Cities as engines of growth and social welfare

Cities as engines of growth and social welfare

Cities as engines of growth and social welfare ______________________________________________________________________________

Index Executive Summary

3

Introduction

7

How to accelerate economic growth and expand employment

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Assuring cities' contribution to growth and solving institutional challenges 1. Make land use regulations more flexible 2. Pragmatism to make investment in infrastructure and logistics more efficient 3. Leading broad consultation processes with the political, economic, and social sectors of cities 4. Supporting inter-municipal coordination for the development of city systems 5. Contributing to consolidating trends in the digital and ecological economy 6. Paying attention to the heterogeneous growth of cities of various sizes

12 14 14 14 15 17 20

Financial limitations to an accelerated growth strategy and how to overcome them 21 1. The return to normality will impose greater demands and efforts to finance local investment 23 2. The collection of land and urban property taxes can be significantly increased by improving local tax management and administration 24 3. Finding and implementing innovations and new sources of financing will be indispensable: asset management 25 4. Increasing access to financing is both possible and beneficial for local development 26 Conclusions

27

References

28

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Cities as engines of growth and social welfare ______________________________________________________________________________

Executive Summary Latin America and the Caribbean is a highly urbanized region: in most countries, the population and economic activity of cities account for more than 80% of the total, and 27% of gross domestic product (GDP) growth comes from its 10 largest metropolises. Moreover, the urban population is growing at a rate of more than 500,000 new residents per month, and by 2050, land is expected to be occupied at 2 to 4 times the rate of population growth.

In this context, and in the face of the crisis caused by COVID-19, urban economies and local governments have a central role to play. Indeed, their action will be fundamental to the success of any process of economic recovery and accelerated growth that will enable many countries in the region to emerge from the aforementioned crisis and become developed in the next 20 years.

However, it is worth considering that the disorderly growth of Latin American cities multiplies the problems caused by the concentration of companies and people, such as vehicular traffic and pollution. These problems, in turn, cause losses that reduce the productivity of firms and slow down the pace of growth and the potential for job creation.

Therefore, two of the most important tasks that should be the focus of city government policies are: i) to accelerate the benefits of agglomeration (i.e., the gains to production that come from physical proximity) and ii) to control the increase in costs associated with congestion.

As a contribution to achieving these objectives, this document discusses public policy issues that should be prioritized by local governments:

1. Make land use regulations more flexible. On the one hand, the coordination of macro planning between municipalities in the same urban agglomeration should be simpler, in order to accelerate joint strategic investments; on the other hand, development plans should release land as soon as possible, while preserving urban planning codes on building specifications, in order to give rise to combinations that provide flexibility to economic activity. For example, it is estimated that the pandemic will idle a large amount of office space globally, forcing entrepreneurs to reinvent interaction models and find new sectors and residences. These changes in economic patterns must be expeditiously accompanied by the authorization of changes in land use regulations.

2. Achieve efficiency in infrastructure and logistics investment. The most effective and impactful vector for boosting growth in Latin America and the Caribbean is massive

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Cities as engines of growth and social welfare ______________________________________________________________________________ investment in public goods in infrastructure, logistics, digital services, energy, water, sanitation, urban and social equipment, among others. To achieve this goal, progress must be based on pragmatism and early victories in contrast to comprehensive macroregional plans that imply political agreements that are difficult to achieve and investment requirements that are complex to finance.

3. Promote broad consultation processes with the political, economic and social sectors of the cities. A municipal administration with a long-term vision and commitment to economic growth must rely on broad consensus with the various sectors that influence local policy. A practical way to facilitate agreements among these diverse sectors is to concentrate consultation on major axes of infrastructure development and long-term services.

4. Support inter-municipal coordination for the development of city systems. Coordination problems and the lack of intermediate levels of government have had a negative impact on logistics systems, which are insufficient and disjointed, representing the greatest challenge for the productivity of companies in the region's city systems. When access to other cities requires the consolidation of large quantities of goods due to the effect of high transportation costs, the advantage of being local is lost. Adequate logistics integration would increase the competitiveness of the local economy.

5. Consolidate digital and green economy trends. The pandemic has accelerated three global trends that can be harnessed to encourage productive transformation. These are digitalization, process automation, and digital infrastructure and technology. The level of education that exists in the region makes it possible to consider skills conversion strategies to develop industries that support automation, which are also an opportunity for cities, especially large and medium-sized ones. Public investment and policy should be oriented in this direction. Likewise, the response to climate change opens up an opportunity for cities to promote the provision of green and environmentally friendly technologies.

6. Address the heterogeneous growth of cities of different sizes. In large and medium-sized cities, access to basic services is close to universal levels in most countries. However, in rural areas and municipalities of less than 300,000 inhabitants, the improvement of living conditions is not progressing at the same rate. Therefore, the cities agenda for the region must address the challenges of congestion in urban agglomerates without losing sight of the need to ensure access to basic services in small cities, especially in Central America and the Caribbean, which are becoming important engines of growth.

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Cities as engines of growth and social welfare ______________________________________________________________________________ One of the main obstacles to greater public investment in the region is the lack of fiscal resources.

Today, most local governments only partially meet local spending needs. Generally speaking, countries with tax revenues similar to those of developed nations, such as Argentina, Brazil and Uruguay (above 30% of GDP), must redirect part of current spending to investment spending. And countries with low tax revenues need to reduce tax evasion and exemptions or tax expenditures.

In order for subnational governments to have more resources and direct them to increase investment and economic growth, this document provides the following suggestions:

1. In order to finance local investment in the return to normality, greater demands and efforts will be required. The financial challenges of cities cannot be met by public resources alone. The private sector can also play a key role. Likewise, intergovernmental transfers are indispensable to ensure that local governments can fulfill their responsibilities and commitments to local citizens.

2. Urban land and property tax collection can be greatly enhanced through better tax management and administration at the local level. Property tax collection is low due to the low productivity of the tax. To reverse this situation, it is necessary to increase coverage rates, update cadastres and use methodologies that capture the market values of real estate.

3. New sources of financing, such as asset management, must be found and implemented.

Cities can increase their revenues through tax instruments such as land revaluation derived from urbanization processes. In this way, local governments can improve land use management performance and finance urban infrastructure and the expansion of public services. For example, more than 50% of the main road network in Medellín (Colombia) was paid for through contributions or levies for improvements. Urban development corporations are also successful experiences in asset management, land valuation and the extraction of urban capital gains, and where they have been implemented, they have greatly expanded local tax bases. In these cases, debt financing or bond issuance usually involves loans or issues secured by the corporations' own assets or the expected returns from a project.

4. Opening up to markets is possible and also necessary to enable the increase of urban investment. Local borrowing, through long-term loans and bond issues, is an appropriate instrument for financing public investment projects that enhance the value of land and urban property. An important rationale for financing public works with debt is that users can pay for the cost of new infrastructure as they use it, through local taxes or directly through tariffs and other cost-recovery mechanisms. Moreover, the distinctions between

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Cities as engines of growth and social welfare ______________________________________________________________________________ public and private financing, so common in the past, can no longer be generalized: publicprivate participation schemes yield significant benefits for financing urban works, as do green bonds.

Finally, it is important to bear in mind that current spending, which drives consumption and shortterm growth, has limitations in promoting continuous, long-term growth, which is what generates sustainable economic and social well-being. In this sense, investment is the best bet for prosperity.

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Cities as engines of growth and social welfare ______________________________________________________________________________

Introduction From the last decade of the twentieth century to the middle of the second decade of the 21st century, the Latin American and Caribbean region experienced one of the periods of greatest expansion of its economies, driven by the price boom of agriculture, oil, minerals and other commodities, with growth rates of between 3% and 5% per year. As a result, per capita income multiplied from about $7,000 to more than $14,000. Thus, many countries entered the middleincome category (de la Cruz, Manzano, and Loterszpil, 2020).

As a result of this pace of growth, in most countries there was an extraordinary decline in poverty and an unprecedented increase of the middle class. Poverty, which in the early 1990s exceeded 50% of the population on average, decreased to less than 30%, and in some cases reached below 25%. Meanwhile, the middle class went from covering 25%-30% of the population to more than 50%, and in some countries amounted to more than 60% of the total population (see Figure 1).

By 2015, more than 90 million people had come out of poverty and become part of the middle class of Latin America and the Caribbean (de la Cruz, Manzano, and Loterszpil, 2020).

This extraordinary social transformation is 90% explained by economic growth (see Figure 2) and is centered around the expansion of employment generated by the sustained progression of private and, to a lesser extent, public investment.1 The creation of businesses and jobs are essential factors in overcoming poverty from labor income.

By 2014, most commodity prices began a downward cycle, resulting in a drop in growth levels from the previous two decades, as well as a slowing down in the creation of the middle-class and poverty destruction. In addition, since March 2020, with the COVID-19 crisis, global economic activity has suffered a severe setback, surpassed only by the 1929 crisis and its aftermath, reflected by the massive closure of businesses and the increase in unemployment.

Public investment in the countries of the region is around 3% to 4% of Gross Domestic Product (GDP), less than 20% of total investment. The rest corresponds to private investment. See Castellani et al. (2019).

1

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Cities as engines of growth and social welfare ______________________________________________________________________________ Figure 1 GDP growth 1980-2015; poor population versus middle-class population, 2000-2018 6.0

45

5.0

GDP growth

40

Middle Class

35 30

3-year average

Percentage of Population

50

4.0 3.0

Poverty

25

2.0

20 1.0

15 10

0.0 2000

2003

2006

2009

2012

2015

2018

Source: Compiled based on World Bank National Accounts Data; SEDLAC LAC Equity Lab tabulations (https://www.worldbank.org/en/topic/poverty/lac-equity-lab1/overview).

Figure 2 Economic activity and employment figures in Latin America and the Caribbean, 2000-20 9.5

6.0 5.0 4.0

Rate

8.5

3.0

8.0

2.0

7.5

1.0

Unemploym ent

7.0

0.0

6.5

-1.0

6.0

-2.0 2000

2004

2008

2012

3-year average

GDP

9.0

2016

2020

Source: Compiled based on World Bank National Accounts Data; International Labour Organization, ILOSTAT database (https://ilostat.ilo.org).

One year after the start of the COVID-19 crisis, accelerating growth is the key to reviving economies and employment, reducing poverty again, and recovering and expanding the middle 8

Cities as engines of growth and social welfare ______________________________________________________________________________ class of the region. This paper proposes policy measures to return to the level of growth of the commodity boom era, and to accelerate it further, in a sustainable manner, in order to double the size of Latin American and Caribbean economies over the next 20 years, stabilize the size of the middle class at about 70%, and reduce poverty to less than 10%, along with the elimination of extreme poverty.

It should be noted that Latin America and the Caribbean is a highly urbanized region. In most countries, the population of cities accounts for more than 80% of the total population and it is precisely those cities which produce the majority of economic activity and gross domestic product (GDP).2 Any process of economic recovery and acceleration of growth is centered on urban economies and the contribution of local governments to that recovery. In particular, this paper will emphasize the role of cities in economic growth, and how local governments can make a decisive contribution on the road to post-COVID-19 recovery and beyond, in order to achieve in the medium and long term a more prosperous society with opportunities for all.

Along the way, over the next 20 years several nations in the region could reach the status of developed countries, similar to those of southern Europe, with the equivalent of $30,000 in percapita income. Some will achieve it sooner, others later, and a third group will consolidate an average income level, but all could substantially improve the living conditions of their populations and the vitality of their economies.

How to accelerate economic growth and expand employment The growth problems of Latin American and Caribbean countries have been studied from many angles over the years.3 There are limitations to growth that can be explained by institutional restrictions, educational deficiencies, business informality, problems with access to financing, market failures and government failures, difficulties in intergovernmental coordination, and imbalances between growth and redistribution policies, among other elements. In addition, there are pronounced regional inequities, which also become obstacles to growth.

Recognizing the various problems that exist in achieving development, this paper places particular emphasis on the shortcomings of countries and cities in Latin America and the Caribbean that explain most of the current difficulties in accelerating economic growth, employment, and well-being. In addition to presenting an analysis of the problems, practical measures are proposed, requiring effort, dedication, and perseverance from the public and private sectors, to accelerate the economic and social growth of the region and to overcome sooner rather than later the setback imposed by the COVID-19 crisis.

In Latin America and the Caribbean, more than eight out of 10 people live in cities. 27% of GDP growth comes from its 10 largest cities. The urban population is increasing by more than half a million new residents per month and it is expected that by 2050, urban land is to be occupied at a rate of between two and four times faster than population growth (IDB, 2018a; BAfD et al., 2019). See also the following link, among other references: https://www.worldbank.org/en/topic/urbandevelopment/overview.

3 For an extensive bibliographical reference, see Baron (2012).

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Cities as engines of growth and social welfare ______________________________________________________________________________ First, it is worth noting that the growth of the region in general has been driven by the accumulation of capital and labor (creation and growth of companies and employment), and not by increases in productivity. Over the past 25 years, on average, productivity in the region has not increased. In fact, in some cases, it declined slightly. In other words, production per worker has been stagnant, while in other regions of the world it has grown, which has disadvantaged the production and competitiveness of Latin America and the Caribbean in international markets (Fernández-Arias and Rodríguez-Apolinar, 2016).

Among the most outstanding causes that explain the lack of productivity in the region is the lack of public goods, especially infrastructure, logistics, utilities, and digital connectivity (Cavallo, Powell, and Serebrisky, 2020). A simple example illustrates well the limitations imposed by these shortfalls in the economy: in the United States, a cargo truck travels 100,000 km per year, while in Latin America it travels on average only half that distance. This example clearly highlights that there are significant deficiencies in transportation, logistics, urban, port, and airport infrastructure, etc., which adds costs to economic activity and reduces capital turnover and productivity. As a result, labor pay tends to be lower than in economies with a higher degree of productivity. Similarly, growth tends to depend more on the commodity price cycle, making it more fragile and volatile. In order to overcome the deficit in public goods in Latin America and the Caribbean relative to other more developed regions of the world, it is estimated that an investment of $360 billion per year on average is needed.4 The most effective and impactful vector for driving growth in the conditions of Latin America and the Caribbean is massive investment in public goods for infrastructure, logistics, digital services, energy, water, sanitation, urban and social equipment, etc.

Closing the deficit in infrastructure and public goods requires a sustained increase in public investment. National and subnational governments in the countries of the region jointly invest an average of 3% to 3.5% of GDP per year. To close the investment gap, it is essential to double that expenditure to between 6% and 7% of annual GDP. This level of investment would boost long-term growth from the current average of 2%-3% to an average of 6%-7% per year. Figure 3 compares current growth over a 20-year period with what growth would be in a scenario of increased public investment at the aforementioned level. In this national context, investment in public goods and infrastructure in cities is of particular importance due to the decisive weight of urban economies. This point will be addressed in greater detail in the next section.

Studies by the Inter-American Development Bank (IDB) indicate that in order to close the quantitative gaps in the main public infrastructure sectors, investment should more than double relative to historical averages. This means that between 2% and 3% of regional GDP, equivalent to between $120 billion and $150 billion per year, should be added to the resources currently earmarked for this purpose. In turn, the Organization for Economic Cooperation and Development (OECD) believes that closing the infrastructure gap in Latin America and the Caribbean in relation to more developing countries requires increasing total annual public investment to 6.2% of GDP. IDB studies identified 1,404 urban priority interventions estimated at $23.5 billion. See Serebrisky et al. (2013).

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Cities as engines of growth and social welfare ______________________________________________________________________________ Figure 3 Current trend growth versus accelerated growth in selected Latin American countries, GDP per capita (PPP 2011 constant)

GDP-per capita

32,000

27,000

22,000

17,000

12,000 0

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 Years

Escenario 1: crecimiento inercial (inv. púb. 2,8% PIB) Escenario 2: aceleración del crecimiento ideal (inv. púb. 6% PIB desde año 1) Escenario 3: aceleración del crecimiento realista (inv. púb. 6% PIB progresiva)

Legend translation: Scenario 1: Inertial growth (pub. inv. 2.8% of GDP) Scenario 2: Ideal acceleration of growth (pub. inv. 6% of GDP from yr 1) Scenario 3: Realistic acceleration of growth (pub. inv. 6% of progressive GDP)

Source: de la Cruz, Manzano, and Loterszpil (2020).

Note: The value of the fiscal multiplier estimated by Ilzetzki et al. was used to calculate the effect of public investment on GDP growth. How big (small?) are fiscal multipliers? Journal of Monetary Economics. 60 (2).

Rochester, 2013. Average population growth rate for 2015-2035 in the region calculated by ECLAC, Data and Statistics, www.cepal.org.

The proposed massive investment would have two fundamental consequences for overcoming the current recession situation generated by the COVID-19 crisis, as well as for driving an acceleration of medium- and long-term growth.

In the short term, the creation of aggregate demand that would result from the increase in public investment would stimulate private investment and employment, and this would allow a faster exit from the current crisis.

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Cities as engines of growth and social welfare ______________________________________________________________________________ In the medium and long term, expansion and improvements of infrastructure, utilities, ports, airports, logistics, digital connectivity, and other public goods would provide the basis for private investment to significantly increase productivity, stimulate greater investment, and increase quality and remuneration of labor. This is the key to giving private investment a higher productivity base, which is, after all, what will be able to accelerate growth on a sustained basis.

In addition, it is worth noting the special role that the digital economy already plays in increasing productivity. The quality and speed of connectivity are one of the most important foundations for supporting digital development in any country, but it is also key to continue working on aspects such as digital skills, process automation, and the development and adoption of green technologies. This topic will be discussed further later on, in the context of the role that cities play in regard to growth.

That said, it must be recognized that one of the main obstacles to increasing public investment in the region is the lack of fiscal resources. In most countries, tax revenues are around 15% of GDP, compared to developed countries, where the combined revenues of national and local governments are usually around or above 30% of GDP. The only exceptions in the region are Argentina, Brazil, and Uruguay, which have tax revenues similar to those of developed countries, above 30% of GDP, although much of this is devoted to current expenditure, including massive subsidies. In the group of countries with low tax revenues in general there is no need to increase taxes. The tax systems are similar and contain similar taxes, with a few exceptions. What is mainly needed is to reduce tax evasion and exemptions or tax expenditures, and in some countries to broaden tax bases. In the case of Southern Cone countries, it is not necessary to increase tax collection, but rather some of the current expenditure must be redirected to investment expenditure. The last part of this paper addresses these issues in greater detail.

Finally, in this context, increased investment requires focusing particularly on cities. As mentioned earlier, it is in urban areas where most of the region’s economic activity is generated.

It is also in these areas that the supply of public goods must be modernized and expanded to give the economy a general impetus to overcome the slump of the COVID-19 recession and accelerate growth so that the nations of the continent can project themselves into a future of greater prosperity and sustainability.

Assuring cities' contribution to growth and solving institutional challenges As noted previously, Latin America and the Caribbean have made great progress in their urbanization process, and in most of their countries the population located in cities has reached 80% (United Nations, 2018). The region's economies have benefited greatly from this trend.

The momentum of urban growth comes from synergies between companies and individuals by the effect known as agglomeration economies, i.e., the gains for production that come from physical proximity. These gains have different supports: for example, the concentration of service providers, machinery, or inputs in metropolitan territories; the availability and diversity of professionals and universities; the ample supply of the workforce; the propensity for private 12

Cities as engines of growth and social welfare ______________________________________________________________________________ investment resulting from the demand of a growing population; and the proximity of financial institutions, among other benefits that influence the productivity of companies and can only be provided by cities.

However, as urban centers grow, the problems generated precisely by this concentration multiply, such as vehicular traffic, pollution, health costs, and, in general, the relative increase in production and service provision costs. These drawbacks generate losses that go in the opposite direction of agglomeration economies, reduce business productivity, and slow the pace of growth and the potential for job creation.

Two of the essential tasks and policy axes of city governments include: (i) accelerating the benefits of agglomeration and (ii) controlling the increased costs associated with congestion so that local businesses maintain productivity that is competitive against firms located elsewhere in the world.

In addition to the structural problems of cities, the pandemic has imposed a delay in the attention that needs to be paid to these two axes of policy action to drive growth. Before a higher growth rate can be resumed, short-term reductions in economic activity caused by the delay of policies and investments on these two fronts can be expected. Overcoming the temporary problems caused by the pandemic and working to accelerate medium- and long-term economic growth are part of the same package of measures, all articulated around the promotion of public investment in order to make private investment more attractive and productive.

The following are some aspects of public policy that should be prioritized by local governments to take advantage of agglomeration economies and limit congestion costs.

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Cities as engines of growth and social welfare ______________________________________________________________________________ 1. Make land use regulations more flexible A measure of great importance to promote local investment is to adopt successful management practices for long-term urban planning and development tools. These instruments have two components: a fine-grained one, to define land uses, and a macro one, in which major infrastructure works are defined. Despite the differences, these two components are generally held together by the tradition of layered master planning. The result is difficulty in having a flexible response in fine land-use instruments that causes disruptions to urban renewal and the provision of public goods. In order to speed up the details and allow easier coordination of macro planning between municipalities of the same urban agglomeration, it is worth considering the separation of the aforementioned components, in order to accelerate joint strategic investments.

In fine planning, city governments should avoid any attempt to target one or another productive emphasis in the master plans that define land uses. The ongoing transformations, accelerated by the pandemic, are so rapid that it is very difficult for the public administrator to target land-use zoning as in decades past. Management plans should release land as quickly as possible so that, while preserving the legal framework on urban specifications for buildings and property rights, combinations can be given that allow flexibility for economic activity. Otherwise, cities will increasingly give rise to abandoned neighborhoods that concentrate diseconomies such as crime and huge losses of public and private investment. The pandemic points toward excess office space at the global level, forcing entrepreneurs to reinvent interaction models and accommodate new sectors and residences. These changes in economic patterns should be quickly accompanied by changes in land-use regulations.

2. Pragmatism to make investment in infrastructure and logistics more efficient In macro infrastructure development strategies, coordination between levels of government and between municipalities must be covered by a high degree of pragmatism in order to advance on the basis of early victories in contrast to comprehensive macro-regional master plans of laborious political agreements and hard-to-finance investment requirements. The experience of the metropolitan area of Sao Paulo is illustrative. Macro-regional planning has advanced documents over several decades with major obstacles to realizing investment programmes. In contrast, the formation of the metropolitan transport authority allowed the consolidation of the regional and urban rail network and the development of the urban renewal process of the center. This situation demonstrates that guiding the plans of municipality agglomerations from concrete experiences is more effective as an engine of coordination.

3. Leading broad consultation processes with the political, economic, and social sectors of cities

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Cities as engines of growth and social welfare ______________________________________________________________________________ There are multiple forces that make the economic achievements of urban agglomerations fragile, such as vehicular congestion, pollution, and the rising costs of logistical distribution, among others. While solving these problems, governments must encourage the coordination necessary for multiple agents and companies to optimally develop logistics processes and pool investment resources and regulations so that logistics operation is orderly and efficient. They must also drive massive investment to make public transport an effective alternative to the personal car.

Challenges to achieve the design of long-term urban planning plans include political changes in municipal administrations, private investment decisions, and preferences from organized sectors of civil society. A municipal administration with long-term vision and commitment to economic growth must rely on broad consensus with the various sectors that influence local policy. This idea is not new. Many countries even have regulations that require citizen consultation processes to be carried out for the approval of zoning plans. However, most of these types of consultations are conducted with short-term objectives or constitute formal exercises, with no implications for the development of a shared long-term vision for the city. Even with all the difficulties involved in consulting sectors that respond to different and even divergent interests, to achieve long-term urban zoning and development plans, a dialogue is necessary which involves the visions of those who ultimately decide on the direction of cities. One way to facilitate agreements is the pragmatism referred to in the previous point. The idea is to concentrate consultations on major axes of infrastructure development and long-term services that shape urban agglomerations and open up opportunities for private investment and job expansion. As previously mentioned, coordination around metropolitan transportation in Sao Paulo over the past two decades has made advances possible that were expected to be achieved with master plans since the 1960s.

4. Supporting inter-municipal coordination for the development of city systems A major limitation to achieving more productive urban and national economies comes from intermunicipal coordination failures. This is a difficulty not yet overcome of the region's decentralization model aimed at strengthening democracy, which in many cases has been carried out without allocating responsibilities or resources at intermediate levels, where provision at the municipal level is inefficient. Only in the 1990s, and in some countries such as Brazil and Mexico and more recently in Bolivia, did design begin to be corrected and incentives began to be generated at intermediate levels of government with investment capabilities. This is a reform that is yet to be consolidated and which is certainly a global challenge.

With the combination of the region's large urban expansion, coordination problems, and lack of intermediate levels of government, a negative impact has been generated which affects the productivity of city systems. National governments have dealt with main transportation networks and municipalities of intra-urban transportation systems. In this context, secondary road networks, access to metropolises and intercity logistics systems have fallen behind, without planning and – in successful cases – in the exclusive hands of the private sector. The result is that the region's logistics systems are insufficient and disjointed, and pose the greatest challenge to the productivity of companies in the region. The Development Bank of Latin America (CAF) concludes that the region has made progress in studies and prioritizing investment in logistics 15

Cities as engines of growth and social welfare ______________________________________________________________________________ (CAF, 2016). However, in the World Bank Logistics Performance Index, the region dropped an average of 7.11 places between 2007 and 2018.5 When logistics are deficient, access to the local market represents such a significant cost that it puts local businesses on an unequal footing with competitors in distant parts of the world, despite producing comparable goods. An adequate logistics system would increase the competitiveness of the local economy and allow companies to take advantage of proximity to the market to have smaller inventories, so that deliveries can be made in line with production and sales. When access to other cities requires the consolidation of large quantities of goods due to the effect of high transportation costs, the advantage of being local is lost. This problem becomes even more critical among the countries of the region not only because of the international procedures to be carried out, but also because of the lack of logistical integration.

In the same vein, the COVID-19 pandemic has demonstrated the need to strengthen the functioning of the logistics chain.

Consolidating intermediate levels of government that complement cities in the development of regional infrastructure is an ongoing process which still calls for improvements in the legal sector and greater coordination with national governments.

Box 1 Inter-municipal investments in infrastructure to transform cities Sanitation of the Medellin River, Colombia The Aburrá Valley, where Medellín is located, developed over the mountainous area on the banks of the river's tributary ravines, and its basin became the dumping ground for wastewater. In the late 1970s, the Medellin Public Enterprises undertook the task of building an entire system for the collection, transportation, and treatment of these waters.

Between the 1980s and 1990s, networks were built and the San Fernando wastewater treatment plant in the South of the Aburrá Valley was built, while in the last 15 years work has taken place in the Center and the North, also with the construction of networks and the Aguas Claras plant, reaching treatment coverage of about 88%. The Plan will end with the elimination of nearly 400 network discharges to water sources with the most sanitation difficulties and the construction of other smaller plants in the North.

In total, the system serves more than 1.1 million users, with 4,563 km of secondary networks, collectors, and interceptors, and two large plants. Since 2005, investment in the program has amounted to $1 billion, which has been repaid through user fees.

The most important transformation, in addition to the direct benefits of sanitation, is the effect of environmental sanitation on urban development. In recent years, the city’s growth has been reconcentrating along the river in the flat area of the Valley. These are lands that in the past were unviable and comprised the industrial area and the old airport.

The average increases to 10.6 if Venezuela is included. Data available at https://lpi.worldbank.org/international/global, excluding Bahamas, Cuba, and Trinidad and Tobago, which were not included in 2007, although they were included in 2018.

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Cities as engines of growth and social welfare ______________________________________________________________________________ San José-Puerto Caldera Logistics Corridor in Costa Rica In Costa Rica there are territories with high geographically productive potential, such as the corridor that extends from San José to Puerto Caldera, with a distance of 76.8 km. "The strategic position of the corridor is that it connects the Great Metropolitan Area with the Pacific coast and is also a connectivity node with other productive corridors" Arias et al. (2019: 6).

The road was built through a public-private partnership (PPP) scheme which began in 2008. Operations began in 2009 and final construction was completed in 2017. The corridor opens up a lot of export possibilities for Costa Rica, which have become a priority for the national government and have made the country commercially integrated with the region and the world (IDB, 2019).

Other results, according to Arias et al (2019), include job creation in the different branches of economic activity in the country. Additionally, between 2015 and 2018, the volume of exports by canton of origin increased greatly in the corridor’s area of influence. Finally, vehicular flow and construction in the area of influence also increased.

Sources: https://www.researchgate.net/publication/333745228_Desarrollo_Portuario_y_Transformacion_Productiva_en_Costa_Rica https://publications.iadb.org/publications/spanish/document/Casos_de_estudio_en_asociaciones_p%C3%BAblicoprivadas_en_Am%C3%A9rica_Latina_y_el_Caribe_Carretera_San_Jos%C3%A9_-_Caldera_Costa_Rica_es_es.pdf.

5. Contributing to consolidating trends in the digital and ecological economy It is important to consider the transformations that have accelerated during the pandemic that can have significant effects on the productivity of various sectors of the economy. In particular, three global trends can be identified that can be leveraged to accelerate productive transformation (see Diagram 1). These trends – which can be summarized by the enhancements of digitalization, the need for training in digital skills, and process automation – have become more pronounced over the course of 2020 and offer the region’s cities an opportunity to think about actions that will strengthen their expectations for economic growth and employment expansion.

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Cities as engines of growth and social welfare ______________________________________________________________________________ Diagram 1 Factors that public policy can promote to increase business productivity

Source: Compiled by author(s).

Note: The state of progress approximates the relative level of progress in the region, while the level of importance highlights the rapid change that automation represents relative to the other two global trends.

Table translation: -Digital skills -Process automation -Implementation of green technologies Level of importance (nivel de importancia) Stage of progress (estado de avance)

First, digitalization requires an acceleration in terms of digital skills training.6 The region's level of schooling makes it possible to consider skills conversion strategies to develop industries which support automation and is an opportunity for cities, especially large and medium-sized cities, to contribute investment and public policies to this end. Automation doesn't have to be a threat to employment if accompanied by digital skills training.

Process automation is a trend in full global consolidation as an engine of productivity. From manufacturing, it extends to all industries, especially services, not only in the so-called "Gig Economy", but also within traditional processes, with the acceleration of the "Software as a Service" platforms that are simplifying business management. The service base for automation in agriculture or the financial sector opens up enormous possibilities for cities. Although both digital skills and automation come from the technological change of the fourth industrial revolution, both are conceptually different because one affects labor supply and the other affects demand. Ecosystem-based innovation policies are not necessarily associated with digitization or automation processes (as in the case of biotechnology), but may be linked. For example, London has developed a strong foundation in education technologies. For its part, Medellin, with Route N, targets telemedicine and other components of health sciences.

6 A detailed analysis for Latin America and the Caribbean is provided in a paper by the IDB (2019): https://www.iadb.org/en/labor-

and-pensions/future-work-latin-america-and-caribbean. Other global references are the skills profiles of the World Economic Forum (https://es.weforum.org/reports/the-future-of-jobs-report-2020); or Cognizant for the United States (https://www.cognizant.com/jobs-of-the-future-index). The World Bank series of documents from WDR2019 is also available: https://www.worldbank.org/en/publication/wdr2019, among other bibliographic materials.

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Cities as engines of growth and social welfare ______________________________________________________________________________ Finally, investment in infrastructure and technologies associated with climate change is becoming a high-impact trend for future growth. It is worth highlighting circular economy waste reuse systems, small-scale renewable energy systems, energy efficiency technologies in companies and cities of the Smart Cities concept, and vertical and urban agriculture, among others. Cities have a role to play in the rapid implementation of these transformations because it is mainly there that these industries reside and can establish the supplier bases for these green and environmentally friendly technologies. There are multiple examples of strategies implemented from cities, including: (i) non-motorized mobility, which has proven during the pandemic to be a major driver of employment; (ii) reducing the costs of renewable energy, which is increasing the implementation of renewable energy and will open the door to a strong market for installation and maintenance service providers; (iii) the adoption of the Smart City concept, which has been developing with some success stories and literature, which has advanced during the pandemic and represents an opportunity for productive transformation and job creation.

Some examples of general local policies are presented in Box 2.

Box 2 Early experiences of digital and infrastructure transformations to respond to climate change Ceibal Education Digitalization Plan in Uruguay The Ceibal Plan was created in 2007 to generate inclusion and equal opportunities through technologysupported Uruguayan education policies. Since its implementation, every child and adolescent entering the public education system across the country has access to a computer for personal use with free Internet connection from the school. a The Ceibal Plan is more comprehensive: not only does it include access to laptops, it also provides a set of programs, educational resources, and teacher training, thus transforming teaching and learning methods.

Within 10 years of its inception, the program had 564,000 devices in the hands of students and teachers, and 100% of schools had Internet connectivity. In addition, curriculums were supplemented by activities that use technologies, adapted to local opportunities; 352 centers were established for robotics and 3D printing classes; a remote bilingualism model was developed with 700 classes per day via videoconference; and gaming-based learning was launched for different subjects, long before current models. The system is based on the continuous interaction of students and teachers through a social network-like platform with blogs. All of these programs operate in the context of a continuous teacher training strategy.

Universal Internet access in Yucatan, Mexico Through a WiMax network, with funding from the Inter-American Development Bank (IDB), the Mexican state of Yucatan undertook the Sustainable Development Program with a State Broadband Services Network component. b The program brought Internet access to 1,238 populations in the state's 106 municipalities, with 322 connection points for government, 1,466 for education, 192 for health, and 240 for security. Very early, in 2014, coverage reached 90% of the state. Currently, coverage reaches 95% of the Yucatan territory, based on WiMax wireless technology and a fiber optic network in the city of Merida.

Renewable Energy Strategy in Oaxaca, Mexico

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Cities as engines of growth and social welfare ______________________________________________________________________________ Oaxaca's Renewable Energy Strategyc seeks to create a Smart Network as a platform to encourage the development of Mexico's South-Southeast. It consists of a matrix of multidisciplinary groups of people with intelligent interface with the public and private sector, and is a network with six lines of distribution of energy wealth: (i) the strengthening of the Transmission Network in conjunction with the Federal Electricity Commission; (ii) the creation of energy cooperatives; (iii) the opening of training and technology centers for the training of specialized technicians in the sector; (iv) distributed solar generation; (v) sustainable mobility, and (vi) national content to promote what has been done in Mexico. a Cristia

et al. (2012) show that the impact of laptop access has proven mixed results: the effect has been null on academic performance in mathematics or language, but strong in cognitive skills. However, Marinelli et al. (2020) emphasize that Uruguay was better positioned for non-face-to-face education thanks to the Ceibal Plan. b See http://www.cudi.edu.mx/primavera_2016/presentaciones/yucatan_Red_Estatal.pdf. c See https://clusterenergiaoaxaca.org/.

6. Paying attention to the heterogeneous growth of cities of various sizes The distribution of economic activity among cities is not easy to measure because domestic product accounting (National Accounts) is not usually regionalized in all countries and is not often detailed at the city level. While there are some indicators that can be used to measure economic activity, they are difficult to achieve for all major cities in a comparable way. Recent access to data from sources such as cell phone use, social media use, or satellite photographic sensors is allowing for a more comprehensive view of cities' contribution to growth. By processing the available 7 satellite photography of nocturnal lights, an indicator can be developed to compare the contribution of each city to economic activity. The results can be seen in Table 1. The underlying assumption is that each point of light of the same intensity contributes equally to the output within each country.

In Central America, for example, small cities are developing faster than large and medium-sized urban agglomerations, a process similar to that seen in Caribbean countries. In the latter, however, capital cities, although they have declined, continue to dominate in the contribution to growth. In South America, for its part, the urban system is more stable, since the urbanization rate already reaches 85%, up from 72% for the Caribbean and 75% for Central America.

Table 1 Participation of Latin American and Caribbean cities in economic activity, by size, 2012 and 2020 Central america

Average cities Large Medium

2012 65.0% 27.7%

2020 52.5% 13.4%

Change -12.5% -14.3%

NASA's LADS program has had satellite sensor photographs available with a pixel detail of 750mtsx750mts since 2012 (https://ladsweb.modaps.eosdis.nasa.gov/). Raster (image processing) techniques are applied to selected photo tiles for each country and indexes are obtained for each pixel; clustering techniques are then applied to find urban agglomerations (cities) by joining contiguous pixels. The intensity of the lights is used to define four categories of areas: business, dense residential, scattered residential, and rural. Within each country, the contribution of each city to the sum of the light intensity index allows to approximate the contribution to the national output.

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Cities as engines of growth and social welfare ______________________________________________________________________________ The Caribbean

South America

Small Large Medium Small Large Medium Small

7.2% 88.6% 10.7% 0.7% 62.7% 27.7% 9.6%

34.0% 82.2% 11.8% 6.0% 62.9% 26.7% 10.4%

26.8% -6.4% 1.2% 5.3% 0.3% -1.0% 0.7%

Source: Author’s calculations based on NASA's LADS Program.

Overall, the contribution of large and intermediate cities has been one of the greatest sources of improvement in living conditions. The long-term reduction of poverty in urban areas is very pronounced. Access to basic services such as clean water, health, and basic and secondary education is almost universal in most countries. In contrast, in rural areas and municipalities of less than 300,000 inhabitants, which are not part of large urban agglomerations, the improvement of living conditions does not progress at the same rate.

These differences in access to services and improved quality of life are not common in all regions of the world. Progress towards universal access to public services in high-income countries has proven to be a powerful mechanism for improving the efficiency of urban systems. This has allowed the decentralization of workers and a more balanced occupation of the territory, which makes it possible to reduce external negative factors such as congestion. The city agenda for Latin America should consider the need to address the challenges of congestion in large and mediumsized cities, while simultaneously ensuring access to basic services in small cities in Central America and the Caribbean, which are becoming important engines of growth.

Financial limitations to an accelerated growth strategy and how to overcome them In the countries of the region, the average participation of subnational governments (SNGs) in consolidated public spending doubled over the past three decades, reaching 25% in 2015. The region has around 17,500 SNGs, of which 400 correspond to the intermediate level of government, and the rest are municipalities. The scope of decentralization varies depending on the level of autonomy available to the SNGs (IDB, 2018b). Many SNGs are now responsible for the provision of public services such as water and sewerage, road and transportation infrastructure, education and health, and concentrate a significant share of public investment in these and other areas.8 However, the decentralization of responsibilities in the provision of services to cities and local governments does not necessarily imply adequate equivalence in local finances. Diagram 2 shows the traditional instruments available to these governments, which vary by country.

For example, in Colombia, territorial entities account for a high percentage of public spending, amounting to about 73% of the country's total spending on education and 61% of health spending.

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Cities as engines of growth and social welfare ______________________________________________________________________________

Diagram 2 Local government revenue Own income

Utility tariffs and fees Business taxes and fees

Real estate taxes Collecting land use fees

Vehicle taxes

Building permits, business registration, markets, etc.

Income from other sources

Conditional transfers Unconditional transfers

Short-, medium-, and long-term loans and debts (with public and private entities and multilateral organizations)

Donations and transfers for emergencies

Source: Kamiya and Yin-Zhang (2017).

In this context, the question is how cities can finance, with the current instruments, the investments needed to accelerate growth and employment. Today, most local governments only partially meet local spending needs, and the real issue is whether improvements in local finance can strengthen regional and city economies. A sound local financial system is critical for the integrity of the local public sector and for gaining the trust of citizens (Eguino et al., 2020).

Decisions on how much to tax citizens and how to use that tax revenue to provide services are central issues to local democracy.

The tax base is unevenly distributed within countries. It is normal for larger cities to be able to generate higher tax revenues and for smaller jurisdictions to have less scope to collect their own taxes.9 Therefore, local revenue collection is generally accompanied by a system of fiscal transfers from the national government to ensure that local governments have greater resources For example, four cities in Bolivia (La Paz, Santa Cruz, Cochabamba and El Alto) collect nearly three-quarters of total municipal revenue. Similarly, five cities in Colombia (Bogotá, Medellín, Cali, Barranquilla, and Cartagena) collect nearly two-thirds of total municipal revenue. In Ecuador, two cities (Quito and Guayaquil) receive about half of the municipal tax revenue. See Cruz, Manzano and Loterszpil (2020).

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Cities as engines of growth and social welfare ______________________________________________________________________________ to carry out their functions and that the revenue from the total taxes collected is distributed more equitably.10 Intergovernmental transfers are essential to ensure that local governments can fulfill some of their responsibilities and commitments to local citizens. Governments in countries such as Argentina and Mexico contribute more than 8% of GDP in transfers to territorial levels of government (OECD et al., 2020). In Mexico, on average, 80% of state budgets correspond to resources that the Federation transfers under the headings "federal shares" and "federal contributions". In Argentina, between 2007 and 2017, 47% of the capital expenditure executed by the provinces was financed by discretionary transfers made by the national government (Eguino et al., 2020). Sometimes, however, the Nation's transfers to subnational governments are accompanied by predefined uses set by law, or restrictions on what they can finance, leaving these governments a narrow margin of autonomy to apply resources to local needs.

Intergovernmental transfers are an essential tool to compensate for imbalances between income and spending responsibilities of subnational governments. However, there is ample space to strengthen subnational tax collection. In general, the best way to achieve this is to address weaknesses and use local governments' ability to strengthen their financial autonomy. Municipal finances should be combined with other elements of urban management and governance, such as urban planning and regulatory frameworks, in order to support the development of a comprehensive urban vision aimed at strengthening the incorporation and integration of cities into growth and equity strategies.

The following is a set of suggestions that can support increased SNG resources to steer them towards greater investment and economic growth.

1. The return to normality will impose greater demands and efforts to finance local investment With a return to normality after the pandemic, subnational governments, especially in cities, will play a key role in achieving the goal of restoring economic growth and greater social equity. The increase of self-funding, and thereby of greater autonomy and less reliance on central governments, will be a key part of this strategy focused on increasing resources and public investment. Local tax collection in the region represents on average 0.5% of GDP, with wide variations between countries (ECLAC, 2019). For 19 nations in Latin America and the Caribbean, the total percentage of tax revenue collected by the SGNs is less than 8% of total tax collection, except for Argentina, Brazil, and Colombia. Local government revenues could grow significantly in the coming years once the economy recovers.

In addition to traditional financial instruments, there are a range of innovative financing options, detailed below. The financial challenges of cities cannot be faced solely through the contribution of public resources. The private sector can also play an essential role in financing and contributing to growth, equity, and environmental sustainability.

There is room for improvement in the design of intergovernmental transfer systems. Latin America and the Caribbean is a region with enormous territorial inequality: the average ratio of geographic gross product between the richest and poorest regions is double the values of the countries of the Organization for Economic Cooperation and Development (OECD). See IDB (2018b).

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Cities as engines of growth and social welfare ______________________________________________________________________________

2. The collection of land and urban property taxes can be significantly increased by improving local tax management and administration Regarding tax burdens distributed by tax type, property taxes are among the levies assigned to local governments. In 2017, SNG revenues of Belize, Guatemala, and Jamaica came from this source, as did more than 50% of revenue in Peru and Uruguay. As for Ecuador and Paraguay, about 90% of tax revenue came from property taxes and taxes on goods and services, distributed almost equally between levies on motor vehicles, specific services and municipal fees. In the countries of the Organization for Economic Co-operation and Development (OECD), more than a third of the total average revenue at the subnational level comes from taxes on income and profits.11 On the other hand, the revenue derived from real estate tax barely represents 0.8% in Colombia, 0.25% in Ecuador, and 0.3% in Peru of the total taxes collected in each of these countries (IDB, 2016). The low revenue corresponds to low tax productivity, which in turn is the result of low coverage rates, informal economic activities, outdated cadastres, and obsolete valuation methodologies that do not capture the market values of real estate. For example, in Colombia, 50% of rural land is not registered, many properties are undervalued by 40%-50% on average, and property registration is outdated by 25% to 39% (IDB, 2016). This situation is echoed, to a greater or lesser extent, in most countries in the region. In countries such as France, the United States, Israel, Japan, and the United Kingdom, registration and valuation are usually up to date and generate real estate property tax revenue of more than 2% of GDP (OECD, 2019).

Thus, it is clear that the nations of the region still have a long way to go.

Box 3 Examples of revenue improvements Increasing self-generated revenue is an indispensable public policy tool for achieving the sustainability of local finances. Below are two examples, Barranquilla in Colombia and Fortaleza in Brazil. Both cases have stood out for the efforts made by authorities to achieve these goals.

Barranquilla: Until the first half of 2008, the management of tax revenue in the District of Barranquilla was outsourced and management was characterized by weak institutions and a lack of leadership. To increase tax collection and guarantee the necessary resources to implement the city's development plan, a strategy was designed to increase self-generated income based on five pillars: (i) thorough and procedural review of district taxes and regulation of a new tax statute that would allow taxpayers to have a clear and simple knowledge of levies; (ii) updating of the cadastral valuation of the city's nearly 320,000 properties; (iii) technological modernization of the tax administration to ensure the registration of taxpayers, the fulfillment of their duties, and the actions of the administration; (iv) restructuring the tax administration, with the reorganization of processes to the new statute and reinforcement of the administration’s human resources; and (v) implementation of tax obligation compliance programs through audits and the collection of past-due portfolios. The results have been successful. Tax revenue increased 1.8 times in real terms in the 2007-14 Mexico has a different tax structure, so 42% of subnational revenue comes from taxes withheld on the payroll. See OECD et al.

(2020).

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Cities as engines of growth and social welfare ______________________________________________________________________________ period. This is explained by the following achievements: (i) better compliance with obligations for all local taxes, especially in the case of property tax; (ii) the collection of past-due portfolios, equivalent to 9% of total collection between 2008 and 2014; and (iii) control of evasion, equivalent to 2.5% of revenue in 2014. The increase in self-generated income has raised the credit rating and facilitated the execution of large-scale construction on the banks of the Magdalena River, which has changed the configuration of the urban fabric and led to the rise of private housing construction for the middle class.

Fortaleza: In 2009, Fortaleza began to leave behind an Orthodox cadastral model, whose sole purpose was to support tax management, a task which was executed with little effectiveness. The taxation system became a central part of territorial management by incorporating a territorial information system (TIS) that manages all geo-referenced data and opens the door for other sectors of administration to interact with and use it. The taxation system ceased to determine the land registry and became a consumer of data and a focus of the updating of the cadastral base. The new computer system remodeled the cadastral database and generated a new administration procedure, replacing the structures of the database that were only at the service of the tax domain. Under this conceptual outline, the plot became the center of management and was reconfigured as a common element for its relationship with the different thematic cadasters. This way, the basic principles of the land registry were supported as the ambiguities between the plots and their associated records disappeared.

Thus, the new, broader, and more accessible database materialized the concept of multi-purpose cadaster, providing the option for other institutions, such as the Real Estate Registry and public utility companies, to integrate into the system. The investment of R$ 16 million (approximately US$10 million) to implement the new cadastral system, combined with regulatory changes related to the valuation of real estate, allowed the issuance of the property tax to increase in 2014 by about R$ 40 million (about US$17 million). Revenue increases continued over the following years. The cadaster system enabled migration from very bureaucratic paper-based - processes to greater agility in the provision of services and a reduction in the institution's operating costs. In 2018, with online certificate issuance alone, operating costs decreased by about R$ 1.8 million (about US$500,000).

Sources: Mayor’s Office of Barranquilla, Secretary of finance; Da Silva and Ferreira de Oliveira (2020).

3. Finding and implementing innovations and new sources of financing will be indispensable: asset management In addition to the effort to collect typically urban taxes and devote them to investment, cities can increase their revenue by using tax instruments such as land revaluation derived from urbanization processes. The collection of property valuation taxes on urban land makes it possible to recover the increases in land value generated by actions other than direct investments made by the municipal government. Value seizing or recovery policies focus primarily on the increase caused by public investments or regulations that open up spaces for metropolitan expansion. This way, local administrations can improve the performance of land use management and finance urban infrastructure and the expansion of public services. The results of experience with capital gains recovery tax collection systems have been successful in most countries in the region. They managed to get cities to recover between 30% and 60% of the increase in property value as a result of the provision of public infrastructure (i.e. parks, squares, and streets) (Shloeter, 2016). For example, Medellín has successfully implemented improvement contributions to recover investments in specific projects. More than 50% of Medellín's main road network was paid for through improvement contributions or levies.

25

Cities as engines of growth and social welfare ______________________________________________________________________________ Urban development corporations have also been successful experiences in asset management, land valuation, and urban capital gains extraction, with significant effects on expanding local tax bases. Corporate finance relies on the balance sheet of these corporations, based on their assets, and the returns on capital and appreciation of those assets. In these cases, debt financing or bond issuance usually involves loans or issues guaranteed by corporations' own assets or expected project yields. Numerous examples of outstanding experiences that have provided valuable lessons can be cited. Hudson Yards Infrastructure Corporation is a local development entity created in 2005 by New York City to finance property acquisitions and infrastructure work, including the extension of the No. 7 subway line in an area of approximately 45 blocks, bound by Seventh and Eighth Avenues to the east, West 43rd Street to the north, Eleventh and Twelfth Avenues to the west, and West 29th and 30th Streets to the south. The bonds issued by this entity are guaranteed by their own income and by contributions from the municipality.12 In China, the state-owned Beijing Dashilar Investment Company (BDIC) is the executing entity of the Dashilar Project in Beijing. The corporation organized a partnership platform (Dashilar Platform) to attract private and technical resources and link the municipal government to the private sector. One of the main objectives was to attract investment from this sector and increase the financing of urban assets. Dashilar was one of the first urban regeneration projects in China to adopt voluntary relocation principles with options for monetary compensation or choice of larger housing, better infrastructure, and improved access (Kaw and Wahba, 2020). The initiatives carried out in cities such as Buenos Aires, Barcelona, and Málaga have also shown outstanding results.13 4. Increasing access to financing is both possible and beneficial for local development Increasing access to financing and seeking new financial instruments and market openness are possible and necessary efforts to untie the knots which prevent increased urban investment.

Finally, private financing is an important alternative that can be used.

Local borrowing through long-term loans and bond issuance is a valuable tool for financing local public investment projects, urban programs that elevate the quality of life of citizens, or large urban construction, which generate significant benefits to land and property valuation. A key basis for using debt to finance public works is that users can pay the cost of new infrastructure as it is used, through local taxes or directly from fees and other cost recovery mechanisms. In this way, optimal resource allocation and rational use of instruments that facilitate the availability of financing can be achieved. Classical academic work suggested early on that local government indebtedness promotes urban innovation, with significant changes in access to better standards of life (Poterba, James, and von Hagen, 1999; Tabellini, Guido, and Alesina, 1990). The experience of developed countries with legal frameworks which facilitate the use of debt in capital markets is extensive, and studies in intermediate development countries such as the Philippines, Indonesia, Mexico, Poland, and South Africa have shown boosting the municipal credit market 12

See: https://www1.nyc.gov/site/hyic/index.page.

These three metropolises have in common the reallocation of the use of port land (Port of Madero, Port of Barcelona, Pier 1 and 2 of Málaga) in collaboration agreements between the municipal authorities and the port authorities to develop commercial and residential areas linked to historic city centers, with extraordinary multiplier effects of urban valorization and development.

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Cities as engines of growth and social welfare ______________________________________________________________________________ induces improvements in the legal and regulatory framework governing local borrowing, the ability of financial institutions to assess risk, and the capacity of the borrower to support and manage debt ( Martell and Guess, 2006; see also Larios et al., 2020). In particular, the capacity to generate their own revenues and have a solid financial and project management administration are factors which promote the creditworthiness of local governments and their access to better financing conditions, within a framework of fiscal responsibility.

The issuance of "green bonds" or the participation of private investment through PPP schemes have also produced significant benefits in terms of the possibility of financing for urban works.14 Until recently, the distinction between public and private funding was unquestionable. In recent years, however, new forms of integration between revenue from governments and the private sector and risk-sharing agreements are creating hybrid structures that mean that the aforementioned distinctions, so common in the past, have ceased to be widespread. All these mechanisms will need to be studied and their implementation in the region’s cities carefully examined, while ensuring their financial sustainability.

Conclusions The ideas and policy proposals presented in this paper seek to strengthen the contribution of cities to emerge from the economic crisis caused by COVID-19 and accelerate the economic growth of Latin America and the Caribbean in order to place the region on a trajectory towards becoming a group of high-income countries.

The proposed vector for achieving the recovery and expansion of the economy and employment is massive investment in infrastructure, logistics, public goods, and digital connectivity, because of the strong multiplier impact this type of investment has.

In this context, special emphasis is placed on the role that cities and local governments must play in this strategy, and it is recognized that it is cities, on a continent with an urbanization rate of over 80%, that have the greatest potential to contribute to the successful exit from the crisis and the launch of a long cycle of growth into the next 20 years, through a sustained increase in public investment. Being pragmatic about investment through the creation of agencies specialized in important projects can be very positive for the continuity of these projects. In particular, this paper also makes special mention of intermediate and small cities, which in some cases are expanding more than capital cities, as an engine of growth which requires active policies on the part of national governments, as well as a special effort by local governing bodies to contribute to economic growth and social welfare.

14

In 2016, Mexico City placed its first green bond on the Mexican Stock Exchange for Mex$ 1 billion over five years. The resources obtained were used to implement energy-saving and efficient use projects; improve the supply and quality of drinking water; and boost sustainable public transportation, which help achieve the goal established in the Mexico City Climate Action Program (MCCAP) 2014-2020. In 2017, Mexico City issued a sustainable bond – which is the combination of a Green Bond and a Social Bond – for Mex$ 2 billion, Mex$ 1 billion of which corresponded to the Green Bond for projects with environmental benefits in transportation, water, and energy. See: https://www.gob.mx/cms/uploads/attachment/file/164914/PACCM-2014-

2020completo.pdf.

27

Cities as engines of growth and social welfare ______________________________________________________________________________ One of the most prominent institutional proposals to implement an accelerated recovery and growth strategy is to improve local investment planning and prioritization tools and to foster public-private dialogue to build long-term partnerships that drive urban development and economic and employment growth.

With regard to fiscal and financial constraints, these pages recapitulate the instruments available to local governments and recognize the need for structural improvements in intergovernmental public finances so that they can give municipal governments more capacity to transform the urban structure to create more productive cities with a high quality of life. Similarly, examples of cities that have had successful experiences in leveraging the tax instruments they already have are also presented. Other examples reflect opportunities to take advantage of the management of the largest capital held by local governments, which is the use of their real estate assets to generate private sector investment and tax revenue. In addition, emphasis is placed on the use of debt, within fiscal and financial sustainability parameters, as an investment lever with positive effects on economic growth and urban development.

Finally, a word on how to balance current spending and investment requirements. The proposals presented in this paper insist on increasing tax resources and dedicating them to investment. In practice, this is always difficult for governments, even municipal governments. The need for spending, subsidies, and aid for the lower-income population is always present. This type of spending also contributes to economic growth by increasing consumption. In this sense, there is no conflict between spending and investment to maintain growth. It should however be noted that current expenditure that encourages consumption and short-term growth has limitations in driving sustained long-term growth in the absence of investment. Every governing body must balance short-term needs with the responsibility of driving medium- and long-term development that generates sustainable economic and social well-being. In this sense, investment is the best bet for prosperity.

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