Policy Research Working Paper                                  10734




             Overcoming Left-Behindedness
     Moving beyond the Efficiency versus Equity Debate
               in Territorial Development

                              Andrés Rodríguez-Pose
                               Federico Bartalucci
                              Nancy Lozano-Gracia
                                 María Dávalos




Urban, Disaster Risk Management, Resilience and Land Global Practice &
Poverty and Equity Global Practice
March 2024
Policy Research Working Paper 10734


  Abstract
 Territorial development theory and practice have witnessed                         territorial development, which has driven the adoption
 significant change in recent times. This change has increas-                       of what are increasingly place-based and place-sensitive
 ingly put the spatial dimension at the center of development                       approaches to development. The paper also emphasizes the
 policies. Although agglomeration-focused policies derived                          need for complementarity between efficiency-driven and
 from urbanization and agglomeration economics were                                 equity-focused interventions, while highlighting emerging
 once prominent, their empirical limitations have become                            topics in regional economics research, including the role
 increasingly apparent. Greater territorial polarization and                        of institutions, agency, and external megatrends such as
 pervasive left-behindedness have underscored the need for                          the green transition. The paper concludes by advocating
 a more inclusive territorial development approach, prompt-                         a place-sensitive approach that tailors policies to regional
 ing increased interest in understanding and addressing                             challenges, promoting economic potential, diversification,
 regional disparities to ensure more equitable economic                             and inclusivity across all regions.
 growth. This paper synthesizes the growing interest in




 This paper is a product of the Urban, Disaster Risk Management, Resilience and Land Global Practice and the Poverty
 and Equity Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make
 a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on
 the Web at http://www.worldbank.org/prwp. The authors may be contacted at nlozano@worldbank.org.




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                                                       Produced by the Research Support Team
                     Overcoming Le�-Behindedness:
    Moving beyond the Efficiency versus Equity Debate in
                Territorial Development


Andrés Rodríguez-Pose,*,§ Federico Bartalucci,* Nancy Lozano-Gracia,+ and María Dávalos+


* Department of Geography and Environment and Cañada Blanch Centre, London School of
Economics, London, UK.
+
    World Bank, Washington, USA




Keywords: economic development, growth, efficiency, equity territories, regions.

JEL classifica�on: O18, R10, R58
1. Introduc�on
Over the past two decades, research and policy in territorial development have undergone a
significant transforma�on. In 2005, Thomas Friedman introduced the concept of a 'flat world,'
sugges�ng that globaliza�on had created a level playing field through trade expansion,
interna�onalized firms, outsourcing, and global knowledge networks (Friedman, 2005). This no�on
echoed previous discussions on the 'death of distance,' the 'end of geography,' and the emergence of
a 'weightless economy' (Cairncross, 1997; O’Brien, 1992; Quah, 1999). Subsequently, in 2008, Edward
Glaeser advocated for a focus on helping individuals rather than places to maximize efficiency
(Glaeser, 2008).

As a result, tradi�onal development policy shi�ed towards providing equal opportuni�es irrespec�ve
of loca�on (Rodríguez-Pose & Crescenzi, 2008). Territorial development policy put the emphasis on
spa�ally-blind approaches, postula�ng policies aimed at improving the condi�ons and opportuni�es
of people regardless of where they lived, while recognizing the need for spa�al differen�a�on (World
Bank, 2009).

However, the significance of place in development policy has resurfaced in economic theory and
policy design. In a globalized world, loca�on greatly influences regional outcomes, while assump�ons
about knowledge spillovers and the diffusion of economic ac�vity, well-being, and prosperity have
not always materialized (McCann, 2008; Rodríguez-Pose & Crescenzi, 2008). Proximity —
encompassing not only physical proximity, but also geographical, cogni�ve, organiza�onal, and
ins�tu�onal aspects— plays a vital role in facilita�ng knowledge transfer from prosperous regions to
lagging ones (Boschma, 2005; Caragliu & Nijkamp, 2016).

Agglomera�on maters enormously for the genera�on and diffusion of economic ac�vity not only at
regional but also at metropolitan and neighborhood scales (Rosenthal & Strange, 2020). However,
the diffusion of the prosperity linked to agglomera�on economies also faces numerous barriers that
may prevent the flow of economic benefits from leading and more dynamic areas to lagging and
falling behind ones. Issues such as ins�tu�onal shortcomings, weak regional leadership, deficient
innova�on systems, and the inability of many regions to adapt to emerging structural
transforma�ons obstruct the diffusion of economic ac�vity and prevent a more equitable
distribu�on of economic gains (Milanovic, 2005). These barriers can contribute to deepening and
perpetua�ng spa�al inequali�es, incurring significant economic and social costs. Spa�al imbalances
are not just an equity and social problem, but also lead to missed economic poten�al, social
discontent, and, in extreme cases, even unrest (Barca et al., 2012; Rodríguez-Pose, 2018).

Both economic literature and policy design increasingly focus on understanding the local
determinants of regional development. While mainstream research once emphasized exogenous
forces like globaliza�on, trade, and technology (Krugman, 1991), aten�on has increasingly shi�ed to
endogenous factors that shape a territory's ability to leverage both internal and external growth
drivers. Factors such as ins�tu�ons, produc�vity, employment opportuni�es, agents of change,
regional resilience, and a region's adaptability to global megatrends play crucial roles in determining
regional economic dynamism (Coenen et al., 2012; Mar�n, 2012; Rodríguez-Pose, 2013; Boschma,
2015; Grillitsch & Sotarauta, 2020).

This paradigm shi� has given rise to more localized development interven�ons to deal with
harnessing economic poten�al and le�-behindedness, star�ng with place-based and, more recently,
place-sensi�ve approaches (Iammarino et al., 2019). While a consensus on the effec�veness of place-
based policies is s�ll evolving, recent work highlights the importance of evalua�ng pre-exis�ng

                                                   2
territorial strengths before implemen�ng such interven�ons (Duranton & Venables, 2018). Under the
right condi�ons, they have demonstrated welfare gains within ci�es and peripheral rural regions
(Ahlfeldt et al., 2017; Rodríguez-Pose & Wilkie, 2017). Place-based policies can be successful when
they build upon exis�ng compe��ve advantages but may result in inefficiencies without proper
assessment of both their poten�al direct and indirect impacts. However, assessing the welfare gains
and conduc�ng cost-benefit analyses of place-based and place-sensi�ve policies s�ll face challenges
in incorpora�ng all the poten�al costs of non-interven�on, including lost economic opportuni�es,
long-term human capital losses, and social and poli�cal discontent.

Recent evidence underscores the poten�al of locally tailored territorial development policies.
However, there is s�ll a need to synthesize various strands of literature to navigate the mul�tude of
approaches and assist decision-makers in adop�ng comprehensive frameworks for greater regional
economic growth. This paper aims to contribute to fill this gap. It reviews recent theore�cal and
empirical developments in territorial and regional science. It then explores the role of ins�tu�ons,
new theore�cal advancements, and evidence related to the role of ins�tu�ons, resilience, agency,
and leadership. It later addresses territorial development in the context of sustainability transi�ons
and the socio-economic costs of regional inequali�es. Finally, the paper synthesizes key insights and
lessons from the scholarly literature and offers policy implica�ons and future direc�ons for territorial
development interven�ons.



2. Seeking efficiency and equity through territorial development policy
Early theories on economic geography viewed spa�al inequali�es as a temporary phenomenon that
would eventually decrease as markets cleared. As such, the benefits provided by economies of
agglomera�on in ci�es were expected to spread in �me from the core to the periphery. Encouraging
agglomera�on in the core was seen as a way to generate posi�ve externali�es, such as increased
innova�on capacity and lower knowledge-sharing costs, which would drive the dynamism and
economic growth of mega-ci�es (Fujita et al., 1999; Duranton & Puga, 2001). Urban economists
echoed this sen�ment, viewing urban density as the path from poverty to prosperity (Glaeser, 2011:
1).

However, reality has proven far more complex and variegated, considering the many market failures
that exist. Empirical evidence points to the many benefits from agglomera�on in ci�es. Making ci�es
work can boost produc�vity and inclusion at various stages of development, for instance in the early
and medium phases of structural transforma�on (Grover et al, 2022). However, nega�ve externali�es
in large ci�es, such as conges�on costs, pollu�on, labor crowding, and a high cost of living, can act as
significant barriers to economic growth and may dampen economies of agglomera�on, making
further investments in large ci�es costly and some�mes inefficient (Dijkstra et al., 2013), giving rise
to ‘sterile’ agglomera�on economies (Grover et al., 2022). Large conges�on cost may hamper the
economic dynamism of large ci�es. With this in mind, scholarly research has also pointed at cases
where mid-size ci�es, intermediate ones, and some rural areas have shown considerable dynamism,
despite what can be regarded as less favorable condi�ons for the flourishing of economic ac�vity
(Frick and Rodríguez-Pose, 2018). For instance, in Europe, smaller towns and rural regions outpaced
megaci�es in growth rates during the late 2000s and early 2010s, ci�ng conges�on costs, pollu�on,
labor crowding, and high living expenses as constraints on further agglomera�on (Dijkstra et al.,
2013). A similar trend was observed in developing countries like China, where urbaniza�on did not
always correlate with higher living standards (Jedwab & Vollrath, 2015). In cases where the growth of
mega-ci�es has been atributed to a dependence on resource exports rather than industrializa�on

                                                   3
and manufacturing, lower performance in welfare and development measures is also observed when
compared to produc�on ci�es (Gollin et al., 2015).

Second, there are important barriers that may limit the posi�ve spillovers from large ci�es to
surrounding regions. For countries to fully harness the advantages and poten�al of their major ci�es,
good governance, a well-developed urban infrastructure, and an economic structure that benefits
from agglomera�on economies are needed. While economic theory posits that agglomera�on
fosters innova�on, benefi�ng le�-behind regions through knowledge spillovers, research shows that
these spillovers are weaker than agglomera�on forces, leading to strong distance decay effects and
limi�ng the impact of innova�on and new economic ac�vity generated in core areas on lagging
regions (Dunford & Smith, 2000; Iammarino & McCann, 2013). Knowledge struggles to diffuse from
cores to peripheries —or, in other words, from more to less developed regions— for lack of adequate
and func�oning transmission channels (Boschma, 2005; D’Este et al., 2013; Iammarino, 2018).

Moreover, automa�c adjustment mechanisms, like labor migra�on and firm investment responses to
price signals, are not always func�oning as expected. Barriers to migra�on and the s�ckiness of firm
loca�ons, benefi�ng from agglomera�on effects, hinder the benefits of knowledge spillovers towards
lagging areas (Floerkemeier et al., 2021). Le�- and lagging-behind places struggle to establish the
necessary connec�ons to absorb new knowledge and innova�on, hampering the replica�on of
economic success (Farole et al., 2011). Weak ins�tu�ons and limited local innova�on and skill
accumula�on further hinder convergence.

The complementary nature of efficiency and equity focused policies for territorial development has
become more evident in recent years, as within-country inequali�es have risen in both advanced and
emerging economies (Rodríguez-Pose, 1999; Puga, 2002; Ezcurra et al., 2005; Heidenreich & Wunder,
2008) and the need to ensure that efficiency and equity objec�ves are tackled together has become
more evident.

Consequently, the adop�on of efficiency-driven approaches has failed to bring most le�-behind
territories out of their le�-behindedness, meaning that within-country inequali�es have generally
con�nued to rise in both advanced and emerging economies The outcome has been rising
polariza�on, with many poor regions remaining trapped in a low-income equilibrium and incapable
of adap�ng to changes in economic trends and to transi�on towards more integrated and open
economies (Ezcurra & Rodríguez-Pose, 2014; Diemer et al., 2022).

This situa�on has always had considerable economic costs. However, the hitherto neglected social
and poli�cal costs of regional inequality are in recent �mes becoming far more evident and costly.
Rising discontent in marginalized regions, fueled, among other factors, by barriers to mobility and
limited economic opportuni�es, has led to increasing discontent, the rise of populism and, in some
cases, it has also resulted in violent protests (Rodríguez-Pose, 2018). Dispari�es have become
poli�cized in various countries (Hewison, 2014; Rodríguez-Pose, 2018; Dijkstra et al., 2020) in ways
that are also provoking considerable harm to the overall performance of na�onal economies.

To address regional polariza�on and its associated social, poli�cal, and economic risks, governments
have tradi�onally employed two approaches. Firstly, they resorted to large-scale projects in lagging
and le�-behind regions, o�en resul�ng in expensive ini�a�ves with limited development gains due to
weak socio-economic and ins�tu�onal founda�ons (Flyvbjerg, 2009; Crescenzi et al., 2016). Secondly,
they relied on redistribu�ve transfers, which some�mes sustained stagnant economies, crea�ng
'sheltered economies' (Fratesi & Rodríguez-Pose, 2016) (Figure 1). However, the effec�veness of
these policies has varied depending on the policy adopted and the condi�ons of the target territory,


                                                  4
with some sugges�ng that transfers can generate equity gains outweighing efficiency costs (Gaubert
et al., 2021).



Figure 1: Schema�c representa�on of barriers to spillovers and efficiency gains in lagging regions.




Source: Author’s elabora�on based on Coenen et al., 2012; Mar�n, 2012; Rodríguez-Pose, 2013;
Boschma, 2015; Grillitsch & Sotarauta, 2020.



The increasing realiza�on, amid rising territorial inequality and social discontent, of the need to
tackle the barriers to spillovers and efficiency gains in lagging areas has prompted a re-evalua�on of
exis�ng territorial development policies. This has been conducive to expanding the focus of research
into the areas of ins�tu�onal quality, regional development paths, agency and resilience, and
sustainable development prac�ces (Rodríguez-Pose & Keterer 2020; Venables, 2023). Research in
these areas has become far more prominent and an important source of reflec�on to improve
development interven�ons and design far more efficient territorial policies. In the following sec�ons
we cover these growing areas in territorial development scholarship. In what follows, we summarize
research emerging in these four areas, and point at key lessons for policy design.



3. The role of ins�tu�ons in territorial development
Un�l the turn of the century, territorial development primarily relied on two models: neoclassical
theory (Solow, 1956) and endogenous growth theory (Romer, 1986; Lucas, 1988). These theories
offered policy makers a limited range of development strategies, primarily focusing on inves�ng in
physical capital (e.g., infrastructure) and promo�ng innova�on and human capital. Even the more
recent New Economic Geography highlighted the value of enhancing connec�vity through
investments in transport infrastructure as a key driver of economic growth. However, these



                                                  5
approaches have struggled and con�nued to struggle to deliver consistent regional development
outcomes (Pike et al., 2007).

To address this, researchers have turned their aten�on to ins�tu�ons, a dimension tradi�onally
overlooked in past regional development strategies (Acemoglu et al., 2001; Vijayaraghavan & Ward,
2001; Rodrik et al., 2004). Consequently, ins�tu�ons, especially regional ones, have gained
prominence in territorial development theory and analysis (Gertler, 2010; Rodríguez-Pose, 2013).

Recent advancements in theory and empirical research suggest that the quality and efficiency of
local governments may be as, if not more, important for territorial development as the factors
tradi�on considered as the main drivers of development, like infrastructure, human capital, and
innova�on. Poor ins�tu�ons generally represent the main cause of persistent le�-behindedness.
Table 1 summarizes key channels through which ins�tu�ons can have an impact on regional growth.

The case for inves�ng in ins�tu�ons is becoming stronger, in par�cular for two reasons. First,
ins�tu�ons themselves influence economic performance by shaping networks and processes that
drive economic ac�vity. Formal ins�tu�ons that combat corrup�on and informal networks fostering
trust among economic actors offer substan�al socio-economic benefits (Annoni & Dijkstra, 2013;
Ganau & Rodríguez-Pose, 2019). Ins�tu�ons can affect regional growth directly and indirectly.
Directly, they influence economic actors' interac�ons within a region, impac�ng growth,
employment, and produc�vity. They reduce transac�on costs, increase labor produc�vity, and drive
innova�on (Ganau & Rodríguez-Pose, 2019). Effec�ve ins�tu�ons promote innova�ve performance,
while ineffec�ve and corrupt ins�tu�ons hinder innova�on, especially in less developed regions
(Rodríguez-Pose & Di Cataldo, 2015). Government quality improvements are vital for low-growth
regions (Ma et al., 2023; Rodríguez-Pose & Keterer, 2020). Ins�tu�ons also play a crucial role in
establishing regional entrepreneurial ecosystems, alongside tradi�onal factors like infrastructure
(Audretsch & Belitski, 2017). Trust-building networks, known as bridging social capital, facilitate
knowledge diffusion and economic growth (Murphy et al., 2016).



Table 1. Summary of direct and indirect impacts of ins�tu�ons on regional economic
performance.
  Driver of economic
                             Type of impact          Contribu�on to regional economic performance
     performance

 Quality of regional    Direct impacts            Reducing transac�on costs, rendering economic
 ins�tu�ons                                       growth more viable

                                                  Directly increasing labor produc�vity levels in
                                                  regions

                                                  Improving regional innova�ve performance,
                                                  measured through paten�ng, especially when
                                                  corrup�on and government effec�veness are taken
                                                  into account

                                                  Fostering economic dynamism in lagging-behind,
                                                  low-growth regions




                                                 6
                                                     Atrac�ng greenfield FDI from the most produc�ve
                                                     mul�na�onal companies.

                          Indirect impacts           Ac�ng as a mediator of public policy interven�ons

                                                     Affec�ng the economic returns of policies on
                                                     infrastructure, human capital development, and the
                                                     promo�on of innova�on

                                                     Facilita�ng the diffusion of innova�on and
                                                     knowledge through the establishment of higher
                                                     levels of trust.

                                                     Condi�oning the economic impact of poli�cal
                                                     processes, such as decentraliza�on and the
                                                     devolu�on of authority to subna�onal levels.

                                                     Contribu�ng to render a region atrac�ve as a
                                                     migra�on des�na�on.

Source: Authors’ elaboration based on Annoni & Dijkstra (2013); Rodríguez-Pose (2013); Huggins et al.
(2014); Sleuwaegen & Boiardi (2014); Rodríguez-Pose & Garcilazo (2015); Ketterer & Rodríguez-Pose (2015);
Crescenzi et al. (2016); Audretsch & Belitski (2017); Di Cataldo & Rodríguez-Pose (2017); Fritsch & Wyrwich
(2018); Ganau & Rodríguez-Pose (2019).



Indirectly, efficient ins�tu�ons enhance the effec�veness of policies targe�ng human capital and
regional innova�on (Crescenzi et al., 2016). In this respect, ins�tu�ons mediate all local or regional
public interven�ons. They affect policy outcomes, including the alloca�on of European Union
Structural and Cohesion Funds (Rodríguez-Pose & Garcilazo, 2015) and influence the economic
impact of poli�cal processes like decentraliza�on (Muringani et al., 2019; Jong et al., 2021). Weak
ins�tu�ons contribute to perpetuate regional dispari�es during decentraliza�on, as seen in Argen�na
(World Bank, 2020a). Moreover, the quality of regional ins�tu�ons shapes a region's atrac�veness
for migrants (Keterer & Rodríguez-Pose, 2015).

Second, subpar ins�tu�onal quality at the local and regional levels can undermine even the most
carefully designed development efforts. This is because ins�tu�ons mediate the economic returns of
public interven�ons aimed at revitalizing regional economies. A clear understanding of ins�tu�ons
and ins�tu�onal quality, encompassing formal and informal elements, is therefore essen�al for
shaping effec�ve policy ac�ons. Formal ins�tu�ons include rules, laws, and organiza�ons, while
informal ins�tu�ons involve individual habits, group rou�nes, and social norms (Amin, 1999). Formal
ins�tu�ons, o�en referred to as ‘hard’ ins�tu�ons, represent elements like the rule of law, property
rights, and compe��on law. Informal ins�tu�ons, or ‘so�’ ins�tu�ons, encompass social interac�ons
that generate trust, including norms, tradi�ons, rela�onships, and conven�ons (Rodríguez-Pose &
Storper, 2006). This categoriza�on facilitates a beter measurement of ins�tu�onal quality at the
subna�onal level, revealing varia�ons within and between countries (Charron et al., 2014).

However, despite considerable improvements in our understanding of how ins�tu�ons shape
economic development, significant knowledge gaps persist. Most of the exis�ng research on
ins�tu�ons and ins�tu�onal quality remains primarily focused on developed countries, limi�ng
generalizability to low-income countries. More research is therefore needed to understand

                                                    7
ins�tu�ons' role in developing countries (Iddawela et al., 2021; Hussen & Çokgezen, 2022; Aroca &
A�enza, 2016). Addi�onally, informal ins�tu�ons and their impact on regional development warrant
more aten�on. Finally, transla�ng ins�tu�onal research into ac�onable policies is a considerable
challenge. Ins�tu�onal reforms remain underrepresented in development interven�ons, despite
their importance (World Bank, 2020b). To bridge this gap, policy ac�ons should focus on improving
regional policy design and enhancing subna�onal government capacity to implement policies
effec�vely (Figure 2).

Figure 2. Summary of main areas of interven�on for ins�tu�onal development policies




Source: Authors’ elaboration based on Barca et al. (2012); Rodríguez-Pose (2013); Cejudo & Michel (2017);
OECD (2017; 2019; 2020); Rodríguez-Pose & Wilkie (2019); Rodríguez-Pose (2020).



In summary, while ins�tu�ons are not an all-encompassing solu�on for territorial development,
recent research has highlighted how incorpora�ng them into development strategies can yield
significant benefits. Neglec�ng ins�tu�ons may result in short-term gains but leave regions worse off
in the long run and perpetuate le�-behindedness. A balanced approach that considers ins�tu�ons
across various development axes can lead to more sustainable strategies (Rodríguez-Pose & Wilkie,
2019).



4. Regional diversifica�on and avoiding development traps
But dealing with ins�tu�ons, while important, is not enough to navigate the policy challenges
governments are confronted with when trying to design and implement development policies. That
is why, in the context of regional development, researchers and policy makers are increasingly
delving into the intricate interplay between innova�on, economic dynamism, regional diversifica�on,
and the occurrence of development traps. A growing consensus—originally emerging from the
literature on evolu�onary economic geography—underscores that regions exhibit varying capaci�es

                                                   8
to confront and harness global megatrends, like digitaliza�on or the green transi�on for
diversifica�on. However, weak innova�on systems and produc�vity have presented significant
obstacles to transferring efficiency gains to le�-behind regions through these market adjustment
mechanisms, frequently resul�ng in economic stagna�on and decline and obstruc�ng diversifica�on
(Iammarino, 2018; Floerkemeier et al., 2021).

The evolu�onary economic geography literature stresses the significance of regional diversifica�on
paths in facilita�ng efficiency gains in lagging regions and the role of endogenous factors in
explaining the presence or absence of automa�c adjustment mechanisms related to capital and labor
mobility from more dynamic core regions to lagging- and le�-behind areas. Hence, territorial
development policies should account for the unique opportunity spaces of each region, which can
vary significantly based on factors like income level, urbaniza�on, industrial history, and the
condi�ons of local ecosystems (Pinheiro et al., 2022). Recognizing these differences among regional
development contexts is vital for designing and implemen�ng effec�ve policies tailored to specific
diversifica�on trajectories.

Research on regional diversifica�on has primarily concentrated on a region's capacity to venture into
new technologies, industries, and occupa�ons based on its local capabili�es (Ne�e et al., 2011).
Each regional economy possesses dis�nct diversifica�on opportunity spaces shaped by its unique
capabili�es (Pinheiro et al., 2022). Understanding the emergence of these opportunity spaces
becomes par�cularly relevant as the lack of diversifica�on paths can present significant barriers to
dissemina�ng efficiency gains from core areas to lagging regions, thereby perpetua�ng regional
divides.

Various factors influence diversifica�on and path emergence. Regions typically diversify based on
their exis�ng capabili�es, with technological, industrial, and skill capabili�es serving as key
determinants (Boschma et al., 2015; Boschma, 2017). Regions that diversify into higher-skill and
more complex technologies o�en experience higher GDP growth rates and employment (Rigby et al.,
2022). However, regions aspiring to leapfrog into higher value-added ac�vi�es o�en encounter
challenges due to deficiencies in local capabili�es, a phenomenon observed in both developed and
developing countries (Balland et al., 2019; Frick et al., 2019).

Five key aspects have been iden�fied as key for shaping regional specializa�on and diversifica�on
trajectories, allowing regions to escape le�-behindedness. First, technological specializa�on
determines the local availability of relevant technological capabili�es. This is crucial for regional
compe��ve advantage (Montresor and Quatraro, 2019; Van den Berge et al., 2020; Santoalha and
Boschma, 2021). The presence of local scien�fic capabili�es —and, par�cularly, of knowledge
derived from universi�es— is also a fundamental source of regional innova�on (Balland & Boschma,
2021). Just as important are the ins�tu�onal capabili�es available. Solid ins�tu�ons can encourage
and ease the implementa�on of new ini�a�ves, mobilizing resources, and promo�ng reforms,
thereby enhancing diversifica�on opportuni�es (Garud et al., 2002; Cor�novis et al., 2017).
Moreover, diversifica�on in lagging regions o�en relies on their capacity to set up external linkages,
providing complementary capabili�es (Fitjar and Rodríguez-Pose, 2013; Balland & Boschma, 2021).
Finally, the presence of external agents of change serves as a source of new knowledge and
diversifica�on (Ne�e et al., 2018; Cor�novis et al., 2020; Miguélez & Morrison, 2022). The role of
mul�na�onal enterprises and migrant inventors is fundamental in this respect. Figure 3 provides an
overview of the main factors driving diversifica�on at the regional level.




                                                  9
Figure 3 Schema�c representa�on of factors driving the emergence of regional specializa�on and
diversifica�on paths.




        Source: Authors’ elaboration based on Cortinovis et al., 2017; Montresor and Quatraro 2019;
        Cortinovis et al., 2020; Van den Berge et al. 2020; Balland & Boschma, 2021; Santoalha and
        Boschma 2021.



In addi�on to the emphasis on ins�tu�ons, development paths, and diversifica�on, the 'regional
development trap' has emerged as a concept to iden�fy regions struggling to keep pace with
development. Development traps manifest themselves when regions fail to sustain economic
dynamism in income, produc�vity, and employment, while simultaneously underperforming rela�ve
to their na�onal (and European) peers (Diemer et al., 2022: 489). This concept is akin to the middle-
income trap in interna�onal economics, where countries experience bursts of growth followed by
stagna�on or decline (Kharas & Kohli, 2011). Regional development traps can affect regions at
various levels of development, adding complexity to their iden�fica�on and analysis (Diemer et al.,
2022). In par�cular, in the case of European regions the highest incidence of regions caught in a
development trap happens at high and middle per capita income levels.

Empirical applica�ons of the concept reveal common characteris�cs among le�-behind places, such
as a lower share of manufacturing industry, higher dependency ra�os, lower educa�onal atainment,
and weaker innova�on capacity. These paterns hold across regions at different income levels,
underscoring the importance of these factors in understanding le�-behindedness (Diemer et al.,
2022).

While the theory of regional development traps is rela�vely recent, empirical evidence and the
development of indices to iden�fy trapped regions have been applied in developed countries, such
as those in the European Union (Diemer et al., 2022). The applica�on of these indices to developing
countries remains an area for further explora�on, given the gaping regional dispari�es in these
na�ons. But, overall, the consequence of the realiza�on of the existence of development traps is


                                                 10
pushing policy makers more towards recognizing the need to address stagna�ng regions alongside
lagging-behind and poor regions, thus promo�ng more inclusive territorial development.



5. Agency, leadership, and resilience in territorial development
Agency, leadership, and regional resilience also have a role in shaping regional economic growth.
These elements influence the spread of efficiency gains from core to lagging- and le�-behind-regions,
serving as enablers or barriers to economic development. Although these research areas have
tradi�onally operated separately, their integra�on within research in territorial development is
contribu�ng to shi� the analy�cal aten�on toward the local context and the specific factors that
facilitate or impede endogenous regional economic growth and, thus, overcoming le�-behindedness.
This paradigm shi� holds crucial implica�ons for policy makers.

The interest in the role of agency in regional structural changes has grown in recent �mes. Research
has tended to highlight the significance of micro-level processes in shaping regional growth paths
(Grillitsch & Sotarauta, 2020). Agency studies have put the emphasis on how regional growth paths
result from inten�onal ac�ons of various actors, influenced by internal and external forces
(Sotarauta, 2016). Three types of transforma�ve agency—innova�ve entrepreneurship, ins�tu�onal
entrepreneurship, and place-based leadership—drive the micro-level processes responsible for
regional path emergence. Innova�ve entrepreneurship is linked to technological advancements and
new industrial paths, while ins�tu�onal entrepreneurship shapes the rules of the game, and place-
based leadership guides complex mul�-actor processes (Grillitsch and Sotarauta, 2020; Grillitsch et
al., 2022).

Early empirical studies confirm the relevance of agency for regional development paths (e.g.,
Grillitsch et al., 2022). This approach calls for policy makers to engage local actors in discussions and
consider strategies to promote these elements of change agency. However, challenges remain,
including understanding the contextual condi�ons facilita�ng or hindering change agency and
poten�al nega�ve consequences.

The concept of regional resilience—ini�ated by evolu�onary economic geographers—is another one
that has gained increasing aten�on. Regional resilience refers to a region's ability to an�cipate,
prepare for, respond to, and recover from disturbances or shocks to its economy (Foster, 2007; Hill et
al., 2010). Resilience approaches recognize the poten�al for regions to withstand and recover from
economic crises, providing an alterna�ve perspec�ve to the tradi�onal focus on efficiency and
specializa�on. Resilience is associated with diversifica�on and adaptability, enabling regions to
navigate economic transi�ons and shocks (Mar�n and Sunley, 2020).

The importance of resilience in regional development strategies is also being increasingly
acknowledged. This perspec�ve underscores the value of diversified regional economies, flexible
labor markets, social safety nets, and targeted investments in innova�on and educa�on. Resilience-
based policies aim to equip regions with the capacity to bounce back from adversity and adapt to
changing economic condi�ons. This contrasts with policies that might focus solely on promo�ng
specializa�on and efficiency, providing a richer, albeit more complex, framework for policy makers to
design and implement strategies that are adapted to the specific condi�ons of every territory. Such
shi� in policy focus can contribute to mobilize more local resources and poten�al, while promo�ng a
more inclusive and sustainable regional development.



                                                   11
Key takeaways from the shi� in focus of research on territorial development include the recogni�on
that diversifica�on paths are influenced by a region's unique capabili�es, and policies should be
tailored accordingly (e.g. Ne�e et al., 2011 and Pinheiro et al., 2022). Research has also established
that development traps can hinder regions' ability to keep pace with na�onal peers and that agency
and leadership at the micro-level play crucial roles in shaping regional growth (e.g. Iammarino et al.,
2019 and Rodríguez-Pose & Keterer, 2020). Resilience in regional development has also become a
crucial area of interest for naviga�ng economic shocks and transi�ons (Crescenzi & Iammarino,
2018). Hence, recent developments in research stress the importance of moving away from one-size-
fits-all and top-down types of policies that would increase growth expected to eventually spread out
from dynamic centers to extolling the virtues of more and beter territorially-targeted interven�ons
(Storper, 2018; Iammarino et al., 2019). These new types of place-based and place-sensi�ve
approaches emphasize the merits of engaging local actors in development processes and the
advantages of encouraging local ownership and empowerment as a way to mobilize all available
resources and make the most of the economic poten�al of every place and, as a consequence, of
aggregate development.

Consequently, new territorial development policies are increasingly pu�ng far greater weight than
previous ones on the need of adop�ng more holis�c approaches through complementary policies
that balance market dynamics while removing that development barriers are li�ed and local
advantages and strengths leveraged. They focus more on ins�tu�ons, regional development
trajectories, and aspects of agency and resilience, as discussed above. This implies recognizing that a
one-size-fits-all approach to economic development is o�en insufficient to address the diverse
challenges faced by regions around the world.



6. Policy implica�ons for inclusive territorial development
In this paper we have outlined the main theore�cal and empirical recent developments emphasizing
the significance of place-specific atributes in territorial development. How are these shi�s translated
into policies that help transform the future of dynamic and le� behind places alike?

The understanding that local condi�ons shape regional socio-economic development has not only
permeated academic research but is increasingly influencing policy makers. This is translated into
territorial development policies that more than ever recognize the need for complementary botom-
up and place-based approaches. While tradi�onal development strategies have been top-down, with
na�onal governments se�ng the vision and controlling policy design and implementa�on,
contemporary regional policies are increasingly shi�ing towards botom-up or mul�-level
interven�ons. In this approach, subna�onal governments and other local actors play a fundamental
part in iden�fying local needs, formula�ng strategies, and implemen�ng and monitoring
development ini�a�ves (Crescenzi & Guia, 2016; Iammarino et al., 2019). This has represented a
fundamental change in the founda�ons for inclusive territorial development, leading to significant
changes in the theore�cal design and empirical implementa�on of policies, and, as a consequence,
the implementa�on of far more place-based and place-sensi�ve development strategies. We treat
these three dimensions in turn in the following subsec�ons.



6.1 Founda�ons for Inclusive Territorial Development



                                                  12
One of the main transforma�ons in development policies in recent years is that the focus of place-
based policies has clearly evolved. Increased aten�on on recent territorial development policies is
paid to harnessing local poten�al and promo�ng economic ac�vity by capitalizing on local strengths
while addressing territorial weaknesses and constraints. That is, the main focus is increasingly
becoming tapping into untapped local resources and poten�al. The varia�ons in local endowments
require localized development approaches tailored to specific communi�es or territories. For
example, the European Union undertook a profound reform of its Cohesion Policy in 2014, shi�ing
from top-down regional development policies to a place-based approach through the Smart
Specializa�on Strategy (S3). S3 aims to support regions in priori�zing innova�ve sectors and
technologies through a botom-up entrepreneurial discovery process, uncovering a region's unique
strengths (Foray et al., 2009). This shi� has empowered subna�onal public authori�es as central
players in social and economic policy making, leading to more inclusive stakeholder engagement
exercises (Crescenzi & Guia, 2016). A similar, though less comprehensive, place-based ini�a�ve in the
United States is the more recent Empowerment Zone program, which iden�fies economically
distressed areas eligible for tax incen�ves, tax credits, and grants to s�mulate economic ac�vity in
disadvantaged regions.

The place-based approach embodied in Smart Specializa�on strategies and the Empowerment Zones
program has inspired policies beyond the European Union and the United States, influencing
ini�a�ves in, among others, many La�n American countries like Mexico, Chile, Colombia, and
Argen�na. However, while place-based interven�ons hold promise, assessments of their
effec�veness remain mixed and incomplete. Early evidence suggests that these policies can build
trust and local support, reducing resistance to top-down interven�ons during implementa�on.
Nonetheless, challenges such as coordina�on issues and inadequate ins�tu�onal capacity can
prevent place-based strategies from reaching their full poten�al (Crescenzi & Guia, 2016; Morisson &
Doussineau, 2019; Rodríguez-Pose & Keterer, 2020). Research indicates that spa�ally targeted
interven�ons may be ineffec�ve and inefficient if the territory lacks fundamental endowments, like
viable firms (Duranton & Venables, 2018; Grover et al., 2022) or adequate ins�tu�ons (Aresu et al.,
2023). Addi�onally, the presence of inherent compe��ve advantages in certain regions has been
emphasized in scholarly research (Barba Navare� & Markovic, 2021).

Place-based approaches are, however, not a replacement for the need to address na�onal-level
constraints; instead, they should complement na�onally-driven strategies and help remove
development barriers at the local level. Exclusive focus on equity objec�ves without considering
efficiency can lead, once again, to a mere redistribu�on of exis�ng economic ac�vity, with limited
overall welfare gains (Kline & More�, 2014). Moreover, the success of place-based approaches
varies considerably depending on the local condi�ons of the places where it is implemented (e.g.,
Ahlfeldt et al., 2017; Koster & Van Ommeren, 2019; Bar�k, 2020; Gruber et al., 2023). But early
results tend to be encouraging. In the context of the European Union, there is growing evidence that
transfers from the EU to less developed regions have contributed to overall welfare improvements
(Brachert et al., 2019; Blouri & Ehrlich, 2020). Similar posi�ve net welfare effects seem to be
developing as well in the US, as seen with the Empowerment Zone program (Gaubert et al., 2021).
These transfers seem to be playing a significant role in improving the well-being of these regions.

In response to local challenges, place-based policies o�en intend to enhance the efficiency of local
and regional government structures and establish capacity-building ini�a�ves. These efforts
frequently include the introduc�on of e-government services, e-vo�ng, and capacity-building
interven�ons specifically tailored to local needs. The choice of reforms is o�en influenced by pre-
exis�ng local endowments, such as the presence of high-quality educa�on providers, internet

                                                 13
penetra�on rates, and levels of social capital before policy implementa�on (e.g., Vassil & Weber,
2011; Orkestra, 2021). Addi�onally, in the US context, place-based policies in the form of fiscal
redistribu�on and incen�ves have, under certain circumstances, been found to achieve significant
welfare gains, with equity gains surpassing the typically associated efficiency costs (Busso et al.,
2013; Gaubert et al., 2021).

However, place-based policies can also become too place specific, undermining the poten�al
synergies that may arise from addressing widespread challenges and overlooking the
interconnec�vity of a more integrated economy. Hence, a pure place-based development approach
may not deliver in terms of spreading development as widely as possible and maximizing the
economic poten�al of every place. Different places have different endowments and star�ng points
and the type of development interven�on to fully tap into untapped poten�al requires considering
the commonali�es and challenges affec�ng different groups of economies. Place-sensi�ve
approaches—i.e., those that are well embedded in development theory and evidence but adapted to
the specific condi�ons and challenges of different groups of regions (Iammarino et al., 2019: 290)—
are guided by three principles. First, they acknowledge the need for differen�a�on between different
types of regions (and, specifically, core and peripheral ones), allowing governments to iden�fy the
unique needs, challenges, and drivers of change in each regional group. This approach avoids
oversimplifica�on and promotes tailored strategies based on the characteris�cs of each region.
Second, coordina�on is crucial. Effec�ve place-sensi�ve strategies require synthesis between
different approaches, combining top-down and botom-up efforts, as well as coordina�on between
different levels of ins�tu�ons, including central and subna�onal governments. This integra�on
represents the essence of place-sensi�ve strategies (Rodríguez-Pose & Wilkie, 2017). Third,
integra�on is essen�al. Instead of focusing solely on one development axis, balanced place-sensi�ve
approaches require a mix of policies and reforms addressing structural, socio-economic, and
ins�tu�onal aspects to foster regional economic dynamism (Barca et al., 2012; Phan & Coxhead,
2014).

Further research is needed to explore the effec�veness of place-sensi�ve policies. While early
studies indicate their poten�al to reduce regional dispari�es, more inves�ga�on is required to
understand their full impact. Evidence suggests that these policies can reduce inequali�es in social
service provision and social outcomes across regions, enhance investment atrac�veness for less
developed areas, and promote SME innova�on. Moreover, place-sensi�ve policies can become
crucial for the growth of intermediate ci�es, which have o�en been overlooked in tradi�onal
territorial development strategies (Rodríguez-Pose & Griffiths, 2021).



6.2 From Theore�cal Design to Empirical Implementa�on: Regional Clubs and the
Complexity Matrix
In prac�ce, implemen�ng place-sensi�ve policies o�en involves club theory, which stems from
recent research on regional development traps. Iden�fying regional development clubs allows for
differen�ated approaches that support prosperity in leading regions while enhancing it in others
(Diemer et al., 2022). Club membership can be determined based on various criteria, such as per
capita income levels or comprehensive socio-economic performance measures.

In higher-income and overperforming regions, maintaining specializa�on in high-wage ac�vi�es is
o�en what makes a difference for development. These regions o�en face dynamics that reduce their
value-added contribu�ons over �me, such as the rou�niza�on of ac�vi�es and the diffusion of


                                                  14
innova�ve capabili�es. To sustain economic dynamism, these regions must either generate
innova�ons within their specialized sectors or transi�on to related economic ac�vi�es.

Middle-income regions, which have incomes close to the na�onal average, o�en face development
traps fundamentally determined by rising labor costs. These regions must improve workers'
produc�vity by enhancing educa�on and labor force par�cipa�on to bridge the gap with the best-
performing regions.

Low-income and underperforming regions frequently have limited skills and technological resources
but may possess advantages like low-cost labor. However, they face considerable risks like the
reloca�on of ac�vi�es to emerging countries with even lower produc�on costs. These regions may
require investments in basic infrastructure, labor market policies, educa�on, and government quality
to promote economic development and reduce talent ou�low (Iammarino et al, 2019).

The complexity and breadth of policy interven�ons in each development club may vary (Figure 4).
Regions at early development stages may benefit from targeted interven�ons addressing basic
deficiencies like infrastructure. As the level of development increases, more complex interven�ons,
including ins�tu�onal reforms and cluster policies, become necessary. Choosing the appropriate
policy interven�ons based on the local context and endowments of each territory is therefore crucial
to ensure that any development interven�on works.

Figure 4 Conceptual framework for the adapta�on of regional development strategies to the
local context.




Source: Author’s adapted from Rodríguez-Pose & Wilkie (2019).




                                                 15
6.3 The Limita�ons of Infrastructure Projects for a Place-Sensi�ve Approach to
Development
Large-scale infrastructure projects, like growth corridors and special economic zones, have
tradi�onally been the preferred form of development interven�on by policy makers to revitalize local
economies. These projects have gained aten�on as tools to drive growth across a country. They are
believed to generate various outcomes, from reduced transport costs to enhanced economic welfare
and equity.

However, there are important caveats associated with these projects. Gains may be unevenly
distributed across regions, crea�ng winners and losers. The returns on such projects can be highly
dependent on local endowments, such as varia�ons in the quality of ins�tu�ons. Weak ins�tu�onal
contexts can lead to lower-than-expected returns (Crescenzi et al., 2016). The effec�veness of a
transport project is influenced by local ins�tu�ons, especially the local government, and is
suscep�ble to poli�cal interven�on.

Social and human capital have been found to be beter predictors of economic growth than
infrastructure endowments (Rodríguez-Pose & Keterer, 2020). Moreover, greater connec�vity from
peripheral regions to urban areas may lead to the realloca�on of firms and labor, nega�vely affec�ng
less developed territories. Therefore, complementary interven�ons, including ins�tu�onal
strengthening and improvements in local public goods, are needed to transform large infrastructure
investments into effec�ve regional development projects.



7. Conclusion
This paper has aimed to offer a comprehensive overview of the theore�cal and empirical
advancements in territorial development policies to overcome le�-behindedness and improve
territorial development prospects over the past decade. Policies have increasingly recognized the
importance of considering the local context to expand the spread of efficiency gains, economic
opportuni�es, and knowledge spillovers from core to peripheral regions. This increased aten�on has
been driven by a growing body of research stressing the existence of mul�ple barriers to regional
convergence and poin�ng at the importance of tackling regional inequali�es for economic growth,
poverty reduc�on and inclusion, and long term stability (McCann & Rodríguez-Pose, 2011). Today,
there is a growing consensus that understanding and harnessing local endowments is fundamental
for the socio-economic development of regions. These endowments encompass infrastructure and
accessibility, but also human capital, compe��veness and innova�on, and, last but not least,
ins�tu�ons. They also take into considera�on other factors such as the presence of regional
development traps, the resilience of different places, agency, and sustainability transi�ons. In
par�cular, the significance of ins�tu�onal quality and its direct and indirect impact on regional
economic growth has gained prominence, as has the recogni�on of the need for suitable
prerequisites to benefit from sustainability transi�ons. These theore�cal and empirical developments
are leaving their mark on territorial policies worldwide, promp�ng a shi� from spa�ally-blind
approaches to more place-based strategies and, more recently, place-sensi�ve approaches. However,
these new approaches are s�ll very much works in progress in various geographic contexts, spanning
both developed and developing countries, with their effec�veness under ongoing evalua�on.

Two pressing themes in territorial policy and theory are the emergence of regional development
traps and the new insights into the socio-economic costs of regional inequali�es. Evidence from


                                                16
these domains has led to two significant shi�s in policy-making paradigms. First, there is a move
away from conven�onal sta�c measures of regional backwardness toward a dynamic understanding
of development traps, impac�ng both lagging and higher-income regions. Customized policy
interven�ons are deemed essen�al for rejuvena�ng territories that have experienced stagna�on or
decline in recent years. Second, regional inequali�es, once viewed as a temporary byproduct of rapid
economic development, are no longer considered acceptable. Neither efficiency-driven nor equity-
driven interven�ons in isola�on have effec�vely addressed the profound spa�al dispari�es observed
in many countries. Consequently, place-sensi�ve approaches, which aim to reduce regional
imbalances while fostering overall growth, are gaining prominence as beter suited for addressing
issues of social discontent and disharmony.

The academic literature increasingly stresses the complementarity of efficiency-seeking and equity-
focused policies. Policy makers are urged to develop frameworks that harness the strengths of both
approaches. Mobilizing economic poten�al and overcoming le�-behindedness requires certain
minimum standards and endowments applicable to all regions. Simultaneously, we have to
acknowledge that place-specific condi�ons profoundly shape the outcomes of development
interven�ons in specific areas. This implies that spa�ally-blind policies must be adaptable to the
dis�nct ecosystems in which they are implemented, taking into account factors such as ins�tu�onal
quality, leadership and agency, and a region's historical development trajectory. This adap�ve
framework closely aligns with place-sensi�ve strategies (Iammarino et al., 2019), which aim to unlock
the growth poten�al of each territory, regardless of its ini�al posi�on on the development spectrum,
while leveraging exis�ng local endowments to chart future development paths.




                                                 17
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