From Poverty to Prosperity: Understanding Economic Development part 4

Recap: What Have We Learnt So Far?

• Getting out of poverty requires high levels of scale and specialisation.

• Scale and specialisation play out spatially, and sectorally. Spatially, scale and specialisation is seen in the process of urbanisation.

• Successful urbanisation is the process of achieving high levels of connectivity (higher density and/or highly efficient transport infrastructure) that enable higher productivity. It is important to align the appropriate levels of density technologies and transport technologies as a city grows.

• Many low-income cities fail in building high connectivity. Possible reasons include:

• absence of land markets;

• insufficient household investment in housing; or

• insufficient public investment in infrastructure.

• In addition, there could also be political and cultural impediments, such as elite interests and the lack of a culture of enforcement.

• Taxation plays a key role, specifically taxing land, in generating the revenues required for public investment in infrastructure.

• The transition from rural societies to urban societies is a critical one. If it is mismanaged - if the right public policies are not there - many more people are able to live in cities, but the quality of life stays low because high productivity is not achieved.

Module 4 Summary

• Module 4 explored the necessity of increased productivity for any society to move out of poverty. We saw that two key factors are needed for the move to higher productivity: economies of scale and specialisation. We also saw how these two factors play out spatially in the process of urbanisation and sectorally in the process of industrialisation.

• Our study of urbanisation revealed the vital importance of good connectivity to successful urban areas, and we looked at the two dimensions of connectivity: density and transport. We then explored the different technologies for each of these two dimensions, and we identified the key role that city authorities and their public policies play in the urbanisation process. Finally, we looked at some of the challenges that prevent cities from developing high connectivity such as the absence of land markets, insufficient household investment in housing, and insufficient public investment in infrastructure. We suggested that taxing land could provide the necessary revenues for cities to invest in public infrastructure.

We analysed why industrialisation is a slow process, hampered by the need to concurrently resolve the challenges of scale and interdependence, as well as the challenge of attracting pioneer investments. Specifically, we looked at the realities facing small isolated economies, and proposed that to rise out of poverty they need to federate or integrate into the global markets. However, the process of integrating into the global market is impacted by financial, political, and cultural constraints.

Finally, Module 4 looked at four specific examples of achieving scale and specialisation through the establishment of clusters of firms

Key Takeaways

• Economic growth depends on the move from low to high productivity.

• This increase in productivity depends on two factors: economies of scale and specialisation. These play out in society both spatially (urbanisation) and sectorally (industrialisation).

• Successful cities have high connectivity, conveniently linking workers with the firm, firms to other firms, and firms to their customers.

• High connectivity depends on achieving the right level of density and transport infrastructure.

• The establishment of a public land registry is essential for the development of a legitimate land market, and has significant implications as far as the issues of taxation and land rights are concerned.

• Industrialisation is a slow process, hampered by the need to concurrently resolve the challenges of scale and interdependence, as well as the challenge of attracting pioneer investments.

• In order for small isolated economies to rise out of poverty, they need to cease to be small (by forming federations and increasing their basic scale) or cease to be isolated (by integrating into the global markets).

• Countries wishing to integrate into the global markets also face a number of constraints. Integration is an expensive process that requires large investments in infrastructure that poor countries typically can't afford. It is also susceptible to political 'hold-up' problems from neighbouring countries. Finally, it faces a number of cultural challenges as well.

• Scale and specialisation can be achieved by multiple firms setting up in the same area and forming a cluster. There are a number of examples of how countries that were able to support the establishment of such clusters successfully broke into the global market.

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