THE ROLE OF CITIES: A MACROECONOMIC PERSPECTIVE

1. World Bank Institute NIUA NCAER THE ROLE OF CITIES: A MACROECONOMIC PERSPECTIVE By Rakesh Mohan JANUARY 9-21, 2000 South Asia Urban and City Management Course Goa, India

2. OUTLINE OF PRESENTATION I. URBANISATION AND DEVELOPMENT II. PLANNING AND MANAGEMENT OF CITIES: ROLE OF GOVERNMENT III. ROLE OF MARKETS IN FINANCING CITIES IV. CITIES AND THE NEW ECONOMY

3. URBANISATION AND DEVELOPMENT • Economic Growth Accelerates Urbanisation • Urbanisation promoted by • economies of scale in production • information externalities - technology - suppliers - purchasers - market conditions I. Urbanisation and Development

4. URBANISATION AND DEVELOPMENT (Contd..) • agglomeration economies - special machinery - fashion apparel - entertainment services - interactive services - financial services - high tech farms - software - Internet • Macro Policies Matter - openness - Price Equalization I. Urbanisation and Development

5. HOW HAVE WE DONE IN THE PAST? 1950 - 2000 • Developing world has coped well in the last 50 years.Urban population has grown from 300 million in 1950 to 2 billion in 2000 • Biggest cities in the world are in the developing world now • General improvement in Urban Services during this period: • Health services • Nutrition levels • Access to safe water • Education • Housing • But large unmet needs I. Urbanisation and Development

6. URBANISATION TRENDS(PERCENT URBAN) I. Urbanisation and Development

7. LARGEST CITIES IN THE WORLD 1950 Population 1970 Population 2000 Population (Million) (Million) (Million) New York 12 Tokyo 17 Tokyo 28 London New York Mumbai Tokyo Shanghai Sao Paulo Paris Osaka Shanghai Moscow Mexico City New York Shanghai London Mexico City Essen Paris Beijing Buenos Aires Buenos Aires Jakarta Chicago Los Angeles Lagos Calcutta Beijing Los Angeles Osaka Sao Paulo Calcutta I. Urbanisation and Development

8. LARGEST CITIES IN THE WORLD (Contd..) 1950 Population 1970 Population 2000 Population (Million) (Million) (Million) Los Angeles Moscow Tianjin Beijing Rio de Janeiro Seoul Milan Calcutta Karachi Berlin 3 Chicago 7 Delhi 12 1950 1970 2000 Developed Countries 11 8 3 Developing Countries 4 7 12 Developing Asia 3 3 9 I. Urbanisation and Development

9. OUTLINE OF PRESENTATION I. URBANISATION AND DEVELOPMENT II. PLANNING AND MANAGEMENT OF CITIES: ROLE OF GOVERNMENT III. ROLE OF MARKETS IN FINANCING CITIES IV. CITIES AND THE NEW ECONOMY

10. PLANNING AND MANAGEMENT OF CITIES • Local governments are typically weak and lacking in prestige • National governments are too distracted • First Task is Two Fold : • Reduce Burden on Local Government • Strengthen Local Government • Limit Financial Role of Local Government to provision of public goods • Strategic planning notmaster planning II. Planning and Management of Cities: Role of Government

11. PLANNING AND MANAGEMENT OF CITIES (Contd…) • Decentralise all services which can be paid for • Public or private sector providers • Competition where possible • Forge Links between financing and returns: Accountability • Increase public participation in design and management of local delivery • Increase prestige of mayors and legislators • Professionalise staff, improve salary structures II. Planning and Management of Cities: Role of Government

12. PUBLIC GOODS TO BE FINANCED FROM TAXES • Making property taxes more buoyant • Modernisation of cadasters • Renew property valuation • Transparent land price system • Modernise collection • Making subventions from higher levels less discretionary • Most services can be decentralised • Power • Water • Telecommunications • Sanitation • Solid Waste Disposal • Land Development • Transportation • Housing II. Planning and Management of Cities: Role of Government

13. OUTLINE OF PRESENTATION I. URBANISATION AND DEVELOPMENT II. PLANNING AND MANAGEMENT OF CITIES: ROLE OF GOVERNMENT III. ROLE OF MARKETS IN FINANCING CITIES IV. CITIES AND THE NEW ECONOMY

14. ACTIVATING CAPITAL MARKETS FOR URBAN INFRASTRUCTURE • Need many borrowers, investors and may intermediaries • Who are the borrowers? • Municipal Governments • Urban Development Authorities • Water Agencies • Power Generators, Transmitters and Distributors • Solid Waste Agencies • Land Development Agencies • Others III. Role of Markets in Financing Cities

15. ACTIVATING CAPITAL MARKETS FOR URBAN INFRASTRUCTURE (Contd..) • They will need credit enhancement Who can enhance their credit? • Credit Rating Agencies • Municipal Development Funds • Urban Infrastructure Banks • Bond Banks • Bond Insurers • Bond Guarantors • Project Appraisal Agencies III. Role of Markets in Financing Cities

16. ACTIVATING CAPITAL MARKETS FOR URBAN INFRASTRUCTURE (Contd..) • Who are the lenders? • Individuals • Mutual Funds • Insurance Funds • Provident Funds • What does Government do? • Equity for Project Agencies • Guarantee Mechanisms • Funds/Programmes for staff professionalisation • Set Benchmarks • Fuel Bond Markets : Govt. borrowings • Fiscal inducements • Regulatory Agencies III. Role of Markets in Financing Cities

17. ACTIVATING CAPITAL MARKETS FOR URBAN INFRASTRUCTURE (Contd..) • Globalisation of Capital Markets • Domestic savings will not be enough • Vital to channel international savings • Development countries have aging populations • They need to get high returns on their savings • Developing countries can provide these higher returns III. Role of Markets in Financing Cities

18. ACTIVATING CAPITAL MARKETS FOR URBAN INFRASTRUCTURE (Contd..) • How do we link rich country savers to Urban Financing ? • They must have safe vehicles for investment • Income financing of mature projects can be securitised • Government and other Equity Funds can provide initial funding • After risks are reduced packaged securities can be sold internationally • This would increase financing turnover III. Role of Markets in Financing Cities

19. OUTLINE OF PRESENTATION I. URBANISATION AND DEVELOPMENT II. PLANNING AND MANAGEMENT OF CITIES: ROLE OF GOVERNMENT III. ROLE OF MARKETS IN FINANCING CITIES IV. CITIES AND THE NEW ECONOMY

20. WHAT IS DISTINCTIVE ABOUT THE FUTURE? • India, China, Indonesia, with more than 2 billion people urbanising and industrialising simultaneously • 1990-2030 They will go from 25-30 per cent Urbanisation level to 50 to 70 per cent • Meanwhile other cities and countries will also be going ahead • Unprecedented demand for financial resources for power, telecommunication systems, water supply, sanitation, drainage, solid waste disposal, roads, housing and urban amenities • Lumpy investments. Have to be made upfront. Returns flow over long time period IV. Cities and the New Economy

21. CITIES AND THE NEW ECONOMY • Cities are incubators of new ideas • Cities are centres of information exchange • Cities are centres of modern services • Cities are incubators for entrepreneurs • Knowledge industries need interaction • research institution • medical institutions • entertainment • financial services • High Skill Workers demand high quality public services • High quality cities will be the leaders of the future IV. Cities and the New Economy

22. WHAT DO WE DO? • Cost minimisation • Search for low cost technologies • Make urban investment more demand oriented. Fashion institutional structures which respond flexibly to demand • Reduce upfront investment. • Unbundle where possible • User charges as price signals for regulating demand • Decentralise service provision • Public goods provisions by city governments • More citizen participation in urban governance • Mechanisms for resource generation. • Expanding capital markets IV. Cities and the New Economy

23. CONCLUSIONS • We have coped well in the past • No reason why we cannot do so in the future • New challenges posed by volume of new requirements China, India, Indonesia • Local capacities must be strengthened • Decentralisation, commercialisation essential • Capital market development will need new institutions • Need for new vehicles to channel international savings to urban investment in growing cities IV. Cities and the New Economy