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

The primary objective of this paper is to examine the extent to which agglomeration economies contribute to economic productivity. We distinguish three sources of agglomeration economies: (1) at the firm level from improved access to market centers, (2) at the industry level from intra-industry localization economies, and (3) at the regional level from inter-industry urbanization economies. There is considerable variation in the sources and magnitudes of agglomeration economies between industrial sectors-in particular, our results indicate that access to markets through improvements in inter-regional infrastructure is an important determinant of firm level productivity, whereas benefits of locating in dense urban areas do not appear to offset associated costs. D

This research has been co-funded funded by a French Consultant Trust Fund and the Development Research Group of the World Bank. We thank Laurent Gobillon for helpful comments.

How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? We examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. We distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, we find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, we illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. Our findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development.* This paper is part of a larger effort to understand the impact of spatial policy interventions on the regional distribution and performance of economic activities, particularly in lagging sub national regions. The research has been funded by a World Bank research program grant on "Urbanization and Quality of Life". We would like to thank the Indonesian Central Bureau of Statistics (BPS) for facilitating access to establishment level data, Alejandro Badel for excellent research assistance, and Ani Dasgupta and Neil McCulloch for useful discussions on regional development issues in Indonesia.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.