Competi 101546 tive Cities for jobs and growth What, Who, and How Competitive Cities for Jobs and Growth What, Who, and How A ’competitive city’ successfully Competitive cities drive facilitates its firms disproportionate job growth and and industries to increased income and productivity grow jobs, raise Looking at data on 750 cities for 2005 to 2012: productivity and increase incomes of citizens. Improving 72 percent outperformed their countries in terms of the competitiveness economic growth. of cities is a pathway 10% But there is huge variation in performance to eradicate poverty and increase shared Top 10 percent of cities achieved 9.2% annual job growth, compared to 1.9% in the other 90 prosperity. While percent of the cities. Often these cities are under the three quarters of radar: Secondary cities rather than household names. cities grew faster These competitive cities were not a foregone conclusion: than their national many of them exhibited success amidst adversity - e.g. economies since landlocked and in a lagging region of the country. What can we learn from their growth? the early 2000’s, there is still room What Do They Do? for improvement: Competitive Cities Leverage Key Interventions To Increase Competitiveness millions of additional Cities do not always need to overhaul their economies— jobs could be created A sometimes it is enough to do what you already do, but do it every year if more better. cities performed Market towns to Industry at the level of At GDP per capita below $2,500, cities are typically ‘market towns’ that will need to the world’s most industrialize and transform to increase their incomes; competitive cities. This report aims Increase Production Centers at understanding At GDP per capita from $2,500, cities are typically ‘production centers’ that can grow to around $20,000 GDP per capita by increasing the value what makes a city of their existing industry mix; competitive, and how more cities can be Increase Creative & Financial Services competitive. To rise above GDP per capita of $20,000, cities will typically need to move towards higher value creative and financial services. Cities Can Facilitate The Growth of Jobs, Productivity and A B Incomes Through Four Categories of Interventions: Institutions & Regulations Infrastructure & Land Skills & Innovation Enterprise Support & Finance C A Cities Become Competitive By: Who Does it and How? Competitive cities use three channels to get things done: Leveraging their comparative Mayor’s Wedge advantage, especially in tradable Make economic development an explicit priority. Cities need sectors that can be sold in other to focus their efforts and prioritize according to the outcomes cities and exported to other they care about most. (They also need both the power and countries. capacity to ensure successful interventions). In the fastest- Growth Coalitions growing cities Nurture public-private tradable sectors coalitions to solve grew 2.5 Growth Mayor’s particular problems. It Coalitions percentage points Wedge doesn’t matter who faster than non- tradable sectors; carries out the key interventions, as long as Intergovernmental someone does. Relations Industry-Specific Pursuing general Intergovernmental Relations reforms as well as Use external leverage with neighboring jurisdictions and other specific initiatives tiers of government. These can expand the city’s reach and (targeted to particular engage with problems that one city alone cannot solve. industries and investors); Economy-Wide Competitive Cities Focus on Turning Strategies into Real Action - Through: Focusing on all 1. Strategic Budgeting three sources of growth: expansion 2. Problem-Solving During Implementation of existing firms; creation of 3. Ensuring Quality Delivery Through new firms; and Accountability attraction of investors. Expansion Attraction Creation 4 Background and acknowledgements T his research was prepared jointly by the Social, Urban, The team thanks Karolina Ordon and Christopher Colford Rural, and Resilience Global Practice and the Trade and for editorial and graphic support and Imtiaz Ahmad Sheikh Competitiveness Global Practice of the World Bank for solving administrative problems speedily and with good Group. Its objective is to create a knowledge base on what humor. makes cities competitive, to improve the understanding of job creation at the city level, and to establish a foundation for The team gratefully acknowledges the peer reviews and a community of practice on this topic for World Bank Group inputs from these World Bank Group colleagues: Bill Doro- staff, academia, development partners, and practitioners. tinsky, Emiliano Duch, Thomas Farole, Xavier Forneris, Ejaz Ghani, Mary Hallward-Driemeier, Bill Maloney, Vincent The team would like to acknowledge gratefully the European Palmade, Martin Rama, Ivan Rossignol, Valerie Santos, Parth Commission, the African, Caribbean, and Pacific Group of Tewari, Hyoung Gun Wang, Roland White, Robert Whyte, States Secretariat, and the governments of Austria, Norway, Justin Piers William Hill and Ming Zhang. In addition, task and Switzerland for financing this study through the Com- team leaders and program leaders of the World Bank Group’s petitive Industries and Innovation Program. operations helped configure the research and provided feed- back during the team’s work, including Marcus Lee and Paul The steering committee for this research comprised Stefano Procee (East Asia and Pacific); Stephen Karam, Jean Louise Negri, Cecilia Sager, Sameh Wahba, and Somik Lall. The Racine, and Jose Guilherme Reis (Europe and Central Asia); research was led jointly by Megha Mukim and Austin Kilroy Dean Cira, Lucy Fye, Smita Kuriakose, Onur Ozlu, and David as task team leaders. This overview document was prepared Sislen (Sub-Saharan Africa); Andrea Liverani and Philippe by a team led by Austin Kilroy, Megha Mukim, and Stefano de Meneval (Middle East and North Africa); Jose Luis Acero, Negri. The joint team included Kenan Fikri, Drilon Gashi, Leonardo Iacovone, Thomas Kenyon, and Augustin Maria Z. Joe Kulenovic, Elisa Muzzini, Sharmila Railkar, Dmitry (Latin America and the Caribbean); and Bertine Kamphuis, Sivaev, Daniel Stock, Joanna Watkins, and Juni Tingting Yue Li, Barjor Mehta, and Fatima Shah (South Asia). The team Zhu. Senior management of the two global practices provided is especially grateful for feedback from colleagues outside the guidance and strong support throughout the research. The World Bank Group: Cara Camacho (U.S. Treasury), Roland managers included Ivan Rossignol, Klaus Tilmes, and Anabel Hunter (South African National Treasury), Christian Ketels Gonzalez for Trade and Competitiveness and Ede Jorge Ijjasz- (Harvard Business School), Jaana Remes (McKinsey Global Vasquez and Marisela Montoliu-Munoz for Social, Urban, Institute), Andrew Stern (Dalberg), Gilles Duranton (The Rural, and Resilience. Practice managers for the research Wharton School, University of Pennsylvania), and Shahid were Stefano Negri, Sameh Wahba, and Cecilia Sager. Inputs Yusuf (Growth Dialogue). were also provided by the World Bank Group’s Governance Global Practice, the Jobs Cross-Cutting Solution Area, and This overview document is drawn from detailed findings con- the International Finance Corporation’s Cities Initiative. tained in several companion papers, as described in the fol- lowing section titled “Methodology, Approach, and Outputs.” 5 ©2015 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilater- al Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. About the Competitive Industries and Innovation Program (CIIP) The CIIP partnership was created to enhance country growth and employment prospects by supporting public policies and investments that promote competitiveness and innovation within and across industries. The partnership’s resources are focused on supporting governments’ ef- forts to develop transformational economic development projects and to aggregate cutting-edge knowledge that can be implemented as part of targeted pro-growth initiatives. As the Trustee and Administrator for CIIP, the World Bank Group is responsible for program development, implementation, and monitoring and evaluation. For more information, visit www.theciip.org. 6 Table of Contents Background and Acknowledgments 5 Methodology, Approach, and Outputs 8 Abbreviations 11 Executive Summary 12 Introduction: Making Cities Competitive: Urgent, Complex, and with Big Potential Returns 15 Chapter 1: What Do Competitive Cities Look Like? 23 Key Takeaways from Chapter 1 29 Chapter 2: What Have Competitive Cities Done to Achieve Their Success? 33 What Does the Private Sector Need from Cities? 34 What Can Cities Do for Firms? 36 What Interventions Are Used by Competitive Cities? 38 Who Creates City Competitiveness? 46 How Are Economic Development Strategies Sequenced and Delivered? 51 Key Takeaways from Chapter 2 52 Chapter 3: How Can Cities Become More Competitive? 57 What: Growth Pathways and Prioritization 59 Who: Growth Coalitions 62 How: Organizing for Delivery 63 Key Takeaways from Chapter 3 68 The Role of the World Bank Group in Competitive Cities 69 7 Methodology, Approach and Outputs T he goal of this research has been to create a robust body of knowledge to address cities’ questions on benchmarking their performance, on analyzing what has worked and what has not, and on understanding how to organize for delivery in different contexts. The approach has used several methodologies to tackle these questions on the basis of best practice, data availability, replicability, and simplicity. In many cases, the research team leveraged new and existing data sources to shed new light on unanswered questions; in other cases, the team conducted primary research because available data were inadequate. The research involved looking at global and regional trends, comparing different typologies of cities—by income, sector, region, and industrial mix. The team buttressed these findings with econometric “deep dives” and case studies in selected countries and cities. Where possible, the study cites existing resources (research, analysis, toolkits, and experts) from the extensive literature on each topic. Supplementing and informing this overview document are several companion papers that provide the foundations for the con- clusions. These papers, available on the website at www.worldbank.org/competitivecities, are as follows: Companion Paper 1 Companion Paper 3 “City Analytics” “Six Case Studies of Economically Successful Cities: This paper identifies common threads in city performance by What Have We Learned?” assessing the state of cities today and identifying factors that The case studies were prepared in collaboration with regional appear to be correlated with better economic outcomes. The teams, including the relevant program leaders. This paper document also demonstrates how the database and analytic synthesizes the findings of the six individual case studies— tools can be used in other contexts such as in regional econo- Bucaramanga, Colombia; Coimbatore, India; Kigali, Rwanda; metric deep dives. Prepared by Kenan Fikri and Juni Tingting Changsha, China; Gaziantep, Turkey; and Tangier, Moroc- Zhu with substantial inputs from Anca Bogdana Rusu and co—analyzing the similarities and dissimilarities among guidance from Megha Mukim. them and identifying cross-cutting themes. The paper high- lights the institutions and strategies that successful cities have relied on to spur economic development, the conditions Companion Paper 2 in which such successes have occurred, and the lessons of this “Deep-Dive Quantitative Studies,” combines two experience that might be applicable to decision makers in studies: (a) “Empowering Cities: Good for Growth? other cities. Prepared by a team led by Z. Joe Kulenovic with Evidence from China” and (b) “Decentralization in contributions from Alexandra Cech, Drilon Gashi, Luke Jor- Ethiopia—Who Benefits?” dan, Austin Kilroy, Megha Mukim, and Juni Tingting Zhu. Both studies use longitudinal firm-level data to provide econometric and causal evidence of whether and how cities drive economic growth and job creation. (a) Prepared by Juni Tingting Zhu and Megha Mukim, and (b) prepared by Ritam Chaurey and Megha Mukim. 8 Companion Paper 4 Companion Paper 7 “User’s Guide to Implementing City Competitiveness “Public-Private Dialogue for City Competitiveness,” Interventions,” This paper offers a framework for formulating structured This paper supports cities in identifying management ap- dialogues at the city level, including objectives, analytics, and proaches that can help decision makers implement interven- participants. Prepared by Dmitry Sivaev, Benjamin Herzberg, tions to support the city economy. Prepared by Drilon Gashi and Sumit Manchanda, in consultation with Steve Utterwul- and Joanna Watkins. ghe. Companion Paper 5 Companion Paper 8 “What Do Multinational Firms Want from Cities?” “What Makes a Good City Strategy” This paper reviews what multinational firms want from cities This paper reviews various approaches to city strategy-setting from the perspective of intermediary consulting firms that and identifies common pitfalls of city strategies based on a provide location advisory services and city or regional invest- review of theoretical and empirical evidence. Prepared by ment promotion intermediaries. Prepared by Juni Tingting Dmitry Sivaev in consultation with Sameh Wahba, Soraya Zhu, Valerie Joy Santos, and Yago Aranda Larrey in consulta- Goga, and Austin Kilroy. tion with Robert Whyte and Stefano Negri. Companion Paper 6 “Growth Pathways: A Diagnostic Methodology for City Competitiveness,” and the City Snapshot diagnostic tool This paper provides a methodology for generating a snap- shot of a city economy with reference to the performance of various sectors and firm types—and for identifying potential growth pathways. These diagnostics help decision makers to assess how competitive a city economy is, to understand what a city’s competitive advantages are, and to identify the key barriers that a city’s businesses are facing. Prepared by Dmitry Sivaev in consultation with Austin Kilroy and Stefano Negri. Note Unless otherwise described, region in this paper refers to World Bank Group regions: Africa, East Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, and South Asia. 9 10 Abbreviations DRC Development Research Center EIU Economist Intelligence Unit FDI foreign direct investment GDP gross domestic product GIS geographic information system GMCA Greater Manchester Combined Authority GVA gross value added IFC International Finance Corporation IPI investment promotion intermediaries LED local economic development MICE meetings, incentives, conferences and events MNC multinational corporation ODI Overseas Development Institute OE Oxford Economics OECD Organisation for Economic Co-operation and Development OIZ organized economic zones PPD public-private dialogue RCC regional competitiveness commission SEZ special economic zone SMEs small and medium enterprises TEU 20-foot equivalent unit UNCTAD United Nations Conference on Trade and Development WEF World Economic Forum All monetary amounts are US$ unless otherwise indicated. 11 Executive Summary Improving the competitiveness of cities is a pathway to eradicate poverty and increase shared prosperity. Millions of additional jobs could be created every year if more cities performed at the level of the world’s most competitive cities. A competitive city is a city that successfully fa- growth, and productivity simultaneously. Thus it appears cilitates its firms and industries to create jobs, that usually trade-offs are made between these economic raise productivity, and increase the incomes outcomes and that city competitiveness carries risks as well of citizens over time. Worldwide, improving the competi- as opportunities. tiveness of cities is a pathway to eliminating extreme poverty and to promoting shared prosperity. Of the largest 750 cities Competitive cities include more than just household in the world, three-quarters have grown faster than their names, capital cities, or global centers of commerce. national economies since the early 2000s; but several million They are often secondary cities, and they are experienc- additional jobs could be created every year if more cities ing rapid industrialization. According to this study’s data, performed at the level of the world’s best. The primary source competitive cities include Saltillo, Mexico; Meknes, Morocco; of job creation has been the growth of private sector firms, Coimbatore, India; Gaziantep, Turkey; Bucaramanga, Colom- which have typically accounted for around 75 percent of job bia; and Onitsha, Nigeria. The success of these competitive creation. Thus city leaders need to be familiar with the factors cities was not a foregone conclusion: many of them exhibited that help to attract, to retain, and to expand the private success amid adversity—for example, many of them are land- sector. This document aims to analyze what makes a city locked and in a lagging region of the country. competitive and how more cities can become competitive. What Did Competitive Cities Do to What Do Competitive Cities Look Achieve Success? Like? Cities vary on their economic performance, and Economic structure competitive cities are a cut above the norm. Using data Structural transformation came first, efficiency gains from 2005 to 2012, the report finds the following: and productivity next. Cities do not always overhaul their economies to become competitive. They simply become • Accelerated economic growth. The top 10 percent of cities better at what they do. At lower income levels, the cities are achieved 13.5 percent annual gross domestic product typically market towns that face the challenge of transfor- (GDP) per capita growth, compared with 4.7 percent in mation from a service center to a production center through an average city; rapid industrialization. At middle-income levels (between • Outstanding job growth. The top 10 percent of cities $2,500 and $20,000), cities are typically production cen- achieved 9.2 percent annual jobs growth, compared with ters striving to increase productivity and take advantage of 1.9 percent in the remaining 90 percent. market opportunities rather than to dramatically transform their industrial mix. At higher income levels, cities typically • Increased incomes and productivity. The top 10 percent of become centers for financial and creative industries, with the cities increased the average disposable income of their challenge once again to transform themselves by shifting households by 9.8 percent annually. economic activity into higher value-added sectors. • Magnets for foreign direct investment (FDI). The top 5 One common theme in each of these stages is that percent of cities obtained as much FDI as the bottom 95 long-term job growth in cities is usually driven by percent of cities combined. tradable sectors. Competitive cities have found niche products and markets in tradable goods and services, rather Although 72 percent of cities outperformed their national than in retail or public services. In the fastest-growing cities economies in GDP growth alone, only 18 percent of cities (the top 10 percent in GDP per capita growth), tradable sector were able to outperform their national economies on jobs, employment growth outstripped nontraded sector growth 12 by an average of 2.5 percentage points annually. Tradable Growth coalitions sectors also ignite job creation in nontraded sectors: Cities in which tradable sector employment grew fastest recorded 6.6 Competitive cities paid attention to who—the power percent job growth in nontradable industries. By contrast, in of growth coalitions. Within the city, growth coalitions less competitive cities, tradables and nontradables both grew of public and private stakeholders in economic development around 2 percent annually. were a feature of all the successful case studies examined. Beyond city boundaries, competitive cities found ingenious Sustained long-term economic success in most ways to leverage the capabilities of their neighbors and of case-study cities has been observed across all three other tiers of government when they lacked the capabilities channels of firm-level growth: the growth of exist- or financing themselves. These mechanisms helped to ground ing firms, the attraction of outside investors, and strategies in local economic realities and to solve shared the creation of new businesses. Successful cities do not problems. just rely on attracting outside investment to spur economic growth. They balance business recruitment with assisting the Implementation and delivery growth of existing firms—which typically account for the Competitive cities pay attention to how—to turn largest share of new jobs in most economies—as well as with strategies into action. Cities chose a strategy for economic helping the formation of new businesses. development, aligned their budget to finance it, solved prob- lems during implementation, and mobilized sufficient staff Policy levers capacity and attention to the quality of implementation. They Competitive cities use a menu of interventions to had an explicit economic development–oriented mindset that increase competitiveness, including institutions and complemented a social and environmental vision, and they regulations, infrastructure and land, skills and inno- rallied agencies and layers of the city government around it. vation, and enterprise support and finance. Each city customized its choices and interventions within each area Where cities do not have adequate powers or capacity to its local circumstances, political economy, and economic to perform these functions, national and provincial opportunities and to the needs of its firms. At lower income governments may need to invest in decentralization, levels, institutions, regulations, and basic infrastructure tend including by building the capacity of local govern- to be crucial drivers of competitiveness. At higher income ments to act effectively. Given that the ingredients for levels, human capital, advanced infrastructure, and innova- city competitiveness are distributed between various tiers of tion systems become crucial for sustained economic growth government and between various entities, competitive cities and job creation. will need to know how to complement their own wedge in economic development by leveraging other tiers of govern- Competitive cities focused these policy levers on ment and private sector partners to generate outcomes that economywide interventions as well as on specific in- are more than the sum of their parts. dustrial sectors. In practice, this strategy means creating a favorable business climate and targeting individual sectors There is no single recipe for becoming a competitive for proactive economic development initiatives. City case city, but some common patterns can be identified and studies showed no substantial trade-off between the two some techniques recommended to cities that are de- types of initiatives; competitive cities often did both. Cities signing and implementing an economic development used extensive dialogue and a solid fact base to minimize the strategy. Cities at all levels of income and with different ever-present risk of “capture” by special interests and market industrial structures and political regimes have found ways distortion (such as subsidies and protectionist measures) and to increase jobs, raise incomes, and strengthen productiv- to eventually show the necessary ability to let go when some ity, thus benefiting their citizens. Their path depends on sectors were recognized as not globally competitive. their starting point, size, endowments, economic vocation, economic structure, and administrative remit. Cities can Several critical success factors differentiated the use improve their performance by using a custom process for de- of those policy levers in competitive cities compared signing and implementing a strategy and by using tools that with most other cities. For example, (a) business leaders are already available. These tools include strategic analysis of were consulted about their needs and the constraints they en- the local economy and external market trends and opportu- countered in their operations; (b) infrastructure investments nities, public-private dialogue, and techniques for harnessing were made in collaboration with the firms and industries they the political economy during implementation. The competi- aimed to serve; (c) skills initiatives were designed in part- tive cities examined in this document explicitly or implicitly nership with firms, ensuring that curricula addressed their used some of these tools to make informed decisions accord- practical needs; and (d) industries were supported where they ing to their specific needs. had a real commercial potential, through collective initiatives with the private sector rather than through the public sector alone. 13 “Gaziantep is the number one of the world in machine woven carpet production. We want to catch Belgium in fitted carpet production. If we make this success despite the harsh conditions in our region, this is a good model.” — Mehmet Aslan, Chairman of the Board of Directors, Gaziantep Chamber of Commerce Making cities competitive Introduction Urgent, complex, and with big potential returns Gaziantep is Turkey’s sixth-largest city. As recently as the 1970s, it had a population of about 120,000 people. The city’s population today stands at 1.54 million, not counting approximately 300,000 Syrian refugees. Gaziantep has limited natural resources, and its land is dry and ill-suited for agriculture; it is not a port city; it is not a capital city; it does not have high-tech clusters; it is not a house- hold name or a large, primary city. Yet Gaziantep’s light-manufacturing firms sell their products in 175 countries around the globe. Exports increased tenfold in just 11 years, from $620 million in 2002 to $6.2 billion in 2013. It ranked ninth globally for economic growth in the decade 1999 to 2009. It recorded an average of 6.3 percent in annual gross domestic product (GDP) growth from 2005 to 2012, and 3.6 percent in annual em- ployment growth. Gaziantep is a competitive city. Introduction A competitive city is a city that successfully facilitates its firms and industries to create jobs, raise productivity, and increase the incomes of citizens over time.1 S uccessful and attractive cities have many dimen- • Those 750 cities created 87.7 million private sector jobs, sions—including social and human development, accounting for 58 percent of all new private sector jobs environmental sustainability, and political free- in their 140 countries, despite collectively being home doms. This document focuses on the economic outcomes of to only one-quarter of total private sector employment. cities: output and employment growth, labor productivity, Jakarta, Beijing, and Chongqing created more than 2 and household disposable income. The objectives of this million new jobs each.3 report are to understand what drives the economic outcomes of cities and to find an evidence-based approach for economic A disproportionately high number of the fast- development strategies that maximize those outcomes. est-growing cities since the year 2000 were low- er-middle-income cities, a circumstance that pro- Job creation in cities is at the forefront of the eco- vides evidence of global and regional convergence. nomic development challenge globally (World Bank At the city scale, evidence also suggests income convergence 2013a). Many developing countries are experiencing a through economic development: as cities develop, an influx of demographic and spatial transition, with millions of new migrants leads to an increase in intracity inequality, but sub- entrants to the labor market (UN System Task Term on sequently inequality levels tend to decline as cities gradually the Post-2015 UN Development Agenda 2012; World Bank include migrants in the labor force.4 2013b). Creating job opportunities in urban areas—quick- ly—is essential if countries are to take advantage of their Even for cities enjoying positive economic trajecto- “demographic dividend” and thus avoid a social disaster cre- ries, there are pitfalls along the way. Urbanization does ated by unemployment and inequality. Cities need jobs and not automatically breed economic success (Glaeser 2009; opportunities for their citizens and the means to generate Puga 2010; World Bank 2009). Cities whose leaders do not tax revenues to fund projects that meet their populations’ continuously reassess their approach to growth can lose their growing demand for basic services. momentum. Well-known examples in developed countries such as the United States include Detroit, Michigan, and Existing literature shows that urbanization and eco- Cleveland, Ohio, and such cities in low- or middle-income nomic growth go hand in hand and that higher levels countries also need to rekindle growth. Of the 750 cities of development are correlated with a greater concen- studied in this project, one-third experienced per capita GDP tration of production and population in cities (Hyten- growth rates of less than 2 percent annually from 2000 to get 2011; Glaeser and Joshi-Ghani 2015; McKinsey Global 2012 (such as Valparaiso in Chile, Bloemfontein in South Institute 2012; World Bank 2009). Research for this project Africa, and Kuching in Malaysia). Conversely, city leaders confirms that cities have been the engines of growth in most who realistically reassess their economic opportunities and countries and that cities in developing countries provided act to implement strategic initiatives can execute successful jobs and lifted households out of poverty: turnarounds, even from an apparently dire situation. Good examples are provided by cities like Bilbao in Spain and Pitts- • Of the 750 largest cities analyzed from 2000 to 2012, 72 burgh, Pennsylvania, and Oklahoma City, Oklahoma, in the percent outperformed their national economies in terms United States (KPMG 2014). of economic growth,2 with most of the exceptions being resource-rich countries or countries with already-high urbanization rates. 16 Faced with these challenges, city leaders have clear • Agglomeration economies. Economic development happens questions on their minds: through the growth of firms and industries, and abun- dant empirical research finds that agglomeration effects • What should I do to create more jobs for my citizens? (the productive efficiencies that result from colocation of firms) are integral to that development. An industry can • How do I choose between competing priorities and inter- have a wide geographic span, but agglomeration effects ventions? tend to be spatially bound. Usually economic geogra- phers would consider the natural scale of agglomera- • How do I make things happen for real? tion to be within a metropolitan area (for example, see City leaders realize that their task is no longer limit- Drucker 2012), where workers commute to jobs, there is ed to providing efficient services to their citizens: It a recognizable pool of labor, infrastructure is shared, and now also includes positioning local firms to compete knowledge can spill over between firms. Proximity tends in the global marketplace. Leaders are beginning also to to be more important for industries that rely on face-to- recognize that an economic development strategy alone is in- face interactions and knowledge exchange. sufficient. Implementation mechanisms and delivery systems • Administrative reach. Policy implementation tends to be are equally (and perhaps more) important to achieving the more manageable at the city level than at the national desired results. level, with city leaders employing a range of policy levers Silver bullets are not available. Countless examples and taking a relatively more pragmatic approach to reveal attempts to find them through investments in large dealing with problems (Glaeser and Joshi-Ghani 2014; infrastructure projects, flagship events, or new trending WEF 2014)—transcending the political gridlock that is industrial sectors. Some of those investments are driven by frequently experienced at the national level. City gov- political-economy priorities rather than by competitiveness ernments often struggle, however, with fewer resources considerations. Most of the time, unfortunately, top-down and lower capacity. Getting policy right at the outset will and one-off interventions are not sufficient to trigger the de- have important implications for city competitiveness sired job creation and economic growth, and they sometimes and, because urban areas contribute the majority of generate expensive “white elephants” (Zimbalist 2015). No countries’ economic growth, for national-level wealth single recipe guarantees success across the board. Improving creation and poverty reduction. competitiveness is, instead, a long and complex process that involves multiple public and private stakeholders. Some of Overall, the city competitiveness opportunity is huge these approaches are summarized in chapter 3. (box I.1). If all large cities had been able to increase their rate of job growth to the level of the best 25 percent of cities in However, cities can be particularly well suited to their region, almost 20 million additional jobs would have solving economic development challenges. The scale of been created just in the year 2012.5 Practically, it will not be a city tends to match the natural scale of economic develop- possible for all cities to perform as well as the world’s best, ment in two ways: but lessons and insights from those competitive cities can help others to do better. Figure I.1: Job creation in the average city brought to the level of the top quartile Box I.1: The Competitiveness Opportunity would have created 19 million jobs, 2012. Across all regions of the world, cities perform unequally. For example, cities in the top quartile of Jobs (millions) Sub-Saharan Africa (for example, Onitsha, Nigeria; Dar 35 es Salaam, Tanzania; Kumasi, Ghana) created jobs at a 30 rate 4.5 percentage points faster than the rest. For each of the other regions of the world, this gap is at least 3 25 19 million more jobs percentage points. 20 The authors calculated the gains that could be 15 achieved if the average rate of job growth in 10 the top quartile of cities from each region were achieved by all cities in the region with growth 5 rates below that average. The global gap between 0 that potential rate of job creation and the actual rate of Created by private job creation was 19 million jobs just in 2012 (figure I.1). sector in cities Source: Oxford Economics Dataset 2012. 17 Why Study Cities? A Note about the Data This study explores the “What,” the “Who,” and the City-level data are notoriously difficult to obtain. “How” of competitive cities, thereby trying to find an Even when data are available, well-known concerns are answer to city leaders’ most pressing questions: usually associated with the data (for example, the definition of a city for administrative or economic outcomes). Although Chapter 1, “Performance and Characteristics,” paints a nu- the authors of this report acknowledge all these issues, the merical picture of what competitive cities look like and what Oxford Economics (OE) dataset was considered the best avail- their outcomes are, making use of descriptive data. able, with some caveats.6 Chapter 2, “Evidence and Analysis,” examines what the Briefly, the cities in the database can be described as private sector, as the main creator of jobs, needs from cities. follows: The chapter analyzes the determinants of success, presents evidence from case studies, and presents a framework of the • Sample selection. The 750 cities included in the dataset are levers used by competitive cities. the world’s largest urban agglomerations or metropolitan areas with populations of at least 400,000,7 according Chapter 3, “Implementation,” outlines a user’s guide for city to the list compiled by the Population Division of the leaders who are pursuing the difficult path to competitiveness United Nations Secretariat Department of Economic and focuses on diagnostic tools, public-private dialogue, and and Social Affairs. Some “strategically important” cities, delivery techniques. such as country capitals that did not make the threshold population of 400,000, were then added to the list. In a world of multiple, overlapping tiers of public administration and many structures of devolved • Regional distribution. The 750 cities are located in 140 government, why does this report concentrate exclu- countries across all regions. The sample distribution cov- sively on cities as its subject? The question is especially ers East Asia Pacific, 27 percent; Latin America and the pertinent in countries that do not have strong powers for Caribbean, 13 percent; South Asia, 12 percent; Eastern city governments and instead have a concentration of powers Europe and Central Asia, 9 percent; Sub-Saharan Africa, at the state level (for example, India and Nigeria) or at the 9 percent; Middle East and North Africa, 6 percent; and provincial or county level (such as Kenya). Is a report on cities members of the Organisation for Economic Co-operation still relevant? and Development (OECD), 23 percent.8 To some extent, city is convenient shorthand for local • Income distribution. The sample distribution by income government. Some of the insights in this report will be levels using the World Bank Group’s per capita GDP cut- relevant to any subnational government that is considering off lines as of 2012 is as follows: low income (< $1,035), an economic development strategy, regardless of whether the 9 percent; lower-middle income ($1,036–$4,085), 33 administrative area ends at the city limits, includes a rural percent; upper-middle income ($4,086–$12,615), 26 hinterland, or indeed includes several urban areas. Public percent; and high income (>$12,615), 32 percent. administrators for all of those areas will need to consider the drivers of subnational economic development (“what”), • City size distribution. The sample distribution by size the stakeholders in that process (“who”), and the techniques using UN-Habitat’s population cutoff lines is as follows: for diagnostics, design, and implementation (“how”). Some small cities (<500,000), 5 percent; intermediate cities other aspects may require adjustment, adapting to the legal (500,000–1 million), 25 percent; big cities (1 million–5 powers available at each administrative level or to the extent million), 48 percent; large cities (>5 million), 22 percent.9 to which recognizable spatial clusters of firms and industries exist (because the core objective of a competitive cities ap- proach is to understand and engage coherently with the local Approximately 40 percent of the data points in the economy). OE dataset are estimates instead of actual observa- tions. For regions, OECD countries have the best city-level Overall, the report concentrates on understanding data coverage, almost reaching 100 percent; more estimates the underlying and practical dynamics of economic are used for cities in Africa and the Middle East. Data avail- development in cities rather than on defining ex- ability for cities across Asia and Latin America is somewhere actly what differentiates a city from other local, in the middle. For variables, demographic and labor market subnational administrative units. The label city is used series have the most complete data, with more than 90 per- as a term that readers can most readily identify, even as the cent of series based on published data, followed by economic authors recognize that these insights will be adapted to local output variables. Detailed consumer spending and stratified contexts. income variables are the least complete. 18 Construction of the database was challenged by three to city competitiveness. City leaders in some sense categories of data that were originally missing. These need to juggle those multiple complex areas of policy and missing data were estimated in the following ways: investments to facilitate city competitiveness. • For data series with missing values (but where historical • The messages on what to do within these four cat- data are available at the city level in certain years), da- egories are largely consistent across reports. It is ta-mining techniques, such as extrapolation or interpo- unusual for reports on city competitiveness to contradict lation, are used to fill in the gaps. For example, census each other, as shown in examples here: data usually fall under this category, as most countries conduct a census only every five years, and thus yearly -- Institutions and regulations. Reports tend to highlight data points have to be extrapolated or interpolated.10 the importance of a taxation and regulatory system that is conducive to business and investment, a • For data series with only one year or no observations at transparent and efficient public administration, and the city level, estimations are obtained by using region- the use of some special measures to address envi- al- or country-level data coupled with specific economic ronmental degradation, social cohesion, and traffic assumptions. For example, when city-level GDP data are management. not available, OE scales down regional- or country-level GDP data using a modified ratio of city population to -- Enterprise support and finance. Reports tend to high- regional or country population. light the importance of regular conversations with businesses, roadshows to attract investors, pub- • For data series with no observations either at the city or lic-private partnerships, training and mentorship the country level, estimates are made by analyzing simi- networks for small and medium enterprises (SMEs), lar countries by economic development and region. and seed capital. -- Skills and innovation. Reports tend to highlight the Competitive Cities: An Emerging importance of strong educational institutions, the Consensus? alignment of training curricula with the needs of local industry, and arts and culture to attract inter- national talent and investment. Competitive cities and city competitiveness are terms that have become widely used by economic develop- • However, consensus seems to be lacking on how ment practitioners, political leaders, researchers, to balance those policies and investments, given and others. Their definitions vary, but some common scarce resources —including the processes for making underlying threads can be noted. This report defines a com- decisions, the choice of partners, and the techniques for petitive city as one that successfully facilitates its firms and implementation. industries to create jobs, raise productivity, and increase the incomes of citizens over time. A framework is proposed for -- Some reports emphasize a collaborative approach nurturing a competitive city by (a) prioritizing firm-level per- between various stakeholders in a city and with oth- formance, (b) considering the determinants of that perfor- er tiers of government (for example, OECD, World mance, (c) determining the policy levers available to improve Bank, Cities Alliance, Brookings). performance, and (d) combining the scope and capacity of the city public administration with private partnerships and -- Other reports emphasize the need for bold mayors intergovernmental leverage (see page figure 2.2, page 36 for a and city leaders to envision and push a development full explanation). agenda from the front (for example, WEF, McKinsey Global Institute). In reviewing similar literature from organizations such as the World Economic Forum, OECD, McKinsey -- Some reports frame economic development as a Global Institute, Brookings, KPMG, and previous long-term strategic effort, requiring reliable financ- literature from the World Bank, several patterns can ing, timelines for implementation, ownership of be noted (Brookings Institution Metropolitan Policy Pro- the process from stakeholders, and a collaborative gram 2007, 2011, 2012, 2013; Centre for Cities 2013, 2014a, approach (for example, OECD, Cities Alliance, World 2014b, 2014c, 2015; Cities Alliance 2006; McKinsey Global Bank). Institute 2013; OECD 2006, 2013; WEF 2014; World Bank 2006): -- Other reports highlight a more opportunistic approach for achieving “wins” in economic develop- • Most literature considers all four major catego- ment, through an adaptive, pragmatic approach that ries of policy levers (institutions and regulations; evolves according to needs (for example, Brookings, infrastructure and land; skills and innovation; McKinsey Global Institute, and WEF). enterprise support and finance) as being integral 19 Notes 1 The term competitive cities has become widely used, and it is featured in 5 Calculated by applying the average rate of job growth in the top quarter a number of high-level reports and academic articles. However, there is of cities from each region to all cities in the region where growth fell below no consensus about precisely what competitive cities means, as noted by that average and then comparing the resulting net increase in jobs to the Harris (2007) and others. For this report, the authors have combined a actual increase. number of elements that appear in the economic literature to best reflect 6 For more information on Oxford Economics, see oxfordeconomics.com. their understanding of city competitiveness. The components include the dual priorities of job creation and productivity growth, as identified by the 7 To be precise, this dataset includes at least the largest 500 cities in the European Commission (2007); a focus on firms, as suggested by Storper world. For the rest of the cities in the dataset that are close to the 400,000 (2013) and Parkinson and others 2004; and the recognition of the “city” as population threshold, whether they are the largest depends on how bound- a combination of local public, private, and civil-society actors, as noted by aries are drawn for metropolitan areas. WEF (2014) and Zhang (2009). 8 Does not sum to 100 percent because of rounding. 2 Measured as GDP growth over the study period (2000–12 or the first year 9 When trying to pinpoint the exact statistical boundaries for each urban the data became available for certain cities). Unless otherwise noted, the agglomeration or metro area, OE uses the United Nations’ list of urban ag- data reported here were obtained from Oxford Economics and analyzed by glomerations as the starting point. It then compares the metro population the World Bank. figure published by the United Nations with the metro population figure See Fikri and Zhu (2015). Because most city-level job data start only from 3 published by individual countries’ official statistics. If they are close, then 2005 in the Oxford Economics data, the figures here are from 2005 to 2012. the boundaries used by the official statistics are adopted. If they are sig- nificantly different, in general OE adopts the statistical boundaries (either 4 A time and city fixed-effect regression model was used to test the Kuznets by the United Nations or by the individual country) that include the higher effect at the city level: As income increases, inequality will increase first population. before it starts dropping. The global full sample dataset from OE does not have city-level inequality observations for each city in each year. Some The 40 percent missing value figure excludes instances in which OE 10 observations were extrapolated by models. A robust check conducted by the had to estimate missing values in between years or beyond the available authors used cities with actual observations only (which in itself is subject historical series through interpolation or extrapolation (such as through to sample bias), and the same Kuznets effect still holds, although it is no census data) because most of these annual estimates are made on the basis longer statistically significant. of actual observations. 20 References Brookings Institution Metropolitan Policy Program. 2007. “Metro Hytenget, Eva. 2011. “The Impact of Urbanization on GDP Per Cap- Nation: How U.S. Metropolitan Areas Fuel American Prosperi- ita: A Study of Sub-Saharan Africa.” Master’s thesis, Jönköping ty.” Blueprint for American Prosperity report, Brookings Institu- University, Sweden. tion, Washington, DC. KPMG. 2014. Magnet Cities: Decline, Fightback, Victory. 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Washington, Glaeser, Edward L. 2009. “The Death and Life of Cities.” In Making DC: World Bank Group Cities Work: Prospects and Policies for Urban America, edited by ———. 2013b. Planning, Connecting, and Financing Cities—Now: Robert P. Inman, 22–62. Princeton, NJ: Princeton University Priorities for City Leaders. Washington, DC: World Bank Group. Press. Zhang, Ming. 2009. Competitiveness and Growth in Brazilian Cities: Glaeser, Edward L., and Abha Joshi-Ghani. 2014. “The Urban Imper- Local Policies and Actions for Innovation. World Bank: Washington, ative: Toward Shared Prosperity.” Policy Research Working Paper DC. 6875, World Bank, Washington, DC. Zimbalist, Andrew. 2015. Circus Maximus: The Economic Gamble ———, eds. 2015. The Urban Imperative: Towards Competitive Cities. Behind Hosting the Olympics and the World Cup. Washington, DC: Oxford, U.K.: Oxford University Press. Brookings Institution Press. Harris, Nigel. 2007. “City Competitiveness.” Research for the World Bank posted online by DPU Associates, London. http://www. dpu-associates.net/system/files/City+Competitiveness+09.pdf. 21 Coimbatore is not a well-known name outside of India. yet this booming city of more than two million has since 2000 grown just as fast as Bangalore or Hyderabad, and faster than most of its peers — as the supplier of up to two thirds of the motor pumps produced in that country. 1 What do competitive cities look like? chapter Cities vary enormously when it comes to their economic perfor- mance. While 72 percent of cities grow faster than their countries, these benefits do not happen uniformly across all cities. The top 10 percent of cities increase GDP almost three times more than the remaining 90 percent. They create jobs four to five times faster. Their residents enjoy higher incomes and productivity, and they are magnets for external investment. Competitive cities include more than just household names, capi- tal cities, or global centers of commerce. They are often secondary cities, and they are experiencing rapid industrialization. According to this study’s data, competitive cities include Saltillo, Mexico; Me- knes, Morocco; Coimbatore, India; Gaziantep, Turkey; Bucaraman- ga, Colombia; and Onitsha, Nigeria. The success of these competi- tive cities was not a foregone conclusion: many of them exhibited success amid adversity—for example, many of them are landlocked and in a lagging region of the country. Chapter 1 There is no single recipe for becoming a competitive city, but some common patterns can be identified and some techniques recommended to cities that are designing and implementing an economic development strategy. C ities differ in many dimensions: size; economic Cities appear to fall into three categories in their mix orientation; geographic location and endow- of economic sectors.1 The categories are defined using the ments (port, landlocked, resource rich, barren); data shown in figure 1.2. Patterns in the data suggest the income level; history (new, old, planned, unplanned); following three categories of cities: political system (highly federal versus centralized); among others. As highlighted in figure 1.1, cities’ economic • Market towns with GDP per capita of about $2,500 or less. performance also varies dramatically. Consumer services (such as wholesaling, retail, catering, and recreation) account for a large proportion of the Moreover, each city has its own set of development economy of these cities, consistent with their function concerns that shape its perspective and objectives. as trading centers and market towns for the surrounding Several cities in Eastern Europe, for example, are shrinking rural economy. Industry accounts for a growing propor- because of their declining industries. In Africa and Asia, tion of their economy as cities move up the income lad- cities are trying to integrate a flood of migrants into their der toward $2,500. The main challenge for these cities is job markets and social fabric. In some cities in the developed how to facilitate job creation through industrialization, world, the onus is on attracting and retaining talent; in some and therefore how to become a production center. cases, it is on preventing mass outflows of people. Figure 1.1: Economic performance of cities varies greatly across the world Panel a Panel b Panel c Panel d Panel e Population Average Annual Growth, Average Annual Growth, Average Annual Growth, Average Annual Growth, Population Jobs GDP Household Disp. Income People (millions) Percent Percent Percent Percent 40 25 25 25 25 35 20 20 20 20 30 15 15 15 15 25 23% 10 10 10 gap 10 20 144x 12.8% 17% mean higher 5 gap 5 gap 5 mean 5 20% 15 mean mean gap 0 0 0 0 10 5 -5 -5 -5 -5 mean 0 -10 -10 -10 -10 Minimun Maximun Minimun Maximun Minimun Maximun Minimun Maximun Minimun Maximun Source: World Bank analysis of Oxford Economics Data 2000–12. See Fikri and Zhu 2015. Note: GDP = gross domestic product; Disp. = disposable. 24 • Production centers with gross domestic product (GDP) per • Creative and financial services centers with GDP per capita capita between about $2,500 and $20,000. These cities of about $20,000 and higher. High-end services account have a large range of incomes yet a strikingly similar mix for an increasing share of the city economy in cities with of industries. Manufacturing, construction, and min- incomes of $20,000 and above, and industry represents ing accounts for the largest share of economic activity a declining share. The main challenge for these cities in these cities. During this phase of production center is how to support their firms in remaining competitive development, cities make large gains in value by be- with increased costs of production and, hence, how to coming more sophisticated and productive at what they facilitate the shift of economic activity into higher val- are already doing: improving productivity of firms and ue-added sectors. industries through product and process innovation and capturing more profitable niches in their value chains. In the dataset of 750 cities that the World Bank The main challenge for these cities is how to create the examined, 150 are market towns, 405 are production conditions to increase efficiency and productivity for centers, and 195 are creative and financial services their firms and how to exploit market opportunities. centers. The 750 cities are stratified into bands of 15 cities each in figure 1.2. Figure 1.2: The different industry structures and different needs of cities at different levels of income Market Towns Production Centers Creative and Financial Services aiming for aiming to increase converting deindustrialisation industrialization the value of production to growth ~$1000 ~$2,500 ~$5,000 ~$10,000 ~$20,000 ~$50,000 100 100% 80% 80 High-End Services (GVA) added(%) Added 60% 60 value Value Public Services gross Gross of total of Total 40% 40 Consumer Services Share Sector share Agriculture 20% 20 Manufacturing, Construction, Utilities, and Mining 0% 0 of 15 Cities Bands Bands Ordered of 15 cities fromfrom ordered Lowest to Highest lowest GDP to highest per GDP Capita per capita Manufacturing, Construction, Utilities and Mining Agriculture Consumer Services Public Services High-End Services Source: World Bank analysis of Oxford Economics Data 2000–12. See Fikri and Zhu 2015. 25 Competitive Cities Are a Cut Above the When the diversity of circumstances and needs men- Norm tioned previously is taken into account, the top-per- forming cities show that when it comes to economic The research focused on understanding what a com- performance, they are a cut above the norm. They petitive city was and what drove its success. The task exhibit the following characteristics: was to identify a set of best-performing, most competitive cities2 and to isolate what they seemed to have in common Economic growth and to remain sensitive to their structural differences. The data revealed cities in each region of the world that had Annual GDP per capita growth in an average city is outperformed their national economies on job growth, already impressive at 4.7 percent,4 but the top 10 per- income growth, and productivity growth.3 Of the largest 750 cent of cities achieved 13.5 percent per year between cities in the Oxford Economics (OE) dataset, 130 meet this 2005 and 2012. Production centers achieved the fastest performance standard. Since the beginning of the millenni- GDP per capita growth rates, averaging 6.3 percent per year. um, these competitive cities have been growing faster, their That growth rate compares with 5.3 percent in generally economies have created a disproportionate number of private less-developed market towns and only 1.0 percent in more sector jobs, and their household disposable income grew mature creative and financial centers. More than two-thirds faster than their peers. of the fastest-growing cities in GDP per capita were low- er-middle-income cities, confirming the existence of a global Many of the competitive cities are not household convergence or “catch-up” story at the city level. A conditional names or world-famous primary cities. They can be convergence rate of 1.4 percent to 9.0 percent per year is found in all regions and on all continents. Judged by econom- observed for the 750 largest cities in the world from 2000 to ic performance, competitive cities are places like Bucaraman- 2012. In other words, cities with a lower per capita GDP are ga in Colombia, Coimbatore in India, and Onitsha in Nigeria. catching up at a rate of 1.4 to 9.0 percent per year.5 Of partic- They host firms and industries that create growth and jobs ular interest is the evidence from Africa: The top 10 percent and that improve the income levels of their people—and they of African cities in the dataset achieved an annual growth do it in a variety of ways. rate of 11.0 percent, strengthening hopes for the continent’s growth story. Unfortunately, the bottom 10 percent suffered from a fall in GDP per capita of 1.7 percent each year, under- scoring the severity of Africa’s competitiveness challenge and the need for growth-focused interventions in Africa’s urban Box 1.1: The Informal Economy centers to fully reap the benefits of urbanization. Across all regions of the world, but particularly in Job creation lower income countries, a substantial proportion The top 10 percent of cities achieved 9.2 percent of the economy is constituted by informal activi- annual jobs growth, compared with 1.9 percent in the ties. Informal economic activities are those that are not remaining 90 percent of cities, from 2005 to 2012. On regulated and registered and thus would not show up in average, job growth was faster in market towns and produc- official economic data. tion centers (annual averages of 3.5 percent and 3.3 percent, respectively) than in creative and financial services centers. The data used in this chapter do not make a Still, the most competitive metropolises managed to generate distinction between formal and informal jobs. impressive private sector job growth, quickly rebounding For African and Indian cities, the Oxford Economics from the 2008 financial crisis and ensuing recession. dataset made some adjustments to account for informal employment. For other countries, the extent of adjust- ment depends on whether the official statistics adjust for Average incomes informal jobs. The top 10 percent of cities increased the average disposable income of their households by 9.8 percent For this report, World Bank did not specifically annually. Some of the strongest performers on this metric explore the role of the informal economy in city were market towns, but production centers saw the highest competitiveness. A broad existing body of literature annual average increase in incomes at 4.6 percent. Converse- explores the dynamics of informal economic activities ly, many creative hubs struggled to raise living standards: and the links between the formal and informal economy. household disposable income increased by only 0.7 percent For example, there is some evidence that the informal on average, and it increased by a meager 0.1 percent in the sector, like its formal counterpart, is attracted to cities bottom 10 percent of cities. Advanced economies were not and the benefits of their urbanization economies and the only ones to grapple with stagnation or falling living better access to infrastructure (Ghani, Goswami, and standards: in Sub-Saharan Africa, even as the top tenth of Kerr 2012; Ghani, Kerr, and O’Connell 2014; Ghani, Kerr, cities grew incomes by 11.0 percent a year, the bottom tenth and Segura 2015). saw household incomes fall by almost 4.0 percent. 26 Productivity6 Tradable sectors In 2012, 70 percent of cities in the database outper- In the 10 percent of cities in which GDP per capi- formed their countries in productivity. Across the ta grew fastest from 2005 to 2012, tradable sector three types of industrial structures identified, market towns employment growth outstripped nontradable sector and production centers experienced the fastest growth in employment growth by an average of 2.5 percent- productivity (at 4.4 percent and 4.1 percent annually, on age points annually—6.2 percent compared with average), compared with creative and financial services hubs 3.7 percent. Economic literature often finds that tradable at 1.0 percent annually. However, considerable variations can sectors—goods and services that are geographically mobile be found across regions, across countries, and across cities and thus subject to regional and international trade—are the within countries: most important drivers of higher productivity and wages (At- kinson 2013; Porter 1990; U.S. Cluster Mapping Project n.d.). Middle East and South Asia. The top 10 percent best-perform- It should not, therefore, be a surprise that competitive cities ing cities increased productivity 3.0 percentage points faster exhibit a particular emphasis on the production of tradable than their peers. goods and services as a way to boost their economic growth and job creation (Fikri and Zhu 2015). Significantly, traded Africa. The top 10 percent of city performers increased pro- sectors also seem to ignite job creation in other nontraded ductivity 1.7 percentage points faster than their peers. sectors in a city’s economy. The 10 percent of cities in which traded sector employment grew fastest from 2005 to 2012 United States. Even in this country with a mature urban (9.8 percent annually) recorded also a 6.6 percent growth system, the average masks wide variations: output per worker in jobs in nontradable industries. By contrast, in less-com- in San Jose, California, the most productive U.S. city, is more petitive cities, tradable and nontradable industries grew at than twice that of the least productive, Buffalo, New York, at effectively the same slower rate: just above 2.0 percent. This more than $210,000 per worker compared with $87,500. contrast is particularly stark in production centers, where the China. In this rapidly urbanizing country, the results are even most competitive cities achieved nearly 11.0 percent annual more skewed, with top-performing cities such as Tangshan average traded sector job growth and 9.1 percent total job (Hebei) and Dongguan (Guangdong) averaging up to seven growth, compared with a global average of 3.2 percent. times the national average productivity. This disparity is One caveat here is that nontraded sectors will almost driven by, among other things, differences in city economic always make up the bulk of a city’s economy—includ- structures and industry specializations, yet it remains a stark ing most of its jobs—so they should not be neglected. reminder of why competitiveness matters. The insight is rather that tradable sectors will be critical in Interestingly, a close relationship was not found be- determining the overall economic development pathway tween productivity and other indicators of economic of a city, through driving growth in incomes and providing performance. Job creation, income growth, and produc- spillovers for other sectors. An economic development ap- tivity improvements do not necessarily go hand in hand. The proach that nurtures both tradable and nontradable sectors is dataset indicates that some cities experience job growth but outlined on page 45. not productivity growth, income growth but not job growth, productivity growth but not income growth, and so on. These patterns are shown in table 1.1. In only 69 percent of the cities did job growth go hand in hand with both productivity growth and increases in average household income. During the same period, only 18 percent of cities, or less than one in five, performed better than their national economies on all three measures. Table 1.1: Incomes, jobs, and productivity in the largest 750 global cities, 2005–12. Income Job Productivity Growth in all three growth alone growth alone growth alone simultaneously Percentage of 750 cities in 85 85 90 69 which growth occurred Percentage of 750 cities which 50 73 42 18 outperformed their countries Source: Oxford Economics Database, 2005–12. 27 Foreign direct investment (FDI) Comparative advantages The top 5 percent of cities obtained as much FDI 7 Successful cities make the most of what little they in the decade leading up to 2012 as the bottom 95 may have had to power ahead of competitors. A com- percent combined.8 This statistic carries a “chicken and mon theme across all of the case study cities is that city lead- egg” dilemma: Did FDI generate growth or did fast-growing ers found a competitive advantage and leveraged it. (Exam- cities attract FDI? Large high-income services hubs (such ples include a skilled workforce, geography, language, cultural as Singapore and London) and production centers (such as ties, technical know-how, existing industry base, and product Guangzhou, China, and Bucharest, Romania) dominate this and market knowledge.) Note, for example, the following: list in absolute terms. However, normalizing inflows by the size of a city’s economy presents an entirely different picture. • In Kigali, Rwanda, the city leveraged its nearby goril- In FDI capital investment relative to city GDP, low-income la-viewing opportunities to build a MICE (meetings, market towns account for 45 percent of cities among the top incentives, conferences, and events) sector by harnessing 10 percent of performers. Sub-Saharan Africa populated the a national-level focus on national parks and by designing top bracket with as many cities as the East Asia and Pacific re- and marketing a world-class master plan to encourage gion, led by Abuja, Nigeria, and Addis Ababa, Ethiopia. These hotel and tourism investors. cities punch far above their weight in the global competition for mobile, production-oriented capital. • In Bucaramanga, Colombia, the city used oil revenues to invest in universities with a specialization in oil industry Yet the economic development potential of FDI research, a strategy that has created broader technical should not be overstated. Although the attraction of skills that have spilled over into new industries. high-profile outside investors often yields the most attention, the majority of jobs are actually created through the growth These cities and many others seized on opportunities of existing domestic firms, and FDI should be seen as a when they presented themselves and forged their means to trigger economic activity, technology transfer, and own paths rather than jumping on bandwagons or local content, rather than as an end. In the average city that following the latest economic development fads (such received any FDI in 2012, foreign investors directly created as biotech, software, and clean tech). Similar to what only 1,400 jobs. Those jobs represented 0.1 percent of the em- happens in the markets for private companies, first-mover ployment base, or only a small fraction of the 2.0 percent net cities and their firms can obtain a higher return on their in- job growth that occurred on average in these cities (Fikri and vestments when they manage to secure a market niche where Zhu 2015). Recent work from Latin America underscores the they have a clear comparative advantage. fact that FDI is no silver bullet for competitiveness (World The paths to success differ depending on the city, yet Bank 2014). For vaunted productivity increases and spillover successful cities offer lessons for others. Document- benefits to materialize, foreign companies must be integrated ing the success of cities such as New York, London, Dubai, into domestic production networks and supply chains.9 and Singapore helps set the bar for best practice, but useful Such integration amplifies the local multiplier effect nuggets can be obtained from cities that are not household of an investment, too. For example, in the automobile names and that managed to overcome common challenges industry in India, for every 100 jobs generated in automo- often faced by cities in the developing world. bile manufacturing, 300 more jobs can be generated in auto For an explanation of how the informal economy is consid- component and auto body manufacturing (Bhasker 2013). ered in the data in this chapter, see box 1.1. Additional jobs are generated through auto services (such as dealerships, auto finance, and auto insurance). 28 Key Takeaways from Chapter 1 In this chapter, we described what competitive cities look like Slicing cities by their levels of per capita GDP and and how they perform. Here are the key findings: their economic composition results in three broad categories: poorer markets towns, whose economies Cities vary greatly across their characteristics and consist mainly of wholesale and retail consumer their performance, across the world, and across time. services; lower-to-middle-income production centers, For example, the top 10 percent of cities achieved 9.2 percent where industrial activity tends to dominate; and annual jobs growth from 2005 to 2012, compared with 1.9 richer creative and financial centers, where high-end percent in the remaining 90 percent of cities. The top 10 services are increasingly important. Cities do not percent of cities achieved 13.5 percent annual GDP per capita always need to overhaul their economies to increase incomes; growth, compared with 4.7 percent annually in the average in particular, it seems that cities at GDP per capita levels city. from $2,500 to $20,000 typically have a similar mix of in- dustries, yet those at the upper end have been able to greatly Cities that are competitive are markedly different increase the value of those economic activities. In other from their counterparts. They grow faster; they empha- words, sometimes it is enough to do what you already do, but size tradable sectors; they exhibit FDI success and growth to do it better. of their domestic firms; and they create a disproportionate number of private sector jobs. For example, in the top 10 per- Striving for competitiveness might involve tradeoffs cent of cities in which GDP per capita grew fastest from 2005 between top-line economic growth, job creation, to 2012, tradable sector employment growth outstripped and productivity. Only 18 percent of cities in the data, or nontradable by an average of 2.5 percentage points annually. less than one in five, are able to outperform their national The top 5 percent of cities obtained as much FDI as the bot- economics on all three measures. Cities may need to choose tom 95 percent combined in the decade ending in 2012. between more jobs, better jobs, or inclusive jobs over differ- ent planning horizons—now, soon, and later. Competitive cities do not include only familiar house- hold names, and they are often a country’s secondary More investigation into some of those factors will be cities. They are not unique to any particular region or coun- needed. For instance, this chapter looked at the proportion try; instead, they are dispersed across the world. of tradable sectors in cities’ economies, but it did not inves- tigate the relationship between regional or global trade and competitiveness outcomes. Here, the measure of productiv- ity is labor productivity, which fails to capture total factor productivity—the force that predominantly drives economic growth at the national level. The World Bank data allow us to look at a decade or so in time (2005–12), and so they shed little light on the question of path dependence in outcomes over decades or even longer periods in time. Researchers will aim to deal with some of these gaps in later phases of work. 29 Notes 1 The three categories of cities—market towns, production centers, and without fixed effects and the 9.0 percent rate is from a model with fixed creative and financial services cities—are similar to the categories used in effects (plus additional controls such as education, foreign direct invest- the World Development Report 2009: Reshaping Economic Geography (World ment, and other public services provisions). Unconditional convergence is Bank 2009). Here we provide data to catalog the income levels and typical tested as well, and positive and significant convergence rates are observed at distribution of sectors that these categories entail. an interval of 1.9 percent (without fixed effects) and 4.5 percent (with fixed 2 To distinguish a tier of the most competitive cities whose performance effects). For comparison for this convergence exercise, see Barro (2015) and truly stood apart from the rest, the World Bank identified cities that outper- Gennaioli and others (2014). formed their countries on three key measures: private sector job growth, 6 Here, productivity is measured as gross value added per worker. This defi- productivity growth, and disposable income per capita growth since 2000 nition of productivity is predicated mainly on data availability. Although (the first year for which data became available). the definition captures elements of labor productivity, it remains biased 3 Several countries exhibit many cities that fill these criteria—particularly given the inability to account for the effect of changes in capital productivi- China (18), India (24), Mexico (9), Nigeria (14), the Russian Federation (8), ty and total factor productivity. and the United States (7). 7 This report refers only to greenfield FDI investments, as they alone are World Bank analysis of OE data for the years 2005–12. 4 tracked by the fDi Markets data underlying this analysis. 5 The results are made on the basis of a five-year lagged model, similar to 8 World Bank analysis of data from fDi Markets, a service of the Financial the one used in Barro (2015). Consistent with regional growth literature, Times, London, http://www.fdimarkets.com. it seems the speed of city convergence is faster than country convergence, 9 See, among other pieces, Javorcik (2004) from Lithuania. For a thorough contributing to the argument that cities are the leaders in economic growth review of the ambiguities of the literature, see Görg and Greenaway (2003). and convergence to reduce poverty. The 1.4 percent rate is from a model 30 References Atkinson, Robert D. 2013. “Competitiveness, Innovation, and Pro- Ghani, Ejaz, William R. Kerr, and Alex Segura. 2015. “Informal ductivity: Clearing up the Confusion.” Working paper, Informa- Tradables and the Employment Growth of Indian Manufac- tion Technology and Innovation Foundation, Washington, DC. turing.” Policy Research Working Paper 7206, World Bank, Washington, DC. Barro, Robert J. 2015. “Convergence and Modernisation. Economic Journal 125 (585): 911–42. Görg, Holger, and David Greenaway. 2003. “Much Ado about Nothing? Do Domestic Firms Really Benefit from Foreign Direct Bhasker, Velury Vijay. 2013. Foreign Direct Investment (FDI) in In- Investment?” Institute for the Study of Labor (IZA) Discussion dian Automobile Industry: Impact on Employment Generation. Paper Series No. 944, IZA, Bonn, Germany. Research Journal of Management Sciences 2 (2): 14–22. Javorcik, Beata Smarzynska. 2004. “Does FDI Increase the Pro- Fikri, Kenan, and Juni Tingting Zhu. 2015. “City Analytics.” Com- ductivity of Domestic Firms? In Search of Spillovers through panion paper for Competitive Cities for Jobs and Growth: What, Backward Linkages.” American Economic Review 94 (3): 605–27. Who, and How. World Bank, Washington, DC. Porter, Michael E. 1990. “The Competitive Advantage of Nations.” Gennaioli, Nicola, Rafael La Porta, Florencio Lopez De Silanes, and Harvard Business Review 68 (2): 73–93. Andrei Shleifer. 2014. “Growth in Regions.” Journal of Economic Growth 19 (3): 259–309. World Bank. 2009. World Development Report 2009: Reshaping Eco- nomic Geography. Washington, DC: World Bank. Ghani, Ejaz, Arti Grover Goswami, and William R. Kerr. 2012. “Is India’s Manufacturing Sector Moving Away from Cities?” NBER ———. 2014. “International Flows to Latin America: Rocking the Working Paper 17992, National Bureau of Economic Research, Boat?” Semiannual report of the Office of the Chief Economist, Cambridge, MA. World Bank, Washington, DC. Ghani, Ejaz, William R. Kerr, and Stephen D. O’Connell. 2014. “Spa- U.S. Cluster Mapping Project. n.d. Website. http://www.clustermap- tial Determinants of Entrepreneurship in India.” In “Entrepre- ping.us/cluster. neurship in a Regional Context.” Special issue, Regional Studies 48 (6): 1071–89. 31 In just over a decade, the ancient port city of Tangier went from dormant to dominant. Today, it has one of Africa’s largest seaports and automotive factories, multiple free trade zones, and industrial parks, while also thriving as a tourist destination. 2 What Have Competitive Cities Done to Achieve Their Success? Evidence and Analysis This chapter presents evidence and analysis on what chapter cities have done to become competitive. Three areas of evidence are covered: What were the interventions used? Who were the stakeholders involved? How were the sequencing and processes employed? Mayors and city leaders worldwide are striving to under- stand what interventions can best achieve job creation and economic growth. Which interventions have the po- tential to generate the biggest return for a city’s growth? Who should be designing and implementing the inter- ventions? How should investments and policy reforms be prioritized and sequenced, using the starting point of each city as the basis for action? This chapter proceeds from the premise that private firms are the main job creators (IFC 2013), and thus firm-level performance is at the heart of a competitive city. If job creation and growth are to be sustained over time, employment opportunities and increases in produc- tivity and growth must come from the private sector, be- cause relying on government funds alone is not feasible. Understanding what influences firms’ performance, and understanding what attracts them to specific locations, is therefore at the core of this investigation. Chapter 2 Job creation and economic growth in cities are clearly linked to the cities’ success in attracting and expanding private sector firms. City leaders need to understand what factors help attract, retain, and expand firms that create jobs and spur economic growth. W hat does the private sector need from cities? ing countries, where the business environment is less estab- This question is important because of the centrality lished, skilled labor markets are smaller, and credit is scarcer, of private sector growth in creating jobs and in- SMEs inevitably face different considerations (Lingelbach, creasing incomes. Between 2002 and 2012, the private sector De La Vina, and Asel 2005). High-growth “gazelle” firms—a accounted for about 75 percent of job creation and about small proportion of SMEs that grow fast—are an important 80 percent of gross value added across the 750 cities in the source of new jobs (Audrestch 2012). Clustering of firms can Oxford Economics (OE) database. It is therefore imperative be particularly advantageous, because SMEs are more reliant for city leaders to be familiar with what factors help attract, on their executives’ personal networks and knowledge than retain, and promote the expansion of private firms—both are larger businesses (Kuah 2002). domestic small and medium enterprises (SMEs) and mul- tinational corporations (MNCs). Domestic SMEs usually MNCs account for the largest proportion of any city’s employment, For MNCs, fundamental attributes of cities explain and thus their success is essential for the overall economic most investment location decisions. Existing litera- performance of every city. Large MNCs, at their best, help ture on location determinants of foreign direct investment provide entry to global value chains for SMEs and can help (FDI) using data on revealed preferences highlights that the catalyze technical innovation that grows tradable sectors. presence of robust institutions, government stability (Sán- Because MNCs can choose where to invest and are mobile chez-Martín, de Arce, and Escribano 2014), infrastructure across cities, they offer a lens through which to evaluate what (Cheng and Kwan 2000), and human capital and peer effects makes cities attractive to businesses. Both types of firms are (Nunnenkamp and Mukim 2012), and a lack of corruption addressed here. (Wei 2000) matter significantly when multinational firms aim to expand and make location choices. Studies of firms’ SMEs stated preferences in survey results,1 including recent inter- According to previous studies, SMEs will favor lo- views with location advisory firms, confirm these economet- cations where they can find proximity to suppliers rically tested findings and provide a more complete picture of and consumers, connective infrastructure, and basic the factors that matter for firms, some of which are not easily services. Examples include García (2014), Mazzarol and captured by data. Choo (2003), Urata and Kawai (2000), and van Noort and Reijmer (1999). Those studies also find that SMEs prefer to But other “softer” factors—such as the professional- stay near the business owner’s home city and are reluctant to ism and responsiveness of city leadership to investor lose valuable human capital by moving far from an existing needs and the overall image and quality of life that location—suggesting that SMEs are less mobile than MNCs. cities offer to corporate leaders—can tip the balance Indeed, when making investment decisions, SMEs often have between competing locations. The final mile of such neither the resources to engage consulting firms to advise decisions consists of the interactions between firms and them on location decisions nor the capacity to perform exten- cities in the final stage of the decision making process. These sive evaluations themselves. so-called 10 percent factors often tip the balance of a decision between one city and its closest competitors in securing an Within a given location, entrepreneurs are more investment. likely to establish or expand businesses in favorable regulatory and financial environments (Gonzales The World Bank found that the perceived importance Rocha 2012). Cities officials can therefore work to improve of such factors varies across categories of investor, labor laws, tax codes, trade restrictions, limited access to as summarized in figure 2.1. In preparing this study, the credit, and other constraints whose elimination or reduction researchers interviewed 5 major location advisory firms and benefits both MNCs and SMEs (Audrestch 2012). In develop- 10 city or regional investment promotion agency officials 34 about their experiences of what multinational firms want ative advantage and that is customized to the type from cities. Their comments highlighted two main areas: of investor (by size and industry, for example) that first, the needs of investors who seek low-cost production it wants to attract. Cities need, first, to understand their locations are different from those who seek large markets and existing value proposition (such as endowments and busi- are different in turn from those who seek strategic assets and ness environments) and what needs to be done to improve it natural resources. Second, cities do not have full control of (such as through investments in infrastructure or pushing every factor that firms care about. Therefore, a broader set of for business regulatory reform). Cities then should try to governmental actors needs to be considered. identify which types of investor are most likely to be inter- ested in the city’s value proposition. As shown in figure 2.1, FDI literature widely uses four categories to summa- efficiency-seeking manufacturing firms look for different rize motives for multinational firm expansions: (a) things in cities than do market-seeking services firms. market-access seeking, in search of new consumers for the Investor outreach and promotion efforts can then center on firm’s goods or services; (b) efficiency seeking, in search of communicating the city’s identified comparative advantages low labor costs or rationalizing their operation to decrease to its hoped-for investors. Some of the needed investments or production costs; (c) strategic-asset seeking, in search of reforms can be directly enacted by cities, but others require tangible or intangible assets to strengthen its market leading leveraging other tiers of government and private sector position; and (d) resource seeking, in search of natural re- partnerships. Targeting industries whose needs are within sources, raw materials (Dunning 1993). the city’s administrative authority or within the city’s ability to leverage change is a better and more effective way for city Given the varied needs of investors, cities must de- leaders to demonstrate to investors that they not only are velop an investment-attraction strategy and a value able to identify the city’s core competitiveness but they also proposition that is consistent to the city’s compar- are able to deliver what they say the city’s benefits are. Figure 2.1: What do private sector investors need from cities? Firm type Market- Strategic Category Factor Level of city Efficiency access asset Resource influence seeking seeking seeking seeking Location Proximity to major markets/distributors æ √ endowments Natural resources æ √ Relationship Personal connections between firm and city √ with city “Soft power”: city image, proactive mayor, proactive √ √ √ and responsive IPIs General Macroeconomic stability and growth potentials √ √ √ √ business Institutional and regulatory environment √ √ √ √ environment Labor availability, skill and cost √ √ √ Infrastructure and availability of land √ √ √ “Sweetener”: fiscal and nonfiscal incentives √ Level of sector New opportunities due to a neighboring country or √ √ √ development city moving up the value chain Presence of forward- and backward-linkages firms æ æ √ Presence of similar firms/competitors @ @ √ City has no influence City has influence but not full control City has major influence or full control √ Valued by all firm types (strategic asset-seeking and resource-seeking were not broken out by firm type) æ Valued by service firms only (efficiency-seeking refers to back office services; market-access refers to high-end services) @ Valued by manufacturing firms only Source: Zhu, Santos, and Larrey 2015. Note: IPI = Investment promotion intermediaries. 35 Fiscal incentives or tax holidays are not the main What Can Cities Do for Firms? priority for the majority of potential investors, and the extent to which incentives are useful is subject This section presents a framework for thinking about to debate. Interviews with location advisers, however, did competitive cities. The overall framework is represent- suggest that when competition for investment is fierce in the ed in figure 2.2 and is derived from the preceding analysis final stage, incentives can tip the balance (Zhu, Santos, and combined with a review of economic theory and empirical Larrey 2015). They are obviously appreciated, especially by research. efficiency-seeking investors, but they are usually considered to be a nice bonus and become crucial only after other struc- Several points should be noted: tural interventions are in place, such as a decrease in the cost • Firm-level performance is placed at the center of of production through better connectivity. the framework, because jobs, incomes, and pro- ductivity are at root generated by private sector firms. Figure 2.2 Competitive cities address firm-level performance as the core of job creation and growth Ins tit City Wedge* nd u tio La n & s& re Re u ctu gu str lat ra i on Inf s Agglomeration Firm-level performance Factor Output markets markets En ter pr n ise atio Su ov pp or Inn t& l s& Fin S kil an c e Source: World Bank. Note: This figure illustrates a framework for thinking about competitive cities. Firm-level performance is placed at the center of the framework, because jobs, incomes, and productivity are at root generated by private sector firms. Firm-level performance is a function of factor markets, entrepreneurial ability, output markets, all of which are facilitated by agglomeration effects. The four arrows represent enabling factors (or levers) in the agglomeration process. Cities can assert these levers of economic development using the city wedge. *The term “City wedge” refers to the policy space available to and the leverage that various city actors can use to modify key conditions of the business environ- ment in the city, that are largely shaped by external forces including market trends and national policies. 36 • Firm-level performance is a function of factor -- Enterprise support and finance: access to capital, markets, entrepreneurial ability, output mar- subsidies, incentives, export assistance, and capacity kets, and agglomeration effects: development for operational activities (legal, finan- cial, administrative) -- Factor markets. Inputs such as land, labor, and capital are configured through entrepreneurial ability, turn- Hence, competitive cities are more than simply a geo- ing raw materials into products. graphic space in which competitive firms and industries grow. They are environments that enable firms to per- -- Output markets. Products are transported and sold in form effectively by providing factors and conditions such particular markets, necessitating connective trans- as regulations, infrastructure, services, quality of life, portation and logistics, plus trade facilitation. talent, and strong governance. -- Agglomeration. This process is catalyzed by the Those levers are similar in nature to those available at presence of similar firms nearby that in combina- the country or subnational3 levels of government, but tion will form local pools of skilled labor, create a they differ according to the scope and capacity of a city critical mass for shared infrastructure, and generate to exert them. Not all levers and actions are within the knowledge spillovers between firms and between legal powers and administrative capacity of the local gov- employees. ernment. For example, a city can set up a one-stop shop to speed approvals and business registration, but if firms • Cities provide several enabling factors in the face further paperwork at the national level, the effect on agglomeration process: (a) institutions and reg- competitiveness would be limited. ulations, (b) infrastructure and land, (c) skills and innovation, and (d) enterprise support and • Cities can assert the levers of economic develop- finance. Those four categories try to encompass the ment using three wedges, which together we term suite of policies and interventions available to city gov- the city wedge: ernments, and were aggregated from a long list of factors identified in an extensive review of literature.2 Each of -- Mayor’s wedge—the internal scope and capacity of the categories includes policies and initiatives of consid- the city administration compared with other tiers of erable nuance: government -- Institutions and regulations: taxes, licenses, duties, -- Growth coalitions wedge—partnerships with other legal regulation, promotion and branding city stakeholders (especially private sector and civil society) -- Infrastructure and land: roads, electricity, water, sanitation, transportation, communications, and -- Intergovernmental relations wedge—external lever- land (including colocation arrangements for similar age with neighboring jurisdictions and other tiers of firms) government -- Skills and innovation: basic education, vocational This chapter explores each of those topics in turn. First to be training and workforce development, and innova- addressed will be the four categories of interventions (what); tion networks second, the actors involved (who); and third, the processes undertaken (how). Figure 2.3: City indexes predict levels of development better than they predict growth of jobs and incomes Correlation -0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 Labor productivity Labor Productivity EIU City Hot Spots Disposable Income per Capita Disposable income per capita Employment Growth GDP Growth UN-Habitat City Prosperity Index Employment growth GDP growth EIU Liveability Index A.T. Kearney Global Cities Index Global Financial Centers Index Mercer Quality of Life Index Source: Fikri and Zhu 2015. 37 Note: EIU = Economist Intelligence Unit; GDP = gross domestic product. Figure 2.4: Correlates of good economic performance vary by city income level and move sequentially Market Towns Production Centers Creative and Financial Centers <$2,500 GDP per capita $2,500-$20,000 GDP per cap. >$20,000 GDP per capita Disp. Labor Emp. Disp. Labor Emp. Disp. Labor Emp. Category Metric Income Prod Growth Income Prod Growth Income Prod Growth Institutions & Ease of Doing Business Regulations Index (DB) + Start with basic + ... then upgrade + infrastructure and regulation... infrastructure... Physical Infrastructure1 + + + + Infrastructure & Land Social Infrastructure2 — + + + Human Capital 3 + + + Skills & Innovation Innovation4 + ...and invest in human + capital & innovation. Enterprise Support & Finance Financial Infrastructure5 + + 1 Physical Capital (EIU), Infrastructure Index (UN), Cost of Electricity (DB) + Positive stastistically significant correlation at the 10% level 2 Social and Cultural Capital (EIU), Healthcare (EIUL), Quality of Life (UN) 3 Human Capital (EIU), Education (EIUL) — Negative statistically significant correlation at the 10% level 4 Number of patents (GUC) 5 Private Credit Bureau Coverage (DB), Financial Maturity (EIU) Source: Fikri and Zhu 2015. Note: DB = World Bank doing business index; EIU = Economist Intelligence Unit City Competitiveness Hotspot; EIUL = Economist Intelligence Unit Livability Index; GDP = gross domestic product; GUC = Chinese Academy of Social Science Global Urban Competitiveness Report; UN = UN-Habitat City Prosperity Index What interventions are used by No ranking identified was consistently reliable in competitive cities? predicting changes in output or employment. One of the underlying reasons may be that city-level indexes tend to A review of the resources readily available to city have a rich-country bias (city-level data are more likely avail- leaders to help guide decisions and interventions able in rich countries). This bias limits the indexes’ abilities found that several are available. City indexes are one to predict economic outcomes for cities at different stages of of the most conspicuous measures of city competitiveness, development. No particular index was found to have univer- as they intend to rank cities on meaningful aspects of their sal predictive ability across regions and outcomes.4 business environment and attractiveness to firms. City in- dexes are produced by various organizations and are usually A better answer comes from disaggregating the in- launched with great fanfare and publicity. However, it is not dexes and supplementing them with new data. Various clear if good performance in a city index actually does trans- popular city indexes can be disaggregated to allow for a late to good performance in the real world in terms of growth detailed analysis, focusing on the four levers of city competi- of incomes and jobs. Therefore, as a first step, this report tries tiveness.5 Data on the economic outcomes of 750 cities come to test whether the various popular city indexes are well cor- from the OE database.6 Figure 2.3 summarizes the results related with the economic outcomes that city policy makers of a pair-wise correlation to test whether certain levers of care about: gross domestic product (GDP) and job growth, city competitiveness tend to be observed in cities with good levels of disposable income, and city labor productivity. economic outcomes. On investigation, it appears that popular city indexes The results imply that cities can use a sequence of are better predictors of the level of city development interventions to maximize economic outcomes. One than predictors of growth. The EIU (Economist Intelli- of the project’s objectives was to identify whether certain gence Unit) Hot Spots and Livability surveys, A. T. Kearney’s determinants matter more than others and whether the Global Cities survey, and the UN-Habitat City Prosperity different dimensions come into play sequentially in different Index are all highly correlated with both city labor productiv- typologies of cities.7 It appears that the building blocks of ity and household disposable income—two competitiveness competitiveness—institutions and social and basic physical outcomes that vary with overall level of development but infrastructure at lower incomes, then innovation capacity— remain quite stable from year to year. can be sequenced to build the human-capital base required to compete, grow, and prosper as a high-income city.8 (See 38 figure 2.4.) This finding is largely consistent with existing consciously or unconsciously, on its own singular competitive literature (World Bank and DRC of the State Council 2014; advantages, existing constraints, national policies, local scope Moretti 2004; Samad, Lozano-Gracia, and Panman 2012; and capacity, overall market trends, and even administrative Shapiro 2006; World Bank 2009). As local decision makers and cultural traditions. In some cases, the public sector was prioritize such interventions, they should also keep in mind not at all the leader in local economic development efforts; the main industrial structure of the city and its competitive rather, private sector actors stepped in to formulate proactive advantages. economic development strategies and guide their implementa- tion. These six cities are as different from one another as they These high-level statistical results are supplemented are successful. with detailed case studies of successful cities. Econo- metric results are useful to identify general patterns, but cit- The competitive cities’ initiatives were examined ies require more detailed guidance when making real choices under the four intervention categories proposed in on interventions. The World Bank commissioned six city case the competitive cities framework outlined earlier in studies to understand at a more detailed level the interven- this chapter. The summary of that examination is present- tions that were pursued and the effects that were generated. ed in table 2.1 and is supplemented with additional findings The six cities were selected by ranking the best performing from a literature review. In particular, the analyses focused cities on economic performance outcomes and identifying on the conditions and factors that enabled those initiatives to one city in each region of the world that broadly represents produce positive results—given that many other cities have the typical challenges faced by the majority of cities that are unsuccessfully attempted initiatives similar to the ones listed, in lower- and upper-middle-income countries, that are of and hence the biggest challenge is in identifying what special medium size, and that lack an abundance of natural resourc- circumstances led to success where so many others have es.9 The detailed results from this work are presented in a failed. background paper accompanying this overview document (Kulenovic and others 2015). All six of the cities studied represent, in some way, success amid adversity—and their experiences can be used by other cities to glean some lessons on path- ways to success. The following are examples: Box 2.1: Engaging with Traded and Nontraded Sectors in Barcelona, Spain • Bucaramanga, Colombia, is hundreds of kilometers from the country’s capital city and major industrial centers, Tradable sectors were assigned to an agency called yet it has become a center of research and innovation. 22@Barcelona, whose mandate was to help the sectors • Changsha, China, has engineered a successful proactive to compete and innovate at the highest level. For ex- industrial strategy in a provincial capital. ample, a tech cluster was built in a derelict site close to the harbor. Collaboration with local firms led a critical • Coimbatore, India, is landlocked and is within a country mass of technology and research institutions to relocate that has plenty of competitor cities of a similar size, yet to the cluster, supported by the government, which it has achieved income levels that are double the national streamlined land use change, eased zoning regimes, and average and it has become a center for precision manu- provided basic infrastructure, street paving, and fiber- facturing, mechanical engineering, and textiles. optics. Between 2003 and 2009, the number of firms in the cluster tripled. • Gaziantep, Turkey, is landlocked and is in one of the poorer parts of the country, yet it has achieved phenome- Nontradable sectors were assigned to another agency, nal export growth, its GDP per capita growth was around Barcelona Activa, whose mandate was basic business 6 percent annually from 2005 to 2012, and it produces support and mentoring to help companies run efficient- 57 percent of all machine-made carpets globally. ly. Physical hubs were established where entrepreneurs could attend classes and seek guidance on their busi- • Kigali, Rwanda, has emerged from civil war and has nesses. inspired an impressive economic rebirth. When the agencies were later combined, both functions • Tangier, Morocco, has leveraged its port to build up its suffered. industrial base in logistics and transportation, mechani- cal engineering, chemicals, textiles, metals, and automo- tive manufacturing. Taken together, these six case studies illustrate that there is no single recipe for economic success. Each of these cities has pursued its own path to prosperity, building, 39 Table 2.1: What kind of competitiveness initiatives were tried—and why were they successful?a Initiatives Horizontal (economywide) Vertical (sector specific) Critical success factors Institutions Expedited permitting (including one- Special governance regimes for spe- Local business leaders and local cham- and stop shops or “single window” systems) cial economic zones or industrial bers of commerce were consulted regulations and support to firms in navigating parks. about their needs and the constraints the city’s regulations. Assistance to firms in meeting sec- they encountered in their firms’ daily Business-friendly zoning regulations tor-specific quality standards. operations. and land-use policies. Mayors and other local officials Online e-government services, focused on constraints they could greater transparency and accountability realistically and directly affect (such as for public agencies (including staffing water supply or land use). decisions and public procurement). Constant attention to avoid rent-seek- ing and bribery: “Governments should be business friendly, not friends of business.” b Infrastructure Basic service delivery. Concerted Free or highly subsidized land or Infrastructure investments often made and Land effort to ensure essential services were office space for priority industries. through consultation with target- available for industries (such as feeder Subsidized or public provision of ed sectors and firms (rather than a roads, water, and electricity). sector-specific infrastructure build-it-and-they-will-come scheme). (such as logistics for manufacturing and agribusiness; fiberoptics for information and communications technology industry). Skills and Improvements to the overall educa- Worker training programs. For Human capital initiatives were innovation tional system. These measures were example, regulating and promoting designed in collaboration with intended to develop and foster the vocational schools to improve the private for-profit firms, making next generation of human capital, as a quality and applicability of train- sure that curricula addressed the needs longer-term strategy. ing; designing or funding custom- of business and maintained a highly Talent attraction programs. ized worker training programs in applied, practical focus. For example, offering resettlement response to industry needs; fostering Program funding linked to per- allowances and attractive positions to industry-academia partnerships, formance, assessed through periodic diaspora; improving the livability of the including links between private reviews, in which diverse stakeholder city through improvements to safety, for-profit firms and vocational groups were consulted. cleanliness, low costs of living, and low schools (or universities) to improve congestion; attracting foreign universi- curricula. ties to establish branch campuses and offer graduate-level programs to local students. Enterprise Investment facilitation: business Financial incentives targeted Industries supported because of real support and recruitment, expansion and retention, toward priority industries or commercial potential according to finance incentives, site selection services (zon- sectors, including tax rebates, market analyses (rather than arbitrary ing and permitting, business facilities, industry-specific subsidies, cash judgments). Presence of institutions to other infrastructure), custom workforce grants, credit access programs (lines guard against the risk of lobbying and training, investor aftercare. of credit, credit guarantees, export capture of subsidies. Market intelligence and business credit) and including the leverage of Effective mechanisms for engaging information: competitiveness anal- national support tools. key stakeholders and enabling ysis, planning, market research, lead Colocation of similar firms (such collective action. generation, branding and marketing, as shoemakers, craftspeople, carpet firm targeting. manufacturers) assisted with the provision of supportive business training and backroom services. a. Table 2.1 is based on team findings from case study research, complemented by prior literature. b. Gilles Duranton, chair of the real estate department of The Wharton School, University of Pennsylvania. 40 Table 2.1 continued Institutions and Regulations: City examples KIGALI, Rwanda, upgraded its one-stop GAZIANTEP, Turkey, improved its busi- COIMBATORE, India, permitted the shop to target obstacles faced by foreign ness environment by reducing red tape and private development of a private economic investors, while cleverly leveraging a improving regulatory practices. zone (Coimbatore case study annex in Ku- well-designed and well-marketed master lenovic and others 2015, 32–33). The de- plan to attract investors (Kigali case study How they did it veloper formed a pipeline of clients during annex in Kulenovic and others 2015, 6, construction, built the zone gradually as 12, 15).c City leaders tenants came in, and then customized • Differentiated Gaziantep from facilities and services to their needs. other cities on what usually are key How they did it constraints: the city provided land City leaders (including industrially serviced land) How they did it • Created the Kigali Investors’ Forum, at a relatively low cost and created a • Staff members of the developer, a private sector forum, to collaborate one-stop administrative process in the KgiSL,d undertook an extensive, with government to identify specific OIZs (special economic zones) for systematic analysis of market trends reforms. expedited permitting. and players in the offshoring world • Diagnosed constraints with a Doing • Rationalized the municipal bureau- and, in particular, the activities of Business assessment (through the cracy: the city’s mayor slashed the multinational corporations (MNCs) in World Bank) and through the Kigali municipal administration from 2,700 India. Observing that some compa- Investors Forum, highlighting the to about 100 employees as part of nies had run out of room to grow in following constraints: inefficiency and the streamlining of bureaucratic places like Bangalore and Chennai, lack of interagency coordination on procedures, limiting opportunities for the developer made targeted pitches construction permits. corruption and political patronage. positioning Coimbatore as a viable • Established a one-stop shop in 2010 alternative, given its highly educated, that brought together all agencies What they achieved English-speaking workforce that is needed to approve construction available at significantly lower cost permits. In 2011, the city also created Gaziantep’s exports have increased tenfold than in Tier 1 cities. an electronic platform for construc- since 2002, with $6.2 billion exported annually by 2013, and the city exports tion permits with support from the products to 164 countries. What they achieved International Finance Corporation and African Development Bank to The zone has been able to attract Cogni- further reduce red tape. The city based What cities can learn zant, Dell, and Bosch among its tenants, the project on a similar one that was amassing 20,000 jobs. A competitive business location is achieved successful in Nairobi, Kenya, and paid by combining several interrelated, mutu- for it from its municipal budget. ally reinforcing activities. Furthermore, What cities can learn strong political will to implement radical Market-driven industrial development, What they achieved reforms can help turn the local business with appropriate guidance and support Investors now handle all approval needs climate around in a relatively short time. from the city government, allows for more in one place and receive a construction customized and overall successful projects, permit within 30 days. The city is now avoiding new construction that sits empty. 34th worldwide in dealing with construc- tion permits, according to Doing Business d KGiSL stands for K Govindaswamy Infor- surveys. mation Systems Private Limited. It is now a conglomerate of companies, but it started out as a cotton-trading venture by Shri.K Govindas- What cities can learn wamy Naidu in 1932. Business climate reform was targeted at the constraints that offered the most effect indicated by the private sector and then was facilitated by coordinating effectively with the national government. c Data also from Doing Business 2015 indicators (database), World Bank, Washington, DC (ac- cessed February 27, 2010), http://www.doing- business.org/data/exploreeconomies/rwanda. 41 Table 2.1 continued Infrastructure & Land: City Examples GAZIANTEP’S organized industrial TANGIER , Morocco, leveraged national BUCARAMANGA , Colombia, successfully zones (OIZs) have each been developed investment in a large new port to attract lobbied for infrastructure upgrades that with specific sectors or sizes of firms in foreign investors in automobile manufac- were most needed by the city economy mind, from the type of infrastructure pro- turing and supplier industries, which pay (Bucaramanga case study annex in Kule- vided to the sizes of plots (Gaziantep case higher wages than previous local averages novic and others 2015, 13). It built a local study annex in Kulenovic and others 2015, (Tangier case study annex in Kulenovic private sector coalition to persuade the 42–43). This strategy may have set them and others 2015, 6, 25, 32). national government to fund the infra- apart from less successful industrial zones structure. in Turkey and elsewhere. How they did it • Morocco’s government funded the How they did it How they did it construction of a new seaport facility, • The city chamber of commerce iden- Tanger-Med, 35 kilometers from Tangier • The city’s first two OIZs were more tified connectivity as a constraint in City. The new port would have capacity generic, initially servicing small and a 2004 study. Transportation was a to accommodate large container ships medium enterprises (SMEs) and key constraint to the growth of local and provide landside access for an ex- eventually larger producers. The first firms. panded volume of commerce (which was few OIZs featured smaller land par- • The study was used as a supporting limited in the old port). cels for tenants, helping to formalize document to lobby the national • Major upgrades were also made to SMEs and to facilitate upgrading their government. The results of the study northern Morocco’s road and rail operations. Later OIZs catered to could be linked to concrete infrastruc- connectivity. The highway and rail large carpet-making firms as well as ture needs. For example, the airport connections enabled rapid intermodal intermediate and smaller firms that reconstruction and expansion in par- transfer of containers, bulk cargo, produced related products. ticular aims to support the tourism and motor vehicles and quick access • The process for implementing OIZs sector as well as health services and from the port to nearby regional is the same throughout Turkey, but precision manufacturing exports. population centers, offering market Gaziantep has benefited from greater access for manufacturing and logistics interaction with target firms and industries. What they achieved greater collaboration from public • City stakeholders worked hard to agencies. The municipality and gov- The national government responded by attract specific investors, including providing new investments, including the ernor’s office closely collaborated in Renault, combining efforts of the na- forming the OIZs. In addition, regula- construction of new highways (the Ruta tional investment promotion agency, tions aimed to avoid speculation: title del Sol highway) and a new airport (Palo AMDI, with the city’s local economic deeds for land are transferred only Negro Airport). Furthermore, the 2012 Bu- development entity, TMSA. One of after the tenants begin operation. caramanga Regional Competitiveness Plan the key dealmakers was the public included planned upgrades for all modes of sector offer to set up a dedicated What they achieved automotive training center to provide transportation in Santander State. sufficiently skilled workers, with skill Gaziantep has five OIZs at full capacity, needs identified through industry What cities can learn with the fifth under construction, and a working groups. City needs can sometimes seem like a wish sixth now being planned. The sixth zone is planned to be as large as all previous zones list for higher-tier government. Bucara- combined. What they achieved manga backed those requests with a study Tanger-Med is now one of the largest and linked that study to the industry intermodal facilities on the Mediterranean What cities can learn Coast and Africa’s biggest container port sectors that could benefit most. It identi- fied the value proposition for the national Gaziantep avoided the build-it-and-they- with an annual capacity of 3.2 million government’s infrastructure investment. will-come approach and built industrial 20-foot equivalent units (TEUs). The port parks as they were needed. This approach has led to a rapid increase in investment in was facilitated by close collaboration be- the Tangier-Tetouan region—for example, tween public agencies and target firms. Renault initially employed 5,500 at the site, supporting up to 30,000 additional jobs in the region indirectly. What cities can learn Large-scale national infrastructure invest- ment initiatives can unlock new growth potential for a city, if leveraged well. Tangier enjoyed maximum benefits from the new port development because it was well connected and governed by a dedicated agency that un- derstood and targeted growth opportunities 42 to benefit local companies. Table 2.1 continued Skills and Innovation: City Examples COIMBATORE’S private sector growth CHANGSHA, China, improved the quali- CHANGSHA attracted talent (highly is directly linked to its thriving collection ty of vocational training programs by stim- skilled individuals) from within China by of vocational training institutions that ulating competition among schools and identifying the needs of firms, leveraging produce a workforce with skills relevant strengthening links between schools and national programs, and engaging in ad- to industry needs (Coimbatore case study businesses (Changsha case study annex in ditional recruitment efforts domestically annex in Kulenovic and others 2015, 9–10, Kulenovic and others 2015, 22–23). and abroad (Changsha case study annex in 28–29). Kulenovic and others 2015, 21–22, 24). How they did it How they did it • Competition was stimulated among How they did it • Coimbatore’s higher educational vocational schools. The municipal City leaders institutions were created by the city’s government encouraged competition • Formed a “Leading Group” on family-owned firms and thus are by having schools publicize student talent attraction composed of civil shaped directly by current industry national exam scores and employ- servants from multiple municipal needs, in addition to helping to devel- ment rates, and it allowed for private departments. Establishing the group op future potential in new areas. They as well as public competitors. enabled the city to coordinate tasks offer practically oriented technical • Incentives and links were strength- among municipal departments and curricula developed in consultation ened between schools and businesses. with higher-tier government—and, with for-profit companies. The government provided funding most important, to solve implemen- • Local engineering students spend to schools on the basis of enrollment tation problems along the way. Key part of each school day on the shop numbers, and it offered tax credits initiatives were to identify the talent floor as well as in class. This regime to firms for sending participants to needs of existing and emerging is distinct from schools elsewhere in worker training programs. Perfor- firms, to leverage available national Tamil Nadu. Students graduate with mance data on vocational schools programs and funding schemes for relevant applied skills and extensive were distributed among businesses. talent attraction, and to engage in manufacturing experience. Funding was provided for training recruitment efforts domestically and • Coimbatore’s engineering schools offices and fairs. abroad. produce engineers and managers as • Attracted national talent using the well as shop supervisors and machine What they achieved 1,000 Talents program, which provid- operators. The city has 10 universi- ed compensation packages for highly ties, 60 engineering colleges, and 30 Changsha’s firms have stated that labor qualified Chinese nationals willing polytechnic and industry training has been relatively easy to find, and this to resettle within China. Changsha’s institutes that prepare graduates with fact has allowed for both continuous and leading firms, Sany and Zoomlion, technical skills and specialize in fun- new investment. recruited high-level talent through damental disciplines such as physics the program. and mathematics. What cities can learn • Used diaspora networks to attract new applicants from targeted indus- Vocational training abounds in city efforts What they achieved to improve skills. Changsha ensured that tries, offering them jobs and incen- tives to start their own businesses in Coimbatore’s colleges produce “150,000 this training was effective. Its methods are Changsha. employable graduates every year,” accord- replicable: some barriers to entry ensure ing to a leading city conglomerate. About quality and incentives spur competition 1 in 10 of India’s engineering colleges are among schools. What they achieved located in Coimbatore, putting it on par Some 10,000 professionals were attracted with or above many cities that are larger in through national programs from 2009 size, including Pune and Jaipur. to 2011, and the city has set aside Y30 million to fund future talent attraction What cities can learn programs. The city recruited 102 “high-lev- el talents” and 17 start-ups in two years Cities’ growth can be rooted in training from municipal programs. institutions that produce a workforce with practical skills to meet current needs and What cities can learn be relevant to growth in new areas. This directed training is achieved efficiently Cities must be aware of and capitalize on through the private sector’s involvement national programs for talent attraction in devising curricula, sponsoring intern- and to the extent possible use the logic of ships, and as in Coimbatore, even running those programs to devise local initiatives. universities or university departments. Talented individuals need assurances and incentives to relocate, and as Changsha discovered, they can be attracted to a good opportunity or even to start their own business. 43 Table 2.1 continued Enterprise Support and Finance: City Examples CHANGSHA developed a system of BUCARAMANGA’S chamber of com- COIMBATORE’S private sector stepped measures to attract new industries and di- merce helped the city succeed by actively up to bridge the gap when the regional versify the local economy. The city offered and continuously assisting firms trying investment promotion body did not fully incentives to favor specific industries, de- to receive national support, including represent the interests of the city (Coim- veloped relationships with investors, and assistance in selecting and applying for batore case study annex in Kulenovic and improved communication between firms funds (Bucaramanga case study annex in others 2015, 22, 30–32). and government officials. Kulenovic and others 2015, 15–16). How they did it How they did it How they did it • KG Group—a private conglomerate • The city government offered attrac- • The chamber convened 70–80 offering information technology, tive incentives to investors, including business, academic, and government information technology enterprise preferential tax policies, funding leaders to adapt and seek new growth solutions services, business process (such as tax credits for high-tech areas to help the city survive in the outsourcing services, real estate research and development activities) global economy. development, and higher education— and locational advantages in industri- • The national government, meanwhile, was the developer of a large office al parks (colocated input suppliers and created regional competitiveness park in the city. To attract investors, component producers). commissions (RCCs) to serve this it pitched Coimbatore to MNCs as a • The Changsha government’s atten- purpose—Santander Competitivo viable alternative to Bangalore and tiveness and coordination stood out in Bucaramanga’s case. The new RCC Chennai, with their growing labor to investors. Industrial park orga- did much of what the chamber of and land costs and lower potential nizing committees and independent commerce had done before: identify- for growth. The city was presented as management structures provided ing national sources of support (for one with a highly educated, En- support to tenant firms (for example, technology development, training, glish-speaking workforce with engi- addressing labor supply needs by con- funding, export assistance, and so on) neering skills and practical training. ducting regular recruitment events). and submitting timely applications • KG performed typical economic • Changsha also supported firms for its members. development functions: analytics for through an intergovernmental coor- • The chamber offered its assistance business recruitment; industry and dination mechanism known as the and office space to help operationalize firm identification; and targeting, Leading Group for an Open Economy, the RCC. The RCC’s full-time staff of business expansion, and investor a committee to coordinate among four was paid by public and private aftercare. KG also organized a dinner various government departments, in- funding and led by an executive between prospective investors and dustrial park organizing committees, director. the Coimbatore business community, and top-level officials and keep them showcasing the city’s entrepreneurial aware of progress and problems. What they achieved and collaborative spirit. The RCC and chamber of commerce What they achieved What they achieved provide a mechanism for firms to leverage Automobile industrial output doubled national programs and support, partic- KG Group has been able to attract between 2008 and 2012, reaching $4.95 ularly to fund activities outlined in the Cognizant, Dell, and Bosch to its special billion. Currently, firms in this industry RCC’s regional competitiveness plan (such economic zone, amassing 20,000 jobs. include Bosch, GAC Fiat, Hitachi, and Liz- as funding to support nationally targeted Cognizant, which employs 10,000, is look- hong Automobile Design. A new Volkswa- sectors). The initiative involves working ing to add space to employ up to 60,000 in gen plant is under construction; that plant with SENA, the national learning agency, the next three to five years. will increase car production to 300,000 by on worker training programs and with 2016. ProExport, the national export promotion What cities can learn agency, to provide export assistance to KG Group filled the role conventional- What cities can learn local firms. ly played by an economic development Changsha’s combination of tools—indus- agency because Coimbatore lacked one. KG trial parks, preferential tax policies, local What cities can learn Group worked to shepherd new invest- supplier links, and coordinated govern- The chamber of commerce assisted its ment, doing so with extensive, system- ment support—has been a “dealmaker” in members and the city by identifying atic analysis not only to find and recruit bringing investors to the city rather than national support and funding schemes and investors but also to provide a menu of to competitors with similar endowments. submitting timely applications on behalf economic development support. of its members. 44 Some key insights from these case studies can be cities combined broad interventions in transportation highlighted: and communications infrastructure with sector-specific investments (Kodrzycki and Muñoz 2009). • Competitive cities pursued horizontal (economywide) interventions as well as vertical (sectorally focused) in- • Competitive cities benefited from all three channels of terventions.10 All six cities prioritized the provision of firm-level growth: growth of existing firms, attraction of basic enabling infrastructure and services needed to outside investors, and creation of new businesses. The cities attract and retain investment and to promote business did not target only one of those channels. They balanced formation and growth. Wherever it was practical and recruiting investors with assisting the growth of existing was within the city’s scope to do so, bureaucracies were firms—which typically accounts for the largest share streamlined, permits and licenses were simplified and of new jobs in most economies—and with helping the expedited, and services were enabled online. At the formation of new businesses. same time, most cities also targeted specific sectors for economic development, such as through the provision of • Competitive cities’ growth was usually driven by at least two dedicated training programs, marketing efforts, target- or three tradable sectors. In Coimbatore, the sectors were ed infrastructure, or export-promotion initiatives. For mechanical engineering, textiles, and food; in Gazian- instance, nearly every city studied placed human capital tep, they were carpets, food, and shoes; in Kigali, they among its top priorities, recognizing its importance to were tourism and trade services; in Changsha, they were the realization of short- and long-term goals, the growth construction engineering and some manufacturing. of key industries, and the attraction of investors. Rather In top-performing cities more widely, tradable sectors than only aiming generally to improve the overall edu- typically grow around 2.5 percentage points faster than cation system, these cities also focused on the develop- nontradable sectors do. Tradable sectors thus seem to ment of specialized skills and know-how in such areas be a driver of city income growth because they provide as automotive technologies and medical science to foster a pathway to injecting new income from exports while the growth of those industries above others. Such efforts reducing income leaks due to imports.11 were sometimes led by public sector entities and some- times led by private sector entities. Traded and nontraded sectors may be treated as two separate opportunities, with two different approach- • To minimize the risk of “regulatory capture” and market es to industry support. Nontraded sectors (such as coffee distortion (such as subsidies and protectionist measures), the shops, shopping malls, hairdressers, and maintenance cities used extensive dialogue and a solid fact base to anchor services) can be used as tools of spatial income redistribution their priorities in real comparative advantages. The fact base within a city and as a means to create jobs in underserved helped them make decisions that were based on techni- areas, and they do not need sophisticated industrial strate- cal merit rather than on political interests or arbitrary gies to account for global competition. Traded sectors (such judgments. The city leaders also showed an ability to “let as manufacturing and exportable services) require strategic the losers go” when some sectors were judged not to be analysis and sector prioritization because they are subject to globally competitive. These trends are consistent with external competition, and they succeed when a competitive city case studies conducted by other researchers. For niche has been identified within global value chains. An example, studies of cities in the United States that have example of this distinctive approach in Barcelona, Spain, is executed successful turnarounds have shown that the summarized in box 2.1. Figure 2.5: Leading economic development—from public to private and many points in between Public-Private Spectrum A predominantly public model, with A mixed public-private model, with A predominantly private sector–driv- a dedicated city economic development shared responsibilities between the en model, where local government agency or local government department local government (in a supportive role focuses on providing public goods (responsible for investment attraction, for public-private dialogue and public like trunk infrastructure and physical entrepreneurial assistance, or capacity investments) and business associations security (but does not directly inter- building) seems most appropriate in and private institutions (providing vene in investment attraction and firm conditions of an underdeveloped local sector-specific support and assistance growth) seems most appropriate where private sector or where the state already to firms) seems most appropriate where local government lacks the legal scope plays an influential role in the economy. local industries already have a foothold for interventions or does not have the Kigali, Tangier, and Changsha used this and some local private sector champions institutional capacity to exercise its model. are emerging. Gaziantep and Bucaramanga administrative powers. Coimbatore used used this model. this model. 45 Source: Kulenovic and others 2015. Who creates city competitiveness? The different configurations of proactive city lead- ership can be framed as a city wedge on which city leaders pursue economic development through three Popular literature on city competitiveness has con- different avenues: ventionally drawn attention to the central role of strong mayors, important personalities or chief ex- • Mayor’s wedge—the internal scope and capacity of the ecutives (KPMG 2014b, 28–29; WEF 2014, 49) as a driving city administration compared to other tiers of govern- force behind city success. Although this narrative may reflect ment the reality of several urban success stories, an emphasis on the role of personal leadership does not suggest many action- • Growth coalitions wedge—partnerships with stakehold- able recommendations. The emphasis on a mayor’s leadership ers, especially with private sector also excludes a wider spectrum of city leaders, such as other actors from the public, private, and nonprofit sectors. In the • Intergovernmental relations wedge—external leverage case studies, leadership came from different combinations with neighboring jurisdictions and other tiers of govern- of actors working in and for the city. Moreover, personal ment leadership will lack traction unless it is accompanied by an institutional structure to turn intentions and aspirations into Ideally, a city’s proactive engagement in competitive- action and delivery. ness includes all three of the wedges. Successful cities leverage their full city wedge, using their internal scope and The research team found that it did not matter pre- capacity, creating growth coalitions with the private sector, cisely who performed a particular role in economic and linking with other levels of government and neighboring development in a city, as long as someone did it. Cer- jurisdictions. All of the case-study cities employed some form tain policy levers such as regulatory reforms, legal provisions, of public-private dialogue that had a visible bearing on their and fiscal incentives are the prerogative of governments only, economic outcomes. What was most critical was whether the but other initiatives can be pursued by a wide range of civic leading actors had the capacity to lead local economic devel- actors (including skills and innovation support, infrastruc- opment, including (but not limited to) the ability to engage ture investments, and financial instruments). This conclusion with stakeholders, develop effective strategies, identify key contradicts the opinion of some city governments that they industries, improve the business environment, and address must do everything in economic development. The case stud- the needs of local businesses. ies of successful cities demonstrate that this is not the case. Figure 2.6: Cities vary widely in the resources available to them Regions and select countries City share of total government spending Africa 9% Government organized into interdependent spheres; South Africa 17% cities issue bonds and have considerable revenue Low city revenue but high levels of local Uganda 34% government spending (conditional transfers) Asia 18% China 50% Philippines Strong national and state agencies 14% but with substantial devolution Europe and Central Asia 27% Belarus 36% Moldova 25% European Union 25% Latin America and the Caribbean 11% Brazil High devolution to cities with extensive cosharing; 26% relatively high city spending and revenue Mexico 7% Cities dependent on strong states; low city spending and revenue Source: Spending data from UCLG and World Bank 2009; qualitative findings from Smoke 2013. 46 In practice, who takes the lead varies case by case, In the following three subsections, findings on each depending on politics and on the capacity of the pub- of the three “wedges” are described. A companion paper lic sector compared with the private sector. The lead provides more detail on each wedge (Gashi and Watkins actors in this process will be a function of history and relative 2015). institutional strength, as illustrated by figure 2.5. Figure 2.7: Competitive cities know their own competencies relative to other stakeholders, and they prioritize their efforts accordingly Institutions and Infrastructure & Land Skills and Innovation Enterprise Support Regulations and Finance National government Macroeconomic Highways, roads, Public education system Export and trade management airports, ports Immigration policies to facilitation National investment Power grid attract talent Access to finance and trade policy Regulations for R&D funding, support support schemes Legal framework amd infrastructure provision, schemes property protection such as PPP laws Healthcare Industry-specific taxes Mayor’s Wedge and regulations City government Municipal taxes and City roads and public Talent attraction Business support incentives transportation programs services Zoning and land use Water and sanitation Investment policies, policies Public safety Cluster development promotion, and aftercare Construction permits; Housing/slum support Facilitation of seed, business licenses upgrading catalyst, and risk capital Public safety and law Linking firms with enforcement academia Private sector Standards and Additional Vocational training Business associations certification associations infrastructure and programs and support networks shared services R&D Market intelligence and business information Equity and debt Source: World Bank. Note: PPP = public-private partnership; R&D = research and development. 47 The Mayor’s Wedge: Internal City Box 2.2: Mayor’s Wedge in Practice Delivery The scope and capacity of city governments varies A powerful mayor’s wedge greatly across cities and countries. Figure 2.6 summa- Bilbao, Spain, is unique in that its fiscal policy is com- rizes some of the expenditure figures worldwide, showing pletely devolved from the central government. The city the proportion of total government spending that is admin- used that power to its advantage by raising a direct tax to istered by local governments. The wide variation in these fund the regeneration of a critical city asset, the Nervion numbers illustrates the imprudence of generalizing about the River, for urban and economic regeneration. The city also role of city governments. solidified its economic development landscape by setting up two new development agencies—Bilbao Ria 2000, a City governments’ ability to act will therefore be public corporation set up to redevelop the riverfront and conditioned by their particular scope and powers, brownfield land, and Bilbao Metropoli-30, a nonprofit that is, the mayor’s wedge. Figure 2.7 provides an illus- economic development partnership to strategize the city’s trative typology of what powers and responsibilities might be economic revitalization (Summary in Gashi & Watkins mapped to different levels of government and between public 2015 of KPMG, Magnet Cities, 2014: 34, 39-42, 50-53). and private sectors, with the city government having only a share of these. A slimmer mayor’s wedge In several cases, cities were able to prioritize inter- Tangier, Morocco, has a city government with a limited ventions according to their powers. Where they lacked administrative role in interventions aimed at economic the administrative remit or the financial resources, cities development, although it plays an active enabling role in were able to facilitate growth coalitions with the private practice. The government engages in interventions that in- sector and to lobby national governments in a coherent and clude “placemaking” through quality of life improvements coordinated way to address the investment gaps. Those pat- for residents, visitors, and investors; investment promotion terns are examined more thoroughly in later sections of this events (inbound and outbound); and work to improve the document. business climate and simplify administrative procedures. The city government has formed a regional growth coali- For national policy makers, one key question con- tion with the regional government (the Wilaya of Tangier) cerns whether an increased scope and capacity of the as well as with other local stakeholders. mayor’s wedge is important in determining economic outcomes. The World Bank investigated econometrically Figure 2.8: Effects on economic outcomes of increased administrative scope and financial autonomy for city governments Scope Financial autonomy Negatively Positively GDP growth Negatively Positively Correlated Correlated Employment growth Correlated Correlated Primary Primary cities Cities Primary Cities * Cities cities Secondary Secondary Secondary Cities * * * * Large Large cities Cities Large Cities * Small Cities * Small cities Small Cities * * (Bars reveal relative magnitude and direction of the relationship.) GDP Growth Employment Growth GDP Growth Employment Growth * denotes statistical significance at the 10 percent level. (bars reveal relative magnitude and direction of the relationship) (bars reveal relative magnitude and direction of the relationship) Source: Fikri and Zhu 2015. Note: GDP = gross domestic product. 48 whether the scope, financial autonomy, and capacity of local • This puzzle is explained by the finding that public sector government actually does influence GDP and employment. capacity is the underlying driver of positive outcomes. The proxy used for measuring the scope of local government In other words, scope and financial autonomy do not is the local share of total government spending. The proxy produce an influence unless they are accompanied by a used for measuring financial autonomy is the share of the capacity to implement. Using more detailed data from city’s revenues raised locally. The proxies used for measuring the European Union and China (Zhu and Mukim 2015), capacity of local government are local government size, local the analysis examined what happened to firm-level out- tax extraction capability, and public employee productivity.12 comes when cities were provided a larger administrative The conclusions are the following: scope at a specific point in time. The research found that an enlarged administrative remit did indeed translate • Increased city government scope is associated with in- into better outcomes for incumbent firms and new creased GDP growth and job growth, globally. Here, scope entrants—in particular, in increased profitability and means the administrative responsibilities of city govern- operating revenues and in higher wages for employees— ments. Scope was measured using data on the proportion but only when accompanied by commensurate increases of total government spending that is expended by local in local government capacity. Increasing scope without governments. Globally, increased city government scope capacity was not enough. is associated with positive economic outcomes (as shown in figure 2.8). Results from this figure are calculated on • Bigger scope and capacity at the city level also creates the basis of a regression model controlling for year and a better conduit for implementation of national-level city fixed effects. reforms. In Ethiopia, decentralization through city proclamations (a sudden broadening of the mayor’s • Conversely, increased financial autonomy is associated wedge across the country) resulted in better implemen- with decreased GDP growth and job growth. These results tation of existing national-level tax policies, leading to are stronger for small and secondary cities than for pri- better economic outcomes for the intended private sector mary and larger ones. 13 beneficiaries (Chaurey and Mukim, forthcoming). This Box 2.3: Growth Coalitions in Practice In Bucaramanga, Colombia, the chamber of com- Sialkot, Pakistan, is known for its export manufac- merce convened 70–80 businesspeople, academics, and turing cluster consisting of sporting goods, surgical government leaders in 2006 to seek new growth ar- instruments, and leather. However, the cluster was in dire eas—motivated by the risk that the city would become a need of better transportation and logistics, and it turned backwater in the global economy. Subsequently, regional to its local chamber of commerce for help. The Sialkot competitiveness commissions were mandated by the Chamber of Commerce and Industry teamed up with national government to plan for the country’s economy local government to create a public-private institutional at provincial scale; in Bucaramanga’s case, only a quar- mechanism—the City Package Association—which built ter of the members of the commission were from the several kilometers of roads and the first private sector government. airport in South Asia, operating 27 flights a week (Gashi and Watkins 2015; Zaheer 2012). In Gaziantep, Turkey, a city assembly was established in 2006 with 225 members,a of which only 20 percent The universities in Pittsburgh, Pennsylvania, helped were from the government and 80 percent were from the diversify the heart of the U.S. steel industry into the new local private sector and civil society organizations. The economy. In the high-tech cluster, the state government assembly assigns subcommittees to analyze and propose recognized university efforts, particularly those of Carne- solutions to specific citywide problems (such as transpor- gie Mellon University, to establish close ties between uni- tation, small businesses, international visibility, broader versity research and development and the city’s economic economic development) that can then be implemented growth. The state government supported the creation of collectively by the city government and private sector Ben Franklin Technology Partners, which offers office associations. When the research team first arrived in space and support to startup firms and venture capital Turkey, interviewees in Istanbul and Ankara told them, investment. Since 1989, this initiative is credited with “It is amazing how people from Gaziantep speak with creating 80,160 jobs (KPMG 2014b). one voice.” But after visiting Gaziantep, the team realized that this one voice is not amazing: it is rooted in institu- a Public-private collaboration in Gaziantep predated the council’s for- mation in 2006, but it was formalized in the city council structure after tionalizing a growth coalition. the enactment of national legislation for city councils in the same year. 49 finding suggests that local actors, with adequate capacity, A Growth Coalition of Public and Private are well placed to transmit institutional and business Stakeholders environment reforms more efficiently and according to local needs and particularities. With all their differences, a common feature across the case studies was the existence of an effective In summary, the larger the mayor’s wedge, the higher growth coalition. The coalition combined public and pri- the potential for positive competitiveness outcomes, vate stakeholders in setting a strategic direction and contrib- but only if accompanied with commensurate local uting to economic development. government capacity. (See box 2.2 for two examples of the mayor’s wedge at work.) This result confirms the hypotheses That pattern contrasts with the experience of many of other publications.14 The findings are particularly relevant cities, where various stakeholders in city economic at a time when city managers in many countries are tak- development work at cross purposes. City governments, ing on additional powers and accountability, including the agencies, chambers of commerce, sector associations, local responsibility for economic development, but not always with universities, training centers, and labor unions all have a adequate preparation. In several examples, power is devolved stake in economic development. But, somehow, they exhibit to cities without devolution of resources and governance and parallel strategies, duplicative functions, and sometimes com- capacity-building efforts. For example, in Kenya, a country peting mandates. Within the public sector, such inefficiencies currently undertaking ambitious decentralization reforms, are usually symptoms of a lack of coordination. Between the local governments have empty coffers, and they thus run public and private sectors, they are usually symptoms of a the risk of being incapable of undertaking much-needed, lack of trust. economic development initiatives. Similar situations are In successful cities, collaboration and coordination occurring in several countries in Latin America and southern occur. In some cases, businesspeople from a city were Africa. renowned elsewhere in the country for thinking with one mind—having a “hive mind.” City transformation resulted from individuals within government, industry, and academia working together for the advancement of their city rather Box 2.4: Intergovernmental Relations in Practice On interjurisdictional cooperation, Bucaramanga, local authorities began through the Association of Greater Colombia, and Gaziantep, Turkey, ensured interjuris- Manchester Authorities. The Greater Manchester Com- dictional cooperation within their respective metropolitan bined Authority (GMCA) formalized these collaborative areas, collaborating between municipal governments and arrangements and was created as a statutory body to through public-private growth coalitions. The Bucara- manage transport, economic development, and regenera- manga Metropolitan Area is made up of four individual tion functions (Wilcox, Nohrová, and Williams 2014, 12). municipalities and has a coordinating body with a small The GMCA was, in effect, the creation of an additional tier professional staff. Whereas the body is primarily focused of government for Manchester—a cabinet of 10 leaders on metropolitan development projects of areawide signif- with powers to deliver joint programs. The authorities icance on transport, mobility, water supply and sewerage, also established the Greater Manchester Transport Fund, and housing, it is also involved in proactive economic de- to combine the various contributions for infrastructure velopment through its participation in the area’s public-pri- spending (KPMG 2014a, 12). vate growth coalition (the Regional Competitiveness Com- mission). Similarly, Gaziantep’s three municipalities within On intertier lobbying and cooperation, Bucaramanga its metropolitan area have roles in public works (maintain- and Coimbatore, India, like many other cities, lobbied ing secondary roads), sanitation and land management, their national governments for infrastructure invest- and expropriation. They take part in the Gaziantep City ment. However, they lobbied with a purpose. Bucara- Council, where they engage with government and external manga’s chamber of commerce identified connectivity as stakeholders on the city’s most pressing issues, including a constraint to the growth of its local firms in an infra- economic development (Bucaramanga case study annex in structure study, and it used the results to lobby for specif- Kulenovic and others 2015, 13–14; Gaziantep case study ic infrastructure needs. Similarly, Coimbatore’s chamber annex in Kulenovic and others, 2015, 30–31). of commerce and industry led a “10 point agenda” (backed by 110 stakeholder groups in the city) to articulate the In the United Kingdom, Greater Manchester’s 10 top 10 infrastructure needs of the city. The city leaders local authorities have a legacy of successful collaboration purposefully promoted the agenda during local and na- and were willing to make the institutional changes nec- tional elections, lobbying politicians using their specific essary for devolution. Cooperation between Manchester’s project proposals (Gashi and Watkins 2015, 24). 50 than from the actions of a visionary mayor alone. Nongov- How are economic development ernment stakeholders are not just consulted in these cities: strategies sequenced and delivered? they are often the drivers of the entire process, as cocreators and coimplementers. They create a growth coalition. Examples are shown in box 2.3. Many city economic development strategies, as so- phisticated as they might be, fail to prove effective. A The stakeholder engagement process is often formal- reviewed of the most common reasons for failure revealed the ized. In Kigali, participatory planning was done at every tier following patterns (Sivaev 2015). In brief, it is notable that of government, giving citizens a greater voice in identifying most of failures concern the process of strategy design and priorities. In Bucaramanga, government and nongovernment implementation—the who and the how of strategy setting, stakeholders interacted through roundtables and regional not just the what. Some typical pitfalls include the following: committees, collectively developing a regional strategy. In Gaziantep, dialogue took place through a forum (the City • Spending huge resources on data collection and descrip- Council) that brought together business leaders, academia, tion—sometimes as mandated by national-level re- civil society groups, and government officials. quirements15 —rather than focusing tightly on the most urgent objectives for the city (Boiling the ocean) Intergovernmental Relations • Using a checklist approach for interventions selection Cities’ scope for action is limited by administrative instead of an analytic process derived from evidence powers, geographic boundaries, and fiscal resources. (Cookie cutter) Examples follow: • Presenting too many initiatives simultaneously without • Administrative powers: Lucknow, a city of 4 million prioritizing them (99 priorities) people in the Indian state of Uttar Pradesh, was unable to respond to mounting challenges of rapid population • Creating a wish list of ideal interventions that do not growth because of the limited administrative powers reflect cities’ administrative scope, responsibilities, and of cities in India. A city mayor has authority over road implementation capacity (Straight to Utopia) construction projects, but cannot make decisions on bridges—which limits what can be done in a city that • Limiting private sector engagement to consultations only flanks a river (Barata and Pokharel 2009). or developing a draft strategy first and approaching the private sector later (Consulting not cocreating) • Geographic boundaries: The city of Denver in the United States wished to expand its public transport service • Hiring external consultants who do the analytical exer- through the “FasTracks” initiative, but did not have cise once, present their results, and then leave (Fly-in/ sufficient geographic reach to cover the whole network. fly-out) The metropolitan area is divided into central city and suburban districts, with fragmented political leadership • Responding to a local economic development initiative (Katz and Bradley 2013, 56–61). started by a private sector association by taking it over (Control freak) • Fiscal resources: Cities worldwide usually need revenue transfers from the national government to fund major • Treating a strategy like a fundraising proposal to attract projects. The city of Amsterdam, Netherlands, funds funding throughout the implementation phase (Hence major projects through nationally created reserves. Cities only selected projects get implemented, and the strategy such as Cape Town, South Africa, and Brisbane, Austra- ends up having vast gaps.) (Vision without a budget) lia, depend on pooled resources, shared by city-provin- • Abolishing a previous administration’s projects without cial-national tiers (OECD 2013, 31). determining which ones were working (New leader/New strategy)16 Thus competitive cities use their leverage to nudge others to do what they cannot do themselves. In For this final topic—the how of city competitiveness—the re- response to their limitations, competitive cities work closely search findings have been combined with guidance on strate- with their fellow metropolitan area city leaders, and create gy making, implementation, and delivery. The approaches are mechanisms and channels to access higher-tier funding and presented in chapter 3. support schemes. This may involve the following: • Interjurisdictional cooperation—with neighboring cities and districts • Intertier lobbying and cooperation—across tiers of gov- ernment (state, provincial, national, and federal) Box 2.4 provides selected examples of how these two mecha- 51 nisms can work in practice. Key Takeaways from Chapter 2 Job creation and economic growth in cities are clearly A delicate balance between scope and capacity is linked to the cities’ success in attracting and expand- needed. Increased mayoral scope (compared with other ing private sector firms. The World Bank estimates that tiers of government) is not sufficient to improve economic the private sector accounted for three-fourths of job creation outcomes. Power has to be accompanied by capacity to bring and four-fifths of gross value added across the 750 cities in about city competitiveness outcomes. the database. City leaders need to understand what factors help attract, retain, and expand firms that create jobs and Critical attention needs to be paid to implementa- spur economic growth. tion and delivery. Competitive cities chose a strategy for economic development, aligned their budget to finance it, Four key categories of policy interventions should be organized to deliver it over time across electoral cycles, and considered. It appears that the building blocks of competi- provided sufficient staff capacity and attention to the quality tiveness can be sequenced: institutions and infrastructure at of implementation. lower incomes, then innovation capacity and the human-cap- ital base required, together with the enterprise support and Although it is impossible to replicate the path of finance provided for firms to compete, grow, and prosper as a other competitive cities, each city can improve its high-income city. A careful sequencing of these interventions performance by learning from these findings and by also depends on the main industrial structure of the city and using a custom process to design and implement a its competitive advantages. Competitive cities often pursued strategy using tools that are already available. Such both vertical and horizontal interventions. (They worked to tools include strategic analysis of the local economy and improve their business climate and also targeted individual external market trends and opportunities; public-private sectors for proactive economic development initiatives.) dialogue; and techniques for harnessing the political econ- omy during implementation. The techniques are outlined in A city’s proactive engagement on competitiveness chapter 3. includes a leverage of its full city wedge, using its internal scope and capacity (the mayor’s wedge), creating growth coalitions with the private sector (the growth coalition wedge) and linking with other levels of government and neighboring jurisdictions (the intergovernmental wedge). Certain policy levers are the prerogative of governments only (such as regulatory reforms, legal provisions, and fiscal incentives), but others (skills and innovation support, infrastructure investments, and financial instruments) can be pursued by various actors, either public or private. In the case studies, it did not matter precisely who performed a particular role in economic devel- opment, just so long as someone did. 52 Notes 9 The high-growth metropolitan economies studied span a range of income 1 Some popular surveys in this area are the World Bank’s enterprise survey levels and economic structures, but none of them has an economy based and United Nations Conference on Trade and Development’s world invest- primarily on extractive industries (natural resource wealth), major military ment prospects survey. installations, or other nonreplicable economic advantages. 2 The literature included academic papers and reports by multilateral 10 This mix of horizontal and vertical interventions is similar in nature to organizations and nongovernmental organizations that address the issue what scholars have begun terming new industrial policy. of city competitiveness. These sources included Choe and Roberts (2011), Kamiya (2013), Nollen (2011), OECD (2006), Parkinson and others (2003), 11 Nontraded sectors account for most of the economy and are important for Rodríguez-Pose, Farole, and Dowson (2007), and Zhang (2010). Additional- employment and service delivery. Traded sectors provide a growth engine ly more than 30 empirical studies of individual determinants of economic for a city’s economy. An accessible exposition of this principle can be found performance of cities were reviewed, including Acemoglu, Johnson, and in Jacobs (1969). Robinson (2001); Aghion, Howitt, and Mayer-Foulkes (2007); Barro (2002); 12 Attempts to directly measure local government capacity systematically Bloom and Van Reenen (2007); Boulhol, de Serres, and Molnar (2008); across countries met methodological roadblocks. To try to get around Branstetter and others (2010); Calderón and Servén (2004); Escribano and these global issues, the performance of proxies was explored for capacity in Guasch (2005); Glaeser and Kerr (2009); Kaufmann, Kraay, and Mastruzzi two institutional contexts: China and the European Union. In China, two (2008); Mauro (1995); and others. proxies were used to measure capacity: (a) share of public employees paid 3 Unless otherwise defined, subnational in this paper refers to the govern- through public finance out of the total city population (that is, local gov- ment tier between city and national government. ernment size), and (b) tax revenues collected locally out of city GDP (that is, local tax extraction capability). In the European Union, public employee 4 The EIU Competitiveness Index (used for Hot Spots), for example, does productivity was captured in the dataset, which probably is a better proxy a better job predicting outcomes in East Asia and Pacific and Organisation overall for measuring government capacity. for Economic Co-operation and Development cities than it does in Latin American and Caribbean or South Asian cities, and it does a better job in 13 Indeed, literature shows that affects of fiscal decentralization have mixed high-income cities than it does in low-income ones. The A. T. Kearney Glob- results across countries. That effect probably occurs because fiscal decen- al Cities Index performs better with primary cities, and the Mercer Quality tralization has to be coupled with political and administrative decentral- of Life Index performs better for secondary cities. Hence, it is difficult to ization when it is evaluated, because a systematic approach that takes into know a priori which index is a useful measure of competitiveness for any account the design of fiscal decentralization is more relevant than the fiscal given city. dimension alone. See Martinez-Vazquez, Lago-Peñas, and Sacchi (2015). 5 Raw data from popularly used indexes—covering themes ranging from See Lall (2013). The report points out that too much emphasis on financ- 14 competitiveness to livability, sustainability, and infrastructure—was ing without careful planning first could set back a city’s development for combined with the World Bank Group’s Doing Business Indicators, the decades. In turn, planning requires a reasonably high local government Chinese Academy of Social Science’s Global Urban Competitiveness Report capacity, which can determine the degree to which the financed infrastruc- for patent data, and the International Monetary Fund’s Government Yearly ture and services are successful and sustainable. Financial Statistics. 15 Several countries require cities and local governments to produce large 6 The OE database covers 750 cities across 140 different countries. The strategic documents to access national funding. As a result, documents dataset contains 12 years of historical data, covering the period from 2000 get produced only as a duty rather than to maximize their usefulness to to 2012, and includes 90 variables containing demographics, output and economic outcomes. employment (each by sector), household income, consumer spending, and The team also made some incidental observations: (a) local economic 16 retail sales, among others. development (LED) literature is produced predominantly by organizations 7 The results are given in the context of previous research such as Duranton that conduct LED operations, and case studies are biased toward successful and Puga (2013), which finds in developed economies that physical (trans- cases that support their own methodologies, and (b) most LED methodol- portation) and social (housing supply and amenities) infrastructure, as well ogies focus on local government as the client, with the local public sector as human capital, entrepreneurship, and technology shocks are key drivers playing the lead role. 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Shapiro, Jesse M. 2006. “Smart Cities: Quality of Life, Productivity, and the Growth Effects of Human Capital.” Review of Economics and Statistics 88 (2): 324–35. 55 Bucaramanga, with Colombia’s lowest unemployment rate and with per capita income at 170 percent of the national average, is on the threshold of attaining high-income status as defined by the World Bank. 3 How can cities become more competitive? This chapter is offered as a pragmatic user’s guide to city chapter competitiveness. It is written for city administrators and leaders—mayors, city managers, directors of eco- nomic development, public officials, and private sector leaders and associations. It is designed to support efforts to increase competitiveness as a dynamic attribute. It does not contain recipes for guaranteed success. Instead it provides tools and processes, alternative approaches, and organizational systems that can help city leaders to identify and implement a strategy and then to evolve and adapt it so that it can support decisions in each city’s discovery process. Chapter 3 There is no single recipe for becoming a competitive city, but some common patterns can be identified and some specific techniques can be utilized by city authorities designing and implementing economic development strategies. T he techniques presented in this chapter are not Chapter 2 explained that successful cities focus on new, but they have tended to be poorly used or the who and how of competitiveness, not only the not used at all. Several toolkits on local economic de- what. With firm-level competitiveness at its core, a city velopment techniques are readily available from a number of administration would take the following steps to create a development organizations,1 and local economic development strategy: efforts have been undertaken for decades. Yet in practice, urban economic development efforts commonly suffer from 1. Identifies sources of growth (section 1: “What: Growth some of the pitfalls identified in the final section of the pre- Pathways and Prioritization”) ceding chapter, particularly in not striking a balance between the what, who, and how of strategy design and implemen- 2. Collaborates with various stakeholders to determine a tation. In some cases, economic development initiatives are course of action (section 2: “Who: Growth Coalitions”) implemented as process alone, without robust analytics to 3. Organizes its own role in the process (section 3: “How: help leaders define targets, structure the process, and make Organizing to Deliver”) decisions between various competing viewpoints and desires. In further cases, local economic development is interpreted Within each step, different approaches are available, each of narrowly as a need to focus on local small and medium enter- which is suitable to different types of governance and capaci- prises (SMEs) and cooperatives rather than to solve particular ty, as outlined here. problems that move the whole local economy toward greater competitiveness. This chapter attempts to respond to some of In real-world cases, the process described is not those pitfalls with a consolidated approach. necessarily linear or formal. In fact, successful cities may assert some elements far more than others, or they iteratively No single prescription will likely be found to be return to the beginning of the cycle to continuously adapt useful in a policy environment as varied and com- their strategy using sophisticated “market sensing.” For ex- plex as city economic development. Thus we present a ample, the cities of Bucaramanga, Colombia; Changsha, Chi- number of different approaches, some less interventionist na; and Kigali, Rwanda, all prioritized investments in human and some more interventionist. Even in the case studies of capital. However, in Bucaramanga, the strategy was informed highly successful cities, a number of different approaches and by extensive analytics and benchmarking (Growth Pathways); recipes for competitiveness are apparent. The World Bank will in Bucaramanga and Kigali, the strategy was driven by formal continue to test and adjust these ideas in a continuing series stakeholder engagement in planning (Growth Coalitions); of engagements with cities. and in Changsha the strategy was refined through organiza- tional innovation, experimentation, and flexibility in long- term plans (Organizing for Delivery). In Gaziantep, Turkey, researchers did not find written or sophisticated strategies, but all key city stakeholders knew exactly what the priorities were and who was accountable for them. 58 What: Growth Pathways and • A City Competitiveness Snapshot looks into growth Prioritization potential and constraints that certain types of business- es face. This process provides a bird’s-eye view of a city This section presents a series of diagnostic tools that economy. can facilitate a prioritization process. The tools are not new. The analytic techniques summarized here have been • Deep Dives focus on specific sectors and types of firms used by strategic analysts in developed and developing coun- and reveal enabling conditions that are missing. tries and in the public sector as well as in the private sector. • Constraints Diagnostics focus on selected citywide con- The use of the techniques is inspired by evidence ditions that are major barriers to growth across industri- presented in previous chapters. As noted, the most suc- al sectors and business types. cessful cities made strategic choices about their expenditures, involved a coalition of stakeholders and followed up with an appropriate implementation staff and structure. Plans were developed through various techniques, including identifying the city’s competitive advantages, assessing external market Box 3.1: The Evolution of Management Thinking opportunities, and highlighting constraints to growth that from Productive Efficiencies to Strategic need to be addressed. Choices and Market Creation In particular, strategies were able to support multi- ple sources of growth. Interventions not only supported • “We do not ask the initiative of our men. … All we existing firms’ activities, but also were able to support new want of them is to obey the orders we give them, do firms and to attract firms into the city. Hence interventions what we say, and do it quick.” were formed that not only catered to the wishes of incum- —Frederick Winslow Taylor (from June 4, 1906, bents—who often focus their lobbying efforts on lowering lecture, cited in Kanigel 2005, 169) the costs of production2—but also examined opportunities in new markets or in more lucrative products. This approach is • “There is surely nothing quite so useless as doing important because, as presented in chapter 1, cities will trans- with great efficiency what should not be done at all. form the structure of their economy over time and across income —Peter Drucker (1963, 83) levels. Efficiency alone is not sufficient. • “Managers do things right. Leaders do the right This approach to city economic strategy making mir- thing.” rors trends in private sector firms since the 1950s. —Warren Bennis and Burt Nanus (1985) An earlier emphasis on productive efficiencies from the era of Henry Ford and Frederick Winslow Taylor evolved into an • “The essence of strategy is choosing what not to do.” emphasis on the customer and the market, as conceptualized —Michael Porter (1996, 64) by Peter Drucker, Theodore Levitt, and Philip Kotler (box 3.1). According to the theory, firms succeed by determining • “Good companies will meet needs. Great companies a competitive advantage then organizing to deliver it. This will create markets.” delivery involves the firm’s making big choices to outcompete —Philip Kotler (cited in Capstone Publishing, 2003, their rivals (strategy) and performing their core operations 268) efficiently (management). Currently, many cities appear to fo- cus mainly on management, delivering a generic set of basic services and infrastructure. By contrast, as shown in chapter 2, the most successful cities in the world in the last few de- cades have delivered a core set of services and infrastructure (management), and they have also intervened strategically in support of growth opportunities (strategy). The approach offered in this section is based on the interpretation of a city economy as an interaction among enabling conditions and needs of businesses that vary across industries, sizes, and ownership types. This approach follows directly from the case-study findings that competitive cities engaged in both economy- wide interventions and in sector-specific interventions. To structure the interventions, the research team consolidated a number of analytic techniques into three dimensions: 59 Figure 3.1: Three levels of growth pathways analysisa Competitive Cities Snapshot The snapshot is an overview of the city economy that focuses on changes in key economic indicators, on benchmarks of the city’s economic performance, and on enabling conditions with relevant comparator cities, and provides analysis of the city’s economic structure. Why do it: The snapshot answers the question from city leaders, “How is my city doing?” What it delivers: Beyond an overview of the city’s economic performance, this exercise helps formulate two types of hypotheses: (a) factors that are likely constraining city competitiveness and (b) sections of the city’s businesses (defined by sector, size, or type of ownership) that offer growth potential or are underperforming. How it is done: It can be done in two parts: Part 1 is an automated economic overview and benchmarking exercise. Globally available data (global datasets, city indexes, Doing Business indicators, and data on patent registration) is used. Indicators include gross domestic product (GDP); employment and income growth; industrial structure and location quotient for broad sectors; and index values for infrastructure, insti- tutions, skills, and access to finance. Part 2 is a customized approach. The analysis is expanded with other data sources such as the World Bank Enterprise Survey, Subnational Doing Business survey, and local data sources. Detailed analysis of the business structure can be conducted using location quotient, shift-share analysis, and business demographics techniques (which global data usually do not permit). Qualitative techniques (expert surveys and triangulation) should be used to complement the analysis, verify results, and identify gaps in local perceptions. Sectors Sizeband Ownership Constraints Competitiveness factors Manuf. (e.g.) ICT (e.g.) SMEs (e.g.) MNCs (e.g.) Foreign owned Local business Diagnostics Institutions and This level of analysis zooms into econ- Taxes, licenses, duties Regulations omywide conditions that appear in the Legal system snapshot to be major barriers to growth of Market regulations local businesses across industrial sectors Local government and business types. Infrastructure and Physical infrastructure Why do it: The research indicated Land Social infrastructure that successful cities use both targeted Housing interventions and general business Skills and Human capital climate reforms. Such conditions may Innovation include infrastructure, regulations, Education and research skills and innovation issues, enterprise Networks support, and access to finance. Enterprise Support Financial maturity What it delivers: An in-depth and Finance understanding of the issues related to Cost of credit a specific determinant of city com- Agglomeration Industrial mix/clustering petitiveness and a rough estimate of Local supply chains the potential benefits in fixing the Other endowments Location, history, amenities problem. City image and other intangibles How it is done: Selection from a large number of off-the-shelf diagnostic tools for various parts of the business Deep Dives environment. Tools for this purpose could include regulatory impact This level of analysis focuses on selected industrial sectors or firm-size bands and ownership types to identify analysis, subnational tax assessment, their competitive potential and identify key constraints. TRACE energy analysis tool, land use and housing diagnostics, jobs diagnos- Why do it: This approach to city competitiveness starts from firm-level needs. The firm-level needs tic, financial infrastructure analysis, differ across industries, firm sizes, and ownership types. Thus the most efficient interventions are and others. sometimes those that identify and target needs of specific business with growth potential given the comparative advantages of a certain city. What it delivers: This approach identifies detailed issues that need to be addressed to support specific types of businesses in the city. How it is done: In-depth prioritization uses market intelligence and industrial analysis techniques (such as “five forces” and diamond analy- sis) to understand the growth potential of given groups of businesses. These exercises rely on qualitative data collection, interviews, and focus groups in addition to any related quantitative data. Driving conditions benchmarking uses literature review, expert consultations, and sector analysis (such as value chain analyses) to identify constraints and opportunities. This analysis compares a range of data sources collated in the World Bank database to evaluate these conditions against comparator cities and to identify where the city is lagging behind the most. It is based on economic boundaries rather than on admin- istrative boundaries, meaning that the analysis will often include the broader metropolitan area and beyond as needed. Source: Sivaev 2015. Note: ICT= information and communications technology; Manuf. = manufacturing; MNC = multinational corporation; SME = small and medium enterprises. a For sample outputs of this diagnostic tool, see Sivaev 2015, annex 1, 23–26, and annex 3, 35. 60 A short description of the tools follows in figure These analytic techniques help to build a list of po- 3.1 and is available in more detail in the companion tential interventions, and that list provides a solid paper “City Competitiveness Snapshot and Growth fact base for discussion. But it is not meant to be prescrip- Pathways,” which accompanies this document (Sivaev tive, and it is not the same as knowing where to start. The 2015). Such tools are created on the basis of real-world use next important step will be the prioritization of interven- in city economic strategies. The following are examples: tions. One approach to prioritization is a technocratic process of selecting the interventions with the highest effect and • In the Philippines, a “Cities Competitiveness Rank- the potential for the quickest wins. However, high-priority ing” initiative helped cities compare and contrast their initiatives also need to be politically feasible, able to be im- strengths and weaknesses through a benchmarking plemented given local capacities, and need to be supported by exercise (Rodriguez-Pose, Farole, and Dowson 2007). key local stakeholders. The process outlined here can be used to identify priorities using a structured dialogue between • In Toronto, Canada, location quotient analysis formed public and private stakeholders, to develop consensus, and the foundation of the Toronto 2000 development strate- to generate a coalition to support selected interventions. A gy (Rodriguez-Pose, Farole, and Dowson 2007). companion paper, “Public-Private Dialogue for City Competi- tiveness,” offers examples of applying public-private dialogue • In Glasgow, Scotland, shift-share analyses were used at the city level and discusses how dialogue processes should to inform the city’s strategy revision in 2005 (Rodri- be designed to address the specifics of a city context (Sivaev, guez-Pose, Farole, and Dowson 2007). Herzberg, and Manchanda 2015). • In Nairobi, Kenya, the recent integrated development plan combines industrial structure analysis, benchmark- ing, geographic information system (GIS) techniques and detailed investigation of constraints including land use and infrastructure issues (Nairobi City County 2014). 61 Who: Growth Coalitions This section focuses on potential approaches to forming a productive growth coalition. The process is Once an analytic fact base is available to make discus- often termed public-private dialogue (PPD) or struc- sions productive, cities can leverage three wedges to tured dialogue.3 A companion paper reviews key concepts support economic development: the growth coali- for this process (Sivaev, Herzberg, and Manchanda 2015). tions wedge, mayor’s wedge, and intergovernmental Three key questions can help frame this approach: relations wedge (figure 3.2). Each of these was detailed in chapter 2. In sequencing the wedges, a growth coalition is What is the problem to be solved? placed as primary because it will define priorities for internal delivery and leverage of other government tiers. Effective growth coalitions change over time, ac- cording to the problems they attempt to solve. Several characteristics of productive growth coalitions remain con- Figure 3.2: The City Wedge stant, such as a clear statement of objectives and a facilitator Three main points of leverage for city economies: (1) pub- and organizing body. But because problems change over lic-private collaboration; (2) internal delivery; and (3) external time, the composition of the dialogue to solve them should relations. also change—including the benchmarking that is done and the initiatives that are undertaken. The PPD process can be driven with smart questions about the problem to be solved. Underlying questions can be framed as “How can we compete better in this value chain? And how do we deliver the changes required?” 3 1 Flexibility and adjustment are the roots of success. As Leverage Catalyze a global trends evolve and new competitive positions (markets regional and public-private and products) are identified, new challenges and potential national Growth solutions will emerge. Hence cities should not have a linear relations Coalition plan of design and implementation but should instead build feedback mechanisms and cyclical processes. Who participates? 2 Effective growth coalitions choose their participants Apply city scope and capability on the basis of economic and strategic analysis. When the seafood cluster was organizing itself in the city of Hull, United Kingdom, most participants were fishing firms and processors. But, as it turned out, the biggest constraint to the seafood cluster was logistics, not fish (Duch and others 2011). Source: Gashi and Watkins 2015. This problem became clear only after industry analytics and benchmarking were performed. So PPD processes should not pick their participants until they have performed strategic analytics. Box 3.2: Using Strategic Economic Staff to How will the discussion be structured? Help Solve Economic Development Problems Talk to firms, but come with data. Economic develop- ment professionals often ask firms what they need. Paradox- Cape Town, South Africa, funds several cluster ically, firms may not have the best picture of what is really promotion organizations (such as fashion, oil and holding them back. (They may all say taxes and regulations, gas, information technology, and business process even when a formal industry benchmarking reveals that un- outsourcing). Each of these has a different strategy, of productive labor is what is pushing up costs.) Thus diagnos- which the Cape Craft & Design Institute is arguably tics and analysis can be a critical prerequisite for convening the most strategic. One of its main initiatives is to productive meetings. communicate a better understanding of buyers’ needs on quality and characteristics to its members, thus Discussions need to be structured and filtered ac- helping producers of handicrafts achieve a better ori- cording to analytic inputs. Facilitators perform the role entation of their product toward commercial markets of strategy consultants, elaborating on the strategic analysis and reducing the production of handicrafts that are with participants, and preparing the group for a process akin made without a clear buyer in mind. to change management. Action lines are prepared through in- tensive dialogue and one-on-one interviews. For example, in Bucaramanga, the competitiveness commission was staffed 62 with four full-time employees to perform this role, tasked How: Organizing for Delivery with performing analytics and guiding the dialogue. This section explores techniques that competitive Furthermore, the process will need to be under- cities have used to get things done. The emphasis is on pinned by strategic economic staff members. Suc- underlying processes rather than on organizational pre- cessful examples exist of staff members being employed by scriptions. Traditionally in cities, economic development has various organizations—the city, an economic development been the remit of a department or agency (Clark, Huxley, agency, a chamber of commerce, and others. In general, their and Mountford 2010)—but in practice, the mindset is more influencing role, capability, and function are more important important than the organizational structure and institution- than where they fit within the bureaucratic structure. Their al form. Successful cities manage to orient all departments key functions usually include the following4: toward a productive agenda. Chinese cities demonstrate this pattern dramatically: the mayor’s performance assessment • Researching specific value chains to identify where value is and promotion path is based on achievement of city economic created and how firms in the city can move into those posi- growth objectives. Thus mayors themselves are de facto the tions. This information will be specific to each subsector head of economic development or CEO for their cities, and of the economy, and it usually requires specialized re- the entire municipal government is responsible for delivering search rather than the review of secondary information. those objectives. Leading groups (an organizational structure For instance, no single economy is competitive across detailed later in this chapter) to manage cross-departmental entire macrosectors such as “information and communi- initiatives and help to fast-track prioritized initiatives. cation technology” or “manufacturing.” Instead, opportu- nities and constraints are specific to particular products How can a delivery strategy avoid the classic pitfalls and particular markets. (See box 3.2.) of implementation? Recurring implementation problems include unclear objectives, lack of clarity among compet- • Bringing knowledge and strategic thinking from outside the ing priorities, lack of accountability for achieving targets, city. Strategic economic staff members should interact imperfect information on progress, and a lack of coordination not only with existing firms in the city but also with across large multisector organizations. firms in competitor cities and with advanced buyers elsewhere. Doing so will generate more strategic think- City administrations are often structured according ing about sources of competitive advantage. Talking with to function, with one department for transportation, this wider range of stakeholders in the value chain often another for infrastructure and utilities, another for yields distinctive and better answers. housing, another for economic development, and so on. However, city objectives often span multiple de- • Configuring public-private dialogue to achieve these compet- partments. For example, reducing crime will involve inter- itive advantages. Conducting this dialogue is an expert ventions in policing, transportation safety, public housing skill in itself because it will involve presenting a viable design, and jobs programs. Economic development initia- commercial case and building private sector support for tives, more than any other function, tend to span multiple new activities in the value chain. Usually these activities departments and require coordination of programs, projects, will need to be distributed between public and private and decisions. stakeholders. If new investments are required (for exam- ple, in shared services or shared infrastructure), these The following three key internal techniques have may be structured through public-private partnerships. proven successful in facilitating implementation in cities around the world: 63 Aligning budget and initiatives around the political economy and vested interests associated strategic outcomes with such discussions. • In Lagos, Nigeria, during the turnaround of the city, a Do not tell me what you value. Show me your budget 10-point plan was formed with specific goals for infra- and I will tell you what you value. structure, employment, security, health, and revenue —U.S. Vice President Joe Biden enhancement. The goals were then translated into a me- dium-term expenditure framework, which tied projects Competitive cities make strategic choices on their to available resources over a three-year horizon. Each investments, thus aligning their budgeted expendi- goal and objective was dissected into a set of projects tures and daily initiatives with overall city priorities. with specific budgets assigned to them.5 What process can be used for this prioritization? There is no best model, but the following are notable examples of cities The underlying principle here is to focus on truly that employ a budgeting process on the basis of intended strategic initiatives that solve problems rather than outcomes: on budgets that are “sticky” between years and that focus on conducting business as usual. These tech- • In Baltimore, Maryland, in the United States, every de- niques, familiar to managers of private sector firms, can also partment and agency must propose exactly why it merits be used by cities. Indeed, many of the “turnaround” cities a budget allocation, and how the work relates to six examined placed a strong emphasis on rigorously prioritizing agreed citywide priorities. Implicitly, the starting point their expenditures according to strategic priorities across the for the next year’s budget is zero unless a clear justifica- city. Some process of budget alignment is essential to avoid tion for spending is made. The proposals are considered expensive mistakes and also to ensure that all programs are by “Results Teams,” which include members of the public, tightly configured toward agreed-upon city objectives. and when the justification is not strong enough, entire programs may be abolished (Kamensky 2013). The city At least two types of organizational innovations may reduced and reallocated its budget by several hundred be necessary to implement such an approach: million dollars using this technique as a way to navigate • Within city administrations, cities may need to create a team of staff members from several departments to work on the interventions rather than assign the inter- ventions to individual line departments, which might Box 3.3: Continuity Across Electoral Terms work independently as silos. One of the most common types of problems in city government stems from a lack Boston World Partnerships in Massachusetts is chaired of coordination, whereby different departments fail to by the mayor and is composed of and financed jointly by the public and private sectors. The senior board includes implement an agreed policy or pursue several conflicting Boston’s former chief economic development officer and policies at once (Tavakoli and others 2013, 16–17). By senior representatives from Harvard Business School and using an interdepartmental team to work together on firms such as Bain Capital Ventures. Thus the mayor, a key interventions, funds can be managed according to the stakeholder, is also part of a board of stakeholders equally project to buy necessary staff time, services, and goods. invested in the city’s success and has an interest in a longer time horizon. • Beyond city administrations, special agencies may be established, such as economic development agencies, The mayor of Gaziantep, Turkey, for 15 years, Celal Doğan, investment promotion agencies, or cluster management set priorities on the city’s economic development, with organizations. Such agencies enable cities to outsource efforts focused on upgrading infrastructure, improving the high-priority initiatives and overcome some structural business environment, enhancing livability and quality constraints, such as civil service human resources pol- of life, and promoting the city. His successors continued icies or onerous procurement regulations, that they do the approach, developing a light rail system, treating city wastewater and upgrading water supply generally, and not have the power to change. providing infrastructure to the city’s slums. A reason for this consistency has been closed public-private collabora- One discipline that might help to encourage strate- tion throughout, made formal with the creation of a city gic prioritization would be to publish and consult on council with a majority private sector in 2006. City councils more details of the city’s finances and expenditures. in Turkey, acting as de facto metropolitan parliaments, run The most straightforward technique involves disseminating alongside city government staff and elected officials and the budget publicly, offering televised city council hearings work as a check and balance to the municipality’s actions. on the budget or televised monthly reviews of departmental In this case, it assures continuity in work on the city’s performance.6 For example, in Phoenix, Arizona, the city economic development needs (Gaziantep case study annex publishes and widely distributes a summary of its proposed in Kulenovic and others 2015, 11, 28–30, 32). budget as a 16-page newspaper insert (Denhardt and Den- 64 hardt 2001, 7–8). A more comprehensive technique would Solving problems during implementation involve participatory budgeting, as pioneered in a number of Brazilian cities. Participatory budgeting is an inclusive ap- With $20,000, off-the-shelf software, and a few good people, proach to allocating public funds at a city level through direct you can revolutionize city government. consultation with communities.7 Porto Alegre, a recognized leader of the process since the late 1980s, has established —Mayor Martin O’Malley, City of Baltimore a yearly cycle of consultations (World Bank 2003). In most (Henderson 2003, 12–13, 15, 21–22) cases, participatory budgeting accounts for a relatively small portion of city government spending in narrowly defined The underlying challenge of implementation is to areas; however, it has been recognized as a powerful tool for identify problems and solve them. Problems are some- improving service delivery, enhancing trust in the credibility times viewed as pathologies; arguably, they are an inevitable of governments, and promoting active citizenship and social part of a complex world, owing to unexpected events and accountability. many interlocking protagonists. Many problems cannot be solved merely by consulting a predetermined plan because In the longer term, cities face a problem of ensuring they involve multiple departments, personalities, and unan- the continuity of strategic initiatives across politi- ticipated external events. cal administrations. A lack of continuity is an especially relevant problem in economic development, a discipline in Solving problems depends, at the core, on three crit- which industries take years to develop fully. Thus, to achieve ical ingredients: meetings, information, and staff. long-term objectives, cities require a continuity of policies The research team examined four well-regarded and effective and investment strategies across electoral cycles. Yet elected delivery structures: CitiStat in Baltimore; PEMANDU in officials enter office with a mandate to deliver on their prom- Malaysia; Leading Groups in China; and Pernambuco state ises and the need to “put their stamp” on a city often leads to administration in Brazil (Jordan 2015). The four cases illus- new initiatives, even if that means neglecting what has gone trated that the precise institutional form can vary substan- before. tially but several fundamental characteristics and behaviors are shared. Three key ingredients were the following: How can the chances of continuity be improved? Implementing initiatives across electoral cycles is • Productive meetings. In particular, meetings exist to reach inherently difficult because it depends on the next decisions or, as a second best, to unearth new informa- administration, which is outside the control of the tion that will improve the decision of the meeting one current leaders. There is no right answer to accomplishing tier above it. The agenda items are constituted by excep- continuity, but one notable technique involves establishing tions requiring a decision. Those meetings are followed an institutional structure for economic development that is up through an institutionalized management system, mandated to provide long-term and external advice. and any outstanding issues must be resolved by the time of the next meeting. This pattern contrasts with meet- Economic advisory boards are used by some cities ings in many cities that are focused instead on infor- to improve the continuity and quality of economic mation sharing (listening to reports) or on considering development activities. The boards are formed to provide approvals that have already been given by a subordinate feedback, offer consultation, and help hold the city officials to administrative tier. account. Examples include the Amsterdam Economic Board in the Netherlands, Boston World Partnerships in the United • Relevant targets and information. Effective targets are States, Greater Manchester Local Enterprise Partnership in deliberately designed to be difficult to achieve, thus the United Kingdom, and Oslo Teknopol in Norway (see box improving performance and prompting the organization 3.3). These public-private structures are relatively unusual: to unearth problems and to learn (box 3.4). Typically the Indeed, the Organisation for Economic Co-operation and targets will include whole-of-city outcome targets, inter- Development (OECD) finds that less than one-tenth of mediate outcomes, and outputs from individual activi- governance bodies include members from the private sector ties, with these three levels linked by a theory of change and other city interest groups (OECD 2014, 88). Such boards (from outputs through to outcomes). Data collection allow for decision making on economic development initia- is usually frequent by light touch—where key perfor- tives to be made in consultation with economic stakeholders. mance indicators may be updated weekly but are sourced They also mirror the benefits of structured dialogues on directly from an automated system such as enterprise or specific value chains (see the growth coalitions section in this call-center logging software (rather than requiring extra chapter), building consensus on strategies, programs, and work to collect and report these data). projects for the city. New political administrations will be less likely to abolish initiatives if they continue to be backed by • A general support unit. Often this critical unit is miss- key city actors.8 ing. The CitiStat office generally employs 5 analysts; in PEMANDU, the number is around 100 (though 5 team members are assigned to Kuala Lumpur); in Chinese 65 cities 1 or 2 individuals are assigned per sector. The team may entail multiple skills, from basic project management members become experts in preparing for, structuring, through to technical knowledge about economic develop- and guiding meetings—supporting problem solving. ment. Staff members of the unit assist this process by (a) preparing meeting participants with a common under- Some capacity issues can be tackled through careful- standing of the problem and intent of the meeting, (b) ly tailoring training programs to ensure that staff ensuring that the most relevant data and information members are equipped with the right skills to deliver are brought to the meeting, (c) delineating the decision effectively. However, beyond training, cities have also used to be made, and (d) communicating clearly the expec- some structural changes to improve performance. Three cate- tations for follow-up after the meeting. The unit’s staff gories of techniques are highlighted here: must have the authority to gain access to department heads and senior executives. • Getting the right people. Cities can improve their recruit- ment and retention of highly qualified staff members When this structure works most efficiently, it gener- by addressing underlying problems in, for example, (a) ates a learning organization that can perform better the compensation and terms and conditions (reflected by solving problems. A recent meta-analysis suggests that in distortions in compensation relative to the private organizations with performance systems tend to be associat- sector), (b) the use of merit-based (competitive) recruit- ed with incrementally better performance than those that do ment processes, and (c) the career development (creating not (Gerrish 2014). a career ladder). Identifying and recruiting the right staff member in the first place is an absolute requirement Improving quality of delivery through for subsequent performance (Ketelaar, Manning, and accountability and capacity Turkisch 2007). For example, during the turnaround of Lagos, Nigeria, private sector professionals were appointed to open government positions, including top In the British government, if you ask somebody for a plan, what they actually did was write an essay. It was a beautiful essay, very good barristers, bankers, and consultants, and governors Bola English, grammatically correct; might have the occasional number in Tinubu and Babtunde Fashola worked to inculcate a it. They’d put it in a glossy cover, print it beautifully, send it to you, culture of professionalism among existing staff mem- and then nobody would read it again. … We weren’t talking about that bers.9 In Gaziantep, the reformist mayor associated with kind of plan. We wanted a real plan. I used to talk about plans with the economic rise of the city from 1989 onward oversaw coffee stains and marmalade on the corners. The plan that you got up the repopulation of the municipal council from well-ed- in the morning and said, ‘Have we done that? Whose job is it to do it? ucated managers and professionals to businesspeople, When’s it got to be done by? And how can I check? A real operational who were wealthier but with lower levels of education. plan that gets scribbled on. The share of council members with university degrees —Sir Michael Barber, former head of U.K. Prime Minister’s declined from 70 percent in 1989–1994, to 56 percent in Delivery Unit (Lecture on April 10, 2013 at World Bank, 1994–1999 and 35 percent in 1999–2004 (Bulut 2000, Washington DC). 36–38). The council was perceived to have become more pragmatic and business friendly. Accountability and capacity of public officials appear to be key drivers of effective delivery. The analytic find- • Getting people to do the right things. Cities can improve the ings indicated that increased administrative scope for cities focus of staff members on strategic priorities by address- does not appear to lead to economic outcomes unless it is ing individual performance management issues. The accompanied by capacity improvements. In practice, capacity scale for this accountability ranges from a city’s mayor down to a city’s individual staff members. 66 -- At the top leadership level, for example, Chinese but who were in different offices or had different titles. mayors are formally assessed according to their These teams helped make best practices universal. The performance on a number of key economic indica- teams shared best practices within themselves and tors. In Rwanda, all mayors have to report to the applied them across different offices. The teams also president once a year on their achievements vis-à-vis identified departments that needed training, saving the their declared priorities, and this report is televised cost of more formal servicewide evaluation and training as a news event. During the turnaround of Lagos, (Devlin and Chaskel 2010). Governor Fashola reported on progress in a televised open meeting every 100 days. For experimentation, cities can institute ways to modify initiatives during implementation, either -- For technical staff in cities, techniques include using to improve the functioning of one initiative, or to quality performance dialogues with staff members spread successful initiatives more widely—or indeed and ensuring effective follow-up. Performance to shut down initiatives that are not achieving their contracts or agreements can be used to clarify ob- objectives. The following are examples: jectives and strengthen accountability. For example, in Lagos, each commissioner (the head of city de- • In New York City, Mayor Michael Bloomberg introduced partment) was given a personalized work plan that innovation teams (i-teams) that serve as in-house con- matched the city’s 10-point agenda. Officials bench- sultants and work directly with the city chief execu- marked their progress against quarterly goals (ISS tive and other city public agencies to solve problems.10 2014, 6). Performance contracts and agreements I-teams break down problems into carefully assessed first emerged in the context of overseeing public challenges and attempt to address them through a enterprises, and they have been used in a number of process of generating ideas. They then choose the most OECD countries as well as in India, the Republic of promising ideas, create an implementation plan, and, Korea, Pakistan, and elsewhere. Cities could also in- lastly, implement the plan and begin monitoring results troduce well-designed incentives for staff to perform (Bloomberg Philanthropies 2014, 5–7). The center was and opportunities for them to perform, recognizing continued under current Mayor Bill de Blasio (Puttick, that motivation is a product of both extrinsic and Baeck, and Colligan 2014, 66–77). intrinsic factors. Extrinsic motivation is harnessed by incentives that provide rewards (such as perfor- • In Chinese cities, experimentation techniques have been mance bonuses) for tasks completed or disincentives used at a much larger scale—so-called Point-to-Surface for tasks left unaccomplished. Intrinsic motivation in the literature.11 In this paradigm, the central govern- is fostered by allowing time for staff members to ment identifies key constraints to growth and lets local find their own paths to meeting organizational goals governments experiment to find solutions. Local-level rather than instructing them on the details. municipalities and provinces seek the solutions to these constraints through “points of experimentation,” exten- • Learning through knowledge sharing and experimentation. sive pilot projects that test alternatives. The approaches Some improvements in capacity will be specific to the that emerge as being successful are then transferred local context in which they must be applied. In knowl- from the local points of experimentation to the national edge sharing between city staff, several techniques are surface of general policy. One of the best-known evi- available. For example, in the early 2000s, the Bogotá, dences of the effectiveness of this process is the creation city administration created “transversal teams” of civil of the first five special economic zones in the coastal re- servants who worked on common issues of civil service gions of China in the early 1980s, a policy that was then extended and adopted throughout the country through knowledge and expertise sharing. 67 Key Takeaways from Chapter 3 This chapter is intended to be a user’s guide for competitive ✓  7. Assess the political dimensions of program and, in cities. Accordingly, the concluding section summarizes the some cases, disentangle particular reforms from preceding material as a checklist for city leaders.12 specific politicians or parties. Include private and other stakeholders in the program to offset its being exces- sively identified with a particular politician or party. Building consensus and preparing the groundwork ✓  8. Adapt the sequencing and level of ambition of the program to respond to the capabilities of government departments, taking into account the specific concerns ✓  1. Create a shared analysis and understanding of problems of leading officials. If capabilities are insufficient, con- and challenges to achieve a clarity of purpose, both sider targeted interventions. within city government and as a result of a public-pri- vate dialogue. ✓  9. Ensure that leaders and teams articulate a compelling vision: display empathy for governmental challenges ✓  2. Activate personal leadership, with senior leaders own- and work hard and in collaboration to address them. ing the objectives, through the involvement of key exec- utive government offices and through the formation of ✓  10. Gain personal accountability of key officials critical for a representative board with leaders from public, private, progress. Ensure that there is sufficient accountability and research sectors. from the top down (within government) and also from the bottom up, supporting a process with private sector ✓  3. Gather a dedicated, diverse, and capable team to drive and civil society buy-in. the program. ✓  4. Ensure that a public-private coalition underpins the city’s engagements on competitiveness, with tasks Monitoring and adjusting shared among the different actors and a significant implementation degree of private sector ownership. (This partnership could be created through joint public-private boards or ✓  11. Establish standards for the ongoing monitoring of ex- through cooperation between distinct bodies.) ecution and performance. This process will require de- veloping meaningful outcome measures for programs, agencies, and the community. Calibrating for successful implementation ✓  12. Set up the protocols for reviewing performance in- formation. (A number of countries have introduced data-driven reviews to improve program performance.) ✓  5. Develop a realistic time line that draws on the insights of the groups responsible for implementation. ✓  13. Routinely report on progress to determine whether programs are achieving desired results. ✓  6. Ensure the program or policy is sufficiently resourced through city government resources, private capital ✓  14. Build and maintain the capacity for ongoing quality sources, and higher-tier funding. improvement. ✓  15. Manage evolving situations to make mid-course correc- tions. 68 The Role of the World Bank Group in • Informality in cities. How best can governments facilitate Competitive Cities a transition from low-value nontradable activities to high-value and tradable value chains? The World Bank Group has, over time, offered a suite of financial and technical support to its clients, • Good quality and comparable city-level data. How can comprising financial lending, technical assistance, city-level data be improved and deepened, including and analytic work. These engagements include operations through use of crowd-sourced and secondary data? oriented toward cities, including at the national level by engaging with systemic issues such as fiscal transfers and decentralization and at the urban level through municipal fi- nancing and infrastructure investments. Many projects have Notes included local economic development initiatives. 1 These include City Development Strategies (Asian Development Bank), City Development Strategies (Cities Alliance), LED through In working with cities, the World Bank Group often Strategic Planning (United Nations–Habitat), Local Economic fills a gap in knowledge and financing. In knowledge, Development (International Labour Organization), Local Economic cities in low-income and lower-middle income countries do Development (Organisation for Economic Co-operation and Devel- not usually engage commercial consultants to advise them opment), Local Economic Development (World Bank), and Strategic Urban Planning (Institute for Housing and Urban Development on economic strategies and may not be aware of some of the Studies). insights from global experience presented in this report. 2 Incumbent firms will often lobby for objectives such as regula- Moreover, a typical World Bank Group project would last sev- tory reform, fiscal leniency, infrastructure investments, improved eral years and thus provide scope for support on implementa- labor skills, and price reductions on their utilities. Those changes tion and ongoing technical advice, which goes beyond initial will help firms scale up their existing activities, but they may miss diagnostics and strategy making. In financing, the World opportunities to transform activities into new products or sectors. Bank Group offers a flexible series of instruments, including 3 Many definitions and recommended procedures exist; this paper investment project financing, development policy lending, offers a selective summary of some of the key features. and results-based financing. 4 A fuller framework for choreographing this process is available in World Bank (2011). The insights provided in this report summarize some 5 See Filani (2012, 19–20, 42). Note that the “city” of Lagos is man- of the dimensions to city economic development that aged predominantly by the government of Lagos State (rather than a city government, per se). However, this example is included as an can be supported by the World Bank Group through instance of subnational results-based budgeting. financing, technical assistance, and analytic work. 6 According to the World Bank, social accountability is defined as the The key channel for these engagements is provided by local “extent and capability of citizens to hold the state accountable and World Bank Group offices, which in turn engage global staff make it responsive to their needs.” Televising city council hearings to deliver projects for client governments, firms, and other on the budget or reviews of performance form a critical element of entities. social accountability—namely, the need for vast information for ac- countability purposes that is needed from the state to citizens (and also from the citizens to the state). Considerable effort is required to improve citizens’ and civil society’s access to information, as Future Research well as their understanding of the information. For more on social accountability, see Grandvoinnet, Aslam, and Raha (2015). Each of the main topics covered by this report—anal- 7 See Participatory Budget Formulation, a World Bank website, at ysis of city performance, diagnostic tools and tech- http://goo.gl/KlaAaa. niques, and implementation modalities—could bene- 8 See, for a more detailed exposition, the case study of Rosario, fit from further research. However, some gaps in existing Argentina (Steinberg 2002, 20). knowledge resources available to cities should be priorities for 9 See Kuris and Blair (2014, 5, 7). Because of labor union rules, research to help solve the following problems: unproductive workers were reassigned rather than fired. 10 “Government Innovation: Innovation Teams.” Bloomberg Philan- • Resilience to economic shocks. Which cities weathered the thropies website at http://www.bloomberg.org/program/govern- financial crisis better, and what factors can help more ment-innovation/innovation-teams/. cities sustain economic performance over time? 11 See Sabel and Jordan (2015, 43). These points of experimentation are disseminated through extensive media coverage, high-profile • Governance structures and economic performance. For exam- conferences, “intervisitation” programs (exchanges between locali- ties) and appeals for emulation to more and more regions. See also ple, do elected mayors tend to generate better economic Heilmann (2008, 2). performance? 12 In this checklist, previous technical conclusions can be found in the literature on change management in the public sector. A recent • City administrative performance. 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