Are Cities the New Growth Escalator?

Urban areas tend to have much more
productive labor and higher salaries than rural areas, and
there are vast differences across urban areas. Areas with
high salaries and high productivity tend to have employers
that invest in much more research and development than areas
with low salaries and low productivity. This paper addresses
two questions. First, it discusses the causes of these vast
geographical differences in wages, human capital, and
innovation. The second part of the paper discusses regional
economic development policies. The European Union has an
even more ambitious program transferring its development
funds to regions with below average incomes. Asian
countries, especially China, have a variety of special
economic zones, designed to attract foreign investment to
specific areas. Such regional development policies, often
called place-based economic policies, are effectively a form
of welfare, targeting cities or regions, not individuals.
While such policies are widespread, the economic logic
behind them is rarely discussed and even less frequently
understood. This paper clarifies when these policies are
wasteful, when they are efficient, and who the expected
winners and losers are. Understanding when government
intervention makes sense and when it does not is a crucial
first step in setting sound economic development policies.
Local governments can certainly lay a foundation for
economic development and create all the conditions necessary
for a city's rebirth, including a business climate
friendly to job creation.