Sunday, January 8, 2012

SR-520 Bridge Project: Reconnecting Seattle

by Brandon Musser

State Route 520 (SR 520) is a 12.8 mile corridor linking downtown Seattle and its Eastern suburbs of Bellevue, Kirkland, and Redmond (collectively known as the “Eastside”) which are separated by the 30 mile long Lake Washington. The route is of considerable economic importance to the greater Seattle area as it provides one of only two passages across the lake, connecting the dense downtown residential area to several large commercial centers, including Microsoft's main campus in Redmond which employs nearly 40,000 people (another employer in the area you may have heard of is Boeing). Every day, around 115,000 vehicles travel the four-lane, 2,285 meter long floating bridge which currently spans the lake. However, the bridge, which was opened in 1963, was originally designed to accommodate only 65,000 vehicles per day. During peak rush hours, traffic merging onto the bridge creates a bottleneck, turning the freeway into a parking-lot and the short 10-15 minute journey from Redmond to Seattle into an insufferable hour-long nightmare.

Construction is to begin in 2012 on a new bridge which will replace the existing bridge and expand the flow of traffic to six lanes, as well as a pedestrian path, and will be compatible with future inter-city light-rail proposals ( ). Additional upgrades will be made to both on- and off-ramps, further improving the flow of traffic along the entire corridor, but especially in the vicinity of the bridge. The additional third lane (in each direction) will be a designated HOV lane (reserved for car-pools, motorcycles, and public transit), improving the reliability and attractiveness of using means of public transportation to commute to and from work. Much wider shoulders will also dramatically decrease the time of accident/breakdown response and cleanup/removal, which are often responsible for the worst traffic delays. The eventual implementation of light-rail will provide residents of the metropolitan centers of Bellevue and Seattle with a very quick, reliable point-to-point means of commuting which will avoid traffic all-together. The new bridge is scheduled to open in 2014, while a definite time-line has not yet been set for the light-rail.

The new bridge, along with the upgrades being made along the entire corridor in general should greatly reduce the cost of commuting between Seattle and the Eastside, not only in terms of dollars but in the opportunity cost of time as well. Using two different models of economic geography, we can speculate as to what kind of implications the drastically reduced transportation costs could have on the economic dynamics of the region. Predictions depend largely upon how one views the greater Seattle area; as two distinct regions (Seattle and the Eastside) or as one larger integrated economic region. According to the Krugman model of New Economic Geography, in a two region scenario exhibiting a mobile labor force, there are two forces in which reduced transport costs could induce agglomeration. The first being the price-index effect and the second being the home market effect (HME). Under the price-index effect, the larger market has an advantage because the price-index will fall with the size of the market, making products cheaper in that region. According to the HME, the region with higher aggregate income will enjoy a more than proportional amount of variety of consumer goods and a more than proportional amount of the higher-skilled workers, making the larger market more attractive. The NEG model would, therefore, suggest that lowering the transport costs between Seattle and the Eastside could spur agglomeration in the larger market (Seattle) at the expense of the smaller market.

On the other hand, if we consider the greater Seattle area to be one large market, the classic Von Thunen could offer insight as to the effects of reduced transport costs between Seattle and the Eastside. The model is used to examine crop selection based on bid-rent functions which depend heavily on the transport costs of various crops. In this case, we can think of different economic functions (industrial/commercial activities) with activity locations being based off of the same bid-rent functions.  According to the model, as transport costs fall, so should the area of land profitable for agricultural activity, introducing opportunities for new activities that were once unprofitable under high transport costs to become profitable. To me, this scenario depicts a region becoming increasingly integrated as the flow of goods (or people) becomes less costly.

I believe the second model is more applicable to this case of decreasing East-West transport costs in the Seattle area as I believe the area is much more resemblant of an integrated market than two separate regions. Reduced transport costs could allow smaller or less profitable firms to locate on the periphery, where it was once unprofitable to do so because of the high costs of attracting skilled-workers from the core (downtown). In other words, reducing the costs of labor flows throughout the greater metropolitan area will make the region more attractive to (external) firms looking to relocate to the area by being able to locate near the periphery (taking advantage of lower big-rent costs) while still being able to draw from a very large pool of skilled-workers in the core. Relocation of firms to the area will also attract new workers, enhancing the overall economic activity of the region.

Dubai as a Logistics Cluster

by Giorgi Machavariani

Dubai as a logistics cluster is one of the most successful cluster at the global level. It is a highly developed region of the United Arab Emirates (UAE). The country enjoys with relatively high income per capita (approximately 36.2 thousand USD). In the UAE the service sector represents 47 percent of GDP. As for Dubai, it has the most dynamic economy within the UAE where logistics play very important role in economic activities. Its share in GDP is 8.8 percent (including communication). Besides logistics are an industry that influences on the competitiveness of an economy. Logistics comprise transportation, inventory, material handling, warehousing, and packing and also very often security services.

Dubai has developed a dynamic logistic cluster that is playing a central role in the Europe-Asia-Africa trade. It also serves local markets and operates as a regional trade hub. Three main factors must be underlined in explaining why Dubai is such a successful logistic cluster. These factors are: advantageous geographical location, market conditions, and the role of the government.

The region has very strategic location in Gulf and therefore part of the fortune of Dubai is related to its proximity to some of the fastest growing economies in the world, basically China and India. So, advantageous geographical location helps this region to take a prominent position in the global logistics network and therefore today it is one of the critical nodes in the world’s supply chain.

Dubai’s (as a logistic cluster) market conditions are analyzed by using the diamond model of Porter (1990). Based on this model following four key factors must be considered: firm strategy, demand conditions, related and supporting industries, and factor conditions. Actually, these factors are the basic drivers of competitiveness of an industry which is crucial for a success.

From firm strategy point of view 6 factors must be highlighted: open markets in logistics and transportation sector, business supportive economic policy, favorable complementary policies, massive infrastructure investments, attractive regulatory and business environment, and growth oriented governmental companies. In fact these became contributors of Dubai’s logistic cluster development. It is also worth noting that massive and aggressive infrastructure spending became a key element for a success (see figure1).

Dubai’s ability to operate as a regional trade hub has been spurred by the demand conditions as well. Six main demand conditions can be underlined: Jebel Ali Free Trade Zone, domestic manufacturing sectors, Dubai Industrial City, population growth, increased import caused by economic growth, and trade measures against Iran. Among them most important factors are free zone, industrial city and domestic production. These determinants create economic activities and push significant demand for logistical services and much of it is captured by Dubai.

Related and supportive industries play considerable roles in the Dubai’s logistic cluster development. It, in fact, includes not only industries but also trends in related sectors, clusters and markets, associations and supportive governmental organizations. There are 6 main factors in this regard: highly developed finance, insurance, construction, and tourism clusters, substantial increase of FDI, rise in local capital markets, cluster associations, Dubai Industrial City, and rapid growth in trade. These industries and organizations provide necessary services, markets and information for improvement and strengthening of competitiveness of the logistic cluster (see figure1).

Dubai’s logistic cluster has some beneficial factor conditions – in particular its natural assets (harbor, oil, gas), advanced physical infrastructure (ports, airports, highways) and geographical proximity with the potential suppliers (mainly China and India) and buyers (EU, Asia) (see figure1). All factors listed above reinforce the potential of Dubai’s logistic sector to be competitive at the global level.    

State plays very important and active role in Dubai’s logistic cluster. In order to promote logistic sector the government (both local and central) actively intervenes. It has 5 main priorities: 1. Spurring growth by massive infrastructure spending; 2. Facilitating collaboration (public-private and personal relationships); 3. Strengthen links between port, free zone and customs; 4. Evolve innovations (for example airport in the port), and 5. Develop complementary policies (trade, fiscal, business environment improving).

The UAE’s government succeeded in creating world class infrastructure in transportation (seaport, airport, roads) energy, communication, and tourism sectors. This infrastructure is a strong asset and plays essential role in encouraging logistical development. Recently, for instance, a new logistics centre in Dubai Logistics City has been launched. 

The UAE government attempts to facilitate interactions between the government and business sector. This is crucial for a success of the logistics cluster because public-private and personal relationships are central issues in improving the competitiveness (Porter, 1998). In this regard, the major institution is the Chamber of Commerce. Its objectives are: encourage collaboration with private sector and support the development of small and medium sized enterprises. Besides the government launched the Dubai Cluster Platform and before this was created Focus Group of all stakeholders (public and private companies, service providers, educational institutions, associations, related and supportive industries) in logistics sectors. The aim of these actions was: boosting the competitiveness of Dubai in logistics by creating and fostering permanent network of collaboration.

It is also worth noting that the UAE government also uses complementary policies to spur logistics sector. It implemented business friendly tax system (very low corporate tax) which significantly reduces the cost of doing business. I addition, creation free zones also have positive impact on the cluster. It attracts capital form abroad and raises mobility of it.       

Hence, the main forces that make Dubai’s logistics cluster successful are favorable geographical location, market (factor, demand) conditions, effective complementary policies, highly developed related industries, and the world class physical infrastructure.

Construction Cluster - First and Successful Clustering Experience of Ukraine

by Denis Nedin

One of the biggest achievements of Khmelnytskyi region is introduction of the first in Ukraine cluster model of regional policy of economy. Moreover, this case is especially interesting since it serves as a prominent example of effective cooperation of government, business and institutions concerning in revival of regional economy. This was activity of Khmelnitskyi Regional Civil Organization “The Podillya Pershyi Association” which united heads of regional state authorities, heads of Khmelnitskyi authorities, directors of private and state enterprises, professors, bankers, leaders of NGO. As a result, the Khmelnitsky Regional Public Association “Construction Cluster” was registered in August 14, 2000 and started implementing in full a managerial role in the cluster.

Distinctive feature of clusters, in spite of its scale and industrial accessory, is focus on creation and production of competitive products which can be exported abroad or at least to other regions. However, the cluster in Khmelnytskyi region is special form of the cluster model because construction industry is, first of all, oriented on domestic market and main product is building of modern comfortable housing.

Nevertheless, possibility of cluster creation in this industry area was feasible due to several reasons. First, Khmelnytskyi region is transitional territory for high financial flows: there are large wholesale markets, and significant amount of remittances are being transferred from abroad. Therefore, it was expected that activity of the Construction Cluster would assist redistribution of these transits in favor of local construction and production of construction materials.

Second, Khmelnytskyi region has large reserves of natural resources, most of them are used in construction, which stimulates active building in the region. Thus, utilization of own minerals for producing construction materials provides corresponding workload of associated companies, reduces transport costs and positively affects prime cost of final product .

Construction cluster differs from other types of clusters because of very diverse members and broader scope of goals. The cluster combines all components of production process ranging from minerals suppliers to consumers of final goods, including service sector and specialize infrastructure.

Nowadays, Construction Сluster consists of 32 companies specializing in implementation of construction works, production of construction materials, projecting, designing, enterprises and establishments of infrastructure which provide trade, juridical, audit, marketing, training and research development services. The most important players are: Khmelnitsky Design Institute "Tsyvilprombud", Khmelnitsky National University, PF "Prospektbud", LLC "Budklast", LLC "Budvest-tempo", LLC "Building Industry", PF "Dita", JSC "Khmelnitsky Plant Building Materials ", LLC" Trade House "Megapolis", HF JSC "State Export-Import Bank of Ukraine", Podolskiy Department of Capital Construction of Ukraine, Scientific-Production Enterprise "City", CJSC "Electro", JSC "Hmelnytskhaz", HF "Ukrsotsbank", HF JSC "Bank", JSC "Slavuta Ruberoid Plant", LLC "Kamenetz", Center for Scientific, Technical and Economic Information, State Center for Standardization, Metrology and Certification, and others .      

The main goal of the integration is achievement of concrete economic result – production of competitive product which enhances efficacy of activity of every individual enterprise and accelerates the development of regional economy.

In order to assess effectiveness of the cluster, I consider dynamics of the construction companies (table 1). As we can see, over the period from 2000 to 2009, the volume of realized products in construction increased 5 times. At the same time, the number of construction enterprises increased by 50 per cent, from 14 in 2000 to 21 in 2009.

The raise in number of economic agents indicates attractiveness for investments. It is worth to point out that decrease in number of people employed in construction and, at the same time, the growth of realized products during analyzed period is an evidence of boost in labor productivity which is certainly positive tendency. There is also observed an increase in average wages of constructors by more than 8 times from 2000 to 2009, which is the biggest rate in Khmelnytskyi region.

Table 1. Main indicators of construction cluster

The level of profitability increased three times – industry turned from unprofitable to profitable.

Economic effect of creation construction cluster is caused by production and building cooperation which allowed: to use effectively aggregate potential of network partners; to diminish costs on modernization of construction products by passing part of work to specialize partners; to enhance effectiveness of supplying construction production with building materials, details, constructions on the basis of establishing long-term partnerships; to increase efficiency of execution of certain managerial functions through division of labor, involvement of specialize organizations of building profile; to increase efficiency in marketing, servicing and purchasing of essential resources; to improve reliability of network partners in investment and production sphere .

Saturday, January 7, 2012

Shrinking the Atlantic Ocean – A Case of Transatlantic Superspeed VacTrain

by Shota Gvaramadze

The idea of it was first proposed by Michel Verne in his book in 1888, a son of the famous French science fiction author Jules Verne. But it was not until 60ies when engineering visionaries started to get into the science of building a transatlantic superspeed vac-train (TSV). The idea is spectacular and audacious, as well as unimaginably hard and expensive by today’s capacities and costs.  

A TSV train would hover above the track without physically touching it thanks to the magnets, eliminating the rail friction altogether (which limits the train speed). Magnetic levitation train is no longer a science fiction; such train already has been serving a route between Shanghai city and its airport since 2004. Different from a conventional maglev train, TSV would be moving in a vacuum tunnel submerged and fixed 50 meters above the bottom of Atlantic Ocean (shown on the picture), eliminating another source of friction - air. By eliminating two sources of friction, air and rail track, the train will be able to accelerate up to the speed of 8000 km/h allowing the train to cover a distance of 5000 kilometers between London and New York in just 54 minutes, shrinking the time and space between two continents (it would take 20 minutes to reach the full speed and same time to slow down to make the journey comfortable for passengers. This is the reason why it would take about 54 minutes to travel and not less).

Different sources estimate the cost of project from $175 billion up to staggering $12 trillion making the project unimaginable to be embraced by any current government. For a comparison, average cost of building a 500 km HSR track in Europe is estimated to be around 10 billion EUR (operational costs not included). This number doesn’t even reach the lowest proposed cost of $175 billion. However, as the engineering and material sciences evolve and advance, costs will be pushed down to a point where undertaking such venture might even become possible. In spite of all costs, uncertainties, technical feasibility, risks associated with under water travel (which is way outside of the scope of this article), I think it would still be interesting to look into the socio-economic impacts of such a grandiose undertaking should it one day become a reality.

The Japanese and European experiences show that HSR trains that cover the distances between two cities in less than 2.5 hours can obtain 80-90% of all air traffic and 50% if HSR train covers the distance in less than 4.5 hours. TSV easily meets this requirement. Financial Times in 2009 listed LondonNew York flight as the third busiest international route with annual number of passengers slightly over 1,6 million. By transporting 80-90% of those passengers, TSV will be one of the busiest train routes on earth.

High Speed Rail (HSR) projects almost never cover their infrastructure and operational costs and are therefore financed by tax payers’ money. Such spending is always justified by the wider social and economic benefits HSRs bring. These are passenger time savings, reduction in congestion, reduction in accidents, reduction in environmental externalities and benefits including the development of the less developed regions. Historically, United States and UK have favored HSR projects much less than other European countries, Japan or China. However, if such project was ever given a green light by British and American governments, TSV would make impossible possible and have a number of wide scale social and economic effects on two cities.

A study on UK’s InterCity 125/225, a HSR network, has shown that towns that became reachable from London within 1 and 2 hours, had higher employment rates as well as gross value added per head after the construction of HSR line. Employment increase was highest in knowledge intensive business services and creative industries. Reason for this is the high cost of tacit knowledge exchange in spite of advancement of information and communication technologies. Therefore, New York and London, two hubs of advanced and high value added service industries have very high potential to benefit from a TSV. Cutting a travel time between two cities from 7 hours (by air) to 54 minutes would enable more frequent business meetings, increase working hours of business travelers and as a result increase the productivity of firms. Extent of productivity will also depend on ticket costs, whether every day commuting would be possible, uniting two job markets into one, increasing the size of the labor market pool and enabling workers to move from less productive to more productive jobs between two cities. These two cities as agglomerated as they already are would become even more competitive, with firms having larger markets and enjoying the scale economies. As world’s two financial centers, these cities probably have most in common than any other two cities in different countries. By having similar physical size and economies, as well as identical intellectual resources and endowments, these two cities could benefit from a shared and united market most. On the negative side, as the output of these two cities would increase, so would the congestion and office rents, which already pose enormous problems to  respective city officials.

As history has already shown, often impossible can quickly become possible. So who knows maybe one day it will really be possible to have lunch on Manhattan and still make it to London for an evening theatre performance. 

Saturday, December 24, 2011

Texas Toll Roads: The Flawed Benefits and Costs

by Alexander Simmons

As Texas is faced with a burgeoning population and further economic development, its poor transportation infrastructure becomes a greater issue. In the past decade, the state has chosen to address this problem through toll roads financed by public-private partnerships. Currently, Texas lawmakers are debating building new toll roads or converting already existing highways into tolls. In theory, tolls help improve the mobility of the local population, prevent congestion, ameliorate road quality, decrease the amount of time needed to construct roads, increase development, boost productivity from time saved, and avoid tax increases. Many of these benefits are indeed factual and have little tradeoff; however, others are flawed. Moreover, there are costs associated with toll ways that policymakers seem unaware of. With its already widespread usage and possible expansion, it is important that policymakers consider the tradeoffs associated with toll roads.

Flawed Benefits
Theory states that new toll roads decrease congestion by providing new road alternatives. However, toll roads often only solve congestion problems for a small portion of the population. Residents within a mile from the toll road usually get the highest amount of usage, while those further away are relegated to other more congested routes. Additionally, many citizens cannot financially afford to drive tolls regularly. Thus, there ends up being a lopsided share of traffic between the two road networks and lifestyle inequality. The toll ways are usually uncongested and sometimes receive sparse usage, while the free roads face heavy traffic that result in travel times that are twice that of the tolls.

Theory urges that toll ways improve consumer access to local business and thus, further economic development along the road. However, there is little evidence to support this in the short run. According to Sukumar Kalmanje’s research, Texas toll ways attract additional trips to local business by a negligent 1% and thus, have almost no effect on short-term development. Although, in the long run, it is likely that economic development will follow the route of the toll way and lead to agglomeration. Unfortunately, there is not enough evidence from Texas toll ways to support this argument.

Tax Increases
Due to Texas’s balance budget requirement, road funding cannot be done without either cutting another government program or increasing taxes. In theory, toll ways opt as a method of building roads without increasing taxes. Yet, tolls are essentially a consumption tax on driving. Instead of paying a road tax in a lump sum, residents contribute on a daily basis.

Toll Price Increases
Currently, all toll contracts in Texas grant private contractors the right to raise toll prices on an annual basis. These increases are often tied to an inflation based index or revenue maximization formula. Proponents insist that road prices should increase proportionally with the prices of other goods. However, this argument ignores importance of roads. Consumers have the option to remove other goods from their consumption basket, but cannot do the same with driving. Additionally, price increases are allowed during recessions or oil shocks and successfully worsen downturns.

Politically Unpopular
There is widespread distain for tolls in Texas. Despite their many benefits, Texans view them as a form of double taxation and resent the constant increase in prices. At some point, the general consensus of the population must be considered by representatives.

Unwanted Foreign Influence
Since most toll roads in the United States have been built by public agencies, there is virtually no private sector toll industry. Therefore, large toll contracts are frequently given to foreign companies. In the midst of an economic downturn and growing concerns of globalization, many critics cite this as a poor economic practice and claim it exposes the United States to security risks. In reality, the foreign firms originate from strong ally countries and employ almost entirely Americans on the projects. Thus, the foreign influence has no measurable negative effect. However, while this argument is not realistic, policymakers still must consider the general perception of the public.

Opportunity Costs
As with any government sponsored project, there are opportunity costs policymakers should consider. In this case, it its best to look at the opportunity costs within transportation infrastructure improvement. For instance, funding could be directed to public transportation options, which are severely lacking in Texas. If the general stigma attached to public transportation in Texas could be overcome, the economic gains and those that benefit could be much greater than in any road project. However, large scale public transportation projects require a substantial investment and at this point, there is little political support for such spending.

As policymakers debate about how to solve Texas’ infrastructure issues, it is important that they properly measure the often cited benefits of toll ways with the costs mentioned above. If purely publicly funded roads without tolls are no longer an option due to budget constraints and public transportation projects are off the table, toll roads built via public-private partnerships may indeed be the best option for Texans. However, this does not mean that policymakers can accept toll projects naively and ignore taxpayers’ opinions. 

Crossing the Scandinavian Waters: Oresund Bridge

by Katalin Molnarfi

Copenhagen is a fairly small, but rather cool and well-run city, dressed with posters advertising green energy. Though nothing characterises it more than its delicate Oresund Bridge, the longest of its type in Europe, and winner of the IABSE Outstanding Structure Award. Board a train in Copenhagen and in a comfortable twenty minutes you will find yourself in Malmo, Sweden's third-largest city. The Copenhagen international airport is also a mere fifteen minutes far away, connecting the bridge with the rest of the world. This year marks the 11th anniversary that Sweden and Denmark opened their much-talked-about bridge-and-tunnel across the Oresund strait, four months ahead of the original schedule and under budget . Yes, ahead. These Nordic people are an exceptionally professional bunch.

Denmark with its more than 400 islands is understandably ideal for bridge-lovers and already boasts two of the world's most impressive: the Great Belt Fixed Link between East- and West Denmark, and the Oresund bridge. And how about linking eastern Denmark more directly with Germany’s Baltic Sea coastline, a three-hour direct journey to, say, Hamburg? The government has already announced an even grander project for the country's biggest large scale fixed-link: a 19-kilometre road and rail bridge across the Fehmarn strait between Denmark and Germany in order to create a new growth area, similar to the development that has taken place in the Oresund region .

Birth of a new region
The Oresund brigde undeniably folstered growth, giving boost  to both Malmo and Copenhagen. It was designed to serve an explicit dual purpose: cross-border integration, with a particular emphasis on regional productivity, and competitive vitality, as well as the concentration of the North-European pattern of traffic flows. It should function as a backbone of the Oresund Region in order to abolish economic, administrative, institutional, cultural and other barriers, in one common urban system - the integration of Greater Copenhagen and the Malmö-Lund agglomeration, while encouraging citizens to cross the shared border more easily, and give incentives to foreign investors to use the area as a hub of development. Today's Oresund region  with a population of over 3 M produces 26-27 % of Sweden and Denmark's joint GDP, being of  the the most buoyant region in Scandinavia.

A common labour market
The bridge has turned the Oresund area into a single job market. As the  time-distance barrier was reduced dramatically, and the land-see bottleneck was eliminated, the traffic is steadily increasing: every day: 20.000 people commute to work between Sweden and Denmark. A daily average of 19.400 vehicles crossed the Oresund bridge in 2011. All forms of trafic have increased, but commuting has shown the strongest increase by far. Though the past three years brought low growth years for the bridge, mainly as a result of a sharp fall in economic activity caused by the turmoil of the financial crisis, the traffic did not decrease until 2010 (also due to the Swedish krona, which then recovered its former strength in 2010). In addition to greater accessibility, growth in commuting has been driven by the dramatically rising house prices, as well as the increased workforce shortages in the Greater Copenhagen area. Commuting is, therefore, embarassingly one- directional, with around 96 per cent of all commuters living in Sweden and keeping their jobs in the other side of the Oresund. In general, commuters are well-educated and well-paid young people, being pronounced targets of the bridge's policy.

Nordic countries: a happy family?
Nordic identity is alive and well: these countries have a great many things in common, though the Swedes and the Danes were not always the best friends through history (the Oresund area was under Danish authority until 1658). There is certainly a Nordic way of doing business for instance, with consensus as its main watchword. The Nordics put  greater emphasis on partnership and co-operation than most other European counterparts. Then there is religion, Martin Luther, whose reforms left a powerful cultural and moral legacy, leading to exceptionally successful, export-oriented economies. However if the two countries on both sides are to prosper together, Danes and Swedes will have to make efforts of further harmonising labour, tax and social policies. The Oresund region could therefore become a laboratory of transnational regional co-operation within the EU. Development towards a bi-national, integrated, functional urban region is in progress, though the space is much slower, than expected, but doing fairly well. 

Importance of the First Nature Geography in Regional Development

by Otabek Saydikaharov

Spatial inequality in a country could be because of the natural advantages of some regions comparing to others and also due to the agglomeration effects which might lead to clustering of activities. Advantage of first nature geography simply means that being close to rivers, coasts, ports, forests etc. some regions may benefit from natural endowments through specialization in certain type of activities like fishing , growing crops and forestry. A few decades ago, there were two regions in Uzbekistan, Karakalpakstan and Khorezm benefiting from water endowment of Amudarya and Syrdarya rivers and of formerly one of four largest lakes in the world, the Aral Sea. During the Soviet Union, Karakalpakstan and Khorezm specialilised in rice production and were one of the main rice-producing regions in the Soviet Union. After the independence those regions’ specialization did not change and they continued to be Uzbekistan’s largest rice producing regions.

However, during the Soviet Union period two main rivers which are sources of the Aral Sea, the Amudarya and Syrdarya, were channeled only to irrigation and substantially used for agriculture especially in the aim of increasing the amount of cotton and rice production. Unsustainable irrigation projects like a massive irrigation in the Kyzylkum Desert were introduced during this period, and continuing irrational use of water sources after the collapse of Soviet regime created a very serious problem - the evaporation of Aral Sea (see figure 1).

The disaster of the Aral Sea caused huge devastating economic problems especially for the local people in Karakalpakstan and Khorezm who were generating their income only depending on the endowments of the first nature geography. In rural areas of these regions majority of population depend on their farming lands for the livelihood however because of water shortages these lands adversely affected and polluted and as a consequence local economy decreased and rural population encountered economic hardship, malnutrition and illness. The drought in 1999-2001 had a severe effect on Karakalpakstan’s rice production. The agricultural land area decreased and total rice production fell from 414,000 in 1999 to175, 000 tons in 2000.

Once in Karakalpakstan tens of thousands of people were employed in fishing industry but now as a result of careless use of first nature geography this industry no longer exists causing the increase in unemployment rate and threat to poverty. According to the assessment of certain organizations the drying up of the Aral Sea has led to direct and indirect socioeconomic costs of USD 144 million in total.

Substantial amount of chemical pesticides were used in lands to increase the cotton production, and later when country faced water shortages those lands instead turned to be the source of danger. Winds then scattered the dust of chemicals to the surrounding areas causing health problems for the habitats and also damaging the agricultural deeds. According to observations, there are up to 10 major dust and salt storms occurring a year in the region and they are often between 150 and 300 km wide. In these regions, people are mostly suffering from protein and vitamin deficiencies resulting from malnutrition as well as anemia, tuberculosis, immunological problems, birth defects, children’s liver, kidney and respiratory diseases because of ecosystem contamination. The increase in levels of such various diseases has already become one of the main concerns of the government.

Due to the irrational immense use of first nature and myopic regional policy in the past, the current government encountered long term adverse impact of past experience. In order to increase the production of cotton and rice in water abundant regions so as to increase export, careless use of water resources brought huge cost to the government.  The government has been looking for possible ways to recover the Aral Sea and consequently ecosystem condition of that region. One of the options was to bring water from Caspian Sea but after estimations it was found to be too costly. Since it was believed that there is no way which can totally recover the previous condition of Aral Sea regions the government let the habitats of Karakalpakstan and Khorezm to migrate to the capital and get residence permit without any difficulties. As a result of huge migration and increased demand for houses, house prices soared up in the capital which made much more difficult situation for middle class citizens to buy a house in the city.

Since first nature geography matters a lot in the process of individuals’ and firms’ decision making about locations to live or operate, each policy implemented by government should also take its importance in regional development into account. Otherwise, adverse impact might occur and cost the government considerably in the long term as happened in Uzbekistan.

Figure 1. The Shrinking of the Aral Sea: Socio-Economic Impacts