Connecting Lagging and Leading Regions: The Role of Labor Mobility

How can policies improve welfare of people in economically lagging regions of countries? The answer to this question is not straightforward, and policymakers in developed as well as developing countries struggle in making choices between the market solution of promoting out-migration and the intervention option of promoting economic growth in specific regions. In most countries, policy discussions of improving welfare in lagging regions often focus on targeted interventions or incentives for moving production to these places. While these efforts are likely to be politically attractive, there is considerable evidence highlighting the limited effectiveness of targeted incentives. And when incentives go against the grain of market forces, they can subtract from, rather than add to, national economic growth.

At the same time, policymakers have often viewed internal migration—or labor mobility—from lagging to leading regions, or rural to urban areas, as a consequence of failed place-based policies. And in many countries, policies raise barriers to the movement of labor. Consider the household registration system (the hukou system) in China, which has been a barrier to rural-urban migration. Not having a hukou in urban areas means that migrants do not qualify for public education or health benefits. This can produce large interregional wage differences. Recent research indicates that removing such mobility restrictions would reallocate labor across areas, reduce wage differences, and lower income inequality (Whalley and Zhang 2007).

The World Bank's World Development Report 2009 (WDR 2009) provides a new framework for territorial development, arguing that policies should focus on integrating lagging and leading regions—and not be exclusively concerned with stimulating growth in lagging regions. The WDR 2009 highlights that enabling geographic mobility of labor and improving economic connectivity between lagging and leading regions are key ingredients for countries to gain from the geographic concentration of economic activities along with convergence in living standards. Which policies can help? Policies that are spatially blind in design can have the spatially sharpest effects. These include progressive income tax policies, the achievement of national minimum standards in basic health and education indicators, and removal of barriers to labor mobility. In addition, spatially connective policies such as transport and communication improvements physically link lagging and leading regions. Spatially targeted incentives should be policy instruments of last resort, only to be used when factor mobility is weak due to internal divisions from ethnic and linguistic fractionalization. In such cases, these type incentives may be considered but only after investing in information to identify sources of comparative advantage and to amplify the benefits from spatially blind and spatially connective policies.

In this paper, we focus on one aspect of the territorial integration challenge—the migration of labor from lagging to leading regions within countries. In particular, we are interested in understanding migration decisions in Brazil—a large developing country with no formal barriers to labor mobility. During years of high economic growth in the 1960s and 1970s, almost 40 million people left the countryside for cities—with a large share of those migrants moving from the lagging Northeast to the leading Southeast region (World Bank 2008). And even today, young workers migrate in large numbers.

Why people migrate depends on forces that "pull," as well as those that "push," them to leave. On the one hand, one big pull is economic density in leading regions of countries. Differences in economic opportunity between lagging and leading regions often provide the main motivation for internal migration. On the other hand, people are pushed off their land where agriculture is in severe decline, by the pressures of population growth, and where environmental change makes cultivation no longer viable. Historically, droughts have had sudden and prolonged impact on the distribution of the population, particularly in sub-Saharan Africa and South Asia.¹ Conflict has also pushed people to migrate across sub-Saharan Africa, and in many other developing regions.

But in many low-and middle-income countries, another important push propels internal migration—the lack of adequate public services in rural areas or in economically lagging regions. To a large extent...