[P]ublicly coordinated investment can break the underdevelopment trap by helping economies overcome deficiencies in private incentives that prevent firms from adopting modern production techniques and achieving scale economies. These scale economies, in turn, create demand spillovers, increase market size, and theoretically generate a self-sustaining growth path that allows the economy to move to a Pareto preferred Nash equilibrium where it is a mutual best response for economic actors to choose large-scale industrialization over agriculture and small-scale production.
How does this apply to the south?
We argue here that the â€œGreat Reboundâ€ of the American South, which followed large public capital investments during the Great Depression and World War II, is one such application. Although 1930s New Deal programs are typically presented in the context of their attempt to bring relief and recovery to the U.S. economy through demand-stimulating public expenditures, the long-term economic effects of these and subsequent wartime expenditures were profound for the South. Specifically, and consistent with big push theoretical literature, the infusion of public capitalâ€”roads, schools, waterworks, power plants, dams, airfields, and hospitals, among other infrastructural improvementsâ€”fundamentally reshaped the Southern economy, expanded markets, generated significant external economies, increased rates of return to large scale manufacturing, and encouraged a subsequent investment stream. These improvements helped create the conditions that allowed the region to break free from its low-income, low-productivity trap and embark on its rapid postwar industrialization.
Mark mentions some of the competing theories on southern development. It so happens that my master’s thesis covered these same topics. Parts of it were pretty amateurish, but the ideas are basically sound, I think. Here’s the abstract:
This paper examines the economic performance of the American South in the 20th century through the framework of a model of economic geography and urbanisation. The foundation for the model is given and the principal conclusions of the model explained. The paper then presents a case study of urban growth, the performance of the Research Triangle region of North Carolina. Descriptive statistics, in particular a matrix of correlations between key variables, are used to assess the plausibility of the model with respect to the Research Triangle.
The historiography of southern economic growth is the starting point for the paper. In examining economic development efforts in the South from the New Deal to the recruitment of industry after the Civil Rights Movement, it is shown that, despite the common notion that the south has converged to the United Statesâ€™ national average in output and income, past development efforts have not been very successful, and most of the region continues to fall behind the country at large.
The model used to examine southern development efforts is then introduced to provide a lens through which to view the history of the Research Triangle, described in the third section. It is suggested that the creation of the Research Triangle Park led to the formation of an agglomeration of human capital, which spurred urbanisation and growth in incomes.
Examination of correlations between population, per capita income, human-capital measures, and R&D employment show that the theory is plausible in the case of the Research Triangle.
Basically, I pointed out that development efforts in the south took one of two paths. Most places used incentives and labor cost advantages to recruit manufacturing concerns. The plants provided employment but little else, and they ultimately decamped for cheaper places abroad, leaving a lot of southern towns once more suffering from poverty and high unemployment.
A few other places tried an alternative approach. They sought to capitalize on an initial advantage in developing a concentration of human capital. Essentially, the kinds of firms that might generate self-sustaining growth all required a population with a basic skill level in one field or another. Concentrate enough people of skill in one place, and you could then attract those firms and build something fundamentally different than was going on in the textile towns.
In the Research Triangle, leaders leveraged the technical resources and talent at local research universities to attract tech firms. The concentration eventually hit critical mass, such that labour moved to Raleigh for the tech jobs and tech jobs moved to Raleigh for the labour and venture capital moved to Raleigh for both, and so on. Other cities managed to pull similar tricks with finance or energy, but the root of the success in each case was an agglomeration of skills in an urban area.
Having built a jobs base, these places subsequently built on their advantages by massively adding housing supply, helping to keep living costs low. The resulting sprawl has expanded the zones of economic success to include steadily larger areas. Outside of those boomtowns, however, the south remains very poor. Southern success is very urban in nature.