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PolicyResearchWorkingPaper10734

OvercomingLeft-Behindedness

MovingbeyondtheEfficiencyversusEquityDebateinTerritorialDevelopment

AndrésRodríguez-Pose

FedericoBartalucci

NancyLozano-Gracia

MaríaDávalos

WORLDBANKGROUP

Urban,DisasterRiskManagement,ResilienceandLandGlobalPractice&

PovertyandEquityGlobalPractice

March2024

PolicyResearchWorkingPaper10734

Abstract

Territorialdevelopmenttheoryandpracticehavewitnessedsignificantchangeinrecenttimes.Thischangehasincreas-inglyputthespatialdimensionatthecenterofdevelopmentpolicies.Althoughagglomeration-focusedpoliciesderivedfromurbanizationandagglomerationeconomicswereonceprominent,theirempiricallimitationshavebecomeincreasinglyapparent.Greaterterritorialpolarizationandpervasiveleft-behindednesshaveunderscoredtheneedforamoreinclusiveterritorialdevelopmentapproach,prompt-ingincreasedinterestinunderstandingandaddressingregionaldisparitiestoensuremoreequitableeconomicgrowth.Thispapersynthesizesthegrowinginterestin

territorialdevelopment,whichhasdriventheadoptionofwhatareincreasinglyplace-basedandplace-sensitiveapproachestodevelopment.Thepaperalsoemphasizestheneedforcomplementaritybetweenefficiency-drivenandequity-focusedinterventions,whilehighlightingemergingtopicsinregionaleconomicsresearch,includingtheroleofinstitutions,agency,andexternalmegatrendssuchasthegreentransition.Thepaperconcludesbyadvocatingaplace-sensitiveapproachthattailorspoliciestoregionalchallenges,promotingeconomicpotential,diversification,andinclusivityacrossallregions.

ThispaperisaproductoftheUrban,DisasterRiskManagement,ResilienceandLandGlobalPracticeandthePovertyandEquityGlobalPractice.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebat

/prwp.Theauthorsmaybecontactedatnlozano@

.

ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.

ProducedbytheResearchSupportTeam

OvercomingLei-Behindedness:

MovingbeyondtheEfficiencyversusEquityDebatein

TerritorialDevelopment

AndrésRodríguez-Pose,*,§FedericoBartalucci,*NancyLozano-Gracia,+andMaríaDávalos+

*DepartmentofGeographyandEnvironmentandCañadaBlanchCentre,LondonSchoolofEconomics,London,UK.

+WorldBank,Washington,USA

Keywords:economicdevelopment,growth,efficiency,equityterritories,regions.

JELclassifica甘on:O18,R10,R58

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1.Introduc甘on

Overthepasttwodecades,researchandpolicyinterritorialdevelopmenthaveundergoneasignificanttransforma甘on.In2005,ThomasFriedmanintroducedtheconceptofa'flatworld,'sugges甘ngthatglobaliza甘onhadcreatedalevelplayingfieldthroughtradeexpansion,

interna甘onalizedfirms,outsourcing,andglobalknowledgenetworks(Friedman,2005).Thisno甘on

echoedpreviousdiscussionsonthe'deathofdistance,'the'endofgeography,'andtheemergenceofa'weightlesseconomy'(Cairncross,1997;O’Brien,1992;Quah,1999).Subsequently,in2008,Edward

Glaeseradvocatedforafocusonhelpingindividualsratherthanplacestomaximizeefficiency(Glaeser,2008).

Asaresult,tradi甘onaldevelopmentpolicyshiiedtowardsprovidingequalopportuni甘esirrespec甘veofloca甘on(Rodríguez-Pose&Crescenzi,2008).Territorialdevelopmentpolicyputtheemphasison

spa甘ally-blindapproaches,postula甘ngpoliciesaimedatimprovingthecondi甘onsandopportuni甘esofpeopleregardlessofwheretheylived,whilerecognizingtheneedforspa甘aldifferen甘a甘on(WorldBank,2009).

However,thesignificanceofplaceindevelopmentpolicyhasresurfacedineconomictheoryand

policydesign.Inaglobalizedworld,loca甘ongreatlyinfluencesregionaloutcomes,whileassump甘onsaboutknowledgespilloversandthediffusionofeconomicac甘vity,well-being,andprosperityhave

notalwaysmaterialized(McCann,2008;Rodríguez-Pose&Crescenzi,2008).Proximity—

encompassingnotonlyphysicalproximity,butalsogeographical,cogni甘ve,organiza甘onal,and

ins甘tu甘onalaspects—playsavitalroleinfacilita甘ngknowledgetransferfromprosperousregionstolaggingones(Boschma,2005;Caragliu&Nijkamp,2016).

Agglomera甘onmatersenormouslyforthegenera甘onanddiffusionofeconomicac甘vitynotonlyatregionalbutalsoatmetropolitanandneighborhoodscales(Rosenthal&Strange,2020).However,

thediffusionoftheprosperitylinkedtoagglomera甘oneconomiesalsofacesnumerousbarriersthatmaypreventtheflowofeconomicbenefitsfromleadingandmoredynamicareastolaggingand

fallingbehindones.Issuessuchasins甘tu甘onalshortcomings,weakregionalleadership,deficientinnova甘onsystems,andtheinabilityofmanyregionstoadapttoemergingstructural

transforma甘onsobstructthediffusionofeconomicac甘vityandpreventamoreequitable

distribu甘onofeconomicgains(Milanovic,2005).Thesebarrierscancontributetodeepeningand

perpetua甘ngspa甘alinequali甘es,incurringsignificanteconomicandsocialcosts.Spa甘alimbalances

arenotjustanequityandsocialproblem,butalsoleadtomissedeconomicpoten甘al,socialdiscontent,and,inextremecases,evenunrest(Barcaetal.,2012;Rodríguez-Pose,2018).

Botheconomicliteratureandpolicydesignincreasinglyfocusonunderstandingthelocal

determinantsofregionaldevelopment.Whilemainstreamresearchonceemphasizedexogenous

forceslikeglobaliza甘on,trade,andtechnology(Krugman,1991),aten甘onhasincreasinglyshiiedtoendogenousfactorsthatshapeaterritory'sabilitytoleveragebothinternalandexternalgrowth

drivers.Factorssuchasins甘tu甘ons,produc甘vity,employmentopportuni甘es,agentsofchange,

regionalresilience,andaregion'sadaptabilitytoglobalmegatrendsplaycrucialrolesindeterminingregionaleconomicdynamism(Coenenetal.,2012;Mar甘n,2012;Rodríguez-Pose,2013;Boschma,

2015;Grillitsch&Sotarauta,2020).

Thisparadigmshiihasgivenrisetomorelocalizeddevelopmentinterven甘onstodealwith

harnessingeconomicpoten甘alandlei-behindedness,star甘ngwithplace-basedand,morerecently,place-sensi甘veapproaches(Iammarinoetal.,2019).Whileaconsensusontheeffec甘venessofplace-

basedpoliciesiss甘llevolving,recentworkhighlightstheimportanceofevalua甘ngpre-exis甘ng

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territorialstrengthsbeforeimplemen甘ngsuchinterven甘ons(Duranton&Venables,2018).Undertherightcondi甘ons,theyhavedemonstratedwelfaregainswithinci甘esandperipheralruralregions

(Ahlfeldtetal.,2017;Rodríguez-Pose&Wilkie,2017).Place-basedpoliciescanbesuccessfulwhen

theybuilduponexis甘ngcompe甘甘veadvantagesbutmayresultininefficiencieswithoutproper

assessmentofboththeirpoten甘aldirectandindirectimpacts.However,assessingthewelfaregainsandconduc甘ngcost-benefitanalysesofplace-basedandplace-sensi甘vepoliciess甘llfacechallengesinincorpora甘ngallthepoten甘alcostsofnon-interven甘on,includinglosteconomicopportuni甘es,

long-termhumancapitallosses,andsocialandpoli甘caldiscontent.

Recentevidenceunderscoresthepoten甘aloflocallytailoredterritorialdevelopmentpolicies.

However,thereiss甘llaneedtosynthesizevariousstrandsofliteraturetonavigatethemul甘tudeofapproachesandassistdecision-makersinadop甘ngcomprehensiveframeworksforgreaterregionaleconomicgrowth.Thispaperaimstocontributetofillthisgap.Itreviewsrecenttheore甘caland

empiricaldevelopmentsinterritorialandregionalscience.Itthenexplorestheroleofins甘tu甘ons,newtheore甘caladvancements,andevidencerelatedtotheroleofins甘tu甘ons,resilience,agency,andleadership.Itlateraddressesterritorialdevelopmentinthecontextofsustainabilitytransi甘ons

andthesocio-economiccostsofregionalinequali甘es.Finally,thepapersynthesizeskeyinsightsandlessonsfromthescholarlyliteratureandofferspolicyimplica甘onsandfuturedirec甘onsforterritorialdevelopmentinterven甘ons.

2.Seekingefficiencyandequitythroughterritorialdevelopmentpolicy

Earlytheoriesoneconomicgeographyviewedspa甘alinequali甘esasatemporaryphenomenonthatwouldeventuallydecreaseasmarketscleared.Assuch,thebenefitsprovidedbyeconomiesof

agglomera甘oninci甘eswereexpectedtospreadin甘mefromthecoretotheperiphery.Encouragingagglomera甘oninthecorewasseenasawaytogenerateposi甘veexternali甘es,suchasincreased

innova甘oncapacityandlowerknowledge-sharingcosts,whichwoulddrivethedynamismand

economicgrowthofmega-ci甘es(Fujitaetal.,1999;Duranton&Puga,2001).Urbaneconomists

echoedthissen甘ment,viewingurbandensityasthepathfrompovertytoprosperity(Glaeser,2011:1).

However,realityhasprovenfarmorecomplexandvariegated,consideringthemanymarketfailuresthatexist.Empiricalevidencepointstothemanybenefitsfromagglomera甘oninci甘es.Makingci甘esworkcanboostproduc甘vityandinclusionatvariousstagesofdevelopment,forinstanceintheearlyandmediumphasesofstructuraltransforma甘on(Groveretal,2022).However,nega甘veexternali甘esinlargeci甘es,suchasconges甘oncosts,pollu甘on,laborcrowding,andahighcostofliving,canactassignificantbarrierstoeconomicgrowthandmaydampeneconomiesofagglomera甘on,making

furtherinvestmentsinlargeci甘escostlyandsome甘mesinefficient(Dijkstraetal.,2013),givingriseto‘sterile’agglomera甘oneconomies(Groveretal.,2022).Largeconges甘oncostmayhamperthe

economicdynamismoflargeci甘es.Withthisinmind,scholarlyresearchhasalsopointedatcases

wheremid-sizeci甘es,intermediateones,andsomeruralareashaveshownconsiderabledynamism,despitewhatcanberegardedaslessfavorablecondi甘onsfortheflourishingofeconomicac甘vity

(FrickandRodríguez-Pose,2018).Forinstance,inEurope,smallertownsandruralregionsoutpacedmegaci甘esingrowthratesduringthelate2000sandearly2010s,ci甘ngconges甘oncosts,pollu甘on,laborcrowding,andhighlivingexpensesasconstraintsonfurtheragglomera甘on(Dijkstraetal.,

2013).AsimilartrendwasobservedindevelopingcountrieslikeChina,whereurbaniza甘ondidnot

alwayscorrelatewithhigherlivingstandards(Jedwab&Vollrath,2015).Incaseswherethegrowthofmega-ci甘eshasbeenatributedtoadependenceonresourceexportsratherthanindustrializa甘on

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andmanufacturing,lowerperformanceinwelfareanddevelopmentmeasuresisalsoobservedwhencomparedtoproduc甘onci甘es(Gollinetal.,2015).

Second,thereareimportantbarriersthatmaylimittheposi甘vespilloversfromlargeci甘esto

surroundingregions.Forcountriestofullyharnesstheadvantagesandpoten甘aloftheirmajorci甘es,goodgovernance,awell-developedurbaninfrastructure,andaneconomicstructurethatbenefits

fromagglomera甘oneconomiesareneeded.Whileeconomictheorypositsthatagglomera甘on

fostersinnova甘on,benefi甘nglei-behindregionsthroughknowledgespillovers,researchshowsthatthesespilloversareweakerthanagglomera甘onforces,leadingtostrongdistancedecayeffectsandlimi甘ngtheimpactofinnova甘onandneweconomicac甘vitygeneratedincoreareasonlagging

regions(Dunford&Smith,2000;Iammarino&McCann,2013).Knowledgestrugglestodiffusefrom

corestoperipheries—or,inotherwords,frommoretolessdevelopedregions—forlackofadequateandfunc甘oningtransmissionchannels(Boschma,2005;D’Esteetal.,2013;Iammarino,2018).

Moreover,automa甘cadjustmentmechanisms,likelabormigra甘onandfirminvestmentresponsestopricesignals,arenotalwaysfunc甘oningasexpected.Barrierstomigra甘onandthes甘ckinessoffirmloca甘ons,benefi甘ngfromagglomera甘oneffects,hinderthebenefitsofknowledgespilloverstowardslaggingareas(Floerkemeieretal.,2021).Lei-andlagging-behindplacesstruggletoestablishthe

necessaryconnec甘onstoabsorbnewknowledgeandinnova甘on,hamperingthereplica甘onofeconomicsuccess(Faroleetal.,2011).Weakins甘tu甘onsandlimitedlocalinnova甘onandskillaccumula甘onfurtherhinderconvergence.

Thecomplementarynatureofefficiencyandequityfocusedpoliciesforterritorialdevelopmenthas

becomemoreevidentinrecentyears,aswithin-countryinequali甘eshaveriseninbothadvancedandemergingeconomies(Rodríguez-Pose,1999;Puga,2002;Ezcurraetal.,2005;Heidenreich&Wunder,2008)andtheneedtoensurethatefficiencyandequityobjec甘vesaretackledtogetherhasbecomemoreevident.

Consequently,theadop甘onofefficiency-drivenapproacheshasfailedtobringmostlei-behind

territoriesoutoftheirlei-behindedness,meaningthatwithin-countryinequali甘eshavegenerallycon甘nuedtoriseinbothadvancedandemergingeconomiesTheoutcomehasbeenrising

polariza甘on,withmanypoorregionsremainingtrappedinalow-incomeequilibriumandincapableofadap甘ngtochangesineconomictrendsandtotransi甘ontowardsmoreintegratedandopen

economies(Ezcurra&Rodríguez-Pose,2014;Diemeretal.,2022).

Thissitua甘onhasalwayshadconsiderableeconomiccosts.However,thehithertoneglectedsocialandpoli甘calcostsofregionalinequalityareinrecent甘mesbecomingfarmoreevidentandcostly.Risingdiscontentinmarginalizedregions,fueled,amongotherfactors,bybarrierstomobilityandlimitedeconomicopportuni甘es,hasledtoincreasingdiscontent,theriseofpopulismand,insomecases,ithasalsoresultedinviolentprotests(Rodríguez-Pose,2018).Dispari甘eshavebecome

poli甘cizedinvariouscountries(Hewison,2014;Rodríguez-Pose,2018;Dijkstraetal.,2020)inwaysthatarealsoprovokingconsiderableharmtotheoverallperformanceofna甘onaleconomies.

Toaddressregionalpolariza甘onanditsassociatedsocial,poli甘cal,andeconomicrisks,governmentshavetradi甘onallyemployedtwoapproaches.Firstly,theyresortedtolarge-scaleprojectsinlagging

andlei-behindregions,oienresul甘nginexpensiveini甘a甘veswithlimiteddevelopmentgainsduetoweaksocio-economicandins甘tu甘onalfounda甘ons(Flyvbjerg,2009;Crescenzietal.,2016).Secondly,theyreliedonredistribu甘vetransfers,whichsome甘messustainedstagnanteconomies,crea甘ng

'shelteredeconomies'(Fratesi&Rodríguez-Pose,2016)(Figure1).However,theeffec甘venessof

thesepolicieshasvarieddependingonthepolicyadoptedandthecondi甘onsofthetargetterritory,

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withsomesugges甘ngthattransferscangenerateequitygainsoutweighingefficiencycosts(Gaubertetal.,2021).

Figure1:Schema甘crepresenta甘onofbarrierstospilloversandefficiencygainsinlaggingregions.

Source:Author’selabora甘onbasedonCoenenetal.,2012;Mar甘n,2012;Rodríguez-Pose,2013;Boschma,2015;Grillitsch&Sotarauta,2020.

Theincreasingrealiza甘on,amidrisingterritorialinequalityandsocialdiscontent,oftheneedto

tacklethebarrierstospilloversandefficiencygainsinlaggingareashaspromptedare-evalua甘onofexis甘ngterritorialdevelopmentpolicies.Thishasbeenconducivetoexpandingthefocusofresearch

intotheareasofins甘tu甘onalquality,regionaldevelopmentpaths,agencyandresilience,and

sustainabledevelopmentprac甘ces(Rodríguez-Pose&Keterer2020;Venables,2023).Researchintheseareashasbecomefarmoreprominentandanimportantsourceofreflec甘ontoimprove

developmentinterven甘onsanddesignfarmoreefficientterritorialpolicies.Inthefollowingsec甘onswecoverthesegrowingareasinterritorialdevelopmentscholarship.Inwhatfollows,wesummarizeresearchemerginginthesefourareas,andpointatkeylessonsforpolicydesign.

3.Theroleofins甘tu甘onsinterritorialdevelopment

Un甘ltheturnofthecentury,territorialdevelopmentprimarilyreliedontwomodels:neoclassicaltheory(Solow,1956)andendogenousgrowththeory(Romer,1986;Lucas,1988).Thesetheoriesofferedpolicymakersalimitedrangeofdevelopmentstrategies,primarilyfocusingoninves甘nginphysicalcapital(e.g.,infrastructure)andpromo甘nginnova甘onandhumancapital.EventhemorerecentNewEconomicGeographyhighlightedthevalueofenhancingconnec甘vitythrough

investmentsintransportinfrastructureasakeydriverofeconomicgrowth.However,these

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approacheshavestruggledandcon甘nuedtostruggletodeliverconsistentregionaldevelopmentoutcomes(Pikeetal.,2007).

Toaddressthis,researchershaveturnedtheiraten甘ontoins甘tu甘ons,adimensiontradi甘onally

overlookedinpastregionaldevelopmentstrategies(Acemogluetal.,2001;Vijayaraghavan&Ward,2001;Rodriketal.,2004).Consequently,ins甘tu甘ons,especiallyregionalones,havegained

prominenceinterritorialdevelopmenttheoryandanalysis(Gertler,2010;Rodríguez-Pose,2013).

Recentadvancementsintheoryandempiricalresearchsuggestthatthequalityandefficiencyoflocalgovernmentsmaybeas,ifnotmore,importantforterritorialdevelopmentasthefactors

tradi甘onconsideredasthemaindriversofdevelopment,likeinfrastructure,humancapital,andinnova甘on.Poorins甘tu甘onsgenerallyrepresentthemaincauseofpersistentlei-behindedness.

Table1summarizeskeychannelsthroughwhichins甘tu甘onscanhaveanimpactonregionalgrowth.

Thecaseforinves甘nginins甘tu甘onsisbecomingstronger,inpar甘cularfortworeasons.First,

ins甘tu甘onsthemselvesinfluenceeconomicperformancebyshapingnetworksandprocessesthat

driveeconomicac甘vity.Formalins甘tu甘onsthatcombatcorrup甘onandinformalnetworksfosteringtrustamongeconomicactorsoffersubstan甘alsocio-economicbenefits(Annoni&Dijkstra,2013;

Ganau&Rodríguez-Pose,2019).Ins甘tu甘onscanaffectregionalgrowthdirectlyandindirectly.

Directly,theyinfluenceeconomicactors'interac甘onswithinaregion,impac甘nggrowth,

employment,andproduc甘vity.Theyreducetransac甘oncosts,increaselaborproduc甘vity,anddriveinnova甘on(Ganau&Rodríguez-Pose,2019).Effec甘veins甘tu甘onspromoteinnova甘veperformance,whileineffec甘veandcorruptins甘tu甘onshinderinnova甘on,especiallyinlessdevelopedregions

(Rodríguez-Pose&DiCataldo,2015).Governmentqualityimprovementsarevitalforlow-growthregions(Maetal.,2023;Rodríguez-Pose&Keterer,2020).Ins甘tu甘onsalsoplayacrucialroleinestablishingregionalentrepreneurialecosystems,alongsidetradi甘onalfactorslikeinfrastructure(Audretsch&Belitski,2017).Trust-buildingnetworks,knownasbridgingsocialcapital,facilitateknowledgediffusionandeconomicgrowth(Murphyetal.,2016).

Table1.Summaryofdirectandindirectimpactsofins甘tu甘onsonregionaleconomicperformance.

Driverofeconomicperformance

Typeofimpact

Contribu甘ontoregionaleconomicperformance

Qualityofregionalins甘tu甘ons

Directimpacts

Reducingtransac甘oncosts,renderingeconomicgrowthmoreviable

Directlyincreasinglaborproduc甘vitylevelsinregions

Improvingregionalinnova甘veperformance,measuredthroughpaten甘ng,especiallywhencorrup甘onandgovernmenteffec甘venessaretakenintoaccount

Fosteringeconomicdynamisminlagging-behind,low-growthregions

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Atrac甘nggreenfieldFDIfromthemostproduc甘vemul甘na甘onalcompanies.

IndirectimpactsAc甘ngasamediatorofpublicpolicyinterven甘ons

Affec甘ngtheeconomicreturnsofpoliciesoninfrastructure,humancapitaldevelopment,andthepromo甘onofinnova甘on

Facilita甘ngthediffusionofinnova甘onandknowledgethroughtheestablishmentofhigherlevelsoftrust.

Condi甘oningtheeconomicimpactofpoli甘calprocesses,suchasdecentraliza甘onandthedevolu甘onofauthoritytosubna甘onallevels.

Contribu甘ngtorenderaregionatrac甘veasamigra甘ondes甘na甘on.

Source:Authors’elaborationbasedonAnnoni&Dijkstra(2013);Rodríguez-Pose(2013);Hugginsetal.(2014);Sleuwaegen&Boiardi(2014);Rodríguez-Pose&Garcilazo(2015);Ketterer&Rodríguez-Pose(2015);Crescenzietal.(2016);Audretsch&Belitski(2017);DiCataldo&Rodríguez-Pose(2017);Fritsch&Wyrwich(2018);Ganau&Rodríguez-Pose(2019).

Indirectly,efficientins甘tu甘onsenhancetheeffec甘venessofpoliciestarge甘nghumancapitaland

regionalinnova甘on(Crescenzietal.,2016).Inthisrespect,ins甘tu甘onsmediatealllocalorregionalpublicinterven甘ons.Theyaffectpolicyoutcomes,includingthealloca甘onofEuropeanUnion

StructuralandCohesionFunds(Rodríguez-Pose&Garcilazo,2015)andinfluencetheeconomic

impactofpoli甘calprocesseslikedecentraliza甘on(Muringanietal.,2019;Jongetal.,2021).Weak

ins甘tu甘onscontributetoperpetuateregionaldispari甘esduringdecentraliza甘on,asseeninArgen甘na(WorldBank,2020a).Moreover,thequalityofregionalins甘tu甘onsshapesaregion'satrac甘veness

formigrants(Keterer&Rodríguez-Pose,2015).

Second,subparins甘tu甘onalqualityatthelocalandregionallevelscanundermineeventhemost

carefullydesigneddevelopmentefforts.Thisisbecauseins甘tu甘onsmediatetheeconomicreturnsofpublicinterven甘onsaimedatrevitalizingregionaleconomies.Aclearunderstandingofins甘tu甘ons

andins甘tu甘onalquality,encompassingformalandinformalelements,isthereforeessen甘alfor

shapingeffec甘vepolicyac甘ons.Formalins甘tu甘onsincluderules,laws,andorganiza甘ons,while

informalins甘tu甘onsinvolveindividualhabits,grouprou甘nes,andsocialnorms(Amin,1999).Formalins甘tu甘ons,oienreferredtoas‘hard’ins甘tu甘ons,representelementsliketheruleoflaw,propertyrights,andcompe甘甘onlaw.Informalins甘tu甘ons,or‘soi’ins甘tu甘ons,encompasssocialinterac甘ons

thatgeneratetrust,includingnorms,tradi甘ons,rela甘onships,andconven甘ons(Rodríguez-Pose&Storper,2006).Thiscategoriza甘onfacilitatesabetermeasurementofins甘tu甘onalqualityatthesubna甘onallevel,revealingvaria甘onswithinandbetweencountries(Charronetal.,2014).

However,despiteconsiderableimprovementsinourunderstandingofhowins甘tu甘onsshapeeconomicdevelopment,significantknowledgegapspersist.Mostoftheexis甘ngresearchon

ins甘tu甘onsandins甘tu甘onalqualityremainsprimarilyfocusedondevelopedcountries,limi甘nggeneralizabilitytolow-incomecountries.Moreresearchisthereforeneededtounderstand

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ins甘tu甘ons'roleindevelopingcountries(Iddawelaetal.,2021;Hussen&Çokgezen,2022;Aroca&A甘enza,2016).Addi甘onally,informalins甘tu甘onsandtheirimpactonregionaldevelopmentwarrantmoreaten甘on.Finally,transla甘ngins甘tu甘onalresearchintoac甘onablepoliciesisaconsiderable

challenge.Ins甘tu甘onalreformsremainunderrepresentedindevelopmentinterven甘ons,despite

theirimportance(WorldBank,2020b).Tobridgethisgap,policyac甘onsshouldfocusonimproving

regionalpolicydesignandenhancingsubna甘onalgovernmentcapacitytoimplementpolicieseffec甘vely(Figure2).

Figure2.Summaryofmainareasofinterven甘onforins甘tu甘onaldevelopmentpolicies

Source:Authors’elaborationbasedonBarcaetal.(2012);Rodríguez-Pose(2013);Cejudo&Michel(2017);OECD(2017;2019;2020);Rodríguez-Pose&Wilkie(2019);Rodríguez-Pose(2020).

Insummary,whileins甘tu甘onsarenotanall-encompassingsolu甘onforterritorialdevelopment,recentresearchhashighlightedhowincorpora甘ngthemintodevelopmentstrategiescanyield

significantbenefits.Neglec甘ngins甘tu甘onsmayresultinshort-termgainsbutleaveregionsworseoffinthelongrunandperpetuatelei-behindedness.Abalancedapproachthatconsidersins甘tu甘ons

acrossvariousdevelopmentaxescanleadtomoresustainablestrategies(Rodríguez-Pose&Wilkie,2019).

4.Regionaldiversifica甘onandavoidingdevelopmenttraps

Butdealingwithins甘tu甘ons,whileimportant,isnotenoughtonavigatethepolicychallenges

governmentsareconfrontedwithwhentryingtodesignandimplementdevelopmentpolicies.Thatiswhy,inthecontextofregionaldevelopment,researchersandpolicymakersareincreasingly

delvingintotheintricateinterplaybetweeninnova甘on,economicdynamism,regionaldiversifica甘on,andtheoccurrenceofdevelopmenttraps.Agrowingconsensus—originallyemergingfromthe

literatureonevolu甘onaryeconomicgeography—underscoresthatregionsexhibitvaryingcapaci甘es

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toconfrontandharnessglobalmegatrends,likedigitaliza甘onorthegreentransi甘onfor

diversifica甘on.However,weakinnova甘onsystemsandproduc甘vityhavepresentedsignificant

obstaclestotransferringefficiencygainstolei-behindregionsthroughthesemarketadjustment

mechanisms,frequentlyresul甘ngineconomicstagna甘onanddeclineandobstruc甘ngdiversifica甘on(Iammarino,2018;Floerkemeieretal.,2021).

Theevolu甘onaryeconomicgeographyliteraturestressesthesignificanceofregionaldiversifica甘onpathsinfacilita甘ngefficiencygainsinlaggingregionsandtheroleofendogenousfactorsin

explainingthepresenceorabsenceofautoma甘cadjustmentmechanismsrelatedtocapitalandlabor

mobilityfrommoredynamiccoreregionstolagging-andlei-behindareas.Hence,territorial

developmentpoliciesshouldaccountfortheuniqueopportunityspacesofeachregion,whichcanvarysignificantlybasedonfactorslikeincomelevel,urbaniza甘on,industrialhistory,andthe

condi甘onsoflocalecosystems(Pinheiroetal.,2022).Recognizingthesedifferencesamongregionaldevelopmentcontextsisvitalfordesigningandimplemen甘ngeffec甘vepoliciestailoredtospecificdiversifica甘ontrajectories.

Researchonregionaldiversifica甘onhasprimarilyconcentratedonaregion'scapacitytoventureintonewtechnologies,industries,andoccupa甘onsbasedonitslocalcapabili甘es(Neeetal.,2011).

Eachregionaleconomypossessesdis甘nctdiversifica甘onopportunityspacesshapedbyitsuniquecapabili甘es(Pinheiroetal.,2022).Understandingtheemergenceoftheseopportunityspaces

becomespar甘cularlyrelevantasthelackofdiversifica甘onpathscanpresentsignificantba