Urban Economy

Icons-04Cities are the main creators of economic wealth, generating on average 75 per cent of a country’s Gross Domestic Product (GDP).  Most industries and businesses are located in or within immediate vicinity of urban areas, providing city residents with jobs. At the same time, cities need to finance their urban developments and invest in basic services and infrastructure. Running a city is a costly undertaking which requires constant investments, especially if it wants to stay competitive at regional, national, and international levels.

Because most employment opportunities are within urban areas, cities attract large parts of a country’s job seeking population. This is especially true in developing countries, where almost all economic activities take place in cities, causing rapid rural-to-urban migration. Today, over 50 per cent of the world’s population is urban dwellers, with this figure expected to rise to over 65 per cent by 2030.

In developing countries, a massive and haphazard influx of people seeking a better economic future pours into urban centers, and often fuels the creation and expansion of informal human settlements, as conventional housing options are out of financial reach. Lack of  regulations and housing finance solutions only aggravates the issues of slum growth.

Understanding regional and global dynamics

Cities are not evolving in isolated systems, and must create their economic strategies with a macroeconomic understanding of their economy in mind. A better comprehension of regional and global dynamics will help to foresee and address threats in a more effective way. This will also enable cities to identify opportunities that lie beyond their boundaries, such as the promotion of economic activities complementary to other cities, thus creating regional synergies instead of competition.

Developing the Urban Economy

Cities need to fully understand and take advantage of the systemic relationship between their economy and all other aspects of urban development. Sound urbanization can only be achieved if the economic development aspect is properly addressed.

If employment is low, revenue from taxes will likely be low as well. This will impact municipal finance, which in turn will slow down urban development projects that are needed to provide attractive environments conducive for economic activities and investments. Cities therefore need to fathom the holistic nature of their economy and simultaneously address employment, macroeconomic impacts, housing issues, and municipal finance to achieve sustainable economic development as a whole.

Cities must reinvent and diversify their economies, primarily utilizing their own resources and capturing a niche in the global supply chain of goods and services to gain a competitive edge. They need to attract investments to create jobs, for instance through attractive fiscal policies and incentives, the provision of adequate infrastructure, or eased procedures to set up businesses. At the same time, strong networks between industries and businesses will help pool resources, produce economies of scale, and facilitate the exchange of business knowledge, thus enabling cooperation that will benefit all involved.

Adding to that, municipal finance in developing countries is often riddled by lack of adequate funds. Many cities and towns are seriously under-resourced – in terms of finances, human resources, or technical capacities – to meet an ever-growing demand for basic services, new infrastructure, and maintenance. Revenues are often insufficient to meet the growing municipal expenditure needs, failing to create a favourable environment for the growth of economic activities. Local authorities need to develop innovative mechanisms to generate more revenue for their municipalities, in order to be able to provide better infrastructure, utilities, and services. Value capture – taxing increased land value after public infrastructure developments – is one of the popular tools used by many cities in developed countries to raise revenue and to reap the benefits of urbanization. Also, regulating the informal sector will not only improve working conditions, but will also create new sources of possible tax revenue.

Informal economy and urban poor

The informal economy – characterized by its lack of rules and regulations – tends to develop in parallel to fast demographic growth and supplants other more stable forms of revenue generation, as formal job supply cannot meet rising demand. In Sub-Saharan Africa and South Asia, more than 70 per cent of the labour force is vulnerable, confronted by insecure working conditions, lack of labour rights, underemployment and unexpected layoffs..

Despite cities being the biggest providers of both formal and informal jobs, unemployment and underemployment are still major issues around the world. The resulting poverty leads to problems such as malnutrition, social exclusion, and crime. Likewise, youth unemployment is particularly high, with youth being thrice as likely as adults to be unemployed. The urban poor also face a greater uncertainty because cities are closely linked to the global economy. They tend to be more adversely affected by national and global economic uncertainties than their rural counterparts.

The informal economy requires attention, mostly through policy measures and regulations, to provide workers with a more structured environment and to connect them to the formal urban economic system. This will open up new business opportunities, while at the same time regulating and enhancing working conditions, especially for the more disadvantaged populations. Likewise, vocational training and adult education should be widely accessible in order to empower both the informal workforce and the unemployed. Furthermore, municipalities need to introduce poverty reduction initiatives and strategies geared towards the poorest of the poor, such as microfinance services.

The role of the private and academic sectors

Collaboration between the private and academic sectors also needs to be encouraged in order for educational institutions to understand the needs of local businesses and to offer adequate education or training. Employment opportunities can then be met by local residents who will have acquired the skillsets required by local employers.  The private sector, on the other hand, will benefit from current academic ideas and research, being able to innovate and adopt new technologies to stay competitive.

The private sector itself needs to play a proactive role in the overall development efforts, and businesses must adopt efficient strategies and sound management practices. This is not only to foster growth that will stabilize existing jobs and create even more employment opportunities, but also to ensure employees benefit, for instance through fair wages and health insurance coverage.

Linking the housing problem and urban economy

To tackle the housing problem of rapidly growing urban centers, mostly in developing countries, authorities also must address housing finance. To curb the growth of slums and all its related challenges, city dwellers need to be able to afford formal housing. Consequently, cities need to ensure that rent prices are fair and accessible, and to promote access to property through fiscal incentives and, at a government level, promote banking sector regulations so that loans and mortgages become more attractive and within financial reach of the majority of the population.

UN-Habitat’s Solutions to Strengthen the Urban Economy

UN-Habitat provides advisory services on issues of urban economic development and finance, including housing finance, with the goal of improving policies, planning, resource allocation, service delivery, livelihoods, and governance. It offers strategic guidance on optimizing urban economies for cities to create value and wealth, and to enhance their competitiveness, drive economic growth, and create jobs. UN-Habitat also devises investment and financing plans and articulates asset-based strategies to optimize endogenous growth factors and to fully utilize available local resources.

Moreover, it helps to promote inter-municipal cooperation and to foster relations with national governments in order to expand investment opportunities, regional connectivity, and access to the global market. It also identifies  doable, innovative, and inclusive strategies such as skills development, job matching, or “buy local” campaigns, as well as advising on the design of both business parks and cluster developments and on the organization of business and job fairs.

In regards to municipal finance, UN-Habitat provides advisory, technical, and capacity development support to municipalities so that they can apply innovative revenue generating mechanisms. These mechanisms include land value capture, access to capital markets and grants, and identifying bankable projects that are attractive to the private sector. They also include the privatization of municipal revenue collection and provision of services, which generates income from issuing permits to business operators, and forms public-private partnerships.

UN-Habitat offers strategies to promote social inclusiveness and equity. It further provides advisory, technical, and capacity development support to local authorities and communities to help improve the economic situation of the urban poor and to make their livelihood strategies more sustainable.

Tackling the Youth Employment

UN-Habitat recognizes the particularly high rate of youth unemployment, as well as the potential of youth to transform their cities. Through the youth-led “laboratory” projects such as the UN-Habitat Urban Youth Fund, the agency is increasing opportunities for the urban youth in developing countries to improve living conditions for themselves and their communities. Specifically, the Fund makes grants for and develops the capacity of urban youth-led organizations implementing community projects which contribute to sustainable urbanization and economic prosperity. The Fund supports over 200 youth-led projects in at least 50 countries in Africa, Asia, and Latin America. The Fund has so far opened a funding window in Zanzibar and is working with the governments of Nigeria and Mauritania to establish similar facilities.