Keynes Prize: The Economics of Cities (3)

In the third extract of the winning essay for the 2011 Keynes Prize in Economics, Ross van der Watt asks “What should be done to revitalise cities in decline?”

The beginning of the 20th century saw the rise of the industrial city. These cities often became the site of vast firms operating in a single industry such as textiles in Manchester or cars in Detroit. With the decline in transportation costs the industries in these urban areas lost their comparative advantage against Asian companies that could produce the same product for much less. Reviving these cities requires shedding their old industrial model completely. Urban reinvention is made possible by traditional urban virtues: educated workers, small entrepreneurs, and a creative interplay among different industries.

Governments commonly make the error of confusing a city, which is really a mass of connected humanity, with its buildings. This mistake can explain why when faced by a declining city, governments often attempt to revitalise it through vast development projects. The difference between good projects and follies like Detroit’s ‘People Mover’ which was built despite the fact that Detroit required no new public transport system, is that good projects create tangible benefits for large numbers of users. Bad projects just create patronage opportunities and rewards for developers.

Many nations have tried different approaches to revitalising their declining cities. In some Italian and English cities, tax free zones were set up to entice employers back to urban areas. Although this policy has proven successful, research has shown that it cost $100,000 in tax breaks to create one job¹⁵. This seems extremely expensive for a policy which effectively encourages firms to relocate from productive to unproductive areas. Another alternative, successfully attempted by the Spanish city of Bibao was the construction of their Guggenheim museum. Through the attraction of a great piece of culture Bibao’s tourism has risen from 1.4million people in 1994 to 3.8million in 2005, revitalising the local economy¹⁶. However, this does not work in all cases with Sheffield’s National Centre for Popular Music closing the same year it opened.

Some cities sensibly recognise that they are unlikely to regain their former economic strength and go about dealing with decline by downsizing. Leipzig in Germany destroyed 20,000 houses in order to reduce the oversupply of housing and make the city more attractive through the creation of more green space while reducing the cost of city services. Other polices involve ensuring low congestion and effective law enforcement to increase a city’s overall appeal to businesses or skilled workers.

By understanding that a city is not the buildings but the people that live in them, the most effective way to revitalise a dying urban space is to encourage the development of its human capital. Investing in education and core public services coupled with moderate taxes and regulations is the best governments can do to ensure the strengthening of a city’s human capital for the future. This is so important for a city facing decline as it enables the city to reinvent itself through the entrepreneurship and innovation of its citizens.

Technological changes and improved electronic communications seem, paradoxically, to be making cities more, rather than less, important. There is a strong correlation between urbanisation and economic development across countries, and within-country evidence suggests that productivity rises in dense agglomerations. But urban economic advantages are often offset by the perennial urban curses of crime, congestion and contagious disease. Though the scope of urban challenges can make remaining rural seem attractive, agrarian poverty is typically much more costly. The past history of the developed world suggests that these problems require more capable governments that use a combination of economic, social and engineering solutions to address urban challenges in order to ensure future continued economic growth in the urban environment.