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Will Cities Survive the Financial Crisis?

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  • As world markets suffer, cities in developing nations will inevitably feel the pain most sharply
  • Cities capture the unique benefits of economic density and are important for the prosperity of nations, both in good times and in bad
  • Policymakers should try to make cities work well instead of worrying about their size

February 3, 2009—Consider three cities in the developing world that will be hit early and hard by the worldwide economic downturn. Singapore may be the first Asian economy to enter a recession. Shenzhen in Southern China is preparing to deal with massive job losses, especially in contract manufacturing. In South India's Sriperumbudur, falling demand may mean that plans by companies such as Hyundai to expand plants are scaled back.

During the past two decades, Singapore, Shenzhen, and Sriperumbudur have served as connectors to regional and global markets, and have reaped enormous economic gains from these connections. Now, as world markets suffer, metropolises, cities and towns in developing nations will inevitably feel the pain most sharply.

“Crises bring pain to integrated places, but ultimately we know that places like Singapore, Shenzhen, and Sriperumbudur will weather the storm,” says Indermit Gill, Director of the World Bank’s World Development Report (WDR) 2009 and Regional Chief Economist for the Bank’s Europe and Central Asia region. “This is because urban centers are important for the prosperity of nations, both in good times and in bad.”

Subtitled "Reshaping Economic Geography”, this year’s WDR stresses that urban centers attract workers, capital, and ideas. The report illustrates how dense human settlements help nations exploit the economies from scale, specialization, and trade.

Through the lenses of history, geography and economics, the report sheds new light on questions such as: Is urbanization today unprecedented in its speed? Are the slums we see in developing countries evidence of failed urban policies? Should cities in the developing world be kept small? The answer to all three questions is the same: No.

Today’s rapid urbanization has precedents

The experience of earlier urbanizers such as Britain, France, the U.S., and Japan, as well as the most recent ones such as South Korea indicates that the pace of urbanization is most rapid at the early stages of economic development.

“The same urban shift is being repeated today in other places, as economies move from agriculture to industry, and some countries grow from income levels of $300 to $3,000. In fact, by the time a country gets to upper-middle income levels, a large part of the urbanization process has already happened,” explains Chorching Goh, WDR co-author and Senior Economist in the World Bank’s Europe and Central Asia region.

So the rapid urbanization that we see today is not unprecedented. Britain had burgeoning cities in the 1800s. But it is true that the volume of urbanization is much larger today.

Just over 100 years ago, London, then the world’s largest city, had a population of 6.6 million. Mumbai, the largest city among low-income countries in 2000, had a population of 20 million. Mexico City is the largest city among middle-income countries with 22 million. And Tokyo—now the world’s largest city with 28 million inhabitants—is proof that size does not equal dysfunction.

Today, the volume of urbanization is greatest in China and India. China has added almost 250 million people to its cities since 1985, India about 150 million.

Notably, the period from 1985 to the present has largely been one of resurgence and poverty reduction rather than of decline, and so, the movement of people to cities should be welcomed and supported.

Cities capture the unique benefits of economic density

Settlements of varying size facilitate differentscale economies

Some benefits, such as those from specialization and from various economies of scale, come only from economic density.

Economies of scale are facilitated by settlements of different sizes. Singapore is a center of financial and technological innovation and learning. Shenzhen benefits from thick markets for labor and raw materials. And Sriperumbudur is large enough to facilitate internal economies of scale that come from big factories which require infrastructure and health and education services.

Settlements of varying size facilitate different
scale economies [Click map to enlarge]

Instead of worrying about the size of urban settlements, policymakers should try to make these places work well. Jane Jacobs, a noted urbanist, wrote: “A metropolitan economy, if it’s working well, is constantly transforming many poor people into middle class people…Cities don’t lure the middle class, they create it.”

Urbanization should be facilitated, not impeded.

But what about slums?

To some who have seen the film "Slumdog Millionaire", the notion of welcoming an influx of people to crowded cities might seem irresponsible. But history shows that urban transformation can work, if done right.

A primary prerequisite: basic services such as schools, sanitation and security that reach everyone, whether in villages or towns or cities. Then migrants to cities come to seek economic opportunities, not social services.

Also, connective infrastructure is needed to complement this bedrock of institutions. European cities have done this well; so has New York City.

Finally, public interventions to remove slums have worked only after the right institutions and connective infrastructure were in place and functioning well.

According to the WDR, success comes to cities that follow three basic rules:

  • Work well with central and state governments. Universal institutions such as property rights and basic education are the responsibilities of central governments, and roads and railways are often the ambit of state governments.
  • Work within the capacity limits of government. Policy needs are simpler at early stages of urbanization, become progressively complicated as urbanization picks up speed, and are hardest for advanced urbanizers. Don’t bias policies in favor of urban areas at the expense of rural livelihoods. And don’t try to do at early stages of urbanization what is necessary only at later stages.
  • Keep expectations reasonable. Don’t expect the process to be clean, linear, and painless. Urbanization will be messy—it always has been. But it can be done through unifying institutions, connective infrastructure, and targeted interventions.

“The trick is in getting the timing right,” concludes Gill.

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