BOARD: L Dippenaar (chairman), A Bernstein (executive director), A Ball, E Bradley, C Coovadia, M Cutifani, B Figaji, F Hoosain, M Le Roux, S Maseko, I Mkhabela, M Msimang, W Nkuhlu, S Pityana, S Ridley, A Sangqu, E van As • INTERNATIONAL

ASSOCIATE Prof P Berger

5 Eton Road, Parktown 2193, Johannesburg, South Africa ∙ PO Box 1936, Johannesburg 2000 Telephone: +27 (0)11 482-5140 • Fax: +27 (0)11 482-5089 • www.cde.org.za • info@cde.org.za • Reg No: 026-485-NPO

Will cities continue driving economic growth?

Dr Shahid Yusuf

Paper prepared for the Centre for Development and Enterprise,

commissioned for Cities of Hope project, June 2013.

This paper has only been edited lightly for clarity.

2

Will cities continue driving economic growth?1

Archaeological evidence suggests that cities as recognizable entities took root in the

Fertile Crescent between the Tigris and Euphrates rivers, a region known as Sumer,

around 3,200 BCE some 10,000 years after the domestication first of rye2 (and later of

emmer, einkorn, barley and corn) and 5,000 years after the emergence of village

communities that gave primacy to intensive agriculture over hunting and gathering.

Shortly thereafter, or perhaps simultaneously, cities made an appearance also in China

and in Mesoamerica as local communities began exploiting the potential of settled

agriculture based on cereals (including millet) as well as flax, peas, lentils, beans, squash

and later rice (in China). The spread of intensive agriculture enabled cities to multiply

and flourish and to become key points of reference in the historical record. Ideas and

innovations, which germinated in cities, served as the nuclei of civilization, and as we

come closer to the present, the making of modern societies. History resounds with the

names of cities – we may misplace the names of kings, battles and treaties but not those

of the cities that anchored civilizations, empires and eras.

Cities may have been the drivers of change and the points of light3 in earlier times,

however, the overwhelming majority of humankind remained caught up in rural pursuits

until virtually a stone’s throw from the present day. As recently as 1800, a mere 3 percent

of the world’s population was classified as urban and a century later, the urban share was

still only 14 percent. Fast forward to 2012, and for the first time, urban dwellers – more

than 3.6 billion in total – outnumber their rural counterparts, with the trend line pointing

towards 6.3 billion urban inhabitants out of a projected total world population of 9.3

billion in 2050.4 Recall that the world population in 1800 was approaching 1 billion and it

was less than a century ago, in 1927, that it crossed the 2 billion mark. In demographic

terms and with respect to urbanization, those born in the 1920s, have witnessed

something unprecedented: in less than a blink of the historical eye, they have experienced

an extraordinary elongation of life spans,5 a staggering increase in demographic numbers

and a triumph of the city 6 -economic and in every other respect - over the countryside.

7

Urban centers are responsible for more than 80 percent of economic activity (90 percent

in the United States) and urban dwellers have far greater access to drinking water,

1 In 1984, Alan Kelley and Jeffrey Williamson co-authored a volume entitled “What Drives Third World

City Growth” that ascribed the growth of cities to government policies, including pricing policies, global

developments and urban centered industrialization. 2 https://www.sciencemag.org/content/282/5393/1446.full

3 Now satellite mapping actually uses light pixels to gauge urbanization and economic growth. Henderson

and others (2010) http://www.brown.edu/Departments/Economics/Papers/2009/2009-8_paper.pdf 4 United Nations (2011).

5 From about 30 years in 1900 to approximately 67 years in 2012.

http://en.wikipedia.org/wiki/Life_expectancy 6 Celebrated in Edward Glaeser’s recent book. Triumph of the City.

http://www.nordiccitynetwork.com/uploads/ncn/Summary_Glaeser_Triumph%20of%20the%20City.pdf 7 Cohen (Urbanization in developing countries, Technology in Society, 28:63-80. 2006) notes that in 1950,

one third of the world’s population was urban based – a total of 733 million people. In sixty years, it has

grown almost fivefold.

3

sanitation and health and education services.8 As we look towards the future, we can

anticipate equally significant – and surprising - changes.

The balance of this paper is divided into four sections: section 1 briefly explains why

urbanization began accelerating two centuries ago in Western Europe and its spread to

the developing world to the present day. Section 2 examines developments that have been

gathering momentum during the past three decades that could crucially affect the pace

and geography of urbanization, the design and physical infrastructure of cities, and the

composition of economic activities. Section 3 discusses the implications for urban

strategy and more broadly for economic growth, employment creation and income

distribution. Section 4 concludes.

The industrial city ascendant

Two revolutions account for the remarkable acceleration in the tempo of urbanization and

the salience of cities as drivers of growth: a gradual, dispersed, continuing and still

diffusing agricultural revolution that commenced many centuries ago; and a more rapid

industrial revolution that began acquiring traction in the early nineteenth century.

The agricultural revolution was a slow process at first. Through trial and error spanning

decades if not centuries, farmers raised yields in tiny increments through selective

breeding of plant varietals, progressive refinement of cultivation techniques, and a

diversification of crops produced courtesy of a creeping agricultural globalization.

Modern science led to a quickening of the agricultural revolution9 and by increasing the

productivity of land and of labor began generating ever-larger agricultural surpluses that

in conjunction with developments in surface transport, facilitated the growth of urban

centers.10

Labor released from farming streamed towards cities, with western European

countries leading followed by other industrializing regions and after a long lag, by newly

independent developing nations. This revolution has far from run its course. Although

crop yields in the advanced countries appear to be approaching a high water mark and

agriculture now employs less than 5 percent of the labor force, most developing countries

are making slow progress towards the technological frontier that continues to expand

8 World Bank (2013)

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:2339

1146~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html 9 Evenson and Gollin (2002) assess the gains conferred by the green revolution across a number of crop

varieties between 1960 and 2000.

http://web.williams.edu/Economics/wp/Gollin_The_Green_Revolution.pdf 10

Herrendorf and others (2013, p.78) maintain that “the growth rate of labor in the non-agricultural sector

is completely determined by the exogenous growth rate of labor productivity in the modern agricultural

sector. Countries that use modern technology in agriculture but have low productivity in it will have to

devote more labor to agriculture. This leads to less labor and capital in non-agriculture, and hence to less

aggregate output (accounting) for a large part of the cross-country differences in aggregate output.”

http://www.nber.org/papers/w18996 . Gollin and others (2002) also emphasize the contribution of

agricultural productivity to structural transformation.

http://web.williams.edu/Economics/wp/Gollin_The_Role_of_Agriculture_in_Development.pdf

4

outwards and depending upon the region,11

between 30 and 65 percent of the population

is rural based. In other words, technological catching up in agriculture will render tens of

millions of agricultural workers redundant potentially fuelling decades of rural to urban

migration in Asia, Africa and parts of Latin America.

The industrial revolution that harnessed the energy locked in fossil fuels was much

quicker off the mark.12

The century extending from the mid 1800s saw the

industrialization of much of Europe, North America and Japan and the emergence of

pockets industry in a number of Asian and Latin American countries. By the 1970s,

industrialization had peaked in the advanced countries and has since been in retreat.

Statistical analysis reveals a tight interlacing of urbanization with industrial

development.13

There is also evidence showing that the agricultural and industrial

revolutions reinforced each other: industry greatly enlarged the demand for certain

agricultural products, while industrial chemicals, fertilizers, farm machinery and transport

equipment enhanced agricultural land and labor productivity. Causation is not easy to

establish, however, it can be argued plausibly that most of the scientific advances and

innovations responsible for the revolutions, were nurtured in cities. In turn, entrepreneurs

and skilled artisans14

transformed these into manufacturing establishments increasingly

located in cities once the widening use of fossil fuels ended the reliance on rural sources

of waterpower and wood. As urban industry expanded it gave rise to demand for labor

that in turn was fed by migrants from the rural sector made redundant by mechanization

and other advances in agricultural technology. This virtuous spiral was responsible for

the structural transformation of advanced economies: the urban sphere decisively and

irreversibly eclipsed the rural, the latter being reduced to a minor appendage of a

predominantly urban economic system.

Starting in the 1960s, a succession of developing countries embraced the western model

of urban industrialization and began building (import substituting) manufacturing

capacity behind tariff barriers with an initial focus on light industry although the more

ambitious quickly began (e.g. China, India, Korea, Brazil etc.) pursuing backward

linkages to machinery, chemical and metallurgical industries. A loosening of the

constraints on development imposed by colonial rule and the enthusiastic embrace of

long delayed industrialization, served to trigger urbanization, however, it soon acquired a

momentum of its own. In some East Asian economies such as Korea and Taiwan, the pull

exerted by rapid industrialization was stronger than the forces pushing labor out of

agriculture. However, in most other developing countries industrialization was a weak

force creating relatively few jobs and the growth of cities soon became detached from the

11

Gollin and others (2012) after adjusting the data for household consumption of food, hours worked and

human capital inputs, estimate that value added in agriculture in agriculture is one half that in the non

agricultural sector. http://www.stern.nyu.edu/cons/groups/content/documents/webasset/con_034901.pdf 12

Wrigley (2011) http://www.voxeu.org/article/industrial-revolution-energy-revolution; Pomeranz (2001)

The Great Divergence. Princeton University Press http://press.princeton.edu/titles/6823.html ascribe the

success of the industrial revolution in England and Europe to the easy access to large deposits of coal. 13

Henderson (2010) http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9787.2009.00636.x/abstract; Kim,

https://pages.wustl.edu/files/pages/imce/soks/urbanization.pdf 14

Meisenzahl and Mokyr (2011) http://www.voxeu.org/article/education-policy-innovation-policy

5

process of industrialization – a break from the pattern observed over the preceding

century.

Exploding cities

Three factors contributed to the growth of cities. One was the surge in populations

following the widespread dissemination of cheap and effective medications that

dramatically reduced mortality; these complemented advances in water and sanitation

services. Rural overcrowding generated pressures that induced an increasingly

underemployed workforce to look beyond the confines of the traditional rural

environment.

Second, the promise of better paying jobs15

and “bright lights” pulled the young and the

adventurous to cities and once having made the leap and incurred the adjustment costs,16

they stayed whether or not employment in factories materialized or not. For the vast

majority, jobs in industry proved elusive and migrants were increasingly absorbed by

other activities that proved far more expansive than manufacturing, which brings me to

the third factor. With urbanization decoupled from industry in developing countries, the

economy of cities is now largely reliant on services, formal and informal, public and

other, with non-tradable services dominating the potentially tradable ones. In 2010, the

share of manufacturing in GDP in South Asia, Sub-Saharan Africa, the Middle East, and

Latin America, was 17 percent or less. Only East Asia maintained a 29 percent of GDP

share comparable to that of industrialized countries in their 20th

century hey day. The

share of the workforce employed by industry in the larger cities in developing countries is

generally 10 percent or less. It is 3 percent in Lagos, 5 percent in Kinshasa and 15 percent

in Karachi. The absence or smallness of a leading sector producing tradables and the

paucity of “decent” jobs that could help grow the urban middle class, poses one of the

biggest challenges for cities.

The New Economy and Urban Development

The empirical growth literature and development policy continue to give primacy to

industrialization17

as the principal source of productivity gains, innovation, exports, and

decent jobs. And it is widely assumed that industrialization will be urban focused with

some fringe activities in peri-urban areas as in China. This persistent conviction is

grounded in the experience of the advanced countries and the more recent, meteoric

development of several resource poor East Asian economies. The conviction is reinforced

by two additional assumptions: (i) there is a vast untapped market for light manufactures

and white goods in low and lower middle income countries to support the spread of

industrialization throughout Asia and Africa; and (ii) the “unbundling” of the production

process that led to the fragmentation of manufacturing activities and the dispersion of

labor intensive, relatively low skill and technologically codified activities to

15

The so-called Harris-Todaro gradient based on expected earnings drew migrants to cities.

http://www.aeaweb.org/aer/top20/60.1.126-142.pdf 16

Herrendorf and others (2013) http://www.iadb.org/intal/intalcdi/PE/2013/11843.pdf 17

See UNIDO (2009) http://www.unido.org/fileadmin/user_media/Publications/IDR_2009_print.PDF

6

industrializing East Asian economies with an abundance of human resources, will

continue and enter a new phase.18

This view holds that industrial fragmentation and

intensive trade in intermediates as well as final products orchestrated by global value

chains is here to stay19

and that a host of labor intensive industrial activities currently

concentrated in East Asia, will transfer to South Asia, Africa and Central America. The

widening of the value chain and a further dispersion of production activities - a

replication of the East Asian “flying geese” model20

– will, it is believed, bring export-led

growth to “late starters” that are primed to exploit the opportunities presented by

evolving value chains.21

Once such a growth spiral is firmly in place, cities will acquire

the industrial core with its multiplicity of linkages that can serve as the engine of job

creation and a fairly equal distribution of income, as was the case in East Asia more than

two decades ago.

Another industrial revolution

This model of urban development while certainly compelling is of diminishing relevance

for resource rich late starters and is being rendered obsolete by a third industrial

revolution. The notable characteristic of cities in late starters especially resource rich

ones, is that they are ‘consumer cities’ with a dense concentration of mainly non tradable

services and dependent on the imports of manufactures. The economy of these cities is

frequently supported by rents from the export of minerals or cash crops, by remittances

and ODA. Resource rents finance imports, create demand for services and drive up

wages.22

In all too many instances, they also encourage governments to buy political

peace by expanding employment in the public sector, a practice that further bids up

wages, absorbs some of the most talented and inculcates preferences for service sector,

preferably white collar jobs over employment in manufacturing. Consumer cities with the

weakest industrial prospects are increasingly the norm in resource rich Middle Eastern

countries however, the anti-industrial bias is apparent in resource endowed African

countries as well.

Consumer cities reliant on services and small-scale industrial activities often of an

artisanal nature and serving the local market, are becoming the norm in less resource

abundant developing countries as well. These cities are skipping the industrial stage with

labor market entrants moving directly into service occupations. Even more striking is the

18

See Baldwin (2012) http://www.nber.org/chapters/c12590 19

Accetturo and others (2012) http://www.voxeu.org/article/being-global-value-chain-hell-or-heaven 20

Proposed in the 1930s by Kaname Akamatsu. http://www.grips.ac.jp/forum/module/prsp/FGeese.htm and

elaborated by countless others thereafter. 21

The readiness to engage in export led industrialization using GVCs as points of entry depends on the

emerging eco-system of firms – new and established – the business environment hospitable to FDI,

logistics capabilities and an open trade regime that facilitates imports even as it incentivizes exports. See

Cattaneo and others (2013) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2248476 22

Jedwab (2012) links urbanization in Ghana to booms in cocoa demand and prices, with city formation

following the westward movement of cocoa farming

http://www.econ.yale.edu/conference/neudc11/papers/paper_170.pdf. Gollin, Jedwab and Vollrath (2012)

model the emergence of consumer cities in Africa aided by resource rents.

http://home.gwu.edu/~jedwab/gjv_01242013.pdf

7

trend in the industrialized countries towards the preponderance of services, including

services affiliated with manufacturing activities and the decline of industry in cities.

Services are increasing their share of world trade and already account for a third of the

total value (and this may partially account for the rising share of tradable services in

advanced countries such as the United States).23

In fact, the future of urbanization, of

urban development, urban jobs, urban income distribution and the urban middle class,

began changing, slowly in the 1980s and 1990s, suddenly during the past decade.24

A

technological revolution appears to be at the root of the change we are witnessing

although other factors have undoubtedly contributed. Digital, electronic, information,

engineering and materials technologies are transforming not just the entire manufacturing

and distribution value chain,25

they are dramatically increasing the diversity and

electronic distribution of services even as they reduce their labor intensity. In a handful of

years, ICT26

has affected the mode and density of urban interaction.27

Furthermore,

digital and transport technologies are beginning to make cities ‘smarter’ through the cost

effective delivery of urban services, energy conservation, better environmental quality

and the increasing connectedness of people and of things.28

Digital the urban economy

From the perspective of cities in developing countries, the most consequential

development is the likely much smaller share of manufacturing in GDP at any level of

income because of increasing productivity and the declining relative prices of

manufactures; the dominance of services from the very outset; and the impact of digital

technologies, computerization and artificial intelligence/neural networks on the

production and distribution of services.29

The three developments, which are spreading

from advanced to lower income economies, have implications for the composition of

urban economic activities, the pace of productivity growth, and the number and skill level

of urban jobs. Non-tradable services, formal and informal because they incorporate few

of the advances in ICT, will contribute less to the growth of per capita GDP.30

23

Francois and Hoekman (2010) http://www.aeaweb.org/articles.php?doi=10.1257/jel.48.3.642 24

Sachs and Kotlikoff (2012, p.5) warn, ”Brainier machines pose not just an economic threat to the welfare

of today’s unskilled workers. They also pose a threat to tomorrow’s workers whether unskilled or skilled”.

http://www.nber.org/papers/w18629 25

One manifestation with far reaching consequences for employment in bricks and mortar retailing is the

rise of B2C and B2B transactions. 26

By generating mountains of data, the devices for storing it in the cloud and the techniques for analyzing

it, ICT and computerization is transforming urban living. 27

There are downsides to the revolution in communications however, some believe that it can help

counteract the loneliness and isolation that people can experience in a mega-city by enabling individuals to

connect and to better navigate within the urban space. 28

The Internet of Things looks towards “A world where physical objects are seamlessly integrated into the

information network, and where the physical objects can become active participants in business processes.

Services are available to interact with these 'smart objects' over the Internet, query and change their state

and any information associated with them, taking into account security and privacy issues.”

http://en.wikipedia.org/wiki/Internet_of_Things

http://www.mckinsey.com/insights/high_tech_telecoms_internet/the_internet_of_things 29

Brynjolfsson and Saunders (2009) Wired for Innovation. http://mitpress.mit.edu/books/wired-innovation 30

Herrendorf and others (2013) op.cit. The role of ICT capital in enhancing productivity and growth is

reviewed by Pilat and others (2002) http://www.oecd.org/eco/growth/22024038.pdf . Vu points out that the

8

Sectoral labor elasticities with respect to GDP growth illuminate the structural changes

that are afoot and reinforce the point made above on the contribution of industry to

employment.31

Globally, for the 1991-2003 period, the elasticities for agriculture,

industry and services were 0.24, 0.21 and 0.61 respectively. In other words, for every 1

percent increase in GDP, employment in industry, for example rose by 0.21 percent.

However, they were lower in comparator eastern and central European countries (CEE)

and in East Asia. In the former, the industry and services elasiticities were 0.09 and 0.47

respectively; in East Asia the labor elasticity of industry was just 0.06 although for

services it was 0.5. Although the elasticity of services exceeds that of industry, the scope

for labor saving, productivity gains in tradable services, education and health is

substantial. Moreover, retail, wholesale, warehousing and logistic services that employ

millions of urban workers in developing countries can potentially trim a large part of their

workforces by adopting digital technologies. Retail productivity in developing and

industrializing countries – including East Asian ones – is between 10 percent and 40

percent of that in the United States.

Digital and new manufacturing technologies,32

mass customization of certain consumer

products (e.g. garments), the growing preference for small lot production, and the

transaction costs of managing sprawling global production networks, are threatening not

just a consolidation of value chains but also an insourcing of items the manufacture of

which was dispersed across East and Southeast Asia. Whether a major reflux of

manufacturing back to the advanced countries is likely, remains to be seen, but a

tightening of GVCs is in the cards and digital technologies are reducing labor intensities

and increasing the skill quotient of both industrial and services activities. The upshot of

this for cities in developing countries, particularly late starters, could be serious indeed.

Escaping the consumer city mode could become even more difficult if promoting export

oriented manufacturing and tradable services is constrained by weakening overseas

demand; shrinking labor coefficients for well paid jobs in tradable sectors squeeze

employment opportunities even for college graduates; and the bulk of employment is

channeled into public and personal services, security, hospitality, catering and informal

occupations. Substantial resource rents or transfers from external sources can help sustain

the tempo of urban demand, however, in the absence of these flows, cities with small

tradable sectors and few exports will struggle to achieve economic growth and create

good, formal sector jobs.

Dark side of the third revolution

contribution is dependent upon the education of the workforce, the openness of the economy, the efficacy

of market institutions and fluency in the English language. http://www.hks.harvard.edu/m-

rcbg/ptep/khuongvu/Key%20paper.pdf 31

Kapsos (2005)

http://www.ilo.org/wcmsp5/groups/public/@ed_emp/@emp_elm/documents/publication/wcms_143163.pdf 32

Additive or 3D manufacturing while still in its infancy, has begun attracting widespread attention

because it could change the way many items are produced and the volume of each production run.

http://www.technologyreview.com/featuredstory/513716/additive-manufacturing/

9

The technologies undergirding the third industrial revolution have surely contributed to

prosperity and by accelerating growth particularly in East Asia, they have hastened the

growth and urbanization of resource rich nations. But there are downsides to these

technologies that are beginning now becoming apparent.

The mechanization of agriculture, an increasing use of fertilizer and the gains in yield

made possible by biotechnology, have drastically reduced the numbers that can be

gainfully employed in farming. It now seems that manufacturing employment is on its

way down in the advanced countries and is unlikely to ever employ more than a small

fraction of the workforce in developing countries. These two key sectors, that once

encompassed the lion’s share of economic activity, will probably account for no more

than a third of GDP in developing economies33

and possibly 40 percent of the workforce

– assuming conservatively that the release of labor from agriculture is a gradual process

because of modest rates of investment and technological absorption.34

If so, cities will

need to accommodate not only the majority of the population in any country – rich or

poor – but also find ways for them to earn a decent living.

In addition to compressing labor coefficients in all sectors, technological change (and

globalization) during the past three decades has strongly favored capital over labor.

Technology has been skill and IT capital biased. Owners of capital and those with high

level analytic, managerial and technical skills have done exceedingly well, others lower

down the food chain have experienced a decline in their share of the income pie. There

are exceptions, but throughout the urban world, income distributions are becoming highly

skewed with middle classes losing ground in the advanced countries and nascent middle

classes in the developing countries confronting stronger headwinds. Although poverty

continues trending downwards,35

and life expectancies are inching higher, urban income

polarization36

and joblessness especially of the youth, could increase.37

The great

recession of 2008-9 and its lingering aftermath offer a foretaste of the kind of challenges

that lie ahead.

With the world’s urban population projected to increase by 70 million annually over the

coming decades and with 90 percent of the growth in developing countries, job and

infrastructure creation top are high on the list of priorities. Urban housing and

infrastructures are stretched with between 889 million and 1.3 billion people living in

slums – between a quarter and a third of the urban population worldwide in 2012 and 70

33

In 2010, agriculture and manufacturing together accounted for 39 percent of GDP in low-income

countries and 33 percent in lower middle-income countries. In high-income countries their combined share

was a paltry 17 percent. Data from 2012 World Development Indicators. World Bank. 34

A rapid modernization of agriculture – or shrinkage of farming activities resulting from climate change –

could greatly accelerate the exodus from rural areas. 35

Data presented in the Global Monitoring Report (2013, op.cit. p.9) shows that worldwide rural and urban

poverty declined between 1990 and 2008 from 52.5 percent and 20.5 percent to 29.4 percent and 11.6

percent respectively. In Sub-Saharan Africa the decline was from 55 percent and 41.5 percent to 47.1

percent and 33.6 percent respectively. 36

On polarization trends in jobs and incomes – and the loss of mid-level and middle class jobs of a routine

nature - in the U.S. see Autor (2010) http://economics.mit.edu/files/5554;

http://economix.blogs.nytimes.com/2010/06/14/the-sagging-of-the-middle-class/ 37

See UN Habitat http://www.unhabitat.org/content.asp?cid=8051&catid=7&typeid=46

10

percent of the African urban population.38

The recession has worsened worldwide

unemployment, which reached 197 million in 2012 (with an additional 39 million having

withdrawn from the job market), and projected to rise by another 9 million through

2014.39

Close to 74 million youth are unemployed and their numbers are also on an

upward trend. Financing the infrastructure and creating jobs calls for rapid and sustained

growth primarily of tradable activities with export prospects, spearheaded by the entry

and growth of firms.

Africa’s 5+ percent per annum GDP growth since 2000 belies the state of its enterprise

sector which is crowded with micro enterprises with three or fewer workers, and counts a

tiny number of large firms mostly engaged in finance, construction, transport or

retailing.40

According to a data collected by David McKenzie, large firms, with 100 or

more workers, numbered 80 in Tanzania, 114 in Uganda, and 251 in Ghana.41

An

important finding by Glaeser (2012)42

is that cities in the U.S. that were growing faster

were not doing so through the endless replication of small businesses, instead much of

the employment was due to the growth of firms that became large employers. A dynamic

fast growing, urban industrial system was one that “pushed firms through an up-and-out

process”.43

The weakness of urban growth engines is not peculiar to Africa: it is widespread in the

Middle East, in South Asia and in Latin America, with smaller cities performing more

poorly than larger ones and having to cope with higher rates of poverty, informality and

unemployment.

Urbanization might slow as estimated by Potts (2012)44

for Africa but there is little

likelihood of a reversal, and the rural sector will offer meager job prospects for urban

returnees or for those who forego the option to migrate. For cities that cannot rely upon

resource rents or transfers, survival depends upon the harnessing of growth engines that

are productive and competitive. Without these, an eventual downward spiral is inevitable.

Many mining and mono-industry cities in Europe are in the grip of such a spiral as the

principal economic activities wind down and are not replaced. Detroit is an example of

what can happen to a formerly thriving industrial city in a leading economy once its

principal industry loses competitiveness and migrates to locations where production costs

are lower.

An urban economy supported by low wage based manufacturing and myriad informal

activities all with stagnant productivity (or barely increasing productivity) can eke out an

38

http://www.citiesalliance.org/node/2195 39

See ILO (2013) http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---

publ/documents/publication/wcms_202326.pdf 40

Boston Consulting Group (2010) http://www.bcg.com/media/PressReleaseDetails.aspx?id=tcm:12-49363 41

Mckenzie (2011) http://siteresources.worldbank.org/DEC/Resources/OxfordPaperDraftv3.pdf 42

Glaeser and others (2012) http://ideas.repec.org/p/hbs/wpaper/13-015.html 43

Chatterji and others (2013). http://diegopuga.org/papers/jrs50agg.pdf 44

http://www.kcl.ac.uk/sspp/departments/geography/people/academic/potts/PottsAfResInstWhateverHappn

edtoAfRapidUrb.pdf ;

http://econpapers.repec.org/article/eeewdevel/v_3a40_3ay_3a2012_3ai_3a7_3ap_3a1382-1393.htm

11

existence at a low level equilibrium but such an economy is a fragile one living on a knife

edge and a hostage to shocks. Too many cities in South Asia (e.g. Karachi, Dhaka) and in

Africa are in such a low level equilibrium and recent experience suggests that a

globalized world in the grip of climate change is likely to be exposed to an unending

succession of natural and economic shocks.

How cities could drive growth

What then are the minimum necessary conditions for cities in the developing world to

drive growth over several decades? Growth that is sufficient to create an adequate

number of well paid jobs to accommodate both the natural increase of the workforce and

migrants; and growth that can enable the city to eventually realize much touted but

distant objectives: ie. becoming smart, green and resilient.45

The following six are

arguably the most important: location and urban design; governance; quality and growth

of the workforce; economic engines/sources of growth; size; and adequacy of

finances/financial autonomy.

Location and design

Throughout history, most cities that prospered were ones established at choice spots

alongside rivers and trade routes or ones favored by coastal locations commanding

natural harbors. Prosperous cities were frequently blessed by a rich and expansive

hinterland – a source of agricultural commodities and/or mineral resources and a market

for the goods or services produced in the city. Easy access to water for drinking purposes,

to flush away urban waste and to reduce the costs of transporting goods (including

construction materials for the city) was another factor that induced cities to grow in river

valleys. And because prosperity attracted the envious attention of invaders from near and

far, cities tended to be compact so as to lessen the cost of fortification, and an easily

defensible topography was always prized. City location was also influenced by climatic

and health considerations: severe climates discouraged urban development as did the

prevalence of diseases e.g. malaria, yellow fever, sleeping sickness and others.

Technological advances in transport, climate control, and in the building of

infrastructures to convey water over long distances and to manage human waste,46

greatly

widened locational choices allowing cities to grow in places and in climatic zones that

would have been shunned in the past.

However, we are now on the threshold of an era in which location will impinge even

more decisively on the viability of cities. The growing size of urban populations and the

worsening relative scarcity of potable water (exacerbated by energy costs of transporting

it over long distances or extracting it from the sea) advantages cities that are close to

abundant supplies of water. A tendency for urbanization to sprawl with built up areas

45

These three encompass energy efficiency, livability, walkability, environmental quality, innovativeness,

cultural richness, diversity and the capacity to recover from destructive shocks – topics that are widely

discussed in the literature. 46

A burdensome issue for most cities and one that is sure to worsen.

12

expanding at a significantly faster rate than populations – three times faster - means that

growing cities need plenty of room to accommodate the outward shift of the urban

fringe.47

This tendency could in future be mitigated by the benefits of compactness –

although thus far, the income elasticity of the demand for additional living space and the

economic gains to city officials and developers in bringing rural land into the urban

domain have resoundingly offset the long-standing claims of compactness in countries

ranging from China to the United States – but only time will tell.48

A third and increasingly urgent factor that will impinge on geography of urbanization and

the design of cities, is climate change. Rising sea levels will make many coastal cities

exceedingly expensive to maintain49

and this cost (in the form of levees, sea walls,

natural defenses and insurance) will be further raised by the incidence of extreme weather

events more likely to strike coastal cities in tropical locations.50

Climate change will also

impact inland cities especially those in hot and dry regions, by reducing supplies of water

and adding to the costs of cooling urban structures. Better urban design (surface

geometries, green roofs, trees and shrubs, color of buildings and roadways) and efforts to

cut air pollution can contain heat island effects but there are limits and greater reliance on

air conditioning and refrigeration can offset some of these by releasing hot air into the

urban environment.

Together, these three developments presage a reluctant, long drawn and in many

instances inevitable abandonment of some cities and a greater concentration of urban

populations in areas with space, water and milder climate – the Northern parts of Canada

and Russia appear especially inviting. How cities in the more arid regions of Africa and

China will cope, and what will happen in the Middle East and in the Indo-Gangetic

plain,51

is troubling to envisage.

Governance

The economy, design and livability of modern cities, is inseparable from the quality of

governance an imprecise and elastic term52

which loosely includes: the functioning of the

political machinery; the efficiency of planning, regulation, and policy implementation;

47

While GDP per capita explains a part of the expansion in urban land use, the incentive for municipalities

and developers to convert/rezone rural land for urban purposes accounts for much of the rest.

http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0023777 48

http://green.blogs.nytimes.com/2011/08/22/the-city-limits-are-expanding-everywhere/ 49

The cities at greatest risk are listed in OECD (2007). The list includes Mumbai, Guangzhou, Shanghai,

Miami, Ho Chi Minh City, Abidjan, Lagos, Alexandria and many others.

https://support.rms.com/publications/OECD_Cities_Coastal_Flooding.pdf 50

The vulnerability of urban infrastructures in modern cities was cruelly exposed by hurricanes Katrina and

Sandy. And the cost of protecting New York will be high. 51

The groundwater underlying the plain is being rapidly depleted through excessive pumping. 52

See for example, Fukuyama (2013) http://www.cgdev.org/publication/what-governance-working-paper-

314

13

the simplicity and transparency of rules affecting businesses; the capacity of public and

private stakeholders to work together; and the existence of a vigilant civil society and of

institutionalized checks that minimize costly mistakes by public officials and the

incidence of corruption. Singapore and a handful of European cities have set and

maintain high standards, the rest aspire and try or merely pay lip service to the periodic

calls for “better governance”. But casual empiricism and solid research both underscore

the positive effects of good governance on the economic health and dynamism of a city

and on the overall quality of life. It is no wonder that Singaporeans are pleased with their

lot and others are envious of what the city-state has achieved. City leadership that sets

high standards of performance and accountability and is answerable to a demanding

public, is the bedrock of good governance. That this is a tall order almost goes without

saying. That it is what cities should strive after also by now, should not need repetition.

Quality and growth of the workforce

If the third industrial revolution will shape the economy for decades to come; and cities

will need to be ‘smart, innovative and green’ to grow, compete, and thrive in a harsher

global environment, then becoming a “skilled city” is a must.53

The successful skilled

city is one that can attract talent and is able to raise the quality of its workforce.

Continuous entry contributes to labor market flexibility54

and to the evolution of new

lines of business; furthermore the quality and skill level of the workforce determines

productivity via learning, technological absorption, progress up the value chain and

innovation. Research by Hanushek, Woessmann and others has demonstrated the

relationship between educational outcomes and economic growth and what is true at the

aggregate level, applies also at the level of the city.55

Skilled cities have been able to

remake themselves after shocks that resulted in the demise of an established industry and

create new sources of growth and jobs.56

Moreover, with the technological bias of

industry and services enlarging the demand for those with analytic, technical, vocational

and managerial skills, the skill composition of the workforce is the key determinant of

business formation and growth and city competitiveness more generally.

How does a city become skilled? How did Singapore, Helsinki, Shanghai and Seoul

become skilled cities? It is not something that happens endogenously or can be

engineered overnight through policy interventions. And the accumulating evidence

suggests that the education system needs to be improved from the ground up, possibly

from the pre-school stage.57

Furthermore, a skilled city cultivates an innovation system

anchored to research universities that set high standards, embrace diversity among

students and faculty and network or partner with other leading universities around the

world. An aspiring skilled city needs to observe an “O” ring rule58

: all parts of the

education and research system must set and seek to attain roughly comparable high

53

Glaeser and Saiz (2003) http://www.nber.org/papers/w10191 54

Herrendorf and others (2013, op.cit.) 55

Hanushek and Woessmann (2010) http://ideas.repec.org/p/iza/izadps/dp5401.html 56

See Glaeser (2003) on Boston. http://www.nber.org/papers/w10166 57

Heckman (2013). The importance of pre-schooling for a child’s later development, remains contested. 58

Kremer (1993) https://notendur.hi.is/ajonsson/kennsla/O-ring.pdf

14

standards by investing in teachers and the physical infrastructure, using online delivery of

material and courses to complement classroom teaching, and by inculcating attitudes of

parents and students conducive to superior achievement.59

This is a high bar but not an

impossible one as Finnish cities60

have demonstrated and it is one that Chinese cities such

as Shanghai are taking aim at.61

Research universities and a mix of general and vocational schools are one major element

of a learning and innovation system that is at the heart of a skilled city. The

entrepreneurial and managerial capabilities of the business community, are of equal if not

greater importance. In fact, to explain the performance of a Seoul or a Shanghai, one has

to take account of the industrial activities that flourished before the effort to create a

skilled city got underway. If one has to guess the direction of causation, the skilled city

builds on the foundation provided by dynamic manufacturing activities by strengthening

educational, training and research institutions that promote technological deepening,

innovation and diversification.

It is important to note that growth that skilled workers and technological, production, and

managerial capabilities are one part of the growth story; capital (including ICT capital) is

a necessary complement. Cities (and economies) need both. Jorgenson and Vu (2010)62

show that capital has been the main source of growth although in developed countries it

is being gradually overhauled by total factor productivity. In developing countries, capital

investment induced by macro stability, sound incentives and a good business climate,

maintains the edge over other sources of growth. What is true at the aggregate level is

equally applicable at the level of the city. A skilled city needs to accumulate and put to

productive use both high quality human capital and physical capital. Can consumer cities

in developing countries with largely services based economies morph into outward

oriented skilled cities while skipping the industrial stage? Hyderabad and Bangalore in

India approximately fit the mold but there are few examples to draw upon. Clearly this is

virgin territory with a lot of experimentation ahead. Success will depend on factors other

than the three covered thus far i.e. economic engines, size and global networks, and

finances.

Urban economic engines

As noted above, urban growth was traditionally a function of industrialization – not in

every case because mining, administrative functions and trade also played a part, but in

most major cities, industry loomed large. No longer; however, the direct and indirect

contributions of industry can be substantial and cities neglect industry at their own peril.

Two thirds of trade is comprised of manufactures, most applied research is focused on

manufactures, innovation is more closely associated with manufactures than with

services, and productivity gains are greater in manufacturing than in services. However,

the manufacture of low end, commodified, light consumer items with limited scope for

59

Glewwe, Hanushek and others (2011) http://www.nber.org/papers/w17554 60

Sahlberg, Finnish Lessons. http://www.finnishlessons.com/ 61

http://www.oecd.org/pisa/pisaproducts/46581016.pdf 62

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1912362

15

innovation and narrow profit margins, while it can and does flourish in developing

countries is proving latterly, to be a weak engine for sustaining long term growth. Such

activities, although they do create jobs for the unskilled and produce exportables, offer

few ladders to more sophisticated higher value adding industries. Worse they do not

inculcate much learning in the workforce or generate the demand for skilled and technical

workers and for applied research. Moreover the scope for innovation in these subsectors

is limited. Three decades ago, light manufactures could be profitable stepping-stones to a

more diversified industrial base, but that time seems to have passed.

Cities need to set their sights higher, whether they train their sights on medium tech

manufacturing or on services. Given the risks associated with such ventures, the paucity

of risk capital in developing countries and the fewness of large firms that could take an

entrepreneurial lead, a combination of public and private entrepreneurship supported by a

dose of public equity capital and public procurement may be a path to consider

notwithstanding the well founded wariness regarding state-led industrialization, a picking

of winners by bureaucrats, and the sorry track record of public venture capital. The

alternative is to languish in low-level development traps, which is what consumer cities

are drifting towards.

Scale and connectivity

Bigger can be better if you are a city that is effectively managed and able to provide key

services (including urban land management and design) with a modicum of efficiency.

When an organism doubles in size, its resource consumption rises by 85 percent.63

Thus

as a city grows, it benefits from scale economies – superlinear scaling – with its

infrastructures serving more people and its metabolic activities – e.g. telecommunication

traffic, patenting, and pedestrian speeds – all accelerate.

Size can also lead to rising productivity because of agglomeration economies from size of

the local market, the densifying of diverse activities, the thickening of labor markets, the

emergence of industrial clusters64

and a higher rate of innovation – arising from the easy

circulation of knowledge and “collisions that happen when different fields of expertise

converge in some shared physical or intellectual space” (Johnson, 2010, p.163)65

.

Research on agglomeration pegs the gains in productivity of labor and of firms at around

3 percent although rates as high as 8 -12 percent have been estimated.66

But the

productivity advantages to be derived from the above are not a given that effortlessly

accrue as a city grows. Much depends on the composition of economic activities, the

entry and exit of firms, the position of a city in the global urban hierarchy and its

63

http://www.nytimes.com/2010/12/19/magazine/19Urban_West-t.html?pagewanted=all&_r=0 64

Clusters are most productivity enhancing when they give rise to local spillovers 65

Steven Johnson. Where Good Ideas Come From. Riverhead Books. 2010. Johnson observes, Cities are

environments that are ripe for exaptation, because they cultivate specialized skills and interests, and they

create a liquid network where information can leak out of those subcultures, and influence their neighbors

in surprising ways”. (p.162). 66

Melo and others (2009); http://ideas.repec.org/a/eee/regeco/v39y2009i3p332-342.html ; Rosenthal and

Strange (2003); Puga (2009). http://www.econ.brown.edu/faculty/henderson/willandstuart.pdf;

http://diegopuga.org/papers/jrs50agg.pdf

16

harnessing of benefits accruing from ‘virtual agglomeration’ i.e. the linkages a city forges

with other major urban centers that facilitate the flow of goods and services as well as the

circulation of ideas, capital and “brains”.

According to Saskia Sassen67

and Peter Taylor, this process of international networking

and the realizing of the benefits therefrom, is largely related to the growth and clustering

of tradable services in some of the larger cities. Taylor (2005, p.3) states that, “It is

advanced producer service firms that have been largely responsible for creating and

maintaining the network. These firms have offices in important cities across all world

regions, and personnel, information, knowledge, intelligence, ideas, plans, instructions,

and advice, flow freely among them. As such, these global service firms “interlock” the

cities in which they have a presence”.68

Key cities are the sites of corporate headquarters

and of research and prototyping facilities and they serve as test markets for new products

and services. They are active participants in international events, host international

organizations and serve as crossroads for international symposia. In other words, cities

that are prominent in the global city hierarchy, underscore the salience of tradable

services (including tourism of all varieties) and reinforce local agglomeration economies

with the spillovers arising from nodal positions in the global network of cities.

Not all mega cities are so privileged. Across the world, there are too many examples of

unchecked, unplanned, chaotic and productivity-subtracting increase in the girth of cities

– cities such as Lagos, Karachi, and Cairo come to mind.69

Agglomeration economies

accrue to skilled, smart and well-governed cities not to cities that expand uncontrollably

mainly on the basis of informal low productivity, service activities and informal housing

and infrastructures.

Agglomeration economies present opportunities for the many mega cities in developing

countries. However, this is not low hanging fruit that can be easily picked. Looking

ahead, only the smart and skilled cities that invest in human and physical capital, are

likely to succeed.

Financing

All of the necessary conditions would come to nothing without adequate provision of

urban infrastructures and services with the help of fiscal and financial resources.70

Moreover, a city’s resilience depends on both the robustness of the physical infrastructure

and institutions as well as on deep pockets for rebuilding and repairing damage. The

fiscal resources a city can mobilize depend on the scale of business activities and how

67

Saskia Sassen, The Global City, Princeton University Press, 2001. 68

http://www.brookings.edu/research/reports/2005/02/cities-taylor 69

The AT Kearney Global Cities Index for 2012 gives each a low score: Cairo 50 down from 38 in 2008;

Lagos 59 from 53; and Karachi 62 down from 57 four years earlier.

http://www.atkearney.com/documents/10192/dfedfc4c-8a62-4162-90e5-2a3f14f0da3a 70

Henderson and Venables (2008, p.1) observe, “city formation requires investment in non-malleable,

immobile capital in the form of public infrastructure, housing and business capital”. The latter can be long

lived, with housing having a gross depreciation rate of 1 percent and a net rate with maintenance of close to

zero. http://www.nber.org/papers/w13769

17

these translate into taxable incomes and the value of taxable assets. Hence how a city

incentivizes business activity determines what it can potentially collect by way of

revenues. Revenues actually collected are a function of tax autonomy conferred by the

central government, local tax handles and transfers from the center. The greater the fiscal

autonomy and fiscal independence enjoyed by a large city, the better.

Fiscally prudent cities combine attractive incentives for business with an effective

apparatus for enforcing and collecting taxes and assessing/rating property taxes. For a

large metropolis, coordinating tax instruments and rates across jurisdictions minimizes

tax arbitrage and rate competition. Prudence means adopting fiscal responsibility laws,

carefully measuring out pension and safety net benefits and adopting mechanisms for

evaluating performance on a regular basis.

Fiscal resources are insufficient to finance long-lived infrastructures; therefore, cities

must seek recourse in borrowing against future income streams or complementing local

resources through public private partnerships.71

Experience suggests that strengthening

financial management at an early stage can be rewarding over the long haul. Starting with

straightforward bond financing for infrastructures, cities have developed a multiplicity of

instruments and institutions for financing setting up municipal funds, finance

corporations, community development corporations, land banks and partnerships. They

have also deployed a number of innovative instruments including tax incremental

financing and value capture finance. 72

Concluding observations

Needless to say, the proof of the pudding is in the design and execution of city level

strategies and how these factor in the six elements discussed above. For virtually all cities

in developing countries, a viable growth strategy that builds in growth engines and

minimizes locking in dysfunctional urban design, infrastructures and institutions.

Achieving just this would be a huge plus and it would enable cities to create the jobs and

to maintain a reasonably equitable income distribution. Governance, financing and

skilling of the workforce will be major contributing factors and observing how cities are

struggling to improve each of these; one can only hope that the majority is blessed with a

large dose of luck. If cities fall short, millions of people will lead nasty and miserable

lives.

As to the future geography of urbanization, given the inevitability of climate change that

policy inaction is storing for current and future urban inhabitants, national governments

will need to take the lead with bold and sometimes painful decisions to redraw the urban

landscape do away (Haussmann like) with legacy infrastructures and seriously pursue

greening. For the majority of politicians, such decisions are the exception, however, the

severity of the impending climatic changes and the speed with which they are bearing

down on us all might force the scaling back of urbanization in some areas and its scaling

71

The seamy past history of American cities rife with bond defaults, is examined by Eric H. Monkkonen

(1995), The Local State. Stanford University Press. 72

See Dethier and Morrill for details (2012) http://ideas.repec.org/p/wbk/wbrwps/6256.html

18

up in others. Most likely, these decisions might need to be taken in consultation with

neighboring countries because climate change could make it impossible for some

countries to support much enlarged populations two and more decades hence.