Developing cities: unproductive and unliveable?
Developing cities: unproductive and unliveable?
Cities in the developing world offer the potential to drive economic growth and offer decent living conditions. But some countries are experiencing urbanisation without industrialisation. What is going wrong, and what can be done about it?
time good morning ladies and gentlemen and welcome to this meeting with professor tiny venables whom as you know shall talk about cities in developing countries inefficient and unlivable question mark so we shall try and give an answer to this question listen to his presentation professor thunderbolts studied in cambridge and oxford he now has a chair in oxford and he's also the director of an important center of economics he thought he thought at another important university the london school of economics and is was also advised to the uk treasury and he was also the chief economist at the uk department for international development he studied the economies of developing countries as well but his main focus is on the relationship between economy and geography perhaps is a best known book is something that he has written together with the fujita and krugman the spatial economy is it's out of his book i.e again the relationship between uh space and economy we're very pleased to have him at this edition of the festival of trento because obviously his contribution is key given the fact that this edition as you know is devoted to the places the areas of development nowadays the world economy is growing and the cities play a pivotal road a laurel think about the chinese model you know for sure that this driving economy the chinese economy indeed to develop creates metropolis and as a matter of fact over the past few years we saw huge cities developed that can be actually named as metropolis and plants because there is a certain um district that would develop developing again plants and the residential buildings to where the uh workers could live so this is a city-based economy with all the problems ensuing from that you know very rapid growth of these huge cities brought about a whole set of problems so cities that were already there became twice as big shanghai for example has seen the doubling of his inhabitants including at the moment up to 12 million people the architectural binary just opened in venice and one of the main feature one of the main subject of this edition of vanilla is the growth of cities the ongoing urbanization of world population 10 planners indeed warn us that between now and the 2050. the majority of world population is going to live in cities so the process that in italy we saw at the 1950 is now to be experienced in 2050 in the rest of the world so we're going to have um cities um playing the key role now before giving the floor to professor um venables i'd like to refer about an anecdote in the 80s in mozambique there were that was the time of the cold war and mozambique was divided by the civil war and the muslim government triggered in internal mobilization where the maputo citizens were shifted in very remote areas rural areas and that was named operation production and that cost is quite a number of lives so the areas for production um were identified again in the rural areas so people were shifted from cities to rural areas or so was it to try and bring about development in such rural areas so then after a few years the cold war was over and most of baker shifted again again into the market economy and uh the aid of production became cities again and maputo is one of the great metropolis in africa with all the problems that are connected with being a big city inequalities uh and other problems and not as big as uh in nigeria and nairobi in kenya anyway what was done at the time has been totally undone basically and it is with good pressure now that i'd like to give a role to professor venables good um great thank you for that introduction even if i didn't uh didn't catch too much of it um and let me obviously start by just saying it's uh it's it's a great great pleasure to be here uh and uh let me thank uh and congratulate the all the organizers and hosts of this event uh as i'm sure you've heard people say before the idea of an economics festival uh that gets people off the street it's is slightly slightly alien uh to those of us from uh from from other countries or the anglo-saxon world perhaps uh whatever um whether that means economists are taken more seriously initially perhaps held in greater esteem that would be nice to think and more importantly perhaps ideas there's more public appetite for ideas and uh putting up with lectures by people like me in italy which would be uh fantastic if there is that that respect for ideas anyway with those those words of thanks and introduction yeah what i want to talk about today is cities uh in in developing countries uh it's an area i've been interested in a long time and now we've got quite a large project of work going in oxford nsc in collaboration with the world bank and then funded by by the british aid department vernon henderson who's speaking this afternoon is involved with that work so he'll be talking about a fairly specific piece of work that we're doing i'm going to give a much broader uh overview of the way i see the issues and some of the emerging uh messages and lessons uh we're getting out of the pro out of the project okay um more introduction the challenge you probably all know uh but it's worth putting putting the numbers down um there'll be more than two and a half billion new urban dwellers uh by 2050. that's a lot of people it means getting on for one and a half million people per week will be the rate of increase of city populations and of course most of that's going to be in the developing world so the numbers i've got here uh india 200 000 people a week going to cities africa 350 000 per week so basically um half a billion more africans are going to have to be accommodated uh in in cities uh by by 2040 2050 or putting the same same fact differently um africa is going to have to build twice as much urban structure over the next 30 years as it has in the whole of previous history okay so the challenge is enormous yeah when i think of you know the real policy issues yeah the really important world issues we need to get hold of i suppose you know climate change is number one uh and urbanization you know addressing these numbers and accommodating these people is actually number two so the the the the challenge uh is is evident the key points that i want to get over uh today i think can really be you know summarized in in the two bullets that i have there first is that cities do have huge potential uh for for driving economic growth and for transforming people's lives they can be highly productive and places where we like to live they offer decent living standards and for all the congestion whatever people like to live in cities so key point one is that very very positive message about cities i'm not quite sure that got out into the title that ended up on the program if people remember that but anyway key point one yeah cities have this great potential but second point um many developing countries particularly africa and my focus is going to be africa really are failing to achieve either livability or productivity so what i want to do in this talk just to briefly outline what are they doing first um it's going to be a little bit of sort of urban economics 101 i want to just outline the potential of cities you know how bits of the city hang together why it is that economists think that cities are so so valuable and so so so productive so first i want to outline you know the potential of cities and that's going to be talking more about the developed world on a bit of economic theory than it is about developing the developing world but then of course with that framework hopefully in everyone's heads i'll go and talk about what's going wrong i think in africa and suggesting that there really is a bit of a low-level trap uh that africa's got got stuck in a real real real problem uh that has to be broken out of and then i'll rather briefly at the end uh discuss discuss policy implications although those those policy implications should have dropped out of much of what i've been saying earlier before getting into that um two quick quick background facts about africa uh two two background facts about africa um well first a general world fact obviously there's a correlation strong positive correlation between income per capita income and urbanization so the horizontal axis there's gdp per capita the verticals the urban share of the population and yeah there's a relationship um whoever constructed this diagram really shouldn't have put a straight line since one of the numbers is capped at a hundred percent so i'm going to go over a hundred percent but anyway that strong positive relationship but of course the little squiggles you can't really see uh yellow is you know can i uh pale blues nigeria orange is uh tanzania so they're african countries which are urbanizing uncorrelated without uh the income growth they're just heading basically straight up that diagram whereas historically you know the income growth and urbanization have gone together so that flags something about things being different potentially wrong in africa the second introductory fact is that africa is urbanizing early early in terms of per capita income so the chart here gives per capita income uh average for a region at the date whatever that is where the region gets about 40 urbanized maybe not the whole region maybe some countries selected out okay and orange is um ssa sub-saharan africa okay so africa is reaching that urban level at an income level basically half of the other regions uh latin america caribbean middle east and much less just a third less than a third of east asia pacific okay so africa is urbanizing early right so this is going to flag up uh issues uh that we'll get to later okay that was a couple of introductory facts now let me go to try and persuade you of the potential of cities and for that we need a bit of an analytical framework uh in everyone's heads that i'm going to uh then run through now you know most economists hate diagrams with arrows whizzing around everywhere and it looks a bit more business school than economics anyway what i want the way i want to structure the talk is think of cities as having three components three capital stocks if you like one is the residential capital stock houses right second is the productive the business sector uh that capital stock okay which obviously generates jobs whatever and the third is is infrastructure right so those three capitals the white things on the side residential business uh and infrastructure there are three building blocks but of course key inner city is the fact that it's it's a system uh all all the bits are very closely related that's why we've got the arrows whizzing around okay so let me talk through um what this is trying to say if you start at top right then you know what well-functioning cities what are they doing well they've got a residential capital stock that delivers decent housing they've got infrastructure that enables you to get in and out of work and things okay they're delivering high density as i'll talk about in more detail later on the housing and the infrastructure together are delivering connectivity you know people can get to work firms can communicate with other firms and of course if you've got connectivity if you've got infrastructure that will tend to make the city efficient it'll reduce the cost of doing business coming coming around the circle there okay it'll reduce the cost of doing business in the city so that will in turn attract the investment uh the business investment it will generate the employment uh in in various sectors of the economy and then as i will talk about in a bit more detail at the moment that should generate productivity it will create jobs and raise productivity i'll get into detail there but of course if you've created jobs and raised productivity then what have you done you've created private income that will support the residential construction okay we're going around the circle you've created a tax base that will create you know the fiscal revenue that will pay for the infrastructure going around the circle and very importantly you have created expectations that the city's thriving and flourishing and all these capital stock decisions are long-lived so they're going to be based on expectations about the future so you'd have created expectations that will keep these going so this is the well-functioning city right i'm going to sort of reverse the arrows later on but i want you to have that in mind okay let me elaborate on that a little bit right those three capital stocks um i want to talk a bit about production then residential then infrastructure in that order i think and first for the well-functioning city right and then we'll switch to some of the african issues okay well let me go through this uh fairly fast i hope what do we know about the organization of jobs productive sector in these these are these well-functioning cities okay it tends to cluster in the central business district not all of it you know manufacturers going to be on the edge uh sub-centers will will be around but there tends to be a central cluster why is that okay the fundamental driving mechanism here is agglomeration so productivity is high when there's intense economic interaction okay lots of people close together uh makes for high productivity big literature on that you know just very quickly scale and specialization i've got a lot of activity you can be specialized you can be really really good at a very very narrow task and there's enough demand for it that it actually pays so you've got specialization and scale there's the incentive to train in becoming an expert in a tiny bit of engineering or finance or whatever which you couldn't do in a village right there'd be no market for it scared and specialization the forward and backward linkages uh lots of competition so no little pockets of monopoly or monopsony that's all competed away and just knowledge to others people learn from from from from other people okay so production sector yeah key element is this agglomeration productivity coming out of density i should say a little bit at the bottom there um the evidence for that basically comes from developed countries very little for developing i think for two reasons one lack of data for three reasons one lack of data two researchers haven't been that interested until recently at least uh and i forgot what the third is the third is maybe these maybe developing countries just don't yet have the sectors where these agglomeration forces are really really most powerful i'll come back to that okay that's theory this is a sort of pretty chart that i like to put up um you know that theory seems to be borne out london new york hong kong employment density you're getting about 150 000 people per square kilometer working okay so there must be something correct on the previous slide you know why would you pay central london rents commuting to get 150 000 people into every square kilometer of the square mile of the city of london right so you know the theory does seem to be borne out by those sorts of things okay so the well-functioning city right productive capital residential capital the way to think about this is if you're going to get density you know pack people in then you've got to have efficient use of land i mean land really becomes the scarce factor you know everything can move around firms workers houses uh except land right so you've got to use your land uh efficiently that means two things one land can be developed right there aren't legal institutional obstacles to developing land of which more later um and second lands occupied by the people who value it most the unusual sort of things that can be achieved by market so when you think about those forces in a city you probably get a monocentric structure right achieved by the market system with rents being high in the center therefore incentive to build tall to economize on on land uh those incentives to economize on land high in the center so that that structure and again it seems to be born out you know that a priori theoretical reasoning seems to be borne out by by the evidence um yeah it's pretty monocentric same three cities but now residential uh density so not number of workers per square mile but number of inhabitants per square mile you know it's not as steep so you've got the you know you've got the jobs concentrated like that the how the residence is concentrated like that obviously very specific on the particular geography you know hong kong doesn't have much flat land um on the transport technology when the city was built so conditional and lots of things but they're all that sort of shape um okay that sort of monocentricity this is the same thing for many cities around the world all very deliberately to the same scale so you know bottom left there is atlanta which does you know have that sort of downward sloping gradient but it's not very dense uh anywhere uh top middle is shanghai okay where you really have that so what i'm saying is yeah resident we expect residential pattern to follow that sort of structure because that's economizes on land it's efficient not all cities are like that okay these are three cities that clearly aren't so it's yes distance from the center on the horizontal uh population density uh on on the vertical right and you can guess why those three cities uh you know ended up looking different i won't bother to spread it out it's evident from there from their histories okay third element you know what do we want from from from infrastructure uh how do we how do we want it to work well a couple of pretty obvious remarks here yeah a well-functioning city is going to have decent infrastructure very obvious remark obviously infrastructure is partly public goods um transport and sewerage that sort of stuff partly public services you know waste collection education partly utilities that can be privately provided you know subject to regulation uh water power can can be privately supplied think of infrastructure and i'll come back to this point as well think of infrastructure providing sort of three different sorts of things one is direct benefit second is encouraging private investment there's obviously a complementarity between being a power supply and building somewhere and third an extension of that coordinating private investment okay so the question of where do i build something a city's growing all these different people may be planning to build where do they do it committing to where the subway station is uh helps to coordinate i'll come back to that point as well final thing on urban potential the well-functioning city public finance um infrastructure is expensive surprise surprise um how do you pay for it basic economic principles here you know land is an inelastic supply uh so as demand goes up you can't you know supply goes vertical so the price of land gets gets bid up okay so in some in a simple economic model all the benefit of the city accrues to whoever it was who happened to own the lands that the city is built on that you should tax right yeah clearly it's if i own some land in central london and it's appreciating it's not because of what i've done it's because of how the city's been built and what everyone else is doing so ethically you should do it economically you should do it it's non-distortionary it's on something in fixed supply uh it's fairly easy to administer so the well-functioning city can have the land tax that finances the infrastructure and it all hangs together okay one last thing before i turn to africa um at speed it's just a map i quite like okay so i've talked about you know density infrastructure connectivity making making bits hang together this is this is london uh the yeah you probably can't read any of that so that means can i say what it is um it's the number of people living in one okay that's right it's the number of jobs available by public transport uh within 45 minutes travel time of each place so if you're in the dark red area if you live there in london you can access over two and a half million jobs within 45 minutes by public transport okay if you're in the area stretching out to the sort of pinks you can access uh over a million jobs by public transport in 45 minutes so these messages i'm trying to get over your density density connectivity infrastructure you can see what they you know what they can deliver being able to access that many jobs and the other way around and the employers being able to access a great many workers yeah okay um that's the um introduction it's okay don't panic i'll uh get through it um that's the urban potential now let's turn to african cities and think um again using the same three headings albeit in different order the same three headings um are they delivering uh if not why not so i'll run through some facts a little bit of diagnosis try and put it together and eventually some some policy well on the residential side um you know the story uh but again the facts really speak very very loudly so that uh figure there uh countries uh on on the horizontal and the proportion of the urban population uh living in slums on the vertical so in south sudan it's 95 percent well that's not surprising actually south sudan didn't have a city obviously sudan became independent by eight or ten years ago and it didn't have a city it's now gone to juba yeah but one city that's basically just the sort of shanty town that's grown uh you know from nothing so for south sudan 100 is uh 95 percent it's not surprising the um the fuzzy sort of cross-hatched line in the middle is the um african sub-saharan african average so about 70 of the urban population uh living in slums okay so you know so so africa is evidently accommodating people in slums that is to say basically single-story shacks uh rather than in formal uh you know constructed uh buildings okay so what's the challenge there um clearly you want africa for for livability as well as density and all the rest of it to be able to provide uh better quality housing sort of okay there are two two questions there one is it simply is it techn feasible right africa's urbanizing at low income levels maybe if you're that poor you simply you know the technology to build a decent house that's affordable simply isn't there i don't think that's true but that's one hypothesis you could put forward and the other hypothesis is that something's going wrong institutionally economically that is preventing people from from building decent houses uh let me address both of those the first um i thought it would be time for a picture break at this stage although you're probably not sure you can see those pictures very well is it um technically feasible to provide decent quality housing uh at low income levels well i just put some historical examples there so you know that's the the thing on the top left uh london uh plans for london terraced houses in the 1870s and they were pretty pretty um blunt in their speaking there these are plans for fourth rate houses right that's the way they were described so really very small very packed in but decent houses you know brick brick walls slate same roofs and basic basic services you know sewerage on the mains sewerage system new york did it rather differently 10 month blocks that's top right so there you have five six seven story tenements so it's a view down on on washing day i think uh with all the washing hanging out obviously indian cities um a lot of asian cities are doing a four or five storey route so mumbai uh on the left there right uh four or five stories is good uh because you're cramming in a lot of people but you don't have to pay for an elevator people people can walk up okay hong kong back in time yeah when it was still rather poor did it by public housing at very high density um there's a picture of slums in kampala but you all know what slums look like uh there should be a picture of what addis ababa is doing at the moment which is actually building affordable five-storey tenement blocks fully serviced that are sold off with a little bit of government subsidy but but not too much and it's succeeding in doing it so my point here is it is technically feasible um but most other african cities well they're stuck between slums formal high quality housing for a very small elite and unfortunately policy initiatives building things like this right that's south africa that's dara salam okay it's a very very low density if you think back to that london map right if you want to get you know cram people together building this way is is problematic so these are big public housing initiatives in those those countries that aren't working anyway so i think it is technically affordable you know the addis example so why why isn't it why isn't it happening well i think there are a number of you know legal institutional political obstacles uh to to building decent houses in africa and i want to spend a couple of minutes on them let me just preview them now one is property rights uh messed up i'll come back to that in more detail second regulation uh is pretty building regulations are pretty inappropriate third the financial sector isn't doing the mortgages and then some other things on infrastructure i'll come back to property rights are a real issue in in african cities yeah i've said um that you need to get you know people uh building proper quality structures building dense uh building tall and obviously for that you have to have clarity uh that when you build it you will still own it it won't be taken away from you it won't be subject to a legal dispute for years and years that you don't actually have rights to the land okay africa there's a real mess as traditional land rights have persisted in some places uh changed and been modernized in other places but the phrase we use is uh privatized but not not clarified so yeah traditional rights are now replaced by private claims but often there are multiple claims on the same piece of land these claims get tied up in the courts for years and years and years um that means it's uh difficult to consolidate the development gains on the land very often captured by by the elite you know it's politicians who managed to uh stake a game on on the land or get the planning permission to develop it um all those problems so that obviously reduces the incentive to build if you don't know that you've got secure title to the land but it also has all sorts of other ramifications i mean suppose you have built you know you might want to use your property as collateral to take a loan to start a business where you can't get collateral if unless you've been persuaded the owner that you've the the lender that you've really got felt secure title we see this very uh very acutely in uganda in kampala so the map um the center of kampala is sort of in the sort of reddest area uh somewhere there and that's so it's a map of different land tenure systems uh in in kampala so some are freehold you know modern freehold others are modern leasehold fairly short term on the whole 49 years but probably enough to build some are customary where you know residents have managed to get some sort of rights but they're often you know subject to dispute uh and i'm unclear certainly can't use use the land as collateral and others are this particularly peculiarly uh ugandan thing called milo that's the sort of part of the box there milo is where uh one party uh typically the old uganda royal family owns and has absolute rights of the land and another party owns and has absolute rights over the building on the land if you think about it that's tricky right i mean it's okay if the building is a shack that you can dismantle it and move it but if it's anything more than that uh clearly having that complete conflict of interest is hopeless so property rights are an issue why residential development has been problematic building regulations have also been problematic building regulations are clearly necessary for lots of reasons to mitigate externalities to make sure that proper foundations and things in buildings but many african countries basically inherited building standards from the colonial period so they've got ridiculously large plot sizes for example or very high uh building standards and obviously what that means is they're just ignored right so there's a whole set of building regulations that are ignored therefore most of what gets built in islam about 90 of what gets built is illegal it doesn't make any of these whole completely inappropriate building standards so it's illegal it doesn't have legal protection you're backing with a mess with property rights and all those problems building costs in africa are surprisingly high as well for a variety of reasons in some countries one man has had a monopoly over cement he's the richest man in africa by a long way mr van gogh say worth about 11 billion i think um so lots of issues on the building cost side third reason why the residential side hasn't worked well is simply access to capital right commercial banks aren't very good at uh issuing mortgages uh doing mortgage lending and that's particularly the case uh in an environment that's probably quite inflationary where the hand rights are insecure so typically if you could get a mortgage you'd be very short-term very high interest rate doesn't work they're not getting access to capital okay that was a quick run through so the residential side screwed up for a lot of reasons partly to do with institutions legal rights and so on infrastructure again let me try and be brief obviously infrastructure provision is weak better in urban areas than in rural areas but weak and people who come up with estimates of the magnitude of the infrastructure gap come up with these scarily large numbers you know 15 20 of gdp even needed every year to build the infrastructure so these are massive amounts uh indicative of the scale of the gap the consequences of bad infrastructure i've already alluded to but then let me say them again there's obviously the direct welfare loss of you know sitting in the traffic jam or whatever right that direct loss there but it's more than that you've destroyed connectivity in the city going back to density connectivity and all that if people can't you know firms can't communicate with other firms if it takes two and a half hours to commute to work you know clearly you've got problems there and third this point about infrastructure coordinating investment the way i usually talk about this is is by simple example now suppose that the cities are really growing and everyone knows that there's going to be a sort of secondary a little secondary center on the edge of the city and it has to be the city's growing there'll be some shopping malls secondary centre but you're a private investor you don't know where it's going to be it could be there there or there right if you don't know you're not going to invest right because you want to know that other people will invest and the whole thing is going to take off so it's coordination failure what do you do about that well you could issue the city plan that will say it's going to be there but there are a lot of african city plans and they're not very credible okay or you can do the infrastructure which is the credible commitments that yeah there is a road or a bus transit or something to that point so infrastructure paying this additional role of coordinating private investment getting it going so infrastructure gap with serious consequences i would argue and i will stay closer to the microphone perhaps and i have been okay third element um the productive sector business capital jobs uh and all that yeah once again we know that you know africa's problematic there a very high proportion of employment is informal and you know selling plastic toys or cigarettes or fruit on on the streets enterprises are very small african firms have failed to break into internationally tradeable activities um you know garments apparel the these things that have driven growth in asia and african enterprises have failed to achieve the productivity benefits i was talking about earlier from agglomeration i've put a question mark there because i did say earlier there actually hasn't been much research on that so that's a little bit of an assertion rather than a well-grounded fact but i i believe it to be the case so i i sorry i think i need to be closer to the microphone yes apology is good i will uh stay closer okay turning to the third element right an african experience and how it matches up against uh the potential uh the the the productive sector as i just said yeah informal failing to break into tradables failing to deliver productivity some facts illustrating that again those slides and you probably can't see them very clearly but let me describe them the horizontal axis is the urbanization rate in various countries on the left-hand panel uh non-africa on the right-hand panel africa and the vertical is the manufacturing share of gdp so obviously on on the left-hand panel you see an array of countries that as they've urbanized they've they've got manufacturing okay the right-hand panel is africa all shifted down the lower curve the sparser weaker relationship so africa urbanizing without industrializing without without getting manufacturers so the real worry there i want to go a little bit deeper in the last couple of minutes on the uh productive sector as you dig into this what do you find you find a couple of quite surprising things first african cities have got high dollar wages so nominal wages dollar wages in african cities are high okay so on the left-hand panel there african cities are the red dots the horizontal axis is income g is income per head gdp per capita right so given levels of income per head dollar wages are really high which is surprising the right hand panel is the cost of living and again it's gdp per capita on the horizontal so african cities and then the cost of living on on the vertical so african cities seem to have these high nominal wages uh but high cost of living so what's what's going on here what do we think is the the economics driving this well let me give you the analytical story uh very briefly and it's really just a story of labor supply and labor demand on the labor supply side what i've been suggesting talking about residential structures talking about infrastructure is that african cities are inefficient right that means if they're going to attract you know the population if they're going to hold their population uh from from from coming in from from agriculture migrating to the city then they're high cost they've got to offer high nominal wages uh to compensate uh the compensating differential so african cities i'm saying here have got low real wages but they're expensive partly because they're so inefficient creating that high cost you know they're not nice places to live you need the compensating differential so they're offering a high dollar wages high nominal wages to compensate that's on the labour supply side but of course if i'm telling a story about wages here i'd better have demand as well as supply otherwise it's not going to not going to hang together very well so how come you know if these dollar wages in african cities are so high you know what why are firms paying them uh what's going on well the way to answer that i think is that african cities are only producing non-tradable goods they're producing stuff for local consumption you know they're doing the sort of beer cement uh maybe very light manufacturers they're doing that stuff so there if you have high wages you can pass it on to the consumers because they're just you know the captive consumers uh in in the local market so there's a story a supply and demand story that hangs together here right but of course the consequences if your dollar wages are high then you might be able to compete selling non-tradables to your local captive market but you surely can't compete selling tradable stuff to the world so african cities have locked themselves out of the possibility of getting into tradable goods production you know garments electronics all that stuff that's really supporting productivity in cities elsewhere so the real story i want here is that this bad urban organization on the residential side on the infrastructure side makes the city inefficient makes it high cost sure there are jobs actually quite high wage high nominal wage jobs um that's fine for non-tradables but it locks you out of the real source of growth that you want getting into the tradable sector okay modeling that yeah we have modeled that um it reduces real income that's for sure it gives you multiple equilibria so the possibility that you're stuck uh in a low level equilibrium trap locked in this week week position and it's again strongly reinforced by expectations right the city is built partly on the basis of expectations about the future so you're locked into a bad situation there i'm looking at my watch here the analytical story let me do it very briefly right this is just labor supply and david demand as i said in words a moment ago but diagrammatically so the labour supply curve are these upward sloping lines right i'll just pick one of them the steep one so it's city population on the horizontal axis right as the city gets bigger it gets more expensive your land prices go up so you've got an upward sloping relationship and you've got to pay you know wages along those upward slope of that that was smoking straight line to compensate for the city cost and be able to get the workers from agriculture so that's the supply curve i've drawn the demand curve with two bits right non-tradables have got diminishing returns that's the downward sloping bit diminishing returns because the more you sell to this local market you know the price starts going down so the wage you compare goes down but of course if you could get into break into tradables uh they've got increasing returns all that agglomeration stuff that i talked about earlier so that's why the labour demand curve has got that funny shape okay so if your city's high cost you're stuck but en is is the way it's labelled okay you've got that high cost line yeah so your city is relatively small got high dollar wages although low real wages because it's high cost and hopeless if you bring the costs down maybe you can get into tradables as that's the lowest straight line maybe you can get into tradables but of course there are multiple equilibria for those of you into that sort of thing you're going you could be stuck down at the point labelled el rather than making it uh to et so a real danger of getting stuck okay let me summarize the african experience and then one slide uh on policy and i'm done so the story i've given you in summary um the african cities have failed to make the investments necessary for for economic density because of all sorts of barriers to residential and investment and construction uh the land tenure stuff the lack of capital market stuff the bad regulations all that stuff right giving low density cities they've failed to do the infrastructure so they haven't got the connectivity that gives you high costs of doing business that's fine you can pass it on to consumers of non-tradable goods you know the local market but you can't pass it on in world prices so you lock yourself out of world markets uh by being so having the wrong sort of city structure so you've failed to create jobs fail to raise incomes you're caught in that low level trap all amplified by low incomes you don't have the tax base low incomes you probably don't have the expectations that will generate the building so you're really locked down in that low level equilibrium so it's that diagram again but um reverse the arrows or don't reverse the arrows changes that change the signs on everything i said it's all hanging together to lock you down in that bad outcome okay let me wrap up uh just with a few few policy remarks what do you do about it um yeah clearly land use has to be made more more efficient density has to be encouraged so there are things to do with getting clarity of land tenure appropriate regulation probably tradability of land markets for land but not necessarily i mean you can get you know more efficient land use without going all the way to having free markets in it just removing the obstacles of building regulations and complete lack of clarity right getting rid of those things will help even without going the whole way to full marketability so yeah you've got to do things to improve land use you have to do the infrastructure stuff uh i know if i argue that shapes private investment uh and the city and you really want to try and have infrastructure at least some of it is leading not lagging remember the coordinating expectations argument um just doing the infrastructure afterwards it's losing a lot of the benefit and making it more expensive you really want to try and get infrastructure leading not lagging which of course is easier said than done for lots of reasons above all the fact that infrastructure is mightily expensive so you do really need the public finance side sorted out and as i suggested earlier land value appreciation land taxes are a very natural tax base that can be used to do that not straightforward your tax revenue comes in the future you um need the money now to build and it's not going to be easy to borrow or not always desirable to borrow against that future future tax revenue yeah it's easy it was easy in hong kong where the government owned all the land and could just set it off and you know somewhat similar in china but if it's having to if the city is having to borrow against future revenues it's difficult but still there is a potential tax base to fund that infrastructure and then of course the final thing uh fundamentally important although the first time i mentioned it uh governance right you have to have a city authority uh that is capable of doing this and that city authority has to see the city as a whole uh the bits all hanging together you know very often cities have reformed this little bit you know done that bit of slum improvement you know we really do argue that you you have to see the city as a sort of giant factory uh and see it as a whole and the city authority has to have the capability to act and when i say capability i mean you know the skills but probably above all the authority um you know african governments have tended to be distrustful of uh cities and people in cities so authorities are often horribly divided between i mean what have we been talking about the finance ministry the justice department uh the the land ministry um there has to be an authorizing environment where competent city government can get hold of these this whole range of issues and i think we are seeing that in in some african cities um certainly kigali in rwanda um now has your presidential involvement in making things work i think alice aberberg probably has the same um kampala has set up the kampala capital city authority which is actually a government ministry it sits at the cabinet table so these changes in authority and governance are happening and i think that's really promising although on the other hand darus alam has three mayors for three different parts of the city is completely disjoint okay let me stop that thank you i'd like to thank you thank you very much professor venables for sharing with us the complexity of the east economic mechanism that should see cities as a main theater and thank you also for evidencing the failure of african cities here at the festival the import a number of meetings were held yesterday specifically devoted to migration and i believe that we all see very clearly the relationship existing between the ill-functioning of the african cities for example and migration it is quite interesting to understand why this model doesn't work and what can be done to enhance the situation i would also like to thank professor venables for in presenting us with a lot of content in a limited time down as is the tradition with the trento festival of economics we're going to take questions from the floor i understand that other people are following us from other rooms so i kindly invite the audience um sitting in other halls to raise their questions all the same maybe they can come here just for the sake of raising questions so as again to have a public debate having said as much i'd like to throw the floor open if you raise your hand you'll be given a mic i apologize for not introducing myself my name is pedro bernese i am a journalist i'm my main interest is africa thank you i preamble before i raise my question if i may can you hear me one two three one two three testing testing one two three testing testing one two three one two three one two three one two three testing testing one two three one two three can you hear me one two three one two three one two three one two three testing testing one two three testing testing one two three testing testing one two three testing testing one two three one two three one two three testing testing can you hear we have been translating all the time yes we are here so my question i'd like to make a small introduction what about the areas for of growth do they correspond with the areas of stagnation i'm looking at the whole of the world the sullivan equator is an italian newspaper and we read the paper that the usa are witnessing a reduction in the industrial production um the real estate prices are on the increase and wages real wages is getting weaker and weaker in the usa this is the same thing that we saw in greece spain and italy as well because we see a cry a crisis of demand as generated by these victims by the inspect the bubble in japan the crisis started in 1982 with a bubble that was never sold and all the resources of the welfare ended up in the pockets of the real estate um investors and there's a public debt of something like 300 percent so the the problem is one of the urban development of town planning but behind that there's also an economic problem it all started with adam smith in scotland my question is as follows should we perhaps rethink the economy and replace the um scotland the scottish rhythm with the german rio rio being the advisor to adenauer that transformed the market economy into a social market economy in germany as from the 50s in germany that um leading to the development of the um the development in the netherlands in denmark and in france as well when it comes to residential buildings so if those are the right models combined with the right economy our social market economy as we may term that and uh town planning a social market economy perhaps so we should rethink a town planning with this uh ideal in mind for the whole world so that the town planning can be inclusive obviously everybody wishes for uh in proven enhancement we we see this in germany west germany is producing a lot and the wages are 15 higher than in east germany eastern germany is growing importantly um but ryuk would say that the economic uh order cannot set in the hands of uh um competitors if we really want the planet to be aiming at a new stage of development and growth that are to be really sustainable we have to rethink town planning altogether uh worldwide and specifically in american cities that was a very long question okay i'm not sure i got the last minute or so of that um uh but let me um try and try and try and respond um to some of the points i heard you make yeah i mean clearly is it okay sorry about that right again um cities are policy intensive right they require you know active government um city city government uh intervention to make them work um okay there is a yeah an american model where the large developer comes in and owns all the land and develops the private city and provides the infrastructure but that's not the way it is even in america right so it is clear that cities require you know active uh and and effective government uh i talked about that in the context of infrastructure provision appropriate regulation um very importantly although not done in all cases land taxation as i said there is absolutely no ethical basis for you know the city center land value appreciation being taken by whoever happened to happen to uh own the piece of land in the first place you know i mean the state should in my view tax that so policy intensive uh intervention uh government action is important having said that you have to put on the other side of the equation that the you know ultimately obviously a city is is built uh jobs created by the independent actions of millions of of individuals and tens of thousands of firms right uh and yeah the government is not going to intervene directly in those it can set the parameters the regulations the infrastructure but you know ultimately it's those millions of of independent decision takers and they have to you know be taking their independent decisions in a supportive environment but uh their private decisions and you also have to set against the need for government intervention on the the role of government uh the capacity of government i mean i didn't talk about public housing public housing you know yes definitely has a role to play i mean the addis ababa scheme that i mentioned is undertaken by government government is building the tenement blocks the the the apartment blocks but then selling them on right it's um building them subsidizing the land a bit facilitating mortgages a bit but basically the private individuals then take the mortgages and in practice what then happens is private individuals sublet the apartments so it's a very private sector activity although you know initiated by government action so what i'm trying to say here is you have to take into account the capacity of government you know addis ababa is doing this well do i think that large-scale public housing schemes in africa are likely to be successful no i think their recipe for disastrous mismanagement potential corruption uh and an unreal mess up so so there's a i mean i don't know if this is getting at the point he wanted about the social you were asking about the social market economy but yeah i mean clearly an important role for government but yeah ultimately it's private individuals and let's recognize government failures are likely to be uh very very considerable as against you know private market failures i'm sorry i missed the missed the last part of the question and didn't answer the first part about the world location of activity um professor of venables two questions in the three capitals you mentioned you didn't talk about human capital now is that because the stage of these developing cities doesn't require an intensive skill base that is there's enough labor supply to go into the sectors you're talking about and then the second question is an open economy question on the tradable goods sector how do these cities move in a tradable goods world with competitors principally china and others who can flood their markets with very low cost high production textiles or other manufacturing but textiles will be the classic case where you'd expect on on the first of those human capital um yeah i couldn't i couldn't do everything right yeah yeah evidently it's it's it's it's fundamentally fundamentally important and that means not and institutional capital social capital so let me not uh not not detract from the importance of those things um least in in in government in you know the ability of local government to to function well but yeah i did not mean to down well i simply ignored it and shouldn't have um on on the second question credibles um yeah i mean the standard development model i suppose of you know the last recent decades is that you go through the stage of uh the development stage where development is driven by getting these footloose manufacturing activities the the garments the textiles apparel uh whatever and the simple-minded optimistic application of that would be you know wages in china are going up so this stuff is going to move out to bangladesh and one day to africa um and i hope that will happen uh but what do we have to think about what are the worries on the way well you know africa has to offer the business environment to make it work right uh it doesn't and part of that is the cities are hopeless right they're not the only part obviously i've been talking about the urban part and the argument i'd be making but it's not it's not it's not the only part um yeah so hopefully that will have to happen but africa has to offer uh the environment the environment it won't happen everywhere you know i think if south africa has you know half a dozen really vibrant cities uh working that way that would be a very good news at the moment it has none so it certainly won't happen everywhere a third point that does worry me a lot um wages are going up in china so china's introducing robots don't know whether you saw a couple of weeks ago the financial times around a week-long series on on robots so in china it's now it's not just you know the large factories doing it quite small factories are getting little i don't ask about the details of robotics but they're getting useful machines you know robot time machines to to replace more expensive workers so you know thinking way out well not thinking some distance out into the future into a sort of science fiction world yeah that really worries me you know africa will need to import stuff from outside the continent you can't only do non-tradables you're gonna have to import something you know gasoline electronics airplanes whatever um but if all the tradables i'm not moving to the science fiction world though if all the tradable manufacturers and all that stuff are produced by robots then yeah africa is not going to get it presumably all the income goes all the surplus goes to whoever owns the um intellectual property in those robots and that's i'd be northeastly owning a fair bit it's certainly not africa so yeah there's that development model i think it's important that african cities get in the position where they can uh get this uh attract these activities but i'm not sure it's not with unalloyed confidence that i say that are there additional questions well i would like to ask a question which is about the future vis-a-vis the very strong technology evolution is it thinkable that can you hear me can you hear the translation one two three can you hear me can you hear me one two three can you hear us one two three testing can you hear the translation can you hear can you hear the translation can you hear me one two three one two three can you hear me one two three one two three can you hear me one two three can you hear translation now it works does it work wonderful wonderful let's go so i want to ask a question about the future and especially technology so it seems that technology is not perfect yet though but anyway as i was saying my question is these are the the current technology development is it thinkable that cities in a way experience something which is the reverse because if you can connect remaining far away from the center where population is concentrated it's possible at least in advanced areas to think that cities that cities get less concentrated so again i'm sorry that was not possibly the right question about technology because technology's failing us in this moment okay technology was working so thank you thank you for the question and the interpretation that's great um yes it's possible i mean i ask myself this one this one quite often um but i don't think so um what do we know cities offer amenities and social social contact uh as as well as business contact okay so um yeah i think there are lots lots of reasons for living in cities we're not all gonna want to retire to the countryside uh immediately face-to-face interaction remains important i think you know i'm doing this here rather than by video that obviously could change um maybe video conferencing there'll be a hologram of me here and you know it's that that that that could work um what are the other bits of evidence we know that over the last i mean if you go back 20 years um people were predicting the death of cities right you know london was depopulating american secondary cities were in new york and but were in decline so yeah as in at least in these sort of first stages of the ict revolution the trend has been exactly the opposite okay so uh such evidence as we have is is cutting the other way third or am i on fourth now there's kind of income and substitution effects here if you like um yeah it's easier to communicate with a co-author electronically than it was so i communicate with co-authors electronically but more of my co-authors are scattered around the world right um so um you you need to face it so that means that the total the total amount of face-to-face time that i spend with people who live in other countries has probably increased as a consequence of better technology right so you know i've got more international collaborators a lot of the collaboration is electronic but you do see them face to face every so often so that's that sort of pool that pulled the other way so i guess you know when people ask me this i always end up saying um yeah when when the telephone came along its first use was to arrange face-to-face meetings okay now um as emails come along we no longer just pick up the phone to people uh we use email to arrange a phone call to arrange the face to face so it hasn't unraveled completely yet but it's who knows onto the future i think that our time is up are there additional questions there aren't so we thank you all for being here and we thank our esteemed speaker thank you very much you