SUSTAINABLE URBAN AND INDUSTRIAL DEVELOPMENT AND THE ROLE OF PLANNING Bilbao, Spain Prof. Joseph E. Stiglitz Columbia University February 24, 2005

Sustainable Development and Planning In the aftermath of the fall of communism, backlash against planning:  Markets are all that is required  Adam smith’s invisible hand: pursuit of self interest leads to economic efficiency  Prices provide signals, perform all requisite coordination

The Importance of Coordination But modern economics has recognized that there are severe limits on markets  When information is incomplete or market imperfect—as it always is— then the reason the invisible hand often seems invisible is that it is not there  Need a ‘visible hand’ to perform coordination

Coordination is especially important in the context of urban planning and industrial policies:  Underlying problems of externalities, coordination failures, small bargaining problems  Congestion  Environmental consequences  Market mechanisms (by themselves) don’t work well  Other mechanisms needed  Road planning  Zoning  Planning for parks The Importance of Coordination

Consequences of Coordination Failures Disastrous examples of consequences of lack of planning and coordination failures:  Asian cities—congestion results in enormous waste of resources  Has adverse effects on efficiency, productivity, environment  But equally important, lowering standard of living  Excess concentration of population in major cities

Key Challenges The first challenge is making real estate market development compatible with overall economic development:  Real estate market is intricately linked to other markets (as well other market failures)  Markets, left on its own, do not necessarily allocate resources most efficiently - and can create boom or bust  Lack of availability of land can inhibit development  Real estate market can induce large fluctuation in cycles  Example: Thai real estate bubble during the mid 1990s, leading to financial crisis for the whole economy in 1997

Key Challenges The second challenge is how to make real estate market more efficient, and to ensure housing for all?  Targeted housing development projects for low and medium income groups  Prevent speculative attack on the real estate market which can limit people’s ability to obtain housing at affordable prices  Create a well functioning mortgage market

The third challenge is to manage rapid urbanization and rural-urban migration:  Cities and urban centers are not merely a collection of houses and businesses. Rapid expansion of cities without commensurate growth in social services e.g. schools, healthcare facilities, daycare centers etc. hinder long term human and economic development.  Rapid migration from the rural areas usually crowd out public goods in the cities - Example: Dhaka, Bombay, Sao Paolo, Mexico city  Create ‘livable cities’ and cities as ‘communities’ Key Challenges

Role of Government in Industrial Planning Successful governments have long had a role in industrial planning  Externalities, public good nature of innovation - Huge spillovers to others - Even with good patent system, inventor captures only fraction of benefits  Not a question of picking winners, but of identifying areas of large spillovers  Other principles for enhancing likelihood of success—requiring equity participation; broad based support

Industrial Policy: U.S. Experience In the United States, government played an active role in planning and developing:  Telecom: First telegraph line, Internet etc.  Agriculture: Government research, Extension services disseminate etc  Credit markets: mortgage market, export import bank etc  Railroads: Huge land grants  Minerals: Development of the west - Huge give-away  Today: major industrial policy intervention through Department of Defense, NASA: Boeing

In East Asian miracle countries, governments provided:  Support for education, research establishment—the underpinnings, infrastructure for successful development  But also identified certain industries  But help more through access to credit  And rule based—those who succeeded in exporting got easier access to credit  Reduced extent of abuses East Asian Experience

Role of Government: Concluding Remarks Government needs to play a crucial role to prevent market failure:  Plan a systematic and sequential growth of urban centers  Manage migration into the cities  More market intervention for equitable and efficient spatial allocation of resources – subsidies to rural areas  Help ease credit rationing  Plan and implement long-term industrial policies alongside support for education and research