J. Vernon Henderson

Marshall's scale economies

In this paper, using panel data, I estimate plant level production functions that include variables that allow for two types of scale externalities which plants experie nce in their local industrial environments. First are externalities from other plants in the same industry locally, usually called localization economies or, in a dynamic context, Marshall, Arrow, Romer [MAR] economies. Second are externalities from the scale or diversity of local economic activity outside the own industry involving some type of cross- fertilization, usually called urbanization economies or, in a dynamic context, Jacobs economies. Estimating production functions for plants in high tech industries and in capital goods, or machinery industries, I find that local own industry scale externalities, as measured specifically by the count of other own industry plants locally, have strong productivity effects in high tech but not machinery industries. I find evidence that single plant firms both benefit more from and generate greater external benefits than corporate plants. On timing, I find evidence that high tech single plant firms benefit from the scale of past own industry activity, as well as current activity. I find no evidence of urbanization economies from the diversity of local economic activity outside the own industry and limited evidence of urbanization economies from the overall scale of local economic activity.

A Theory of Urban Growth

In an economy experiencing endogenous economic growth and exogenous population growth, we explore two main themes: how urbanization affects efficiency of the growth process and how growth affects patterns of urbanization. Localized information spillovers promote agglomeration and human capital accumulation and fosters endogenous growth. Individual city sizes grow with local human capital accumulation and knowledge spillovers; and city with empirical evidence. We analyze whether local governments can successfully internalize local dynamic externalities. In addition, we explore how growth involves real income differences across city types and how urbanization can foster income inequality.

Effects of Air Quality Regulations on Polluting Industries

This paper examines unintended effects of air quality regulation, using plant data for 1963–92. A key regulatory tool since 1978 is the annual designation of county air quality attainment status. Nonattainment status triggers specific equipment requirements, with the severity and enforcement of regulations rising with plant size. The differential in regulation favors attainment areas, reducing births for polluting industries in nonattainment areas by 26–45 percent. Industries and sectors with bigger plants are affected the most, shifting industrial structure toward less regulated single‐plant firms. Large preregulation plants do benefit from grand‐fathering provisions, but both grandfathering and shifts to small‐scale new plants contribute to environmental degradation.

The Urbanization Process and Economic Growth: The So-What Question

There is an extensive literature on the urbanization process looking at both urbanization and urban concentration, asking whether and when there is under or over-urbanization or under or over urban concentration. Writers argue that national government policies and non-democratic institutions promote excessive concentration—the extent to which the urban population of a country is concentrated in one or two major metropolitan areas—except in former planned economies where migration restrictions are enforced. These literatures assume that there is an optimal level of urbanization or an optimal level of urban concentration, but no research to date has quantitatively examined the assumption and asked the basic “so-what” question—how great are the economic losses from significant deviations from any optimal degrees of urban concentration or rates of urbanization? This paper shows that (1) there is a best degree of urban concentration, in terms of maximizing productivity growth (2) that best degree varies with the level of development and country size, and (3) over or under-concentration can be very costly in terms of productivity growth. The paper shows also that productivity growth is not strongly affected by urbanization per se. Rapid urbanization has often occurred in the face of low or negative economic growth over some decades. Moreover, urbanization is a transitory phenomenon where many countries are now fully urbanized.

Geography and Development

The most striking fact about the economic geography of the world is the uneven spatial distribution of economic activity, including the coexistence of economic development and underdevelopment. High-income regions are almost entirely concentrated in a few temperate zones, half of the worlds GDP is produced by 15 percent of the worlds population, and 54 percent of the worlds GDP is produced by countries occupying just 10 percent of the worlds land area. The poorest half of the worlds population produces only 14 percent of the worlds GDP, and 17 of the poorest 20 nations are in tropical Africa. The unevenness is also manifest within countries and within metropolitan concentrations of activity. Why are these spatial differences in land rents and wages not bid away by firms and individuals in search of low-cost or high-income locations? Why does economic activity cluster in centers of activity? And what are the consequences of remoteness from existing centers? The authors argue that understanding these issues is central for understanding many aspects of economic development and underdevelopment at the international, national, and subcontinental levels. They review the theoretical and empirical work that illuminates how the spatial relationship between economic units changes and conclude that geography matters for development, but that economic growth is not governed by a geographic determinism. New economic centers can develop, and the costs of remoteness can be reduced. Many explicit policy instruments have been used to influence location decisions. But none has been systematically successful, and many have been very costly-in part because they were based on inappropriate expectations. Moreover, many ostensibly nonspatial policies that benefit specific sectors and households have spatial consequences since the targeted sectors and households are not distributed uniformly across space. These nonspatial policies can sometimes dominate explicitly spatial policies. Further work is needed to better understand these dynamics in developing countries.

Evidence on the political economy of the urbanization process

Urbanization and economic development go hand-in-hand as a country moves from a rural-agricultural base to an urban-industrial base. This paper argues that urbanization per se occurs in response to the basic sector shift out of agriculture, and government policies such as price controls and trade protection of industry affect the process only indirectly through their effect on sector composition. However, urban concentration, the extent to which a countrys urban resources are concentrated in one or two large cities as opposed to more evenly spread, is much more directly affected by policies and politics. The paper finds specifically that investments in inter-regional infrastructure facilitates urban deconcentration away from primate to hinterland cities, as does increasing democratization or increasing fiscal decentralization. The findings move beyond establishing basic correlations in the data to trying to quantify causal effects in a panel framework with instrumental variables estimation.

Urbanization and Growth

This chapter on urbanization and growth focuses on modeling and empirical evidence that pertain to a number of inter-related questions. Why do cities form in an economy, with so much of economic activity in countries geographically concentrated in cities? Second, how do different types of cities interact with each other in terms of trade and migration? Given the answers to these questions the chapter turns to growth issues. How does a system of cities evolve under economic and population growth; and how does urban growth intersect with, or even define national economic growth? In growth theory, endogenous growth is based on knowledge spillovers and sharing, and evidence suggests that much of that interaction must occur at the level of individual cities. In the early stages of growth, economic development is characterized by urbanization - a spatial transformation of the economy, where the population moves through migration from an agricultural, rural based existence to one where production occurs in cities of endogenous numbers and size. How do we model that transformation process and what are the key aspects of the transformation? In any static, growth, or development-urbanization context, how do governance, institutions, and public policy affect city formation and sizes, which then in turn affect economic efficiency. Cities require enormous public infrastructure investments which affect urban quality of life, in particular health and safety and commuting and congestion costs. Institutions governing land markets, property rights, local government autonomy, and local financing affect the city formation process and city sizes. And national government policies concerning trade, labor policies and national investment in communications and transport infrastructure affect the shape of the urban system. A final set of questions has to do with where cities locate. What is the effect of history, of climate and of natural resource locations, including rivers and natural harbors, on the location of current urban agglomerations?

The new urban landscape: Developers and edge cities

Abstract In this paper we model the decisions of an edge city developer who chooses business district capacity and location strategically to maximize profits. The developer competes against a core city with historically given downtown capacity for employment and, implicitly, residential population. Moving nearer the core city enhances production efficiency by increasing the efficiency of the exchange of information between businesses in the core and edge city. On the other hand, it increases typical residential rents and commuting costs (and hence wages demanded by employees) and weakens the developers local monopsony power. The developers choice of location and capacity play out in a complex but fascinating fashion, depending on the historical capacity of the downtown.

Medium size cities

Abstract This paper investigates the role of medium size cities in economies, drawing on the experiences of Brazil, Japan, Korea, the USA and other countries. The paper argues that city size distributions are stable over time and that medium size cities are highly specialized, particularly in manufacturing activities, compared to metro areas. The relationship between medium size cities and metro areas is explored, examining issues of industrial suburbanization, the product cycle, edge city formation, and the advent of information technologies.

CITIES AND DEVELOPMENT

This paper starts with a “primer” on what we know about the conceptual and empirical links between development and urbanization. While historical experience of developed countries is reviewed, todays rapid urbanization in developing countries offers an intense set of challenges. Rapid urbanization requires massive population movements and enormous local and inter-city infrastructure investments in a modern context of heavy government interventions in economies. This context raises under-researched issues, discussed in the second part of the paper. First concerns the spatial form of development. How much development should be focused in mega-cities, or huge urban clusters, as opposed to being more spatially dispersed, a critical question facing China and India today? How do we conceptualize and measure both the benefits and costs of increased urban concentration; and how are they linked to a countrys evolving national industrial composition? Second, what is the evolution of spatial income inequality under massive rural-urban migration? Is inequality heightened today relative to the past by national government policies which “favor” certain cities and regions and by local government policies in those cities that may try to deflect migrants by offering them poor living conditions?