The Evolving Geography of Productivity and Employment

Download the report "The Evolving Geography of Productivity and Employment. Ideas for Inclusive Growth through a Territorial Lens in Latin America and the Caribbean"

Geographical factors have largely been ignored by those trying to explain the record of persistently low economic growth in Latin America and the Caribbean (LAC). The study described in this report has attempted to rectify that oversight.

Relying on the core concepts of economic geography, state-of-the-art techniques, and new data sources, the study adopts a “territorial” lens to identify the geographical factors that constrain inclusive growth in the region. An analytical framework that embraces all spatial scales offers insights that cannot be gained by focusing separately on each spatial level or by conducting a country-level analysis that overlooks the spatial unevenness of economic activity and its persistence over time.

The report begins with a broad view of territorial productivity differences across various locations—from predominantly urban to mostly rural areas—and their evolution between the early 2000s and the late 2010s in many LAC countries. It then explores the frictions that limit the mobility of goods and people within and across countries in the region and quantifies the extent to which those frictions hamper economic growth and welfare.

Next, urban areas come under the lens.The analysis traces the evolution of the composition of urban employment by city size and the factors that weaken urban productivity growth, such as mobility and congestion issues. Finally, the lens shifts toward economic activity within cities, shedding light on socioeconomic differences across neighborhoods in some of the LAC region’s largest cities and their productivity implications.

The study finds that three factors undermine the economic advantages of cities and merit special attention:

1. the deindustrialization of cities, which has sapped them of their dynamism and shifted economic activity toward low-productivity, nontradable services; 
2. the costs of distance between cities, which hamper economic integration, specialization, and knowledge spillovers—and therefore productivity growth; and
3.  the divisions of cities into disconnected poor and affluent areas, which limit the geographic span of agglomeration economies, obstruct information flows, and generate resource misallocation because of the prevalence of informality in low-income neighborhoods. 

Key Messages

• The Evolving Geography of Productivity and Employment uses a “territorial” lens to analyze the perennial problem of low growth in Latin America and the Caribbean (LAC). It employs new data sources and methods to dissect how productivity and employment evolved in different geographic locations and sheds light on the region’s urban productivity paradox of cities that are dense but not particularly productive.
• A key finding is that a striking convergence in labor and place productivity within countries reduced territorial inequality between the early 2000s and the late 2010s throughout the LAC region. Poor, predominantly rural regions began catching up due to improvements in agricultural productivity and investment in mining activities. However, urban productivity growth remained relatively weak.
• Convergence narrowed the income disparities with leading metropolitan areas in the LAC region, including the gaps that could be exploited by migrating to these top locations—these areas deindustrialized but continued to attract migrants. Among residents in the bottom 40 percent of the income distribution, these gaps became negligible in most LAC countries except Bolivia, Brazil, Panama, and Peru, where regional inequality remained high.
• This report identifies three intertwined factors that have weakened the benefits of agglomeration economies, thereby providing an explanation for the LAC region’s urban productivity paradox: (1) the deindustrialization of cities, (2) connectivity issues, and (3) divisions within cities.
  • With the deindustrialization of LAC cities over the last three decades, urban employment has shifted toward less dynamic, low-productivity, nontradable services, such as retail trade and personal and other services. These activities offer lower wages and returns to experience, have more limited potential for catch-up through dynamic productivity gains, and benefit less from internal returns to scale than urban tradables, such as manufacturing and tradables services. The shift constrains the growth in nationwide productivity because the region’s workforce is mostly urban. It also limits urban place productivity because firms offering nontradable products and services benefit less from co-location than firms offering urban tradables, and their agglomeration benefits are reduced more rapidly with increases in congestion, which is a major problem in the LAC region’s largest cities. 
  • Connectivity issues negatively affect the performance of the LAC region’s network of cities by limiting market access, knowledge spillovers, and the ability of firms to specialize by relocating to smaller urban areas. High intercity transport costs reflect to different degrees in different countries a host of issues, including low and badly allocated investments in road improvements, backhaul problems, imperfect competition, government regulations, and information frictions. Digital technologies can be leveraged to overcome transport infrastructure deficiencies, but the LAC region’s progress in expanding access to affordable high-speed internet services, especially among poor and rural communities, has been slow.
  • Reinforced by long and costly commutes, divisions within cities, especially in some of the region’s leading metropolitan areas, have hurt urban productivity by limiting the geographic span of agglomeration economies to central business districts. Divisions also generate spatial misallocation stemming from the informality traps in low-income neighborhoods, often located in the urban periphery. Moreover, deficiencies in basic infrastructure and public services in these low-income areas erode the employability, productivity, and resilience of less affluent urbanites through greater exposure to climate shocks, disease, and crime. 
• The findings in the report reveal that during the Golden Decade (2003–13), the LAC region’s commodity-driven model of development delivered convergence in territorial productivity and living standards but achieved only a short-lived spurt in economic growth. To accelerate growth in a sustainable, inclusive way, the region needs to blend its resource-driven model of development with one that better leverages the skills and labor of its urban workforce. To develop such a two-pronged development model, countries in the region will have to improve the productivity and competitiveness of their urban economy and enhance the efficiency with which they transform natural wealth into human capital, infrastructure, and institutions. 
• Firing up the engine of urban growth requires implementing policies on three territorial scales: national, regional, and local. 
  • At the national level, countries must boost nationwide competitiveness to stimulate the growth of urban tradables and thus the potential of these sectors to generate high-productivity jobs. Improvements are needed in a wide range of areas: from macroeconomic management and education to nationwide innovation capabilities, competition policy, and the “doing business” environment. Making regulations simpler and more predictable, increasing the transparency of legal frameworks and property protection, strengthening competition policy, improving access to finance, enforcing the rule of law, facilitating trade and investment, and harmonizing behind-the-border regulations will attract foreign investment and stimulate export growth. The weak rise in the share of employment in tradable services over the last three decades suggests that the LAC region also needs to implement comprehensive reforms that speed up competition and innovation in these sectors, in addition to closing skill gaps that limit the supply of talent to these sectors. Progress in these areas should go hand in hand with efforts to strengthen national institutions for the management of resource rents and their efficient spending
  • At the regional level, a greater effort is needed toward enhancing domestic infrastructure to reduce intercity transport costs, while also coordinating with regional trading partners to improve transnational transport connectivity. Abolishing regulations that limit competition in the transport sector and accelerating investments in digital connectivity and complementary services would also be helpful. In this context, it is important to improve the efficiency of subnational spending and the ability of regional governments to mobilize their own resources.
  • At the local level, it is important to improve the competitiveness, economic dynamism, and livability of cities. To turn around the fortunes of their cities, local governments must invest in local institutions and enterprise support, as well as improve access to finance and land, the efficiency of permitting processes, and the effectiveness of law enforcement. Investing in basic urban infrastructure, affordable housing, and improvements in air quality, public transportation, education, health services, and other urban amenities could also help attract talent and stoke innovation in their municipalities.
• The complex policy agenda just outlined must be tailored to the needs of individual countries and coordinated across different territorial scales through enhanced intergovernmental collaboration. If implemented well, these policies promise to finally lift inclusive growth in Latin America above the disappointing levels of the past decades.