Monday, April 17, 2017

How should we manage urbanisation?

Far too often debates on urbanisation has focused on supply-side measures that encourage growth of cities. Accordingly, we have policies to expand city boundaries, incentivise businesses and skilled migrants to locate to cities, and so on. 

But as Edward Glaeser and Wengtao Xiong write, we may be focusing on the wrong set of policy instruments,
If urbanization can play an important role in abetting economic growth, then one question is whether public policies should do more to increase city size. There are many reasons to be wary of explicit spatial policies that encourage migration to one region or another. Most obviously, it is unclear whether encouraging urbanization would enhance welfare overall. On average, workers in cities earn more, but they also pay more for housing and suffer other costs. The standard economic model of migration assumes a spatial equilibrium, so that the marginal migrant is indifferent between the city and the rural hinterland, which implies that there is no direct welfare benefit from encouraging migration. Certainly, there may exist externalities from moving to cities, but these can be both positive and negative and we currently cannot tell whether those external benefits on net favor cities.
Moreover, accepting a role for spatial bias in policies sets an uncomfortable precedent. Spatially biased policies may well be used to favor politically powerful regions, rather than regions that should be subsidized. Loud voices will clamor for support for poorer regions, even if economic development suggests that people should leave such areas. A principle of spatial neutrality would seem to be the safest course, which would force regions to compete for capital and workers rather than relying on largesse from the national government.
A more sensible policy alternative is to focus on reducing artificial barriers to urban growth and improving the quality of urban life. If cities have benevolent economic effects, then it can be quite costly to impose land use regulations that stymie urban construction, such as the stringent floor-area requirements that Mumbai has had for most of the past 50 years. In some cases, including Mumbai, these land use controls were imposed to limit the growth of the city. Often, they have only prevented legal, safe housing and left a back door for the growth of sprawling slums.
City governments can also bring urban growth by becoming more effective at improving urban quality of life. Most of the downsides of density, such as contagious disease and congestion, are negative externalities that become magnified when people live close to one another. By reducing these externalities, developing-world cities can attract immigrant entrepreneurs and allow more people to enjoy the added productivity in cities...
First, growing cities need infrastructure, but to get infrastructure right, we need to get institutions right. Second, incentives must accompany infrastructure. Third, property titling and the protection of private property are extremely valuable in urban contexts. Fourth, infrastructure, incentives and institutions must be adapted to local conditions.
This is a very profound insight, very easily missed. In simple terms, ease the demand-side constraints to urban growth and let cities grow on their own, rather than directly targeting urban expansion. Address the regular deficiencies - restrictive regulations, inadequate infrastructure, and poor governance - and allow cities to grow organically.

Far too often governments, at all levels, end up favouring the more immanent and tangible supply-side policies and ignore the more diffuse and deep-rooted demand-side ones. For sure, there are compelling political economy and administrative reasons for such distortions. But the result is the choking and sprawling cities that characterise much of the developing world.

A pivot towards improving urban governance, encouraging vertical and transit-oriented development,  simplifying the doing business regulations, investments to expand and increase the quality of human capital formation, general initiatives that enhance the quality of urban life, and plugging the deficiencies in infrastructure should be the agenda for city managers as well as provincial and national governments. Cities will then take care of themselves. 

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