Africa’s future depends largely on creating successful competitive cities – World Bank

To spur economic growth, successful cities focus on three sources of growth: expanding existing firms, creating new firms, and attracting investors. In other words, the city authorities and national government create an enabling environment.

Africa will in the next 35 years need to accommodate almost 900 million new urban dwellers, which is equivalent to what Europe, USA and Japan combined have managed over the last 265 years, according to the Mo Ibrahim Foundation.

This urbanization is a result of two factors, usually happening concurrently: a “push” from an increase in agricultural productivity growth, which means fewer workers are needed on farms; and a “pull” from urban industries, whereby factories require an increasing amount of labour in cities.

Urban growth in Asia has largely unfolded along this trend, with low productivity farmers moving to higher productivity manufacturing and service jobs in urban areas, which have economies of scale in terms of providing infrastructure and services such as power and water.

A team at the World Bank Group has been working since January 2014 on a series of analyses that looked at two central questions: what makes a city competitive; and how can more cities become competitive. The resulting report, Competitive Cities for Jobs and Growth: What, Who, and How shows that improving the competitiveness of cities can help eliminate extreme poverty and promote prosperity for all citizens.

“We sensed that everyone has an opinion on cities and economic development—these topics are sexy, urgent and perplexing,” said Stefano Negri, Lead Private Sector Development Specialist on the Competitive Cities team.  “But fewer people can point to real evidence—and even better, evidence that is practical and can be used tomorrow by policymakers. This is what we set out to achieve.”

With most of the global population and capital goods concentrated in urban areas, cities are keys to social development and economic prosperity. They are drivers of national economic growth and innovation, and act as cultural and creative centers. But urbanization also brings challenges. With a greater concentration of people, assets and infrastructure in urban areas, an increasingly complex range of shocks and stresses can put in jeopardy human wellbeing and hard-won development gains.

Of the 750 global cities analyzed in the report, three-quarters have grown faster than their national economies since the early 2000s.

If more cities were competitive, several million additional jobs could be created every year. At the center of this potential job growth is the private sector, which typically accounts for 75 percent of jobs created. To improve competitiveness, city leaders can adopt policy actions and reforms that help attract, retain, and expand the private sector.

The resulting enabling environment has a significant impact on economic growth and poverty eradication as the top 10 percent have almost triple the growth of the average city at 13.5 percent annual gross domestic product (GDP) per capita growth compared with 4.7 percent. This high growth encourage strong job creation with the top 10 percent of cities achieving more than quadruple the job creation rate at 9.2 percent annual job growth, while the rest only achieved 1.9 percent. More jobs also result in higher incomes with the top 10 percent cities increasing the average disposable income of their households by 9.8 percent annually.

After expanding existing businesses and creating new businesses, the successful cities also perform better at attracting investors. The data shows that the top 5 percent of cities attracted as much foreign direct investment (FDI) as the bottom 95 percent of cities combined.

The World Bank study shows that you do not need to be the capital or the major centre to be successful as many secondary cities are also successful. These secondary cities are experiencing rapid industrialization. According to the study’s data, competitive cities include Saltillo, Mexico; Meknes and Tangier, Morocco; Coimbatore, India; Gaziantep, Turkey; Bucaramanga, Colombia; Onitsha, Nigeria; and Changsha, China.

Successful cities realize that one size does not fit all, so they customize their choices and interventions to increase competitiveness. These interventions include institutions and regulations, infrastructure and land, skills and innovation, and enterprise support and finance. These are tailored to the needs of firms. The policy levers are focused on creating a favorable business climate and targeting individual sectors for proactive economic development initiatives.

The World Bank cites Gaziantep in Turkey as an example of how to overcome obstacles. Gaziantep has limited natural resources, is not a port city, and does not have high-tech clusters. Yet Gaziantep’s light-manufacturing firms sell their products in 175 countries around the globe. Exports increased tenfold in just 11 years, from $620 million in 2002 to $6.2 billion in 2013. It ranked ninth globally for economic growth in the decade 1999 to 2009. It recorded an average of 6.3 percent in annual gross domestic product (GDP) growth from 2005 to 2012, and 3.6 percent in annual employment growth. The result was that it grew from population of about 120,000 people in the 1970s to 1.84 million currently, including approximately 300,000 Syrian refugees.

Successful cities distinguish themselves not simply by their choice of policy action or reform, but how they get things done in the first place and how they partner with others. Cities choose a strategy for economic development, align their budgets, solve problems during implementation, and mobilize sufficient staff and attention to the quality of implementation. They also leverage other tiers of government and private sector partners to generate larger outcomes.

Success also involves building coalitions and being resourceful. In all of the successful case studies examined, growth coalitions between public and private stakeholders in economic development were seen throughout. And in cases where cities lacked capabilities for financing themselves, they leveraged the resources of neighbours and other tiers of government.

In Africa however there is too often no such team building and no strategic plan to level the benefits of agglomeration. Fragmented development and unfeasible commutes imply that the most accessible urban jobs are those pursued at home and by a single person. For example, in Kigali, Rwanda, the home is the usual headquarters for the 72 percent of firms that are run by a single individual.

A city that is ‘out of service’ and ‘closed for business’ ends up plunging into a low productivity spiral, where the only jobs being created are informal, vulnerable ones in street hawking and market trading. This is one of the reasons why Africa’s large city centres are dominated by a local retail industry, of goods and services being traded within the city, but only modest production in things that can be scaled up or traded internationally. In Gaborone, Botswana for instance, more than half the firms are in the non-tradable sector, whereas in Lima, Peru it is only 10 percent.

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To shift urban centres in Africa from being crowded, disconnected, and costly, and instead become livable, connected, and productive will require some tough measures. These include simplifying and clarifying transfers of property rights, proper urban planning, and realistic regulation coupled with predictable enforcement and coordinated infrastructure investments.

“Given the high sunk costs and enduring nature of infrastructure, any approach to urban development that lacks early planning and coordination will only require future generations to clean up the mess: a terribly inefficient strategy,” the World Bank warned.

Dysfunctional African cities impact on the poor by raising the price level relative to other non-African cities. A regression analysis by Gelb and Diofasi found that the higher price levels in Africa relative to their income levels, remains statistically significant even after controlling for a variety of factors, such as fuel subsidies, geography, and institutional quality. According to their results, the price levels of GDP are 11 percent to 18 percent higher in African countries.

Based on a comparison of 62 countries across Africa, Asia, and Latin America, the World Bank analysis shows that, controlling for their income levels, the price levels of household consumption in Sub-Saharan Africa (SSA) countries are 31 percent higher overall than other countries. Food and non-alcoholic beverages are particularly expensive, with price levels 35 percent higher than in other countries. The World Bank reached a similar conclusion when analyzing the Worldwide Cost of Living Survey data collected by the Economist Intelligence Unit (EIU).

The results of the regression analysis also revealed which African countries are particularly expensive or less expensive for living. Relatively expensive countries include Angola, Democratic Republic of Congo, Mozambique, Malawi, and Chad. By contrast, Gambia, Mauritania, Madagascar, and Tanzania have relatively low price levels among SSA countries.

The fact that food is relatively more expensive in SSA countries demonstrates its impact on the lives of the poor population, who tend to spend a larger portion of their consumption on food. The expenditure weights of food in household consumption in the 39 SSA countries included in the World Bank analysis are exceptionally high compared with the rest of the world.

According to household surveys collected in several African countries, urban households allocate on average 39 percent to 59 percent of their monthly spending to food. Among them, the poorest (the lowest income quintile) spend a larger portion of money on food varying from 44 percent in Uganda to 68 percent in Zambia. The relative expensiveness of food-related headings results in high price levels in household consumption, because of the high expenditure shares of food.

To address the issues of African cities, the third Annual Bank Conference on Africa (ABCA) will bring together scholars and development experts to explore various topics pertinent to the drives and consequences of urbanization in Sub-Saharan Africa at Oxford University on 13 and 14 June 2016.