trade in agriculture, manufacturing, and services.

. The mechanism: “the spatial Balassa-Samuelson effect” . Locations with low trade costs to international markets feature : . high relative price in the non-traded sector . high land rents relative to wages

. Proximity to trade hubs is associated with: . high population density, and structural transformation away from agriculture.

9 Illustration: Kazakhstan - critical node on the BRI

. Road and rail routes between Europe and China crossing the country . Khorgos Gateway dry port (Rehabilitation of the road between Almaty and Khorgos + faster crossing and better logistics at Khorgos (map 1) . rehabilitation of domestic corridors (map 2), and . opening of new railway stations and rail lines

Map 1 Map 2

Khorgos

10 Reductions in transport costs alongside structural and spatial changes in the economy Change in transport costs – Kazakhstan

300%

250%

200%

150%

100%

50%

0% 0 10 20 30 40 50 60 70 Growth of the agricultural output agricultural the of Growth -50%

-100%

-150% Time to the Chinese border (Khorgos)

The districts that are the closest to the Chinese border will benefit the most in terms of growing agricultural production 11 Structural transformation and spatial concentration with better connections

Spatial concentration: Districts close to urban nodes around Khorghos (such as Almaty) will attract more people and also expand the urban economy

Urban economy Urbanization changes

10 1

0.9

8 0.8 0.7

0.6 6 0.5

0.4 4 0.3

0.2

2 of population the urban Share 0.1 before the BRI after the BRI

Log Output of urban goods and svcs and goods urban of Output Log 0 2 2.5 3 3.5 4 4.5 0 0 10 20 30 40 50 60 70 Log Time to the Chinese border

-2 Time to the Chinese border

12 Illustration: Spatially differentiated effects within China

Real wage increases in urbanized western counties .. Associated with growth in agriculture as well as urban employment

13 Complementary policies and institutions to maximize the gains

. How can cities prepare to take advantage of potential economic changes? . Complementary investments and policies - Spatial planning, land use management , housing markets, and urban management . Business ecosystem . Enhancing capabilities and remit of sub national governments

. How can the benefits of BRI investments be spatially spread? . Domestic transport investments and logistics . Resolve tradeoffs between spatial equity and economic efficiency

14 Complementary policies and institutions to manage the risks

. How can welfare be improved in areas that may get left behind?

. Rising spatial disparities – role of factor (labor) mobility . Tax and transfer policies; supporting public services

. Look at the European Union – convergence machine

15 Spatial disparities increase when workers and families are not mobile

. Labor mobility – sharpest instrument for reducing spatial disparities . Choice of living in a location with lower real wages but high amenity versus moving towards the locations with the high real wages . Impediments to spatial mobility will lead to much higher level of spatial wage dispersion . Domestic infrastructure expansion without mobility improvements exacerbates spatial inequality.

. Kazakhstan

16 Spatial disparities increase when workers and families are not mobile

. Labor mobility – sharpest instrument for reducing spatial disparities . Impediments to spatial mobility will lead to much higher level of spatial wage dispersion . Domestic infrastructure expansion without mobility improvements exacerbates spatial inequality. . China . With high mobility, two regions will grow more: Western China counties . Spatial disparities in real wages will increase more with low worker mobility.

Growth of population (in %)

17 Recap: Spatially differentiated effects of the Belt and Road Initiative

. Economic effects of the BRI transport infrastructure and trade openness proposals . Concentration of economic activity around gateways and hubs . Potential for significant sectoral and spatial transformations

. Complementary policies and institutions to maximize the gains . Taking advantage of potential economic changes –business env; urban management and transport systems . Spatially spreading the benefits – should we and how?

. Complementary policies and institutions to manage the risks . Risks associated with reduction in transport and trade costs – . Need to enhance labor mobility – allows for economic concentration and living standards convergence . Risks associated with large infrastructure projects . Environmental risks – and options for managing such risks

18 Data Source: Esri Map & Data (2011, Updated 2017); World Bank Official Borders Land Transport & the Silk Road Economic Belt: Global Road Network (2017) & the Silk Road Economic Belt

The Silk Road Economic Belt THANK YOU

Europe

China

Middle East