Making cities productive and liveable:

economic principles for urban development.

Tony Venables

Dept of Economics

University of Oxford

Introduction

• Want cities to offer jobs and incomes and to be ‘liveable’• Many cities around the world do this very successfully

• Balance two fundamental economic forces, + and -:• High productivity:

• Economic dynamism from scale and density

• Job creation

• High cost: land scarcity/ congestion/ commuting

• Affordability for households

• Cost of doing business

• Successful balance requires:• Efficient use of land

• Public investment: infrastructure, services

• Environment conducive to private investment:

• Residential

• Commercial and industrial

• Combination of private sector (interacting through markets) and public policy:

3 crucial investment processes

Decent housing

High density

Low(er) cost of doing business

Employment + business investment

- Local - Global/ tradable

High productivityJob creation.

Efficient land use +high

investment:- Residential

- Infrastructure

Private incomes.

Tax revenues.

IV

III

II

I

A Tale of...... Two citiesVirtuous circle: Vicious circle:

SlumsSprawl

High cost of doing business

Employment +

business investment

- Local

Low productivityInformality

Poor land use +

low investment:- Residential

- Infrastructur

e

Low income, revenue

Four links: I: Economic activity and productivity

• Cities are good for productivity & growing new activities:

High density & proximity intense economic activity productivity

• Firms: • Economies of scale

• More intense competition spurs efficiency

• Access to suppliers of intermediate goods & services

• Suppliers have good access to customers

• Firms and workers: ‘thick’ labour market• Firms able to find specialist skills

• Workers have incentive to acquire specialist skills

• Knowledge spillovers and networks

• Evidence:

• Large productivity effects across developed country cities of different sizes.

• Cities as incubators for new activities

Four links: I: Economic activity and productivity (continued)

What economic activities get the largest urban productivity advantage?

STRONG:

• Modern manufacturing: e.g.• Automobile clusters

• Garments: - Dhaka

• Services, innovation, creative & media sectors• Finance: London, New York

• R&D: silicon valley

• Hollywood

WEAK:

• Government services, trading

• Production for local markets

MESSAGE: largest urban productivity gains from ‘global/tradable sectors’

‘Global sectors’ – tradable goods & internationally competitive

Scale is restricted by the size of the market.

Four links: II: Urban form for liveability and low cost

Cities derive productivity from density

• Fundamental trade-off? high density small living space

• Mitigated by: • Efficient use of land• High quality building: height• Good infrastructure: transport (proximity by travel time not distance)

Two benefits• Cities are ‘liveable’:

• Decent quality housing/ utility/ service provision

• Cities are (relatively) low cost:• Workers can get to jobs• Firms have supporting infrastructure• Wages not elevated just to compensate for poor living conditions

Four links: II: Urban form for liveability and low cost

How to achieve?

• Efficient allocation of land:• Used by those who value it most

• Users are able to develop – invest in housing/ buildings

Requires:• Functioning markets: land.... also capital, building services• Appropriate regulation

• Regulation needed because of externalities/ imperfect information

• But standards often been set too high informality

• Infrastructure investment that leads not lags• High cost of retro-fitting

• Infrastructure to guide the location of private investments

MESSAGE: Efficient use of land/ housing supply/ infrastructure provision translates into both liveability and lower costs

Four links: III: Costs & business environment to attract investment

Internationally footloose activity will not be attracted to high-cost cities

• Evidence on ‘urbanisation without industrialisation’• Informality

• ‘Resource curse’ at the urban level?

• Attracting new investors: a chicken and egg problem• High productivity from being in a cluster…..but not for the first mover

• Opportunities arising from rising wages in Asia?

MESSAGE: Functional cities are an important part of wider a growth and diversification strategy.

Four links: IV: Income to finance investment needs

Investment in structures – residential/ business/ infrastructure – expensive: How to finance?

• Principally private sector income (& expected future income… capital markets)

• Public finance::Land value and land taxation:

• Some of the economic benefit generated by cities accrues is land value appreciation. (NB – land, as well as buildings)

• Who captures this appreciation? Private land-owners or society?

• Land value appreciation is sufficient to finance all the infrastructure needs of an efficient city.

• How to capture?

• Social ownership of land

• Land taxation;

• Flow of revenue need to borrow for leading investments.

MESSAGE: land tax can provide a secure basis for urban finance

Concluding

• Cities are potentially drivers of growth and job creation

• But must work well enough to attract investment & create jobs

• Need to see the city as a whole:

• Decent (and dense) housing is valuable for liveability and for attracting investment.

• City can be self-financing: land value taxation

• Vicious circle:

• Poor land-use/ infrastructure/ urban form/ low investment/ low revenue.

• Virtuous circle:

• Efficient land-use/ infrastructure/ urban form/ high investment/ job creation/ revenue.