Dramatic decreases in costs of transport, communication and information technology should have reduced spatial disparities in economic activities and moved us to a ‘global village.’ Yet, we find that in both industrial and developing countries, economic activities are concentrated in a few centers and there are regional disparities. For example, about 15 percent of world population live in temperate zones but produce 50 percent of world GDP. In United States, counties that take up 2 percent of the land area produce more than half of U.S. GDP. Similarly, poverty is concentrated in a few pockets in many countries. It was Krugman (1991) who deduced that agglomeration economies accrue at plant level and hence firms are located in a single area nearer to consumer demand in urban areas with large populations and minimal transport costs. In other words, location of economic activity matters and a tiny (initial) difference may soon lead to a concentration of economic activity around a center and ultimately to a formation of industry cluster in the same space. Agglomeration economies accrue at plant level, industry level or city and regional level.
Given this phenomenon of economic concentration in one area and spatial disparities elsewhere, the key issue is “should rural labor move to jobs or should jobs move to rural areas?” Finance and labor do not automatically move towards poorer areas. Available evidence from across the world suggests that policy makers should strive to remove impediments to capital and labor flows and reinforce agglomeration economies. This can be done by policy makers encouraging labor movement by abolishing national minimum wages, cutting unemployment benefits and social benefits, and abolishing rent control to increase supply of housing. Similarly, improving business climate, increasing access to finance, including microfinance and availability of credit to small enterprises, and developing infrastructure services before firms move in, are likely to affect the decisions of firms in location of their productive activities. Strengthening the capacity of provincial and local governments in provision of essential services would be key to reduce economic concentration and spatial disparities.