The World Bank just released a report on the economics of China’s Belt and Road Initiative (BRI). It provides estimates of the potential of Belt and Road transport corridors for enhancing trade, foreign investment, and living conditions for people in the countries that they connect. The report also tries to answer an important question: what happens to the internal geography of countries when they increase connections with others?
The question is important for national and subnational governments. Spatial equity in development outcomes ranks high as a barometer of political success. We know from research that regions with better access to foreign markets, such as large cities and border or port regions, stand to get the biggest gains from improved trade linkages. In fact, connectivity improvements could bring more spatial concentration, not the dispersion of economic activity as firms tend to cluster together to reap agglomeration economies (the winners).
In the absence of mechanisms to compensate places that face “net economic losses” (the losers), such initiatives would exacerbate spatial inequalities and pose fiscal burdens for regions less and less able to bear them. Some parts of a country may only see trucks and rail wagons roll by whilst having to service the debt associated with infrastructure investments.
BRI transport investments favour development in larger cities near border crossings, while people in more distant regions tend to lose out. Lower transport costs increase prices in the export sector and push wages and land rents up. In addition, because wages are equalised across sectors, prices in the non-tradable sectors also increase. Complementary investments in trade accentuate the gains in and around urban hubs near border crossings, so they increase spatial gaps in wages and welfare. Improved domestic transport networks help to spread the benefits, and offset the growing differentials.
Countries where people are not mobile will experience higher spatial wage inequality and, relatedly, lower welfare. This is one aspect of a general principle: how much of the gains from economic integration a country gets depends on complementary reforms. Not making such reforms can convert gains into losses.
Domestic policies and investments that increase mobility of labour, goods, and services can mediate potential spatial efficiency-equity trade-offs. Within countries, workers can have very different levels of market access depending on where they live. These differences fall as labour mobility increases. When they do, spatial differences in the welfare of workers and their families also fall.
In the absence of border reforms, BRI infrastructure investments disproportionately affect population and wages. Large cities are specialised in non-tradable services and local manufacturing, so they should not get much of a boost. But cheaper manufacturing imports mean that many people will keep moving to large urban hubs, and population pressures will increase housing costs and congestion.
What happens in China?
Under the current conditions, reduced transport costs and new gateways along the land borders in the west and south of the country actually create incentives for workers to move towards the centre and the east. The fastest growing districts are all located in the eastern provinces of China, already the densest, richest and most integrated region. With low labour mobility within the country, the BRI actually benefits the central and coastal parts of China more than it does the west. When this happens, wages ought to rise in the west and south because of reduced competition, crowding out economic activity. While the BRI is expected to increase development in the west, high mobility costs would lead to the opposite.
For China, one of the objectives of the BRI is to develop the west and the south. Border openings with Central Asia bring economic development to the west only if Chinese labour is mobile. Lowering the obstacles to labour mobility leads to the spreading of economic activity across China.
The forces of economic geography
The results confirm the potency of the forces of agglomeration, specialisation, and migration. If the BRI is to spread China’s workers away from the east coast and central China and towards the south and west, the Chinese government will have to get rid of restrictions on labour mobility.
For the countries of Central Asia, labour mobility is even more critical for success as they sign up for more transport investments and deeper trade facilitation. Market-driven specialization will be the new order, a complete change from the forced spread of economic activities. For many countries, labour mobility and migration could be the difference between prosperity and malaise. ( (Brookings.edu)