By: Staff Writer
March 5, 2024
A World Bank report highlights the paradox of densely populated cities not having higher productivity in Latin America and the Caribbean and blames deindustrialization along with a change from tradable goods to services in large cities in the LAC.
The report, Evolving Geography of Productivity and Employment: Ideas for Inclusive Growth through a Territorial Lens in Latin America and the Caribbean, said: The deindustrialization of cities did not lead to deurbanization because agricultural expansion did not require more labor. Although employment in urban tradable services rose, including in finance, insurance, and real estate, the increase began from a low level and was not sufficiently strong to offset the decline in manufacturing employment.
“Agglomeration forces made it difficult to launch new tradable activities elsewhere as deindustrialization shifted the employment profile of cities of all sizes away from urban tradables. Thus urban employment shifted toward less dynamic and less productive urban nontradables, such as retail trade, personal services, and construction. This happened to varying degrees in different countries, but in nearly all, deindustrialization was most pronounced in the largest metropolitan areas.”
The effects of deindustrialization has constrained labor and place productivity growth in the region’s urban areas. “In deindustrialized cities where employment is tilted toward low-productivity, nontradable services, agglomeration benefits are weaker because such activities benefit less from being provided in dense cities. Nontradable activities tend to employ unskilled labor, account for a large share of activity in an economy, and are unlikely to exhibit increasing returns to scale if they agglomerate.
“With increases in congestion, the benefits of agglomeration tend to decline more quickly for nontradables than for tradables. Although the markets for nontradables are potentially larger in bigger and denser cities, traffic congestion and competition can considerably reduce market size because nontradable services are often provided in person during peak business hours. Manufacturing firms can better cope with congestion by using storage and transporting inputs and final goods during off-peak traffic hours. Unfortunately, congestion is a serious problem in Latin America’s largest cities, which are some of the most congested in the world.”
Nontradables are goods which include such items as electricity, water supply, all public services, hotel accommodation, real estate, construction, local transportation; goods with very high transportation costs such as gravel; and commodities produced to meet special customs or conditions of the country.
The report continued: “The employment shift toward nontradables has also reduced the potential for dynamic productivity gains in Latin America’s urban areas. Studies have shown that returns to education and work experience vary across urban sectors and are higher in urban tradables. In countries where the share of urban workers in tradables is low, human capital is employed in less productive urban sectors, and, overall, the returns to experience are lower. Productivity growth is also slower in countries with disproportionately high employment in urban nontradables because these activities do not benefit from endogenous innovation and dynamic gains from trade.
“The urban productivity paradox of dense but relatively unproductive cities presents a major growth challenge, not least because of the heavily urbanized nature of Latin America’s workforce and the high concentration of workers in large, dense cities. Factors that increase the costs of density—including those associated with congestion, crime, competition from informal firms, and real estate prices—are key reasons for the weak net agglomeration economies in Latin America. Those costs escalate when urban policy, planning, and management, as well as improvements in transport, communication, and basic infrastructure, fail to keep up with increases in density. Urban productivity can be further restrained by issues such as the size and shape of cities and inner-city connectedness.”
The report also said: “The costs of distance are high both within cities and between cities. Connectivity issues within cities reduce the agglomeration benefits for firms, especially those in the nontradable sectors. Even without congestion and regardless of city size, moving around within Latin American cities takes longer than in comparable cities in the rest of the world. Uncongested urban mobility also declines much faster as cities in Latin America become denser, suggesting deficiencies in urban planning and infrastructure. Meanwhile, intercity connectivity issues undermine the performance of the region’s network of cities by limiting interurban market access and the ability of manufacturing firms to specialize and gain from internal economies of scale by relocating to smaller urban areas, which in the LAC region also struggle with the provision of infrastructure, basic consumer amenities, and local public goods and services.”