The latest CaixaBank Research report titled The Keys to Productivity addresses the major challenge facing the Spanish and European economy and identifies the key factors driving its improvement at the regional level. Its conclusion is surprising for this kind of analysis: “Geographic factors explain around a quarter of the differential productivity growth,” the report asserts, referring to the density and growth of the population in urban areas.
The study, based on a complex econometric analysis, also includes as differentiating elements the quality of institutions, human capital and innovation, key factors well known in economic literature and especially, the latter, extensively developed in the Letta and Draghi reports. The novelty lies in territory and geographic factors, generally absent from economic analyses, despite robust national and international research on the matter.
“The CaixaBank Research study recovers territorial factors, goes beyond the purely physical dimension and confirms the thesis of the urban agglomeration effect”
In 2012, anticipating in many respects our current reality, the American analyst Robert D. Kaplan published The Revenge of Geography, an essay in which he argued that, despite globalization and technology, geography continues to impose hard limits on policy and history. Kaplan reacted to the dominant thinking since the mid-nineties, a moment of technological optimism linked to the expansion of the Internet, with similarities to what we are experiencing today after the emergence of artificial intelligence. The idea was consolidated then that digital connectivity would reduce the relevance of borders and render geography a less significant factor. The main criterion for locating companies should be having a good network connection, which would allow them to operate from anywhere in the world regardless of location. Not only globalization seemed inevitable, but a shift in the distribution of activity and population in developed countries was also anticipated. In this context, locating companies in the world’s major cities was no longer seen as essential.
Why does the “agglomeration effect” explain about 25% of productivity growth?
Kaplan predicted that geography would eventually exact its revenge because physical factors—mountains, seas, climates, resources, strategic positions and borders—reappear sooner or later as decisive forces, reminding us that power and conflict remain anchored in space. The CaixaBank Research study recovers territorial factors, goes beyond the purely physical dimension and confirms the thesis of many other investigations: the agglomeration effect of cities (the economic and social benefits of people, firms, industries, services, and talent concentrating in one place) is key to the economic progress of regions. The places that grow the most are those with dense urban areas and strong metropolitan regions. All analyses conclude that, to compete in today’s world, size matters and any country needs large cities that can compete with other spaces on a global scale. Having robust urban areas is essential to attract economic activity, innovation, talent and the most disruptive industries with the greatest future.
With these findings, CaixaBank’s recommendation is logical: to strengthen “public policies that help create vibrant and dynamic urban hubs.” In other words, if we want to improve the productivity of European economies, we must further bolster the major urban agglomerations: Madrid D. F., Barcelona’s metropolitan area and the large urban areas across the rest of the country.
“The trend, accelerated after the pandemic, points to a greater concentration of population and activity in major urban zones, especially in Madrid and its expanding sphere of influence”
The dilemma faced by public administrations is significant. What should the central government and the autonomous communities do? The trend, accelerated after the pandemic, points to a greater concentration of population and activity in the large urban zones, especially in Madrid and its expanding sphere of influence, which crosses provincial borders and encompasses broad areas of the provinces of Toledo, Guadalajara, as well as bordering municipalities in Ávila, Cuenca and Segovia. The answer is not straightforward, but continuing as if nothing had changed does not seem like the best option. The growth of territorial inequality and the resentment of a portion of the population in the more lagging territories is one of the factors fueling the rise of radical-right populist movements in the United States and in major European countries.
Spain against Europe: why do we lack an ambitious regional policy?
Spain is one of the most decentralized states in the world, with autonomous communities that have exclusive competences in the most important public services (health, education, social services, environment) and a central government that retains the capacity to set the bases, the principles, and minimum common standards, as well as the overall coordination of each policy. The level of decentralization and the system’s design partly explain the absence of an ambitious state regional policy to compensate territorial inequalities and harness the potential of large urban areas. In practice, only the European Commission has for decades implemented an ambitious regional policy, tailored to the conditions of each region through cohesion policies.
“Altering territorial inertia is a hard task, and the views from each autonomous capital are clearly insufficient to confront it”
The trend, at least over the next ten years, will be toward greater concentration of development in the large urban areas. Therefore, it is essential to empower them as centers of dynamism and innovation, but at the same time it is crucial to prevent them from becoming islands of wealth in the middle of empty territories. We must bolster Madrid and its growing urban area, strengthen Barcelona and its metropolitan area, the Basque industrial system and bolster Valencia, Málaga, and the Atlantic urban system of Galicia as alternative poles. But at the same time, it is essential to ensure that the interior of the plateau does not become a desert of activity. Altering territorial inertia is a hard task and the views from each autonomous capital are clearly insufficient to tackle it.
Let’s consider an example: is it a good decision for the Madrid region, given evident limitations of industrial land and electrical capacity, to dedicate this resource to data centers? Wouldn’t it make more sense to focus incentives on higher value-added industrial activities and allow data centers to energize more rural environments? There are many similar examples across regions that point to the lack of incorporation of territorial criteria into decision-making.
It is crucial to consider territorial factors for the location of large strategic projects or also to extend the influence of metropolitan areas through ambitious improvements and extensions of public transport, even beyond regional borders, and to generate hubs of activity linked to the central city. But at the same time, it is essential to generate activity in rural areas. It is evident that current instruments are not sufficient to achieve these objectives. Although the problem is longstanding: territorial criteria are not taken into account in the vast majority of public decisions and, as Kaplan notes, geography will eventually exact its revenge in the form of unsystematic populist movements or other forms yet unknown, but certainly unsettling
