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 productivity Job creation. Efficient land use + high investment: - Residential - Infrastructure Private incomes. Tax revenues. IV III II I A Tale of Two cities Virtuous circle: Vicious circle: 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.