MGI Research

Forward Thinking on people, places, and the revenge of places that don’t matter with Andrés Rodríguez-Pose

In this episode of the McKinsey Global Institute’s Forward Thinking podcast, co-host Janet Bush talks to Andrés Rodríguez-Pose, Princesa de Asturias Chair and a professor of economic geography at the London School of Economics. Between 2015 and 2017, he was president of the Regional Science Association International. He won the European Regional Science Association Prize in regional science in 2018. He covers topics including:

  • What factors make a particular place or individuals in a particular place successful or unsuccessful
  • Whether political decentralization or devolution works
  • The revenge of places that don’t matter

An edited transcript of this episode follows. Subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Podcast transcript

Janet Bush (co-host): Michael, why do you think some places are more successful than others, I mean economically?

Michael Chui (co-host): Well, look, when you are ever talking about success, it’s usually a number of different factors, so it’s probably a combination of things. There are probably places in the world where it is the result of natural resources being there, or industry. I live in San Francisco near Silicon Valley. This place is proud of the fact that it has worldclass universities, that brings in people with skills from all around the world. And you probably need at least some good infrastructure in these sorts of places. But over time I am guessing that the ability to innovate and change is pretty important.

Janet Bush: Yes, I think the ability to evolve is incredibly important. We are living in a dynamic, fast-moving, technologically driven world. And evolution, and change, is part of the alchemy of what makes a place a success. And skills and innovation are certainly part of the mix in the view of my guest today. I spoke to Andrés at home in Madrid on a lovely summer’s day.

Michael Chui: I am really interested in hearing what he has to say.

Janet Bush: Andrés Rodríguez-Pose is the Princesa de Asturias Chair and a professor of economic geography at the London School of Economics. Between 2015 and 2017, he was president of the Regional Science Association International. He won the ERSA Prize in regional science in 2018. That’s the European Regional Science Association.

In his career, he’s specialized in the topics of regional growth and inequality, discontent and populism, innovation, migration, and development policies and strategies.

Regional growth is the topic of a major new report by MGI coming up this year, so I’m particularly delighted to talk to him today. Welcome, Andrés. We always like to know a bit more about people before we talk to them about their academic or other expertise. So I’d like to start by asking you where did you grow up, where were you educated, and how did you end up being an economist?

Andrés Rodríguez-Pose: Oh, thank you. First of all, thank you very much, Janet, for having me here. And I am, as my name can tell, I am Spanish. I was born and raised in Madrid. I went to university in Madrid. And then I did my PhD in Florence, the European University Institute.

And you said how did I become an economist. I would like to clarify that I am not an economist. I am a geographer. I am an economic geographer, but a proud geographer. And I got training in virtually everything under the sun but economics. Some training in law, some training in political science, sociology, of course geography. But I like to interact with, and I like to work a lot with economists. And I very much enjoy their insights and what I think is a very complementary approach to what I do.

Janet Bush: You say you’re a geographer, but we think of you as a regional economist, or a specialist in regional economics. So how does that square?

Andrés Rodríguez-Pose: Well, I’m perfectly happy and comfortable with any sort of label. I am a social scientist. And we social scientists are concerned with, in our field, with the prosperity and the prospects and opportunities of people wherever they live. And since I am a geographer, I would like to emphasize the “wherever they live.” Because where we are born, where we are raised, where we live, to a great extent, determines our opportunities and prospects in life.

Janet Bush: In their primer on regional economics, Edgar M. Hoover and Frank Giarratani note that this discipline had a rather late start. And, they say, because of a, quote, “regrettable tendency of formal professional disciplines to lose contact with one another and to neglect some important problem areas that require a mixture of approaches.”

So they say that the traditional economists have tended to ignore the “where” question altogether. And I’m just wondering, as a geographer, has that changed? And is regional economics, the where, the place, given sufficient attention?

Andrés Rodríguez-Pose: I think one of the main problems with academic disciplines these days is that we are very much working in silos. And that’s very regrettable. Mainly because we can learn from one another, not just from different perspectives that we use, different approaches, different theories, but also different methods.

For a geographer, it is fundamental. We are right at the interface between what people are doing and how they’re doing, what economic activities they’re doing, and where they are doing them.

And in this respect, we are learning, and learning significantly, from what is being done in mainstream economics, but also what is being done by mainstream geographers in human geography, but also specifically in our field, in economic geography, which has the emphasis on place and the role of place for the prospects of individuals.

Janet Bush: It’s interesting, because I worked on an MGI report on the Bio Revolution. And it was very clear that biology was being unleashed by computing and the data revolution. And I guess that the knowledge of place and how that interacts with economics, et cetera, is also being enabled by the data revolution. How much is the data explosion helping your discipline?

Andrés Rodríguez-Pose: Well, I have to remember that when I started doing my thesis, I had to input all my regional data by hand. And most of the data traditionally was collected at a national level. Which, from my perception, is far too large to always influence the lives of individuals.

When I first got my first tape with data, which was the equivalent of what would be 12 megabytes today, the tape was half a meter in diameter. Just processing that took about 30 days for a technician at the institution where I was, to do that.

So it’s changing radically. We are behind other fields. Why? Because the interest in territories has been lower than the interest in individuals. But there has been significant catching up, to the extent that 20 years ago, we had to work with whatever limited data we had. Now the problem is not working with limited data, it’s actually making sure that we’re working with the right data amongst the wealth of information that’s available for us.

Janet Bush: I’d like to ask you what kind of factors make a particular place or individuals in a particular place successful or unsuccessful. I was very struck some years ago when I was a journalist for the Financial Times about the case of Fairfield, Iowa. I found out that this small place in rural Iowa, in the Midwest, had much faster per capita GDP growth than almost anywhere else in America. And I looked into it and I found that this was the center, I mean dominated by, a university dedicated to Transcendental Meditation.

And the entire population, almost, of Fairfield, Iowa, were practicing TM. And I went there, and we talked about how TM really makes you function very well as an individual. Your brain is clear. So that was just one thing that I came across in my past. But there must be more mainstream factors. And I’d love you to talk a bit about that.

Andrés Rodríguez-Pose: There’s not a single factor that makes a place dynamic. If it were that easy, we wouldn’t be talking here. In fact, we have to consider a lot of factors. Because first, there are things that make a place or factors that make a place dynamic today and may not make it dynamic in a few years’ time.

Most of my friends in urban economics would tend to say that it’s big cities. That combination of agglomeration and density in big cities has made them highly dynamic throughout history. And in fact, cities are always, and have been traditionally, dynamic.

But cities have come and gone, and they have periods of high growth and periods of low growth. London, for example, has been very prosperous and, especially over the last quarter of a century, very dynamic. However, that has not always been the case.

Since the 1930s until the mid-1990s, it was having a worse economic performance than the rest of the UK. And many big cities—I want to mention places like Detroit in recent times, but also, in the UK, places like Belfast and Glasgow—have suffered massively from economic decline.

What may make a city dynamic or a place dynamic in a certain period might not be one that makes it dynamic in the next period. Places, cities, regions have to keep on reinventing themselves constantly. And how can they do that?

By a combination of having the right sectors but being able to migrate and transform those sectors, first, into more complex, more technologically advanced, but also more dynamic sectors over time, sectors that can adapt to different conditions.

And that is very often linked to factors like, for example, having the right people and the right skills, in terms of education, the right human capital, if you want to put it that way. They also have to have the right accessibility, and the right infrastructure. Places that are isolated suffer and suffer under whatever circumstances.

And the right capacity to generate and also absorb new ideas, new technology to innovate. And in order to do that, you also have to have the right institutions. Because if you have weak institutions, you have institutions that actually act as predatory institutions, that prevents any sort of potential, any sort of talent, any sort of innovative capacity from emerging and prospering.

Janet Bush: Andrés, you talked about governance as being one of the important determinants of whether a region is successful or not successful. Many countries have opted for devolution or decentralized administration as a way to haul up regions that are lagging. But isn’t the evidence mixed on the effectiveness of that?

Andrés Rodríguez-Pose: Yes, absolutely, Janet, you’re right. In fact, when we look at the returns of devolution across the world, especially in terms of economic growth and employment generation, it’s not that decentralized governments have been far more successful than centralized governments.

In fact, in many parts of the world, and especially in parts of the developing world, decentralization has been an outright disaster. Not because decentralization, per se, is bad. Actually, decentralization, when done adequately, can deliver far greater returns, because it allows to matching the policies that are being provided by governments to the needs and wants of people that might vary, not just across countries, but also within countries.

The main problem with decentralization is that it’s normally done at the wrong time and with the wrong methods. When you decentralize, it should be done rightly, giving subnational tiers of government the right resources to pursue their own independent policies.

However, most countries decentralize in periods of deep political and often economic crisis. Meaning that it’s done top-down, without strong demand, without strong, very often, capacity by local governments. And on top of that, there’s the situation whereby very often central governments are reluctant to actually transfer resources.

So we end up with the worst of all worlds, which is mainly that there’s a lot of transfers of powers and authority to subnational tiers of government, and there’s much less transfers of money. Very often local governments or regional governments don’t have the capacity to raise their own taxation. And as a result, we end up with what is known as unfunded mandates—limited resources for the number of tasks that they have to do. Therefore, they end up doing them not particularly well.

Very often, the problem is not with the decentralization itself. It’s that the way most countries across the world have decentralized, especially over the last three decades, has been the wrong way to do it, leading to results that are not particularly good.

Janet Bush: The other thing you mentioned was the importance of innovation and having the right people and skills. Innovation, effectiveness of clusters and special economic zones, I know that this is something that you’ve looked at a lot. Could you give us some insights and examples of that kind of approach?

Andrés Rodríguez-Pose: OK. In order to innovate, you can innovate in very, very different ways. And the key to innovating is mainly to have the right skills. That is, having the people with the right sort of—or the right human capital first to generate new ideas, and to generate not just new ideas, but also to absorb ideas that are coming elsewhere, because innovation cannot always be radical. New products and processes can be implemented for the first time somewhere in the world or can simply be new to a particular market.

And in order to do that, you need the right educational institutions that promote the human capital, but also the research which is at the basis of innovation. You also need the right institutions that facilitate the generation and adoption of that innovation.

Where does this normally happen? It normally happens in cities, and in big cities where you have this concentration of skills and talent; you have this concentration of dynamic sectors; you have some of the top research institutions, some of the top universities that generate all the agglomeration economies that facilitate the triggering and diffusion of innovation. But in the end, it’s not a prerogative of just big cities. It’s not that big cities, per se, do better. It’s the big cities that have got all these skills.

You can be a very, very large city in a, let’s say, an emerging country, or in a developing country, where you lack the adequate institutions, you lack the right sort of training of human capital, and your research centers, your research organizations, are not at the forefront of research. So you’re going to be less able to generate that type of innovation and also to absorb innovation.

By contrast, this can happen, and can happen at a fantastic rate, in relatively small regions, relatively small cities and towns. One clear example is the case of Germany, where you have what are known as the “hidden champions.” The hidden champions are world-leading firms in medium- to high-tech sectors, but sometimes also in low-tech sectors, that have remained at the forefront in their fields. Mainly because they have this combination of innovative capacity—capacity to absorb innovation through the right human capital and the right institutions.

This is a very interesting case of a country that has done particularly well throughout different economic and technological paradigms and different crises, mainly because they have had dynamic firms and dynamic sectors scattered throughout, most especially in the case of Germany, the west of the country, regardless of whether this is Munich or Frankfurt or Hamburg, some of the big cities, or places like Ingolstadt or Freiburg or Mannheim, which are far smaller but as dynamic, if not more dynamic.

Janet Bush: Do you see the German distributed model in any other country?

Andrés Rodríguez-Pose: Very often, we have countries that have a combination of both. Countries like the Nordics—Denmark, Norway, Sweden, Finland—what you have is the biggest cities, which are not that big. Copenhagen, if you put it in Chinese terms, would be a small “big city.” But it’s the largest in the Nordics. These are cities that are at the forefront of innovation, that are very dynamic. And not just dynamic, they are resilient.

But also across the rest of the country, where you have—whether in Jutland in western Denmark or in Skåne, in southern Sweden—what you have is very dynamic sort of industries, very dynamic sectors that are capable of creating constant innovation, despite what many economists would see as the most unfavorable conditions. High labor costs, high levels of unionization have not become a problem for the prosperity of these areas. In fact, they are part of their attractiveness, part of their intrinsic assets.

Janet Bush: But then you’ll have other countries, I’m thinking, and I may be wrong, you have money poured into the capital cities, whether it’s Paris or London. But then you don’t get the spillovers? Or do you?

Andrés Rodríguez-Pose: This is one of the big mysteries. The assumption within economics is generally that big cities can absorb resources from distant locations, but then they can diffuse their resources. If we want to use a different type of language, they can get the resources, the ingredients to make a cake. They make the cake bigger, and that cake normally spreads out. However, this is normally not the case.

In general, big cities attract resources from very distant locations. We take, for example, the case of Europe. We have measured that there are backwash effects that can be felt 1,000 kilometers away from the cities. The spread effects, emanating from the cities, spread just 200 to 250 kilometers.

If we put that in a European context, and you mention Paris or you mention London, Paris can absorb resources from anywhere in France, in continental France, from Belgium, from the Netherlands, from most parts of Germany, even from Spain. But when it starts spreading out, it gets as far away as Tours or it gets as far away as places like Le Havre. It doesn’t get to Lyon, it doesn’t get to Marseille.

If we put it in the British context, London and the rest of the UK, London can attract resources from not just the UK, but from many parts of Europe and the world. But when it spreads out, it just goes to places like Leicester or not much further away than that.

And additional research points to the fact that, in the case of the US, the situation is even worse. The backwash effects there are normally 1,000 miles. Now we switch from kilometers to miles. The spread effects tend to be limited to around 50 miles.

In that respect, we end up with ever-greater concentration within cities that creates strong polarization, not just in terms of economic dynamism but in terms of opportunities. And leads, in my opinion, to a significant waste of potential of areas that, in the past, were highly dynamic. And also to the emergence of social and political tensions that in the long run can undermine the economic growth not just of these places, but also the big cities and of countries as a whole.

Janet Bush: Just to go back to one thing you said, why is the spread effect so tiny, 50 miles in the US, whereas in other places it’s 100 miles, 200 miles or kilometers. Why is it so small? The spread effect, the spillover effect in the US, do you think?

Andrés Rodríguez-Pose: The spread effects tend to be far lower than backwash effects. This is still one of the biggest mysteries that we face, as most of assumptions in economic geography, and especially in regional economics, are that there would be significant diffusion from cities.

When we do the empirics, we find that this is not the case. Why is that? Well, it remains a mystery. One of the main problems might be that economic factors benefit massively from positive externalities that are associated with agglomeration and density.

And when you have, let’s say, human resources or physical capital moving to a city, probably you’re going to get significant returns by remaining within that city, or higher returns than if you move back to other places. So that’s why there would be this suction effect by cities that, with some exceptions—I mentioned the case with Germany before—actually limits or creates these incredible islands of concentration, islands of concentration of wealth that have become far greater and have led to a far more polarized world today than what we had 40 or 50 years ago.

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Janet Bush: One of my colleagues put to me a sort of choice: people or place. Say you had to choose between investing to make it easier for a talented person to move to a big city like London, or you invest in reviving that person’s home region. You could invest in education in remote places, and that would benefit those places.

But by educating people, you make it more likely that they leave. So maybe the return is higher if the person moves to the big city. But then the return to the home region is higher if the person stays. So how do you counteract that sort of sucking in of resources to the big cities and away from the regions?

Andrés Rodríguez-Pose: Let me just start, Janet, by saying that that dilemma between people or places is an absolute fallacy, in my view. That people live in places and the prospects and opportunities of people depend very much on where they were born, where they work, and where they live, and where they choose to live. And I always tend to say that talent is more or less evenly spread. Opportunities are not. And when you have a situation whereby you’re saying, “Well, should we invest in people or should we invest in places?” That doesn’t exist. You always invest in people. And those people live in places.

Normally, when this is put as people-versus-place-based policy, a people-based policy is normally a policy mainly targeting big cities. You’re saying, “We should invest in talent, and we should invest in those places where you have the greatest opportunities.”

And let’s take a look into something like innovation policy, which is mainly investing in R&D. You’re saying, “We’re going to do it place-blind, we’re going to put it where you have the best opportunities, where you have the best research centers.” These inevitably, because of history, tend to be in the biggest cities. And then you end up doing a policy which, in the case of most of our countries, concentrates and reinforces the primacy of our biggest cities. In a country like Spain, for example, 75 percent of all investment in R&D takes place in Madrid and Barcelona.

Does it mean that there’s no potential, or not talent, not good universities in other places? No, it doesn’t. But we end up with a reinforced situation whereby the only solution proposed to many people is to move to the biggest cities. But not everyone can move. Not everyone has got this opportunity. Not everyone has got the chances to move. Not everyone wants to move to the big city.

We need to also invest in those places where you have significant talent. Because otherwise, you end up, first, from an economic point of view, forgoing opportunities.

We don’t know whether the big cities are always going to do well. Rome, if we go into historical times, was the biggest, the most dynamic city in history. And then it declined, and it declined after a few centuries. So we need to hedge our bets. And we need to have dynamic big cities, we need to have dynamic medium-size cities, we need to have dynamic small cities, towns, and rural areas. Because when we have that, we’ll be maximizing the talent.

But also the problem comes from a social and a political perspective that highly polarized societies from an economic perspective are societies where you can feel the tension.

Janet Bush: You’ve written compellingly about the revenge of the places that don’t matter.

Andrés Rodríguez-Pose: We’re seeing it virtually everywhere in the developed world and in many parts of the emerging world. Everything is intertwined. So when you have economic problems, they sooner or later become serious political problems.

Let me just put the example of France. In France, over the last quarter of a century, out of the former 22 regions that France had, there’s only one, which is the region of Paris, the region known as Île-de-France, that has grown above the national average. That means that 21 other regions, to a greater or lower extent, have grown below the national average. That is a phenomenal process of polarization in a country that is highly prosperous or remains highly prosperous.

China was a country that was significantly more polarized than, for example, the United States or Europe, to give a benchmark. It was around four times more polarized than the US. And polarization had increased rapidly in the second half of the 1980s and throughout the 1990s to a position in which it was almost unsustainable, with very rapidly growing coastal areas and big cities around the coast, and a much less dynamic inland.

So what did the Chinese government do? In some ways consciously, but also unconsciously it tried to promote development inland with more active policies, so the development of infrastructure in inland China, through the Belt and Road Initiative that involves other countries. And in other cases by investing strategically in research facilities inland, improving the quality of education and training.

Janet Bush: Well, that was absolutely fascinating. Thank you so much for spending so much time with us, Andrés.

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