A city may record steady growth in output and investment while a nearby region offers few opportunities, struggles with poor public services and loses many of its young people to jobs elsewhere. This disparity is usually treated as a problem for the less prosperous region. Policies directed towards it are discussed in terms of relieving deprivation or reducing inequality. But another question deserves attention: might the weakness of that region also limit what the prosperous city can achieve?
In my previous essay, “Children Inherit the Map”, I considered how place shapes people's opportunities, expectations and radius of responsibility towards others. Here I examine an economic aspect of the same relationship. What does society lose when some of its productive potential remains undeveloped, and when links between producers and markets that could benefit several regions never take shape?
I call these missed opportunities “the economy that never was”. I mean the productive capacity and activities that might have developed had remediable barriers been removed, where the benefits of doing so would have justified the cost. This definition does not include every project that was never undertaken. Some projects are simply not worth the resources they require. My concern is with opportunities that have a reasonable economic basis but fail to develop because of inadequate education, lack of finance or poor access to markets.
The focus here is on the spatial dimension of this loss. As Edward Soja explains in his work on spatial justice, the distribution of opportunities and services is bound up with the geographical organisation of society (Soja, 2010). Natural conditions matter, of course. But differences between places also reflect decisions about infrastructure, the location of institutions and the allocation of investment. Describing a region as “lagging behind” does little, on its own, to explain how it reached that position or what could be changed.
Opportunities Missing from the Accounts
Gross domestic product measures the value of final goods and services produced within an economy over a given period. It is essential for understanding the scale of economic activity and how it changes, but it does not, by itself, tell us what might have been produced under different conditions. The output of an existing company enters the accounts. A company prevented from starting by a financing problem that could have been resolved leaves no separate entry for its lost output.
Economists address aspects of this problem in their work on resource misallocation, social mobility and long-term growth. The concept of potential output helps estimate the level of production an economy can sustain. My interest here extends beyond the gap between actual output and available capacity to the way that capacity develops over time. An economy may operate close to its potential output while producing considerably less than it could have done had access to education and investment been better in earlier decades.
A study of American inventors by Bell and his colleagues offers an example. The researchers linked patent records to data on income and childhood circumstances. Children from families in the top one per cent of the income distribution were about ten times as likely to become inventors as children from families with below-median incomes. Large differences persisted even among children with similar scores on early mathematics tests. The study also showed the importance of childhood exposure to innovation, including growing up near inventors working in particular fields (Bell et al., 2019).
The researchers used the term “lost Einsteins” for people whose talents might have contributed to innovation had their opportunities been different. In a hypothetical comparison, they estimated that the rate of innovation would have been four times as high if women, minorities and children from low-income families had invented at the same rate as white men from families in the top twenty per cent of the income distribution. The figure indicates the scale of the disparity. It does not identify a programme capable of closing it, or establish that any particular intervention would deliver that increase.
Another study examines the allocation of talent across occupations. Hsieh and his colleagues note that white men accounted for 94 per cent of American doctors and lawyers in 1960, falling to 62 per cent in 2010. Their model assumes that changes in the distribution of innate talent across groups cannot explain this shift. Depending on the model specification, they estimate that improvements in the allocation of talent account for between twenty and forty per cent of growth in market output per person over that period (Hsieh et al., 2019).
Neither study tells us how much an economic centre would gain from the development of a neighbouring region. They do, however, help explain the problem. The output we observe depends in part on who can develop their abilities and enter an occupation suited to them. When access to those opportunities varies across places, geographical inequality may constrain production across the economy.
How Markets and Production Links Develop
The success of an investment can depend on activities beyond the firm itself. Rosenstein-Rodan illustrated this relationship in his 1943 paper on industrialisation in Eastern and South-Eastern Europe. A new shoe factory might struggle to sell its output because its workers would spend their wages on many different goods. Establishing several industries producing the goods those workers consumed could expand demand across the group. Investments that were viable together might therefore appear unattractive when considered separately (Rosenstein-Rodan, 1943).
This example helps explain one aspect of the relationship between a city and its surrounding region. Higher incomes nearby may create an additional market for the city's firms. The development of local businesses may give them access to suppliers or services that were previously unavailable. Locating different stages of production in different places can also allow more efficient use of land and skills. Whether these benefits arise depends on the activities involved, transport costs and the ability of firms to meet the demands of the new relationship.
Economic geography explains how the location of production is related to market size. In Krugman's model, economies of scale encourage firms to concentrate production in a limited number of locations, while transport costs favour locations near larger markets. The size of those markets depends, in turn, on where firms and their workers are located. This cumulative process can reinforce an established centre (Krugman, 1991).
I find it useful here to distinguish between being geographically close and being connected economically. A short distance may create opportunities for trade, but taking advantage of them requires dependable business relationships. A nearby workshop may be unable to fulfil a factory's orders because of power cuts or difficulty obtaining finance, leaving the factory to buy from a more distant supplier. In such a case, it is worth examining whether removing the obstacle would make local production viable and reduce the buyer's costs.
Limited trade between neighbours is not sufficient evidence of a loss. Distant markets may be larger, their products better suited to local needs or the costs of dealing with them lower. Similar economies can also benefit from trade: firms may specialise in different products or stages of production within the same industry. What matters is the net benefit available, rather than the share of trade that takes place locally.
Evidence from Economic Integration
The European single market provides an example of an attempt to estimate opportunities held back by barriers. In 1988, the Cecchini report presented estimates of the gains available from completing the internal market. These included the removal of barriers to trade and the effects of competition and economies of scale. The estimated economic gains ranged from 4.3 to 6.4 per cent of the European Community's GDP. These were gains in the level achieved once the assumed adjustments had taken place, not an annual growth rate that would recur automatically (Cecchini, 1988; Peck, 1989).
Peck questioned some of the assumptions behind the estimates and considered them optimistic. The way the question was framed nevertheless has analytical value: it places the cost of continued fragmentation alongside the cost of removing it. This example does not establish that every form of integration is beneficial. It shows why maintaining the status quo cannot be assumed to be costless simply because its losses do not appear as a separate item in the accounts.
In East Asia, economic links expanded as stages of production were distributed across the region's economies, particularly in electronics. Gangnes and Van Assche show that exports among nine developing East Asian economies rose from 21 per cent of their total exports in 1980 to 40 per cent in 2004. An important part of this expansion involved trade in components within international production networks (Gangnes & Van Assche, 2010).
Their study also makes clear the limits of what can be inferred from these connections. Economies occupied different positions within the networks. Some specialised in more sophisticated components, while others remained closer to assembly work with lower value added. Heavy dependence on final demand in advanced economies also persisted. The growth of regional trade therefore did not prevent external shocks from spreading across the region.
These experiences differ from the relationship between a city and a neighbouring region within one country. Political borders, regulations and institutions bring additional complications. The useful parallel is the general mechanism: connecting productive capacities in different places may make activities viable that would be less so in isolation. The size of the gains, and where they accrue, must be assessed in each case.
Conditions for Mutual Benefit
There is a serious objection to the assumption that connecting regions will spread economic activity more widely. Lower transport costs may allow firms in the centre to serve outlying markets from their existing locations, increasing concentration. This possibility is part of Krugman's own model. Myrdal also warned that the spread of growth could be accompanied by losses elsewhere as labour and capital moved towards stronger centres (Myrdal, 1957).
Investment in connections should therefore be accompanied by an assessment of productive capacity in the place intended to benefit. Which activities could survive without permanent support? What currently prevents them from developing? The constraint may be a particular skill or a missing logistics service; infrastructure may not be the main problem at all. The assessment must take account of operating and maintenance costs, the time needed for results to emerge and alternative uses of public funds.
Social transfers have a role of their own. They may protect households from deprivation and help people continue their education or maintain their health. Their contribution to productive activity depends on their design and the conditions in which they operate. When a programme is proposed as a means of developing the local economy, it should explain how it will help generate a lasting source of income. Higher spending alone cannot be assumed to achieve that.
Population movement remains part of the assessment. Moving to a more productive place may raise a person's income and widen their choices. For some, it may be preferable to waiting for economic change at home. A fall in migration is not a sound measure of success without considering the opportunities available. The concern is that people may have to leave because of deprivation that could be addressed at a reasonable cost. An appropriate programme may combine support for local productive capacity with help for those who choose to move.
Nor does an increase in total output mean that everyone gains. Some firms may benefit from lower supply costs while others face stronger competition. Land values may rise around a new project, benefiting owners and imposing additional costs on tenants. References to “the city's interest” or “the region's interest” do not tell us who will benefit. Sustained cooperation requires an understanding of who pays and who gains, with clear financing arrangements and provision for addressing the losses some groups may face.
This also calls for care in measurement. A project may attract activity from another region without adding an equivalent amount to the national economy. One party's additional income may represent a cost borne by another. Estimating the economy that never was requires us to distinguish additional production from the relocation of existing activity. The results remain estimates that depend on their assumptions. They cannot give us certain figures for events that never took place.
How Shared Interests Are Presented
Suppose a local authority is considering contributing to a road and a technical institute in a neighbouring region. The project could be justified by the need to improve opportunities for that region's residents. It would also be reasonable to examine whether it could create new suppliers for existing firms, address a skills shortage or expand a nearby market. Both considerations have a place, and they may support the same project.
How the project is presented affects the questions asked about it. If it is described as assistance beyond the city boundary, it may be seen as spending that is difficult to justify to residents when budgets are tight. If mutual benefits can be demonstrated, the city's institutions and businesses have an additional reason to help finance and monitor it. Assessment would then include the economic relationships that develop, alongside improvements in the lives of the people the project is intended to serve.
This relationship between ideas and decisions deserves attention. How we understand the connection between two places influences which projects we consider worth investigating, whose participation we expect and which outcomes we measure. A term such as “the cost of non-integration” directs attention to the consequences of leaving existing arrangements in place. It does not remove the need to establish a return, or justify choosing the most optimistic estimate to persuade the public.
Some parties may oppose a project because they doubt it will be carried out as promised, or because they expect to bear its costs without receiving a fair share of its benefits. Such objections call for changes to the design or to arrangements for funding and accountability. Persuasive language can help people understand a problem. Continued support also depends on what they experience in practice.
People's right to education and healthcare remains independent of our ability to demonstrate a return for firms in the centre. Where a mutual economic benefit exists, it provides an additional reason to cooperate and helps inform the arrangements for doing so. Where it cannot be established, improving basic services remains an obligation to be considered on its own terms.
I do not think the national accounts need a single figure covering everything that might have happened but did not. A more useful approach would be to accompany them with specific questions about barriers that could be removed, capabilities that could be developed and partners whose involvement might make an investment viable. Answers can be tested gradually, and programmes revised when their expected results fail to materialise.
The previous essay focused on the child whose opportunities are partly determined by the map before they are able to choose. This discussion gives us a further reason to see that map in terms of relationships between communities, as well as the distribution of prosperity and deprivation. Where viable opportunities for cooperation lack the conditions they need, the child born on the more prosperous side may also have inherited an economy smaller than it could have been.
References
- Bell, A., Chetty, R., Jaravel, X., Petkova, N., & Van Reenen, J. (2019). Who becomes an inventor in America? The importance of exposure to innovation. The Quarterly Journal of Economics, 134(2), 647–713. https://doi.org/10.1093/qje/qjy028
- Cecchini, P. (1988). The European challenge 1992: The benefits of a single market. Wildwood House.
- Gangnes, B., & Van Assche, A. (2010). Global production networks in electronics and intra-Asian trade (Working Paper No. 2010-4). University of Hawai‘i Economic Research Organization. https://uhero.hawaii.edu/RePEc/hae/wpaper/WP_2010-4.pdf
- Hsieh, C.-T., Hurst, E., Jones, C. I., & Klenow, P. J. (2019). The allocation of talent and U.S. economic growth. Econometrica, 87(5), 1439–1474. https://doi.org/10.3982/ECTA11427
- Krugman, P. (1991). Increasing returns and economic geography. Journal of Political Economy, 99(3), 483–499. https://doi.org/10.1086/261763
- Myrdal, G. (1957). Economic theory and under-developed regions. Duckworth.
- Peck, M. J. (1989). Industrial organization and the gains from Europe 1992. Brookings Papers on Economic Activity, 1989(2), 277–299. https://www.brookings.edu/wp-content/uploads/1989/06/1989b_bpea_peck.pdf
- Rosenstein-Rodan, P. N. (1943). Problems of industrialisation of Eastern and South-Eastern Europe. The Economic Journal, 53(210/211), 202–211. https://doi.org/10.2307/2226317
- Soja, E. W. (2010). Seeking spatial justice. University of Minnesota Press.