The Urgency of a New Development Path for African Cities

The Urgency of a New Development Path for African Cities

African cities are crowded as well as disconnected, making them costly for firms and residents. The physical and economic dysfunction of African cities constrains public service provision, inhibits labour market pooling, and prevents businesses from reaping scale benefits. It is why potential investors and trading partners stay away, fearing lack of return on their investment.

The problem is not a simple one of underinvestment leading to low infrastructure, but a more complex one involving the interdependence of many investment decisions. Business investment decisions depend on the presence of other businesses — customers and suppliers — and of workplaces that can be reached from residential areas.

Closed for Business

Infrastructure finance depends on revenues from a growing city. All these investments are interrelated, and expectations are crucial. Investors’ low expectations become self-fulfilling when one investment fails to take place, reducing the expected return to others. The resulting vicious circle locks cities into a low development trap, where cities are ‘closed for business.’

The business decision to produce internationally tradable goods and services will depend on input costs, including urban costs that workers face when living in a city, such as rent, commuting costs, and the high price of many goods. Companies must raise wages to offset (or partially offset) these costs to attract workers. However, even as nominal wages climb to reflect rapidly rising urban costs, real wages remain low.

When urban costs drive nominal wages too high, businesses will not be able to compete in the tradeable sector and will produce only nontradeables, such as the construction trade, the retail trade, and many service sector activities, including informal sector employment.

These producers can raise prices citywide, passing cost increases on to consumers in the urban market. Such price hikes make the cost of living in a city even higher, contributing to the workers’ rising urban costs. This sequence can become a vicious cycle that keeps African cities out of the tradable sector and limits their economic growth.

Often, proposed solutions to Africa’s urban challenges focus simply on increased investments in structures or on reforming urban planning. These actions are necessary and urgent — but they are unlikely to lift cities out of the nontradeables trap.

Efficient tradeable production needs a cluster of economic activity and good coordination. Otherwise, cities remain ‘closed for business.’ A city needs a credible coordination agent, either a forward-looking group of firms that can harmonise their plans and make a move together or a large-scale land developer or municipal government that can realise its vision through major infrastructure investment.

Out of Service Cities

According to the United Nations, More than 60 per cent of African’s urban population lives in areas with some combination of overcrowding, low-quality housing, and inadequate access to clean water and sanitation, meaning housing and basic services deficiency.

Unfortunately, Africa’s urban dysfunction is self-perpetuating. It lowers expectations, deters the investments needed for improvement. Housing investment decisions shape urban form. Providing housing in the formal sector means deciding to sink costs in long-lived structures. Such decisions depend critically on expectations for a city’s prospects.

Cities that inspire high expectations will attract greater investment in formal sector structures, including residential structures, which reduce urban costs and in turn attract more investment. In contrast, cities that seem likely to remain artisanal — based on low-value nontradables production —have low expectations for growth.

Little incentive for investment in formal structures and a lack of capital investment keep cities disconnected and urban costs high, perpetuating the cycle. Furthermore, the business and regulatory environment in African cities creates further barriers to capital investment.

Cumbersome property law and land use and ownership regulations, as well as the design and enforcement of urban plans in African cities, impede urban development. As a result, the land is often developed informally, urban land transactions incur high costs, and inefficient regulations further limit formal development.

Urban plans are largely ineffective in Africa. They typically do not consider finances, market dynamics and interests, social diversity, or differences among income groups. When enacted, regulations lack built-in implementation mechanisms. Human capacity constraints and financial resource constraints preclude effective enforcement.

More generally, the intentions and outcomes of urban plans are distorted by institutional failure and fragmentation across sectors and levels, by political interference, and by lack of consideration of a city’s political economy.

Inappropriate or unrealistic regulations and guidelines, especially on land ownership, impede access to land and discourage the formal development of city centres. Political risk can make future rents even more unpredictable. As a result, African cities remain ‘out of service.’

The Path to Urban Development

The vicious cycle of low expectations appears likely to keep Africa’s urban economies undercapitalised, making the region’s development all the more challenging. Compounding this problem of low urban expectations is the reality of path dependence – identified in recent work as a central concern for policymakers.

Cities that grow inefficiently, without any effective plans or incentives to integrate their physical form, are likely to be locked into the resulting disconnected forms. Once built, they are difficult to modify and can stay in place for more than 150 years.

Also, infrastructure investment needs to be planned well in advance; if a growing city lacks a comprehensive, forward-thinking plan to provide basic infrastructure services — sewerage, drainage, electricity, clean water, and connectivity — it will have to add them later, inefficiently and at far greater cost.

Furthermore, as important as path dependence is interdependence among urban structures, infrastructure, and services. Much of a structure’s value reflects complementarities with other structures in the neighbourhood or city.

Social returns on public infrastructure depend on the proximity of housing and premises. A rapid transit system is more viable at higher densities. Policies need to leverage these complementarities, avoiding coordination failures and single-sector interventions that get in the way of economic density.

Cities that continue on inefficient development paths are growing but in a counterproductive direction. Their physical structures and infrastructure will not keep up with their rising population. As they continue to amass sunk capital — while passing up opportunities for complementary investments that will never come again — they will sink deeper into the low development trap, remaining ‘out of service’ and ‘closed for business’ forever.

Source: The World Bank Group

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