CITIES AND INCLUSIVE GROWTH In a series of short op-eds, Ann Bernstein focuses on South Africa’s cities and inclusive economic growth. South African policy makers have never embraced urbanisation and the merits of urban growth fully. This is despite the superior economic and employment performance of SA’s cities. Many developing countries have one large city which struggles to cope with overwhelming numbers of people and needs. South Africa has an unusual strength – a number of large cities that could be used far more effectively to spur national growth and increased employment and other opportunities for all South Africans. South Africa’s failure to grasp the centrality of cities holds back growth and development. If the economy is to grow fast enough to absorb millions of work-seekers, it will be because growth in city economies will have accelerated drastically. National priorities need resetting: we need to focus on the key challenges cities face, embrace urbanisation and harness the productivity gains that could be obtained from larger, better-run cities that offer hope and opportunity across the entire city irrespective of race or class.
OP-EDS
A level playing field is vital By Ann Bernstein, 28 November 2016
Integrating urban economies in cities as segregated as ours is not easy, but it can be done, writes Ann Bernstein. South Africa is an increasingly urban society and its economy is even more so- our eight major cities are home to about 37% of the population, but account for 59% of economic activity. This should come as no surprise as cities across the world produce more than 80% of global economic output, a figure that suggests our cities have even greater potential as drivers of future growth. South Africa must think differently about how to make the most of our cities. An agenda for cities of hope and opportunity for all residents will need to cover many issues, including infrastructure, housing, transport, finance and regulation. A key goal needs to focus on overcoming the spatial, institutional and infrastructural legacies that fragment the urban economy. South Africa needs to build integrated, one-city economies that can attract investment and encourage entrepreneurs. Integrating urban economies in cities that are as segregated and fragmented as ours is not easy. In some ways, it is unsurprising that today’s planners have different agendas for townships and the formerly whites only cities in which economic activity was concentrated by apartheid’s planners.
the establishment of many kinds of businesses in the township illegal, and made all others difficult to run successfully. Townships also lacked the physical and institutional infrastructure (good roads, banks, lawyers, civil courts) needed for business to thrive. The result was that businesses, if they were established at all, tended to be informal, unregulated and small. They rarely succeeded, creating few entrepreneurial role models for others to follow. Given these factors, as well as bad education and low income levels among residents, it was difficult for households to accumulate the start-up capital and knowhow to get a business off the ground. Much of this remains true today. There is considerable economic activity in the townships mostly personal and household services such as retail and entertainment services, home construction and vehicle repair, hairdressing and healthcare, schooling, food preparation and laundry but the scale is limited, and most township businesses remain small and informal, and operate on narrow margins. As important as institutional and infrastructural issues are, the main reason township businesses do not fare as well as firms providing similar goods and services in the rest of the city is that township households are far poorer than suburban households. This is an issue that cannot be solved using the tools that policymakers seem to be advocating.
One possible response to the imbalances in economic concentration is to seek to stimulate economic activity in the townships by providing township businesses with various forms of public support and protection. Indeed, this is an approach that has attracted increasing attention from policymakers. But is it the right one?
In Gauteng, the department of economic development argues that the high failure rate and low income levels of township businesses are due to “unfair competition from foreign traders and/or formal sector businesses with monopoly power”. Township entrepreneurs, it concludes, must be protected from outside competition.
Let’s start with the obvious: apartheid-era restrictions, including zoning rules and other regulations, made
Of course, providing the right kind of support to township entrepreneurs could be beneficial. However,
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protecting them from competition from foreigners and “monopoly” firms would be the wrong way to do so. Apart from the question of whether external competition is really “unfair” or if the firms they have in mind really are monopolies, protecting local firms against competition would mean imposing higher costs on consumers. Given the overriding importance of improving the welfare of poor households, this would be misguided. The growth of services dominated township economies depends primarily on the extent to which township residents get jobs, and what kinds of jobs they are. Township economies would be stimulated both by expanding employment across the entire city and by improving the ability of township residents to get those jobs by improving access to skills acquisition and public transport. Ultimately, however, the interests of township residents lie in ensuring the expansion of businesses and jobs in the city as a whole, rather than seeking to ensure that jobs are created predominantly in the townships. This means that urban policy should focus more closely on what it would take to get urban economies to grow more rapidly and to absorb more labour than on growing firms that happen to be located in townships. The truth is that pursuing growth has not been at the core of our urban strategies to date. If it were, urban leaders would be shouting about the effect of national policies, attitudes and legislation on their economies, and on urban labour markets where restrictions increase unemployment and prevent
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the emergence of more labour-intensive firms. They would also be crying out for education and training reforms so that young urbanites across the city could become a lot more skilled. Irrespective of where it happens in the city, faster growth will transform the prospects of poor citydwellers and, through the effect on their disposable incomes, it will also help grow township economies. The objective must be to accelerate economic growth in the city while helping township residents access new opportunities for employment and enterprise. So what, then, is needed to forge one city with opportunities for all and to create a business environment that attracts investment? The basic building blocks are providing residents (wherever they live in the city) with high-quality education and skills training. It’s also essential that labour market policies that inhibit job creation are addressed and that entrepreneurs can tap into their cities’ different markets. Within the townships themselves, a regulatory regime that supports faster growth and more employment is needed. This has to include a supportive environment for small business entry, survival and expansion.
Cities are vehicles of growth but policy makers take foot off the accelerator By Ann Bernstein, 17 November 2016
National priority should be higher-density, integrated urban economies that break up our apartheid legacy. Getting out of SA’s low-growth, high-unemployment trap requires bold action. One priority is to take advantage of the energies unleashed by urbanisation and the productivity gains our cities can provide. The country’s future is urban and our major metropolitan areas are one of our strengths. It is time to make more effective use of them and get beyond the fragmented and discriminatory past of townships and cities. SA needs to create integrated urban economies with opportunities for all. We need to reset national priorities to place cities at the heart of growth policy. We also need to tackle the challenge of apartheid’s problematic urban spatial legacy. The structure of our cities, their layout, governance and functioning, reflect a harmful heritage of segregated land use and denial of economic opportunity that to this day obstruct their capacity to generate and sustain rapid economic growth. One manifestation of this legacy is that our cities have much lower density than those in other middleincome developing countries: 2,500-4,000 people per km² compared, for instance, with Sao Paulo’s 7,000 per km². This reduces the efficiency of the urban economy and has acted as a brake on economic growth. The effects of this are seen in the key areas of housing and transport. The RDP housing programme has delivered large numbers of houses, but at the cost of reinforcing apartheid’s spatial legacy and trapping poor people in places with no economic prospects. This is because RDP developments are typically located on peripheral
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land and consist of detached houses on individual plots. SA simply cannot afford to house everyone on this basis. According to the Financial and Fiscal Commission, to meet existing housing needs on this basis will cost R800bn by 2020 — four times the budgeted amount. Even if this were affordable it would be bad policy because it would squander the many potential advantages of densifying the cities. One of the consequences of low density is that public transport systems tend to be inefficient and expensive. No one involved in the transport sector believes enough has been done to develop workable solutions. As many policy documents have noted, long-term transport solutions require the spatial reordering of South African cities, but little has been done to achieve this goal. Instead, we have devoted considerable resources to subsidising public transport, establishing new public transport systems such as the Gautrain and bus rapid transit systems in major cities, and renewing the Passenger Rail Agency of SA’s rolling stock. One common feature of these investments is that they have failed to meet the cost and revenue projections on the basis of which they were approved. In some cities, the fare income of bus rapid transport covers less than 60% of direct operational expenses. The Gautrain service is also heavily subsidised. Raising the density and mobility of SA’s cities is the key challenge for creating more efficient and dynamic urban economies. What can be done to bring this about? In the first place, densification requires political will to drive more intensive use of land within city limits and to discourage the construction of new developments, whether low-income or not, on the urban periphery.
The only way to achieve this is through appropriate zoning rules and approval processes that will provoke the right kind of response in the housing market, along with investment in strategic and catalytic projects — such as well-located transport corridors. This will make it possible for developers, households and entrepreneurs to take advantage of the benefits of densification. Building publicly funded houses for the poor on peripheral land is the exact opposite to this. Scarce Urban Space A policy mix that included open and flexible zoning rules, appropriate building standards and economically sensible use of state-owned land in the cities, as well as the removal of hidden subsidies to public ownership through favourable rates and taxes, would help urban land markets to function more effectively, especially if priority is given to projects that intensify the use of scarce urban space. Improving physical mobility is another priority. Safe, reliable and affordable urban transport helps poor people get access to opportunities. It also reduces the costs of travel, thereby lifting the pressures on household wages and increasing disposable income in ways that benefit service providers and businesses in the townships. Building integrated city transport systems will do far more to improve the lives of the poor than attempts to stimulate township economies through direct intervention in the processes of local business formation and growth. One of the most important benefits of improved public transport is that the key routes and hubs can become the basis for densification, because effective public transport provides logical development nodes with high amenity values for residents. The current approach to providing resources for public transport overemphasises buses and trains and underemphasises the minibus taxis that provide the bulk of transport services: taxis carry 67% of public transport users, but 98% of subsidies go to bus and rail transport. Current policy also benefits and protects incumbent service providers rather than creating competitive pressures that would make transport more efficient, cheaper and safer. A reorientation of policy to subsidise commuters rather than service providers should be explored urgently.
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Housing remains a pressing need but it does not make sense to build houses for low-income households in places where they cannot access economic opportunities. Instead, resources should be redirected to make better use of existing city infrastructure and to house people within easy reach of work or of opportunities for entrepreneurship or skills acquisition. SA’s housing strategy should focus on creating affordable rental accommodation in inner cities, upgrading informal settlements and densifying existing residential areas. Cities should plan for new arrivals before they come, and focus on providing the bulk infrastructure needed for growing populations. Instead of building more RDP houses, existing homeowners should be provided with incentives to build second or third dwellings on their properties. This would reduce the cost of housing provision because bulk infrastructure and roads are already present. It would also increase density because more structures would be erected on existing plots and provide homeowners with potential sources of rental income. The in situ upgrading of informal settlements is hard, but pretending that these settlements can be eradicated is a destructive myth. Policy makers must develop processes where communities take more responsibility for managing the difficult choices involved in upgrading. To this end, cities should formally recognise all informal settlements and assume responsibility for upgrading all of them, except those that are so badly situated that living there places the residents in danger. Parochial Interests SA’s dynamic urban areas and system of cities is one of the country’s strengths. We must capitalise on this to fuel the economy and deliver a rising quality of life for our citizens. None of this can happen, however, without political investment in popularising densification and its relationship to economic efficiency and a better city. The case for growth does not make itself, and can easily be derailed by legal objection driven by parochial interests. Restructuring SA’s cities and ensuring they become centres of opportunity for everyone requires a decisive shift in policy. It will also involve changes some will find discomforting. But this short-term discomfort has to
be judged in relation to the potentially transformative effects of success.
manage this on their own. Most of the support the cities need, however, is not fiscal but institutional.
The potential gains from urban restructuring do not justify riding roughshod over those who have legitimate concerns that change will negatively affect their living standards or property values. These must be factored into the process. At the same time, these concerns can’t prevent all movement.
If Johannesburg’s labour market is to work, the national government needs to reform it; if Durban’s schools are to produce employable young people, we need teachers and principals who deliver or are let go; if Tshwane’s economy is to grow, the department of higher education needs to ensure that universities and colleges produce the graduates who can drive innovation and start new firms.
Metro governments will need to work to build coalitions for growth and jobs incorporating diverse interests across the city. These coalitions will provide the vision, interests and commitment to help drive the changes needed for everyone. The national government needs to be committed to an urban-led strategy for economic renewal. If our metros are to reach their potential, they are going to need far more support from the rest of government. Some of the needed support is fiscal: success will have to be resourced, and it is not clear that the cities can
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And if reforms cannot be implemented for the country as a whole, then cities need to be able to exempt themselves from restrictive national legislation. Cities are the future. SA will not get the growth and expansion of opportunities for the poor we want if we stay as we are. Change is needed if we are to build the future we all deserve.
Cities, not agriculture, will drive growth and job creation By Ann Bernstein, 28 September 2016
Speaking in Parliament on September 13, President Zuma seemed unable to recall his own economic policies. Asked by the opposition what the key components of his nine-point economic plan were, Zuma’s reply was that the list “includes agriculture and many others”. It was a response that led opposition MPs to suggest that the president was “clueless” about the content of his own plan. Whatever the merits of that charge, it is revealing that the one priority Zuma would choose to emphasise is agriculture. One of the cardinal rules of economic development is that the role agriculture plays in an economy declines rapidly as the country grows richer. In SA’s case, agriculture — at about 3% — already makes only a modest contribution to GDP; and only employs about 5% of the shockingly small number of South Africans with jobs. These numbers are comparable to those of the most developed countries in the world, and are exceptionally low by the standards of developing countries. It is the result of SA’s geographic and climate realities as well as our history of land dispossession. Neither of these realities can be easily undone. We can undoubtedly do much better about land reform, the development of successful black commercial farmers and the growth of agriculture as a whole. Nonetheless, it is hard to see how the growth of this sector could play anything more than a minor role in securing SA’s prosperity. There are no examples anywhere of middle-income countries that have successfully followed an agriculture-led development path. On the contrary, every single development success has been premised on rapid urbanisation and the growth of employment and productivity in urban jobs.
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The link between development and urbanisation is easy to explain. By drastically reducing the spaces between them, urban areas make it possible for people to work with and for each other. This, in turn, allows individuals and groups (ie firms) to increase productivity through specialisation and to achieve economies of scale. Human density creates deeper, richer labour markets, and concentrates demand for goods and services so that they can be delivered more cheaply and in greater abundance. The result is that a day’s worth of human labour becomes much, much more valuable than it can possibly be in rural areas. Of course, nothing in life is guaranteed, and, while cities, when viewed over the long course of human history, have been overwhelmingly successful machines for creating wealth, urbanisation has also sometimes failed to achieve this, creating instead slums and pools of urban poverty. When it has failed, urbanisation has generally done so for a simple reason: poor governance. Regarding cities, poor governance comes in many forms. One of the most pernicious is the reluctance of many governments and policy makers to recognise the inevitability and desirability of urbanisation. This reluctance is combined with a failure to deal with the many implications of increasingly urban societies and economies. In this regard, post-apartheid SA inherited a spatial legacy that was shaped by a set of policies as profoundly anti-urban as any in modern history. The main goal of grand apartheid was to keep black people out of the “white” cities and to deny urban black households opportunities that usually come from urbanisation. Post-apartheid policy has not been nearly as anti-urban as its racist predecessors. Nevertheless, policy makers have demonstrated a high degree of ambivalence
about urbanisation and a romanticisation of the idea of rural development. This may be reflected in Zuma’s inability to remember any economic priority other than agriculture. He is not alone. None of democratic SA’s many economic strategies devote serious time and attention to our large and expanding cities, or the policy implications of an increasingly urban economy. One effect of this is that policy makers have been unable to craft an approach to our cities that generates sufficient economic and employment growth to tackle the pent-up demand for an expansion of opportunities for the urban poor. This is apparent in the relatively slow pace of urbanisation in SA (almost a third of the population still lives in the former Bantustans) and in the declining electoral performance of the ANC in the cities. If SA’s economy is to grow, and if we are to create the millions of jobs we need to begin to unwind the world’s most serious crisis of unemployment, the growth of our cities’ economies has to accelerate dramatically. This will not happen, unless all levels of government (and business leaders) recognise the centrality of cities to the country’s economic prospects. What needs to be done? The first goal of an urban policy that matches our realities would be to ensure that cities get as large a share of scarce public resources as possible. A pro-urban (and, therefore, pro-growth) strategy would make sure that the maximum possible level of investment happens in those places in which most of the country’s wealth is created: the cities. This is not merely a question of metropolitan governments’ continued receipt of the “equitable share” of nationally raised taxes. National and provincial departments (eg basic education, higher education, health and housing) must also prioritise spending and delivery in the cities. The same is true of those departments (and state-owned entities) that manage infrastructure investment.
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Given the ANC’s rising dependence on rural voters’ support, it is by no means certain the government will continue to provide the cities with appropriate financial support. That being so, large city governments need to work together to ensure their voices are heard by the executive and the legislature on critical national policy issues that hold back city competitiveness. Cities should also be working on building new funding sources. Ideally, some of these would incentivise cities to ensure that the local economy grows as fast as possible. In this regard, local income or consumption taxes — so long as they are offset by reductions in national taxes — would make sense. Cities need also to ensure that revenues they have are used effectively to promote growth. This means investing in goods and services that improve the business environment, lowering the cost of doing business, and ensuring that residential and commercial developments work together to increase human and economic density. Making sure that workers are skilled and that they can get to and from work quickly and affordably should also be at the top of the agenda. Many of South Africa’s cities are in a far better position to grow and develop than cities in most other developing countries. They could become the platform for much faster, much more dynamic and much more inclusive economic growth.
To grow, SA must put cities at the heart of the economy By Ann Bernstein, 20 June 2016
Economists and many policy makers think about how things are done, but they do not think much about where things are done. Where economic activity is concentrated in a country can be the difference between poverty and prosperity – for people as well as countries, says the World Bank. No rich country is predominantly rural. No country has grown to middle-income status without urbanising, and none has grown to high-income status without vibrant cities. Cities are the most potent force for social and economic progress and they make possible a standard of living that is inconceivable without them. Cities produce more than 80% of global economic output. The key platforms for national, regional and global growth are urban. The economies of SA’s major cities consistently outperform those of its towns and rural areas. The eight largest cities are home to about 37% of South Africans, yet they account for 59% of economic activity. Average per capita income in the metropolitan areas is about 60% higher than the national average, and is nearly four times higher than that in the rural areas. Despite the superior economic performance of SA’s cities; including much higher levels of employment, policy makers have never embraced urbanisation and the merits of urban growth fully. Apartheid planners dedicated themselves to restricting black people from urbanising and to a temporary place in “white” cities. Post-apartheid cabinets have been ambivalent in supporting cities as drivers of growth. The failure to grasp the centrality of cities holds back growth and development. The National Development Plan devotes only a few pages to cities in its chapter on transforming human settlements. If the economy is to grow fast enough to absorb millions of work-seekers, it will be because growth in city economies will have accelerated
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drastically. National priorities need resetting: we need to focus on the key challenges cities face, embrace urbanisation and harness the productivity gains that could be obtained from larger, better-run cities. This would create more wealth, transform the apartheid spatial economy, and increase social, economic and political inclusion. What are the policy implications of all this, therefore? We must place our largest, most dynamic cities at the heart of the economic growth strategy to match the increasingly urban reality of South African society. Cities need a far greater role in national policymaking processes. The country’s larger metros need direct representation alongside provincial premiers in meetings of the extended Cabinet and in other councils of state. The metros — represented indirectly by the South African Local Government Association — are consulted during the budget process only through the local government budget forum. This body is not empowered to discuss the national budget, but only those fiscal, budgetary or financial matters that affect local government. Cities’ voices are consequently unnecessarily muffled in budgetary processes. Cities have too little say about how state-owned enterprises (SOEs) plan their investments. The role of SOEs in development spending has expanded drastically, but cities’ relationships with these entities — and, therefore, crucial infrastructure-spending — have been left behind. Critical decisions — how to expand Durban’s ports, how to implement road tolling — are made without the relevant cities’ input to planning. In addition, SOEs own significant land holdings in the cities, the use and disposal of which are decided without reference to what is in the best interests of the city.
Cities themselves need to place growth and jobs at the heart of urban strategy. This requires a focus on making cities more attractive places for business start-ups, investment, innovation and employment. World Bank research demonstrates South African cities lag dramatically behind India, China, Brazil, Mexico, Kenya, Chile, Malaysia and many others in the number of days it takes to start a business. City governments must lobby for national policy changes that enable domestic firms to grow and hire more people. Faster economic growth will be the strongest dynamic in transforming the prospects of the poor. Within townships, a regulatory regime is needed that supports faster growth and more employment. This includes a supportive environment for small business entry, survival and expansion. Key to all of this are measures to help township residents access new opportunities for employment and enterprise development through effective skills training, de-regulated and more efficient labour markets and affordable public transport systems.
before committing scarce public resources and managerial talent to them. Many other opportunities exist to involve the private sector in delivering public goods and services including in refuse removal, schooling, training and public transport. Interaction between senior members of the city’s government, the leaders of key firms and organised business is also essential if cities are to get a clear idea of what business needs to grow and thrive. Attendance to the needs of business, rather than those of bureaucrats, will create better returns for the country’s urban investments. Most of our main political actors tend to think of city government as being less important than national and provincial politics. This does not match the reality of SA’s increasingly urban economy. Ambitious, talented politicians, therefore, tend not to devote their careers to local or metropolitan government. Attracting the “A team” to run larger cities is crucial for long-term prosperity.
Cities should allow the power and efficiency of markets to drive their economies. This means allowing housing and commercial property markets to function efficiently rather than municipal bureaucrats building and managing housing stock themselves.
Government should embrace the inevitability and desirability of large cities and urban-led, job-rich growth. As growth engines, cities could spearhead the drastic transformation of life chances for millions of people. As their economies grow, the spatial legacies of apartheid could be eliminated progressively, while more opportunities for poor residents will emerge.
Governments need to have compelling reasons for entering these markets as landlords or developers
SA’s future is urban. Policies, power and the state’s resources must now catch up with this reality.
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CDE BOARD L Dippenaar (chairman), A Bernstein (executive director), A Ball, C Coovadia, B Figaji, R Khoza, M Le Roux, S Maseko, I Mkhabela, S Nkosi, W Nkuhlu, S Ridley, A Sangqu, M Teke, S Zibi Published in January 2018 by The Centre for Development and Enterprise 5 Eton Road, Parktown, Johannesburg 2193, South Africa | PO Box 72445, Parkview, 2122, South Africa Tel +27 11 482 5140 | Fax +27 11 482 5089 | info@cde.org.za | www.cde.org.za