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p. 4 of 26 BACK | NEXT Executive Summary I. Introduction II. The Urban Sector A. The Challenge of Rapid Urban Centers B. The Challenge of Sustainable Urban Development C. Dimensions of the Urban Sector III. The Bank's Involvement in the Urban Sector IV. Objectives and Policy Priorities V. The Bank's Urban Sector Strategy VI. Implications for Bank Operations VII. Conclusion

Urban Sector Strategy : II. The Urban Sector

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A. The Challenge of Rapid Urbanization

1. Urbanization and the Growth of Large Urban Centers

8. Urban population growth in the Region has been rapid. While total population of the DMCs grew from 1.7 billion in 1965 to 3.1 billion in 1995, urban population grew from 0.32 billion to 0.93 billion over the same period (Asian Development Bank [ADB] 1996a and United Nations Development Programme [UNDP] 1995). These figures represent 58 percent of overall world population increase and 45 percent of world urban population increase over this period. However, the 1995 urbanization level of 30 percent for the DMCs is low in comparison with the Organization for Economic Cooperation and Development member countries and Latin American countries, where urbanization levels averaged 70-75 percent. While some DMCs such as the Republic of Korea are in the final stages of the transition to fully urbanized societies, the urban populations of South Asia currently average only 25 percent of the total. Continued massive increases in urbanization in the Region are expected: the United Nations (UN) forecasts 53 percent urbanization in Asia by 2025, with the majority of urban growth in Bangladesh, People’s Republic of China (PRC), India, Indonesia, and Pakistan (Figure 1). These projections equate to an average of more than 40 million new urban residents per year (Appendix 1).

9. The proportion of urban population living in large cities in the DMCs will also continue to increase. In 1995, the DMCs contained six of the world’s megacities⁴ (Beijing, Calcutta, Jakarta, Mumbai [formerly Bombay], Shanghai, and Tianjin) and are forecast to have 11 more by 2025 (Bangalore, Bangkok, Chennai [formerly Madras], Dhaka, Hyderabad, Karachi, Lahore, Manila, New Delhi, Shenyeng, and Yangon). Increasingly, megacity growth is taking the form of extended metropolitan regions (EMRs), covering 50-100 kilometers from the city center, with polycentric structures acting as focal points in the movement of people, goods, and services. Metropolitan regional growth has typically sprawled along major highways, expressways, and railroad lines radiating out of urban areas, superimposing new towns, industrial estates, housing projects, and other urban forms onto areas that were previously predominantly agricultural and rural. Without strategic interventions in land-use management and transportation planning, environmental and economic constraints will increasingly affect EMRs; particularly those on low-lying plains subject to flooding, subsidence, and ground and surface water contamination. While not resembling planned cities, at their periphery EMRs provide a cost-effective way for low-income families, developers, and others to gain access to affordable land for shelter and employment. Furthermore, minimum levels of services and infrastructure can be upgraded over time if rights-of-way are secured early enough.

10. While many DMCs have one or several very large urban areas or megacities, problems related to urbanization are best addressed at the level of secondary cities and smaller urban areas, before they become megacities. Interventions should begin at this stage to (i) prevent problems worsening as cities grow; and (ii) support the programs and policies that many DMCs have instituted for the dispersal of industries; development of regional growth centers, corridors, or zones; and promotion of an equitable and balanced hierarchy of urban settlements. Most national urban strategies have adopted some variant of this approach, incorporating explicit and implicit polices that guide urban growth and development to designated urban growth centers.

2. Urban Trajectories

11. Three broad groups of countries can be identified at different points on the urbanization trajectory. The first group, comprising the Republic of Korea, Singapore, and Taipei,China, have per capita gross domestic products (GDP) of $9,000 per year or more and are highly urbanized. The second group, including PRC, Fiji Islands, Indonesia, Kazakhstan, Malaysia, Papua New Guinea, Philippines, and Thailand, have annual per capita incomes of $1,000 to $9,000 and levels of urbanization between 20 percent and 60 percent. The third group, including Afghanistan, Bangladesh, Bhutan, Cambodia, India, Lao People’s Democratic Republic (Lao PDR), Myanmar, Nepal, Pakistan, Sri Lanka, and Viet Nam, have per capita GDPs below $1,000 and levels of urbanization between 6 percent and 35 percent. Figure 2 presents data on the relationship between level of urbanization and GNP per capita for selected DMCs in the Region.

3. Rationale for Investing in the Urban Sector

12. A strong case can be made for the importance of investment in the sector on the basis of the central role played by urban centers in national economic growth. Urban areas are dynamic engines of growth, centers for innovation and entrepreneurship, and sources of highlydeveloped social services. This view is in stark contrast to earlier development theory, particularly expounded in the 1970s, which focused on rural development and viewed cities as parasitical, resource-draining concentrations of people, often poor, that generated little productive return. Opposition to urban development as a national economic strategy was based on the belief that cities already benefited from an urban bias, were too expensive to develop, and increased unemployment as urban labor supply outpaced urban labor demand.

13. A chief complaint against urban development and urbanization was that the process accelerated rural-to-urban migration, characterized by rural workers being lured to the city with false hopes of a high-paying job, only to end up unemployed or marginally employed in the informal sector. However, during the 1970s and 1980s urban areas played a crucial role in absorbing excess rural labor through rural-urban migration, accounting for some 40 percent of urban population growth over the period. Research in Bangladesh and India illustrates that migrants are much better informed about job opportunities than previously thought, and make migration choices in a rational fashion. Unable to be satisfactorily absorbed in an increasingly developed agriculture sector, better-educated workers tend to look to the industrial and service sectors in urban areas for employment. Often employed in the informal sector, migrants’ urban incomes frequently surpass those of midlevel formal sector employees, which subsequently boosts rural household incomes through remittances to their families in the provinces. Urban migrants make rational decisions about their own future, and almost never return to the provinces—deciding that life is better and opportunities are greater in urban areas. The informal sector is actually a competitive center of economic activity, and migration has increased net productivity of the economy by directing labor to locations with higher wages and where a greater contribution to economic production can be made.

14. Recent experience and analysis demonstrates the efficiency of cities as generators of economic growth (United States Agency for International Development [USAID] 1991). The Bank has estimated that some 80 percent of the Region’s new growth is generated in its urban economies (ADB 1996a). Many DMCs are expecting their cities to provide most of the employment required by their rapidly growing populations. In large cities in particular, urban areas benefit from a large and skilled labor force, economies of urban scale, and economies of agglomeration (i.e., efficiency resulting from the clustering of firms in a given industry or related industries), as well as the resulting demand for intermediate and consumer goods (Appendix 2). There is ample evidence that labor productivity increases with city size. For example, the ratio of GDP per capita to national GDP per capita is 1.9 for Manila, 2.5 for Calcutta, 3.5 for Bangkok, and 3.7 for Shanghai. These ratios could be even higher if cities were made more efficient.

15. At the same time, the importance of secondary cities and towns and rural-urban linkages at a regional level must not be overlooked. In many East Asian newly industrializing countries, agriculture has been developed with the rest of the national economy, which in turn has played a critical role in the development of domestic markets and integration into the international economy. Secondary towns and cities provide markets for rural products, service centers for rural activities, and jobs to absorb surplus labor. Strengthening linkages between urban centers and rural areas is necessary to ensure that the two remain mutually reinforcing.

16. While initial capital requirements may be greater in urban than in other areas, the payoff from such investment can also be high. Urbanization brings health and social benefits that could only be achieved in rural areas at far greater costs. Residential infrastructure costs may be higher in cities, but households are also better serviced with piped water, solid waste collection, and electricity—all of which contribute to better health and welfare. Additionally, economic returns to industrial and commercial investments also tend to be higher in cities than in small towns and rural regions. More productive jobs can be created in cities, due in part to the fact that workers have more complementary capital inputs to increase productivity.

17. Throughout the Region, urban areas are, and will continue to be, at the center of economic growth. Economic efficiency of cities is based on the fact that urban growth follows the market. Cities will continue to grow as positive externalities outweigh negative ones. Urban areas with large productivity advantages, stemming from locational features or from the agglomeration of industries, will continue to expand in population and area, and will command the highest wages and land and housing prices. Less productive cities will grow at a slower pace and to a smaller size, where wages, land prices, and worker productivity will be lower. Nevertheless, market forces generally fail to fully incorporate the harmful effects of urban growth, as many of the consequences of environmental deterioration go unrecognized and no market mechanisms are in place to correct them. This may account for the fact that in India, medium-sized cities are growing more quickly that the larger urban areas. Further, the World Bank estimates that the growth of intermediate-sized cities in the PRC and Indonesia account for 24 percent of incremental global urbanization. The dynamics of urban growth is complex, varies between countries, and is not well understood.

18. Other forces are at work in the Region. Globalization and technological change will strongly affect the fortunes of different DMCs depending on their perceived locational advantages, potential profitability, available skills, and adaptability. These external factors are influencing cities in the Region in two ways. First, there is increasing competition among cities as multinational firms compare labor and other input costs and assess economic incentives available, the regulatory climate, the existence of market-based laws and institutions, flexibility of the labor force, and political stability: cities that can meet these requirements will progress economically at much faster rates than those that cannot. Second, the emergence of information-based service industries including financial and producer services, research and development, and media is benefiting larger cities that can offer the most efficient conditions for information dissemination.

19. The process of globalization through the international trade of goods, capital flows, and labor mobility has created an increasingly integrated world economy and growing competition between urban centers for foreign and domestic investment. Interdependencies are being created between urban centers across national boundaries, often creating links that are stronger than those between an urban center and its own hinterland. Trade liberalization, while often painful in terms of the required restructuring across sectors, is creating new opportunities and synergy within and between regional growth zones. Ultimately, competition between urban centers will not only be related to locational and production advantages, but to less tangible but equally or more important factors such as good governance, quality of public service provision, and support for entrepreneurial enterprise. This process will result in both winners and losers.

4. Impact of the Asian Crisis

20. Asia’s current financial crisis has led to a sobering reassessment of the “Asian Miracle” and the previous assumption of continued rapid rates of economic growth in the Region’s DMCs. The contagion, triggered by a combination of weak banking institutions, a lack of transparency in the financial sector, the vagaries of speculative global capital, and corruption, leaves in its wake a number of challenges for some urban areas: high unemployment, a large population of out-of-school youth, a growing level of urban crime, and a nearly bankrupt private sector. The situation is all the more painful for families that achieved middle-class status, only to find themselves once again plunged into poverty. Furthermore, in Indonesia and Thailand, there is already evidence of a trickle of workers returning to the rural sector as work opportunities decline in badly affected cities (Pernia and Knowles 1998).

21. In this environment, the immediate challenge is to maintain and increase the efficiency of cities so that they can continue to offer formal and informal job opportunities to inward migrantsas well as to the majority of existing residents. Given the sheer volume of new entrants to the economically active population in the Region, the task may be impossible to address immediately and is likely to require longer term strategies. Additional challenges arise concerning the financing of social safety net policies to assist the worst affected families.⁵ Governments must prepare for the longer term social impacts of the crisis, which will be felt more acutely in urban areas that are the centers for manufacturing and service industries, by fostering job retraining programs and employment services, and by ensuring that social safety nets target vulnerable groups. Local governments must face the challenge of maintaining infrastructure spending as tax revenues fail to materialize, and of retaining the quality of social services as clients shift from private to public providers.

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