Cities: Pathways to Prosperity

CDE invited Professor Edward Glaeser to South Africa for a series of events in June 2015 where he presented his arguments in favour of urbanisation, and then, in numerous question and answer sessions, engaged with South Africans ranging from National Treasury officials, CEOs of public companies, diplomats, academics and representatives of civil society organisations.

On this page, you’ll find a write up of his presentations, video clips from the public event, photographs and charts, and commentary by CDE executive director, Ann Bernstein. You can download the publication based on his presentation here.

CDE and cities: Ann Bernstein, CDE executive director

ResponseCDEexecutiveDirectorAnnBernsteinIn the 1990s and early 2000s, the Centre for Development and Enterprise (CDE) produced a series of reports on South Africa’s cities as centres of economic growth and opportunity in a globalizing world. In many ways these reports were ahead of their time. Cities have not featured as strongly as they should have as part of the national agenda during the past two decades. But a focus on urbanization and cities is vital if South Africa is to generate the jobs and growth we need to meet our current challenges. Cities account for over 80% of global economic output. In South Africa, four city-regions (Gauteng, Cape Town, eThekwini, and Nelson Mandela Bay) account for 42% of South Africa’s population and 57% of formal economic activity. Between 1996 and 2013, the metro economies grew at nearly twice the pace of the rest of the country. Per capita income in the metros is about 40% higher than in the rest of the country, and residents of the largest cities are significantly more productive than secondary cities, towns or rural areas. Importantly, the rate of employment growth in the metros between 1996 and 2012 was more than twice that of everywhere else.

It is encouraging that some important people in government are starting to take cities more seriously. But South Africa needs to go further. Cities – and how they are governed and managed – must be at the heart of the national economic growth and jobs debate. If we are to have any hope of reaching the NDP growth and employment targets, our cities will need to grow at much faster rates for the next 15 years than ever before.  Adopting a ‘business as usual’ approach to cities is a strategy South African cannot afford.

The country’s future prosperity will be urban-led and this must be based on unleashing market forces in urban environments. The role of the state is crucial in this. Governments, at both the national and the local level, must enable cities to strengthen and improve their roles as engines for economic growth, mass employment, innovation and more vibrant, dynamic entrepreneurship.


Edward Glaeser

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Edward Glaeser is the world’s leading urban economist. He is the Fred and Eleanor Glimp Professor of Economics at Harvard University. His research has made a powerful case for cities as the path out of poverty and key to any nation’s growth. His latest book, Triumph of the City: how our greatest invention makes us richer, smarter, greener, healthier and happier, explains how cities spur innovation, attract talent and sharpen it through competition, encourage entrepreneurship, and allow for social and economic mobility. The Economist magazine calls it “an enthusiastic guide to the blessings of human proximity”. 

Presentation: Professor Edward Glaeser

 

Gandhi famously regarded the growth of cities as “an evil thing, unfortunate for mankind and the world.”  With all due respect to the great man, I think he got this one completely wrong.  The transformation taking place in India is not happening in the village economies he championed.  It’s happening in places like Bangalore, Mumbai, Kolcata, and Delhi. It’s happening in cities that are providing pathways out of poverty into prosperity, that are providing conduits across civilisations and across continents, and that are enabling the flow of knowledge and ideas that are the most important wellspring for economic success in the 21st century.

The benefits of city living

In 2007, humanity crossed an important threshold: more than 50% of us now live in cities.  When we compare those countries that are more than 50% urbanised to those countries that are less than 50% urbanised, the more urbanised countries have, on average, incomes that are five times as high and infant mortality levels that are less than a third, than less urbanised cities.

PerCapitaGrowthGDP_1960to20101

      GDP growth and urbanization. Graphic: Edward Glaeser

If you look at countries that had per capita incomes below $5,000 in 1960, those countries that were already highly urbanised at that point subsequently all experienced positive per capita GDP growth between 1960 and 2010. Some of them at spectacular rates. At the same time, those countries that were not particularly highly urbanised in 1960 did not do so well subsequently. This in cludes a host of African countries such as the Democratic Republic of the Congo, Zimbabwe, Niger, Burundi, Sierra Leone, Senegal, Zambia, Central African Republic, and Ghana. In other words, countries that were poor with relatively low levels of urbanisation in 1960, stayed poor.

What this tells you is that, contrary to Gandhi’s claim, there is no future in rural poverty. Of course, this is not to suggest that governments should force their citizenry out of rural areas and into cities or arbitrarily tax rural areas to subsidise city life. At the very least, though, governments should aim to create a level playing field for cities.

Human progress is largely based on our ability to learn from one another, and cities have been making this happen since Socrates and Plato first bickered on an Athenian street corner. Governments should encourage this process wherever possible or at least never arbitrarily prevent it from occurring or flourishing.

Presumably Gandhi wasn’t talking just about the supposed economic disadvantages of cities but also about some loss of soul, some loss of satisfaction that comes with urbanisation. This view is not Gandhi’s alone but is also reflected in the Anglo Saxon tradition from Jefferson to Wordsworth,  which often elevates rural life over city living. Given the poor quality of water and sanitation in 18th century cities this was, in some ways, a sensible view to hold.

However, it is equally true that modern rural India is not a Wordsworth poem.  Modern, rural India is not in any sense a bucolic existence and the empirical data on health and wellbeing show that life there is hard. On balance there is far more hope in urban slums than in the rural poverty that has persisted for millennia without delivering the change, the promise, the hope that continues to exist on city streets.

When we move from income to self-reported life satisfaction, the central message is reinforced. Among rich countries there is no clear pattern of urbanisation making you happier. Some countries’ respondents are a little happier when they are living in cities (e.g., Sweden and Finland) and some are a little happier when they are living in the countryside (e.g., Italy and New Zealand). In fact, the data suggest New Zealand has some very happy rural dwellers indeed.

“To be poor is to be rural.”

However, the difference is marked when you look at poorer countries. The gap between urban and rural happiness in India is the highest in the world. And the gap between rural and urban happiness is also prominent in Rwanda, Mali, Ghana, and South Africa where city dwellers are much happier than rural respondents.

No matter how you look at it, Gandhi was wrong.

Why are cities so important to human prosperity and happiness?

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Three elements lie at the heart of effective cities.

The magic of economic interaction

Cities exist to connect us and to enable us to learn from one another, trade with one another, and take advantage of economic opportunities.  That explains why cities have become more, not less, vital with the rise of information and communication technologies.  These technologies have flattened the world in a variety of ways and have enabled us to perform certain tasks from a distance; they have also radically increased the returns to being smart. We become smarter by being around other smart people. Humans are intellectual magnifiers: we pick up knowledge from other people around us and use it and transform it into something better. This is how human creativity has always worked. And it is why the most technologically-oriented firms such as Google no longer allow their employees to work from home. Instead they built the Googleplex which facilitates interaction among employees. And the more complicated the world becomes, the easier it is for ideas to get lost in translation and the more valuable it becomes for us to be able to communicate with each other directly.


Combatting the demons of density

There are downsides to human interaction that invariably emerge when a lot of human beings occupy a small amount of space together. If two people are close enough to exchange an idea face to face they are also close enough to exchange a contagious disease. And if someone is close enough to sell you a newspaper then he is close enough to mug you. This is the nature of cities. But it does not mean that we should halt the urbanisation process and keep people in rural areas for fear of subjecting them to the demons of density. What it does mean is that government becomes much more valuable in an urban context.  We need to focus our attention on combating the disadvantages of density – on providing clean water, safe neighbourhoods, and uncongested roads. To accomplish these things requires a smart public sector; a government that focusses on fighting crime, reducing congestion, enforcing the rule of law, and creating the preconditions for innovation and creativity to flourish.


People and the physical city

The buildings and the infrastructure of the city are important. But we must not confuse the physical city with the real city. Johannesburg’s real city is not the skyline; it’s not the Hillbrow Tower or the Carlton Centre or Ponte.  It’s the humanity that is in the city.  It is the people who are connected by proximity that make the city what it is, not the structures that they inhabit. Of course, the buildings and infrastructure matter, in the sense that they could facilitate human interaction more or less efficiently. But they are always only means to ends and never ends in themselves.


Watch: More videos, as well as Glaeser’s full presentation, are available on the CDE YouTube Channel.

Skills matter

When one looks at the difference in the performance between cities, one need look no further than skills as a key predictor of urban success. If you look at per capita GDP in 2010 across major US metropolitan areas and the share of adults in those areas with college degrees in 2000 there is a reasonably strong, positive relationship:  The higher the share of adults with college degrees in a metropolitan area in 2000, the higher the per capita GDP of that metropolitan area in 2010. This is not just about your skills making you more productive, it’s about your neighbours’ skills making you more productive. Holding years of schooling constant, as the share of adults in your metropolitan area with college degrees goes up by 10 per cent, your wages go up by 8 per cent. This study has been replicated in many countries, including India and China, and the results always support the advantage of having skilled neighbours. Quite often the relationship in the developing world is much stronger than it is in the developed world.

And, this relationship becomes more critical and powerful as density levels increase. In fact, density and skills are complements. This was particularly evident in the US during the great recession. What saved some metropolitan areas from having high unemployment rates was having a strong skills base because having skilled neighbours not only makes you smarter but also means having a neighbour who is a potential entrepreneur who might give you a job.

So human capital is really the starting point for a city’s success. What this means is that when you think about underperforming cities, don’t think infrastructure first, think skills first.

   

 

Entrepreneurship and the city

Of course, the skills that really matter are those that are learnt on the job and there is no skill that is more valuable to the long-run health of a city than the talent and inclination to become an entrepreneur.

Fifty years ago, New York’s great industry – and the largest industrial cluster in the United States in the 1950s – was garment production.  This was an industry with very few barriers to entry, with very few returns to scale, one in which anyone with a good idea and a couple of sewing machines could get started. As a result, it was a spur to entrepreneurship. Thousands of people came to New York and started working for small garment producers or set up their own business. And because entrepreneurial skills can be transferred from one industry to another, New York’s garment entrepreneurs went off in search of new opportunities in other industries as opportunities changed. They went on to start film studios, to build skyscrapers, and to do amazing things for America.

By contrast Pittsburgh, which was built upon the coalmines around the city, was heavily reliant on one very large corporation – US  Steel. Steel manufacture is an industry with vast returns to scale, and US Steel was a tremendously productive company. But it certainly did not leave a residue of entrepreneurial capital in the city. US Steel trained company men and when US Steel faltered those company men were not as adept at seeking out new business opportunities as the garment entrepreneurs of New York.

EconomicGrowthAndFirmSizeOur measures of entrepreneurship are generally weak and imprecise. However, one way of seeing whether entrepreneurship levels are high is by looking at average establishment size. And, in this regard, there is a strikingly strong relationship between how quickly American cities grow and how big the average firm is: cities with lots and lots of small firms tend to grow more quickly than cities in which the economy is dominated by larger firms. In fact, cities with the smallest firms on average (and which can be said to have higher than average levels of entrepreneurship), have also seen much faster employment growth. This is true across different regions of the US and the results are enormously robust.

The harder question here is: if we believe in the power of entrepreneurship, what is the government supposed to do about it? Is it possible to do more to train people to do entrepreneurial things? Is it possible to implement reforms that will makes it easier for people start out as entrepreneurs? Perhaps the answer is no for the first question and yes for the second. One of the most entrepreneurial places in the world is Mumbai’s Dharavi slum. It is filled with unbelievable Indian talent doing things one would never think would be lucrative. But the water isn’t safe to drink and the electricity is (at best) intermittent. It reminds us of how critical the public function is because it is not that India lacks entrepreneurial zeal but it lacks an effective public sector that is able to deal with the downsides of density.

 

Managing cities: some policy considerations

 

cog Urban water supply is primarily about engineering. For governments, the overriding objective is to make sure you bring clean water into the city and dirty water is taken out of the city, so it doesn’t make sense to obsess too much about water charges for poor people in Africa or anywhere else. However, when it comes to something like transport the behavioural response is critical and hence engineering solutions are only part of the answer. If you build more roads, more people will drive on them. Studies have shown that vehicle miles travelled increase roughly one-for-one with roads built. Road building, when not accompanied by pricing, is simply a recipe for more traffic, which is why people need to be charged for the social cost of their actions. Singapore is one of the densest areas on the planet and yet it has roads on which traffic moves effortlessly because the government charges people to use them.
peoplemover

Detroit tried to reverse its decline with foolish investments like its People Mover, which here glides over essentially empty streets. Picture: Dennis MacDonald/World of Stock from Triumph of the City: How our greatest invention makes us richer, smarter, greener, healthier and happier

  busMany cities tend to underestimate the value of the bus relative to the train. In fact, there is very little that you can do with a train in an urban context that you can’t do with a bus, especially one on a dedicated lane. However, when it comes to the bus, we shouldn’t just be thinking about bus rapid transit. We should be thinking about minibus taxis too and how to integrate them into the urban public transport system. Minibuses are cheap, flexible and well-tailored to cities with medium densities such as those found in South Africa. The challenge is how to use public funds to upgrade the minibus experience: to shorten the wait, to make them safer, and to serve the needs of the city and the wider country better over time. In many cases, it makes most sense to think about services and systems that are currently in place, and about how to upgrade them incrementally and to make continuous improvements to them over time.   One of the reasons why trains became popular in the United States was that they were sold as vehicles for the regeneration of declining cities. But the hallmark of declining cities in the US is that they were built for a much larger population and therefore have an abundance of structures and infrastructure relative to the level of demand in their post-decline situation. In the case of Detroit, the US government confused the real city with the physical city: engaging in urban renewal projects and building public monorails that would somehow magically entice people to come back to the city. In the end, the result was a colossal waste of money. The poor people in Detroit did not need a monorail. They needed better schools, they needed public safety. In short, they needed investments that actually made a difference to their lives.

personPublic policy must focus on delivering services for people, not places. There is no need to ensure that economic activity occurs in every place in the United States. There is no reason why the government should be subsidising people to locate their businesses in the foothills of the Rockies or for that matter subsidising them to locate in Detroit. However, the government does have an obligation to make sure that the children who grow up in Detroit have the tools, especially the education, to make a brighter future for themselves. 

gunNew York’s regeneration was partly about the emergence of the financial services industry in the city. But a key factor was improving the rule of law and making the streets of the city safer for its inhabitants. You can argue about the methods used by the city – Boston’s community-based approach to crime prevention is a very good counter-example – but the lesson is clear: Since attracting and keeping smart people is so fundamental to a city’s long-run success, ensuring public safety is one of the most critical investments a city can make. I often tell city leaders in the US that the right economic development strategy is to attract and train smart people and then, more or less, get out of their way. In the 1970s no one in their right mind would have wanted to live in New York and work somewhere else. Today, this is all the rage and it would not have been possible without safer streets.

buildingsPolicies influenced either by NIMBYism or by momumentalism are both dangerous. NIMBYism (Not-In-My-Backyard-ism) often results in knee-jerk opposition to new building development. Until very recently, Mumbai had, for 40 years, a limit on building above one and quarter stories in the central city. Pushed in part by an adherence to British town and country planning ideals, but also by public officials who didn’t want Mumbai to grow, the result was a low, sprawling metropolitan area. With the exception of a few new skyscrapers, typically surrounded by big empty fields to meet the floor to area ratio requirement, Mumbai grew out instead of up, effectively making pedestrian transit impossible. As such, Mumbai is an object lesson in the overregulation of city building. In contrast, monumentalism, which essentially amounts to building structures or grand buildings for their own sake, is equally problematic. Monumentalism repeats the error of focusing on the buildings rather than the people who may or may not need those buildings. Somehow a balance needs to be struck that allows for city growth without building for buildings’ sake.

Density and the environment

One of the reasons why it is important to allow cities to build up rather than out is that it is good for the environment. When countries become more prosperous they consume more energy, which means they consume more carbon. For a given increase in GDP, countries can consume less energy by building up relative to building out. People who live in the city instead of outside it typically use far less carbon because they use public transport, they drive shorter distances, and they occupy smaller apartments.


If the great growing economies of India and China on their own, keeping their populations constant, see their per capita emissions rise to the levels seen in the sprawling United States, then global carbon emissions are forecast to rise by 130%. If they stop at the levels seen in wealthy but hyper-dense Hong Kong, global carbon emissions go up by less than 30%. We therefore all have a lot to gain if India and China build up rather than build out. We need to recognise that low density, suburban living on the city edges, is a recipe for increased carbon emissions.

Conclusion

I am an economist.  I believe in freedom.  I believe in choices.  I do not believe that people shouldn’t have the right to live surrounded by nature if they want to live surrounded by nature.  I know that part of my talk could be construed as saying that I think everyone should live in a city. I am not anti-rural. However, I am in favour of a level playing field. We should recognise the importance of cities for growth, for jobs, for prosperity and we should allow people to exercise choice and move to cities to take advantage of the incredible opportunities that they provide.

Phenomenal things have happened when humanity has worked together in cities. Our ability to solve problems collectively is simply incredible. That will not change.  That is not going to go away.  And as such I cannot but have a tremendous amount of hope that, in fact, South Africa will continue to grow, will continue to be a better place because of the magical things that happen in cities like Johannesburg.

Embracing urbanisation and committing to solving its problems is the only path for humanity to take in the 21st century. Urbanisation brings with it enormous challenges but the right response is to meet those challenges and make sure our cities are as liveable and comfortable as possible so that they continue to serve as generators of growth, prosperity, creativity and promise.

Discussion

 

Each of the CDE organised events in which Professor Edward Glaeser participated was marked by extensive audience participation, with Professor Glaeser providing detailed responses to questions. Key issues that emerged and a summary of the responses are provided here.


 
Local autonomy and accountability

Decentralisation is important because it facilitates experimentation.  In many cases no one really knows what the best policy is. We are not exactly sure of the right way to deliver entrepreneurial training or which vocational skills are exactly right. The answers will emerge if cities become laboratories of experimentation.  Accountability can also be increased if autonomy is conditional. In the US, if a local authority is underperforming, it can lose its mandates.  For example, Detroit lost its mandate to perform a lot of functions because it went bankrupt. That is an important check, but, at the same time, some degree of local autonomy is crucial.

Who should city governments be accountable to?

City governments should firstly and primarily be accountable to their residents. I could not be a bigger fan of Indian human capital and of Indian talent. Yet, Indian governments are rarely put forward as models to be emulated. I know of no country in which the cities are more controlled by agriculturally-dominated state governments than India.  Mumbai is dominated by Maharashtra and Bangalore is dominated by Karnataka. In every case, the rural residents are overrepresented, sometimes by as much as ten to one, in the state legislatures.  So city governments are deeply constrained and essentially run by state governments that view the cities as resources to be exploited for their rural constituents. The one exception is of course Delhi, which governs itself as an autonomous district.

Urbanization and sprawl

In South Africa the rural areas are quite urbanized and there is a lot of sprawl in our cities. Is there an economic model in which the current sprawl in South Africa’s can be seen as an asset?

 

Rural urbanisation and the growth of cities are a related but not an identical phenomenon. We want to be thinking about how to lift up the main cities because, after a while, they lift surrounding areas up. We should also be reflecting on the fact that many of the urban townships are congested. The legacy of sprawling townships could, in fact, become an asset if they become centres of interaction and entrepreneurship. I am not sure that even if South Africa had the ability to redesign townships and the urban layout from scratch, that it would be a good idea to do that. It is preferable to do the best with what you have got rather than invent insurmountable planning problems.

 

Further, in new urban areas it is best to proceed incrementally rather than copy the monumentalism of a place like Dubai. It is better when planning a new town or a suburb, that you grid it, meaning you lay down street spaces over the entire area of settlements and that you create and maintain the legal authority to protect that grid. That means you’ll have a space to pave even if you’re not ready to pave now; the space to put down pipes, even if you’re not ready to put down pipes now. Protecting the grid allows you to develop slowly, providing services as the need for those arises.

Should government encourage densification?

Should government implement policies to encourage densification?

 

My view about this comes back to choice. It is never a good idea to force anyone to live in a skyscraper.  What I am in favour of is reducing the regulations on developers who want to build taller towers in places where that makes sense.  I am in favour of deregulating. At the same time, one has to be careful that deregulation does not impose unwarranted costs on the public sector. Up to a point, people have to bear the costs of the decisions they make. So it may be the case that a developer has the right to build a housing complex on the very edge of a city, but that developer cannot then argue that the public sector is necessarily obligated to pay for the infrastructure that would make such a housing development economically viable.  I do not think that is, in any sense, what deregulation means.

Must government provide public goods like education?

Must government be the provider of public goods like education?

 

I’m a big advocate of the public responsibility for ensuring that children get educated.  However, I’m not an advocate for the public being the only provider of education.  Certainly, in the US, many of our greatest educational successes have been in the form of charter schools, which are typically not-for-profit, non-public entities. They randomise who gets in and those children who are offered a place often experience enormous benefits. I am not in favour of replacing a robust, competitive urban market of schools with a public monopoly. Some of America’s public school problems can be summed up by the following analogy: imagine if New York City replaced all of its restaurants with a single, large public canteen. One can imagine what would happen to the quality of the food. That is exactly what New York City did to its public school roster.  That being said, I would never dilute public responsibility for schools.  Every child is a public responsibility.  The public needs to figure out the right way to provide quality schooling, which usually implies a combination of private and public provision.

Mega-city projects to provide housing for the poor?

Should government undertake mega-city projects to provide housing for the poor?

 

Let me be unequivocal on this – backyard shacks, yes, mega cities, no.   Certainly the track record, both in the US and in Latin America, of tearing up existing small-scale barrios or favela–type neighbourhoods and replacing them with large-scale projects outside the cities has not worked and bad things have often happened. People are removed from jobs; a lot of poverty becomes concentrated in one area, and existing structures are disturbed. These types of interventions tend to replace existing landlords – who have been taking care of the areas for which they are responsible – and put a large responsibility on the public sector in their place. The public sector rarely takes on this responsibility in any kind of effective way. I think this is a very bad model, and the model in which current land-holders rent out backyard shacks to incoming migrants is preferable. It also facilitates entrepreneurship in the poorer parts of the city. As the city gets richer, shacks will be upgraded and replaced with better housing units over time.

The city and immigration policies

What is the role of the city when it comes to immigration policies?

 

I believe very strongly that immigrants are good for cities, and cities are good for immigrants. When you examine the phenomenon of immigrant entrepreneurs in the US, both historically and more recently, the share of American patents that are being created by people who are not originally American is huge.  It’s not that immigrants are crowding out jobs. Instead, they more often create jobs through their initiative and creativity.

Multinationals and local entrepreneurship

Should South Africa seek to attract large multinationals into our cities, or is it better to promote smaller, home-grown entrepreneurship?

 

It is not the case that big companies, like the mining companies that have often invested in South Africa, are unimportant.  They bring in global skills and link into global activities, and those roles are important.  At the same time Johannesburg needs to cherish its smallest entrepreneurs in a variety of different ways to make sure that they have opportunities to invest and grow.  What I am suggesting is that whatever is done to promote larger-scale firms is coupled with a passion for the smaller scale as well. Ideally, many of the people who get training from an incoming multinational will one day be able to start their own firm in a similar field.

 

An agenda for growing local entrepreneurship must be widely communicated. Some of those who are selling apples right now might be selling something bigger tomorrow. They might be the next big thing once mining stops. The history of natural resource-based economies is that the resources don’t last indefinitely so the key is to invest the wealth generated from those resources into things that do last – like human capital and infrastructure. Human capital is not just about education. It is also about expanding entrepreneurial capabilities and other difficult to define skills.  However I don’t think any of us know how to teach entrepreneurship very well. It’s a very hard thing to teach.

What are the right taxes for financing cities?

There is a lot to be said for local property or land taxes, and it is not unreasonable to tax prime downtown real estate. In areas where rights are poorly defined it is very difficult to impose these types of taxes, though.

 

One of my favourite models is to finance infrastructure by charging for the property development opportunities that emerge around the rail or roads that are publicly built.  MTR, the Hong Kong Rail System, allowed private developers to build very big skyscrapers on top of their transit systems, and the resulting revenues have been enough to pay for the whole service.

 

In general, thinking about creative ways to finance development is important, but getting as close as possible to a beneficiary-pays model is a good idea. If the beneficiary is the property owner, then it is a good thing. If the beneficiary is the car driver, it is also a good idea to make her pay.

How can we create and nurture innovation platforms?

I believe there are lots of creative ways in which we share information.  Bostonians have a “Where’s my bus app.” They have several that they can use, which will tell them where there buses are. The reason they have these apps is not that the city government paid for some private producer to do it, but because people went out there themselves and developed this system. Within two weeks, there were three competing apps telling you when your bus is going to show up and someone figured out how to monetise this innovation through advertising.  These software developers were not completely altruistic, but it reminds us that there are lots of interesting ways of getting things done, other than a public official saying: “I am going to write you a big cheque to solve this problem for me.”

 

This is part of what makes cities so important – a lot of peer-to-peer exchanges of information take place. A lot of the knowledge generated in cities emerges spontaneously, in a decentralised way, driven by markets and private incentives. Cities have always been good at permitting the free flow of ideas.

Developing world cities and lessons for SA

Which developing world cities provide the best lessons for South Africa?

Different cities provide different lessons. If you want to look at infrastructure, Shanghai looks very impressive, but it’s also incredibly expensive and often very poorly aligned with the needs of its citizens.  It may be better to look at cities like Santiago in Chile, where infrastructure was designed in a way that was much more human-centred.  Santiago is also a place where public private partnerships have worked well, which has not always been the case in other cities.

 

For crime prevention, it is worth looking at Medellin, which went from being the murder capital of the western hemisphere to being a safe and pleasant city.  Medellin has also been the place which has a remarkably innovative building community.  High-end plastic products, mass-produced, that are then potentially stackable are used to help with housing.  One can add an extra floor to a house in a shanty town area without causing major disruptions.

 

The traffic congestion pricing in Singapore is incredibly efficient, ensuring that the second densest country on the planet has roads that move effortlessly during rush hour. This works because they have time-of-day tolling. The second thing to learn from Singapore, is that large concrete public housing projects can work. But you must also remember that these have been an abject failure in almost every other country where they have been tried. Singapore has only been able to pull this off because it is such a remarkably well-run place. This is the reason why learning best practice from Singapore is dangerous – it is a place with enormous wealth and enormous governmental capacity, vastly more than in my own country, the US.  If you’re borrowing something from Singapore, you must make sure that it is something that you have the income and the governmental capacity to pull off.


In this interview by Siki Mgabadeli of ENCA and Moneyweb, Ann Bernstein and Edward Glaeser answer question, discussion key issues, and present the most important themes of these presentations.

Sithole Mbanga of the South African Cities Network responds to Ed Glaeser’s presentation

Concluding remarks: Ann Bernstein

 

South Africa faces two vital challenges in dealing with its appalling unemployment figure. These are how to get to higher growth, and how to make that growth much more labour intensive. Many economists are thinking about growing the national economy, but they do not think enough about where that growth takes place.

The best opportunities for increased growth and employment in South Africa are to be found in her cities. Cities are South Africa’s future.

Growth needs to come through urban-led development, in which both the private and public sector have an important role to play. There is no future in rural poverty. All over the world, people have moved to cities to take up the better set of opportunities these urban environments offer. It is a choice we want to create for the millions of poor South Africans that are stuck in places where there are no jobs and no prospects.

That does not mean we ignore the rural areas. South Africa has never had an economic strategy for the rural areas and it’s about time we did. But unless there is an economic reason for why a region or town should grow and create jobs, we should ensure good education and health and then enable people to move closer to where the economic opportunities are. And developing a clear strategy on how government is going to maximise the economic future of people in rural areas is very different from telling people what to do.

Cities are going to get a lot bigger, mostly from natural growth and partly from urbanisation and immigration. South Africa needs all the foreign skills we can get. This human form of foreign direct investment will help us build our cities, provide more entrepreneurial talent, help train more and more people so that we can maximise the enormous energy and potential of urban growth. We have seen what can happen when perception and policies on migration and urban development go wrong – the terrible violence earlier this year and previously demonstrates that the consequences for individuals, families, small firms and the local economy are terrible. CDE has done a lot of work on making very practical proposals on how South Africa should improve our migration and refugee policies. This process can be enormously beneficial for the country but it needs effective and enthusiastic management.

Cities are places where lots of things come together. It’s where you have to think about human capital and who holds the responsibility and accountability for making sure that more and more South Africans get a better education and learn more skills. Combining effective urban management, with skills development, innovation and less regulation will allow South Africa’s cities to lead the country in its quest for growth and provide pathways out of poverty and unemployment.


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Cities and the economy: Heartbeats of growth

FM Edition: IF you’re a small business wanting to get connected to electricity, it will take you five procedures and 333 days in Nelson Mandela Bay, or 226 days in Johannesburg – but just three procedures and 18 days in South Korea.

Business and cities: The magic of interaction

FM Edition: HARVARD economist Edward Glaeser visited SA last week. While here, he advocated the view that urbanisation should be embraced. The reason? Cities stimulate human interaction and creativity – and with that better business, more jobs and wealth.


Cities drive greater innovation, says Harvard professor

The success of any city depends on the ability of its citizens to share ideas and influence each other, says Harvard University economics professor Edward Glaeser.

Glaeser

Photo gallery: In order to view the event pictures, hover your cursor over the image above to use the gallery controls. Pictures: CDE




Colombia’s ‘second city’, Medellín: What lessons for South Africa?

As part of CDE’s interest in casting South Africa’s socio-economic challenges in an international context, we have been showcasing speakers and their experiences when they visit our shores. (See Mexico’s Market Reforms and Challenges and Raising South Africa’s Speed Limit)

In March 2015 we invited Jorge Perez from Colombia to tell us and an invited audience about the turnaround of Medellín. For information on some of the research and ideas CDE has had about cities as engines for growth and job creation (see Cities of Hope ).

Colombia’s ‘second city’, Medellín: What lessons for South Africa?

– Marius Roodt and Jennifer Cohen

Medellin has been described as one of the most innovative cities in the world.  According to its promoters, the city has, in the past two decades, reversed its statistics of poverty, murder, access to infrastructure and services. By envisioning a collective, shared project, its leaders have overseen a complex metamorphosis.

“Cities don’t always recognise crises,” says Jorge Perez, Director of the Planning Department, City of Medellín. Armed with a formula of planning for urbanisation using a combination of infrastructure, respect for poor communities and by enlisting the commitment of academics, politicians, businesses and NGOs, Medellín converted a city under siege by narco-terrorists and corruption into what has been called a model metropolis.

 

Perez’s presentation from the discussion.

 

Speaking to an audience at the Centre for Development and Enterprise of city planners, local and provincial politicians, public servants and private sector representatives, Perez explained how, from its crisis, the city of Medellín created an inclusive, democratic, accountable society. “We moved through fear to hope to a ‘city for life’.”

The CDE has been looking at what developing democracies of the world can learn from each other, especially in the areas of economic reform and inclusive growth. India, Brazil, and South Africa have absorbed the majority of its focus, however Turkey, Kenya, Mexico and now Colombia all have lessons for consideration by South Africans.

South Africa and Colombia share many similarities including high levels of poverty and inequality and high levels of crime and violence. Colombia is now, by all accounts, one of Latin America’s rising stars. It is today largely peaceful, and its national economy has been growing at above the global average for some time.

Medellín, the second largest city in Colombia, is a microcosm of what has happened in Colombia, turning itself around to the point that it was recently chosen as the most innovative city in the world by the Urban Land Institute. The Economist reports that “mayors from all over the world are trekking to a city that has become a model of urban development”.

“It was not a miracle and we had no messiah; we concentrated on good process,” Perez said, adding that the secret to the city’s turnaround was a combination of its short and long-term vision.

Medellín had long been Colombia’s primary industrial city but as Colombia’s railway system collapsed, coupled with rapid urbanisation, the city soon lost its competitive edge. As the city’s manufacturing and other sectors buckled, the trafficking of narcotics became the only option for many residents of the city. Pablo Escobar and his drug gangs also served to turn Medellin into what Perez called a ‘warzone’ during the 1980s.

“It was vital that we had a strong, inclusive democracy,” he said. Fixing the city was not simply the responsibility of municipal government, but fell on everyone living there to ensure the turnaround was a shared project. Perez explained that while “cities are full of people, they are not always citizens; you have to create a society.”

Democratic involvement continues, he explained: “Local development plans are still formulated inside the barrios, or neighbourhoods. Each political candidate presents his plans and is held accountable to citizens’ organisations for both delivery and budget for that area.”

Another important initiative was to build leadership in the city’s barrios. Perez said that leaders who were 16 years old when the infrastructure and other projects began are now emerging within their communities, a further boost to inclusivity.

Ensuring city expenditures are transparent and open (anyone asking for information must receive it within 48 hours) encourages residents to pay their taxes. Residents understand that a well-functioning and well-run city costs money. Perez argues that “ in return for their high payment compliance, they receive the benefits of a respectful, architecturally distinctive building boom – from public libraries and concert halls (some replacing informal settlements) to public parks and museums.”

And a creative use of cable cars, electric stairs, and an underground network of roads to transport the city’s population – which grew eight-fold during the transformative years – is how he characterised the innovative nature of Medellín. “Transport is the key to accessibility and integration.

“Public spaces and architecture can transform a city for life,” said Perez, repeating the phrase he said describes the objective for Medellín’s city planners. “And we destroyed the walls, creating accessibility for everyone.” Security, he said, is not based on walls, but confidence.

The city still faces a number of challenges, especially with regard to housing, which is sprawling away from where the infrastructure and services are and into the borders of nature reserves.

He described Medellín as a Metropolitan region rather than a municipality. “It is a multi-city system of ten municipalities (an invention of the 19th century) that share problems and solutions.”

Perez argues that social investment and social transformation are key to inclusive economic growth. Furthermore, all those with a stake in the city must work together. “If you want to secure your own future you have to secure your collective future,” he said.




PODCAST: Lessons from Mexico|Cape Talk

Ann Bernstein shares with John Maytham recent reforms made in Mexico which could make a difference here in South Africa. Read the 702/Cape Talk article here.

 

This podcast is based on a report by the CDE: “MEXICO’S MARKET REFORMS: PROGRESS AND CHALLENGES”. Get the report and related articles here.




Op-ed: Mexican policy reforms hold important lessons for SA

BY ANN BERNSTEIN, FEBRUARY 03 2015. Originally Published in Business Day. Read this article at BDLive.

This article is based on a new CDE report, Mexico’s market reforms. Read the report here and the press release here.

MEXICO has embarked on what The Economist called one of the “most ambitious reform programmes in the world today”. Can SA learn anything from this middle-income developing country on the US border? The opportunity to do so emerged recently, when Mexican Secretary of Foreign Affairs José Antonio Meade Kuribreña spoke at a dinner co-hosted by the Centre for Development and Enterprise (CDE) and the Mexican embassy.

Since Mexico became part of the North American Free Trade Agreement, it has become remarkably export oriented. Trade as a percentage of gross domestic product (GDP) is more than 60%, compared with Brazil at 21%, India at 42%, SA at 55% and China at 47%.

Mexico is now one of the top three exporters in the Group of 20 (G-20), measured as a percentage of GDP. The country is rich in energy and is an important producer of oil but commodities constitute just less than 20% of exports. The remaining 80% are manufactured goods. Mexico’s hi-tech manufacturing measured as a percentage of GDP is in the top five of G-20 countries.

Unspectacular but consistent growth in a reformed and diversifying economy has allowed rapid expansion of Mexico’s middle class. About 50% of Mexicans (about 60-million people) can now be considered middle class, with a shrinking proportion working in the public sector compared with previous decades. The border region with the US is now the fourth-largest economy in the world. Mexico is becoming not just a place to locate factories so they can hire cheap labour, but also a vital market for the US as Mexican middle-class consumers expand. The country’s economy has matured and diversified; 90% of exports to the US are now manufactured goods.

Kuribreña explained that there had been a long and growing sense of frustration in Mexico that, despite the opening up of the economy, desultory economic growth never got much above 2%. At that rate Mexico was able to double its real income over 35 years, but the resulting changes were too incremental to satisfy most people. When Enrique Peña Nieto of the Institutional Revolutionary Party won the presidential election in 2012, he was determined to push through reforms he believed were the only way to change Mexico’s long-term growth performance.

In Kuribreña’s words: “In the current context, Mexico’s growth performance had become increasingly difficult. There was no real space to use fiscal spending to stimulate growth and a number of European countries have shown what happens if countries abuse fiscal tools to generate growth. Monetary policy is already loose and cannot be loosened further to stimulate growth. It became clear to the Mexican government that if we wanted to find additional sources of growth, the only way was to undertake a very aggressive programme of structural reforms.”

Before he took office, President Peña Nieto sat down with the major opposition parties and discussed his ideas for reform. He realised that, while there were many areas of disagreement, there was a broad consensus on what the items of the discussion should be. Intensive negotiation allowed politicians to achieve agreement on many reform initiatives and the Pact for Mexico emerged — a package of reforms covering areas as diverse as privatisation of energy (long seen as an untouchable area of national pride), education and labour market reform.

For example, while some of the reforms attack lack of transparency within labour unions and seek to make labour markets more flexible, others strengthen workers’ access to unemployment insurance and state pensions. In the area of tax reform some politicians made their support for expanding VAT to nonessential food and medicines conditional on the president’s support for assistance programmes for lower-income families. By combining the reforms into a package, Nieto succeeded in building a broad coalition that supports the reform process as a whole.

The Mexican energy sector was more tightly regulated and closed than Cuba’s, for example. Reforms now allow Mexico to acquire investments and technology through licensing agreements with foreign companies. The telecommunications sector is being similarly opened up: a powerful regulator has been created and the dominant monopoly is voluntarily selling off some of its assets.

Teaching jobs had come to be seen as the endowment of teachers’ unions with little incentive for teachers to enhance their teaching capabilities. Nieto’s reforms have tackled corruption within unions, made the administration of education autonomous from union interference, introduced teacher and school evaluations and promoted teacher professionalisation.

Membership is compulsory in many unions, but these unions were not obligated to demonstrate that they used membership dues in the interests of members. Unions are now far more accountable and their financial dealings more transparent.

Flexibility in the hiring and firing of labour within specific types of contracts has been introduced. Mexican firms can now hire workers who are in training for a specific period — either three or six months. At the end of the training period, if employers do not want to hire workers permanently, they can terminate their contracts without having to pay any severance. Continuous contracts for seasonal workers are also now allowed.

According to Kuribreña, once these reforms were implemented, the Mexican labour market performed well, and the rate at which formal jobs are being created now exceeds the rate at which the economy has grown. In September 2013, Mexico was able to create 185,000 jobs in one month, the third-best month in its history.

The Mexican story has interesting pointers for SA as we contemplate another year of very low growth. Political leaders developed a strategy for how to build a political coalition of diverse interests behind crucial reforms. The adoption of a package of reforms enabled different political groups to achieve something for their supporters in some parts of the reform package while not being enthusiastic about other aspects. It is frequently the case that reformers fail to deliver results because they avoid the most controversial but important issues. In the case of the Pact for Mexico, this was not what happened.

It is still early days for the Pact for Mexico and the president is under considerable pressure: economic growth has yet to increase significantly, criminal activity continues, and he is personally under attack for what appear to be dubious business dealings, after his wife bought a house from a businessman whose company has benefited from his presidency.

India, under Prime Minister Narendra Modi, and Mexico are now two of the most important places in the developing world for those interested in economic reform. SA has a vital interest in the progress of these leaders and their ambitious reform goals. If we want to turn SA around, protect our constitution and achieve the higher growth rates so essential for this democracy, fundamental reforms are urgently necessary. For that to happen, we need leadership committed to implementing fundamental reforms. We can draw inspiration from what is being attempted in other developing democracies, which provide important pointers for this country.




Op-ed: Democracy is the only way

16 October 2014, Ann Bernstein for Financial Mail. Read this article at the Financial Mail.

 

This article is based on CDE’s “Democracy Works” project. Read more about the project here and read the reports here.

Should the future of the developing world be dominated by authoritarian governments? Are autocracies the best means of producing economic growth and inclusion? One often cited statistic is that India’s GDP almost doubled between 1980 and 2007, but China’s increased seven-fold. This and other examples appear to suggest that initial periods of industrialisation are more effectively directed by autocracies than within democracy. But after two years of research with experts in India, Brazil and SA, the Centre for Development & Enterprise released a report refuting this view. The experiences of these three countries demonstrate that it is not necessary to give up individual freedoms, rule of law, independent institutions, a free press and regular elections.

On the contrary, democratic rights and freedoms can promote sustained development, higher economic growth and effective routes out of poverty.

The argument in favour of autocracy is based partly on the idea that authoritarian governments can force society to delay reaping benefits in favour of first reaching a higher level of development. This has worked in some societies, but has failed elsewhere.

Our study found SA’s democracy has improved the quality of life for millions of people in a short 20 years. Brazilian poverty and unemployment are in single digits. In India, the size of the economy doubled between 2005 and 2012, with nearly 200m people lifted out of absolute poverty in two decades.

All three countries have flexible political systems. Many outsiders see people protesting and quickly interpret this as a threat to the stability of the regime. More often it is a way for citizens to push for reform, not revolution. In exercising their right to dissent they can renew the political system and open the way to better policy making.

Democratic freedoms can also foster economic and social innovation that authoritarian systems find difficult to produce. By protecting dissenters, creating independent universities, entrenching intellectual property rights and freeing up the business environment, democracies can encourage and protect innovators with radical new ideas.

This is not to ignore the challenges. All three countries need reform if they are to make further strides in overcoming poverty and underdevelopment. Macroeconomic discipline must be maintained. Microeconomic reforms must reduce the cost of doing business, open up competition and markets for new firms and workers, promote a positive approach to the role of business and stop the slide in global competitiveness. All three must strengthen competence and capacity in government.

Growth, in a developing country, must be sustained and labour intensive.

It must produce higher revenues to expand basic services, quality education and access to health for those historically excluded from the economy.

As in most other countries, corruption is a challenge. This requires greater transparency, effective democratic institutions, and more representative democracy, not less. It is hard to see how authoritarian states can compete with this.

It is not democracy that inhibits growth and inclusion of the poor in India, Brazil and SA. All three are in trouble because of bad policy choices, a failure to embrace markets and to sell the benefits of competitive capitalism to voters. It is weak institutions (riddled with political appointments) that succumb to corruption and crony capitalism. It is the failure of leadership — politicians captured by special interests rather than a new definition of the national interest.

Shift the spotlight towards the democratic developing world and it is possible to develop a more optimistic perspective on the future of democracy. There is an emerging democratic route to growth and development — if coupled with markets and if India, Brazil and SA implement essential and bold reforms.




Video: Ann Bernstein talks to CIPE about Democracy Works!

Executive Director of the Centre for Development and Enterprise (CDE) Ann Bernstein highlights the findings of a research project to uncover a consensus on democratic governance from the leading emerging markets of Brazil, India, and South Africa.




Video: What is ‘Democracy Works’?

In this short video produced by the Legatum Institute, the project partners explain why they commissioned the Democracy Works project and what it aims to do.




Video: Democracy Works! Johannesburg launch panel discussion and Q&A

The Democratic Alternative from the South: India, Brazil and South Africa was officially launched in South Africa on 11 September 2014 in Johannesburg. A panel discussion in response to Ann Bernstein’s presentation was held and chaired by Andile Sangqu, a member of CDE’s board, and sustainability and group risk executive at Impala Platinum. CDE secured the participation of Maite Nkoana-Mashabane, South Africa’s minister of international relations, who appeared as a panellist and delivered a lengthy presentation in response to the report. The other panellist was Justice Malala, an analyst and well-known columnist for The Times of Johannesburg and the Financial Mail, a well-respected business magazine. There was much robust discussion around the document which was praised as ‘ground-breaking’ by Minister Nkoana-Mashabane.

 

 




Op-ed: Growth Does Not Have To Be At The Expense Of Democracy

By Ann Bernstein. Published in Business Day, 12 September 2014. Read the article at BDLive.

 

This article is based on CDE’s “Democracy Works” project. Read more about the project here and read the reports here.

 

A battle of ideas — a global contest between democratic and authoritarian approaches to growth and development — is playing itself out in countries around the world.

Are autocracies the best way to produce inclusive economic growth for the vast majority of the population? The evidence from three important democratic developing countries, India, Brazil and SA (Ibsa), is compelling and supports a resounding “no”. It is not necessary, as many are arguing in Africa, to give up individual freedoms, rule of law, independent institutions, a free press and regular elections, if you are struggling with the challenges of poverty. On the contrary, democratic rights and freedoms can in numerous ways help promote sustained development, faster economic growth and effective routes out of poverty.

Over the past 25 years, SA and its Ibsa partners, India and Brazil, have demonstrated that the challenges of development and poverty can be tackled using the combination of democracy and market reforms. Between 1986 and 1996, each country had its own economic crisis and, in response, all three governments introduced fiscal discipline and market reforms. In the years since, these reforms have yielded impressive results. In SA, the combination of democracy and market reform has improved the quality of life of millions of people in ways that were unimaginable under apartheid. Brazil’s poverty rate is now in single digits. In India, the size of the economy doubled between 2005 and 2012, with nearly 190-million people lifted out of absolute poverty.

Despite these achievements, India, Brazil and SA still have a long way to go in moving large parts of their population out of poverty and reducing inequalities. All three countries now face serious and remarkably similar challenges if they are to return to the rates of growth and inclusion they desperately need. A two-year research project run by the Centre for Development and Enterprise (CDE) and partner think-tanks in India and Brazil has concluded that each of these developing countries requires the urgent introduction of a multifaceted reform package.

In SA, the economy is being held back by inefficiencies and unnecessarily high costs, with competitiveness sliding in a tough global environment. While maintaining macroeconomic discipline, microeconomic reforms are needed to reduce the costs of doing business, and open up competition and markets for new firms and the unemployed. Considerable deregulation would serve the interests of the economy as well as of politics: too many regulations and subsidies create opportunities for corruption, as well as slowing growth.

SA has the world’s highest recorded rate of unemployment, at 35%, and 60% for people aged 18-24. In part, this is because SA’s labour laws favour workers in formal employment and discriminate against the jobless. India and Brazil’s labour laws are complex and costly. In both countries, pressure is growing for labour market reform, with some Indian states leading the way. This is a priority area for fundamental reform for SA.

Well-functioning state institutions are needed to ensure that the gains of economic growth are translated into genuine assets and opportunities for all. And a competent, honest state committed to public service, with a positive attitude to private enterprise, is vital to support and regulate market players.

In India and SA, the state’s sponsorship of social mobility has emphasised particular groups and the politically connected. This undermines its role as the provider of public goods, guardian of the national interest, and sponsor of inclusion and upward mobility for all citizens. In part, this has to do with policies of redress (reservations in India and black empowerment in SA), which give preference to caste, race and political insiders rather than merit. Such policies create public servants who take office with the assumption that “it’s our turn now” instead of a commitment to serving the public good. In all three countries, broad-based social mobility is held back because weak schooling systems leave so many people badly educated.

State bureaucracies in the three societies are too inefficient to manage infrastructure delivery effectively on their own. Governments either cold-shoulder private infrastructure investment or mismanage it. In Brazil, experts note that President Dilma Rousseff’s backward-looking socialist and nationalist prejudices block the most efficient ways to bridge Brazil’s huge infrastructure backlog. These comments could apply equally to SA.

Faster economic growth requires popular recognition that markets, entrepreneurs and companies are vital for future prosperity. The “trust deficit” between the state and private sector must be eliminated. Political attacks on business also have another source. In India, SA and, to a lesser extent, Brazil, previous market reforms are believed to have disproportionately benefited large companies, politically connected people and “crony capitalists” of all kinds. A second wave of reforms should ensure that new firms and entrepreneurs can take advantage of an improved and more competitive environment.

The central question facing policy makers is not whether reforms can be identified, but whether they can be carried out. Democracy can prove an advantage in this respect.

Real change will require new political coalitions. Reformers will need to identify, reach and mobilise new constituencies that will benefit from higher growth, better education and more efficient poverty programmes. Alternate sources of information and media freedom and diversity make this possible in democracies. Second, reformers must actively “sell” the benefits of high economic growth to voters. Capitalism rarely sells itself. Politicians can and should openly argue that higher economic growth, sustained over time, will not just create a few rich people, but can move the majority of people from the margins of existence to a job, a house, literacy, and basic services. And that the only way to achieve that growth in SA is through open and competitive markets that encourage business expansion and the flourishing of new enterprises.

Too often, reformers fail because they avoid the contested and difficult issues. Stuck in the politics of the moment, they cannot envision the politics of the future: how coalitions are shifting, how future support for change might be built from the bottom up. This is the great strength of democracy. SA has a flexible political system that provides politicians and those that influence them with the ability to renew themselves, deal with challenges and learn from their mistakes, opening the way to a better future.

In the end, democratic capitalism and market competition will succeed only if they are widely perceived to be fair, and if they are regulated by effective and independent institutions that support competitive markets and do not undermine enterprise.

Corruption undermines faith in public institutions; it also undermines faith in the market economy and its key players in the private sector. Rule of law and the effective and fair administration of justice have an economic value — they secure property and contracts — as well as political significance. When citizens see that equality before the law, fairness and justice are applied to rich and poor, powerful and unknown, then they are more likely to accept the system as legitimate. This is the true democratic dividend.




Op-ed: Southern Democratic Pillars Stand Tall

Ann Bernstein for The Mail & Guardian, 12 September 2014. Read the article at the M&G website.

This article is based on CDE’s “Democracy Works” project. Read more about the project here and read the reports here.
M&G: After the fall of the Berlin Wall, Western democratic capitalism seemed to have triumphed. But the 2008 economic crisis, and the relative decline of Western influence that followed, significantly undermined the appeal of Western democracy in the developing world. While Western powers struggle to overcome political gridlock and slow growth, the Chinese authoritarian political establishment, using a mix of market mechanisms and state capitalism, continues to deliver high levels of growth, lifting millions out of poverty.

As a result, it is now far more respectable to advocate authoritarianism in the developing world than it was a decade ago. For example, President Jacob Zuma has argued: “The economic crisis facing countries in the West has put a question mark on the paradigm and approaches that a few years ago were celebrated as dogma to be worshipped.”

But one important piece of the debate is missing. The global conversation rarely refers to the large and diverse group of democratic market economies beyond the industrialised world, including countries such as Turkey, Indonesia, Mexico and Chile.

To correct that omission, the Centre for Development and Enterprise and its think-tank partners in Delhi and Rio de Janeiro set out to examine the relationship between political democracy and inclusive economic growth in three important democratic developing societies: India, Brazil and South Africa, three very different countries that confront some remarkably similar challenges.

All three are developing countries with many poor people and high levels of inequality. At the same time, they combine internationally competitive economic sectors and world-class companies with enormous underdevelopment. Each has experienced relatively high levels of economic growth in the recent past and in each country large numbers of people, not just a tiny minority, have benefited from that success. Last but not least, all three are stable democracies that have for the most part been able to deal with racial, ethnic, religious and other conflicts that have destroyed many of their neighbours.

The achievements of the three countries over the past three decades is impressive. In response to economic crisis some 20 to 30 years ago each country, albeit reluctantly, introduced market reforms and overcame significant hurdles to set their economies on the path to prosperity and the inclusion of the poor and disadvantaged within vibrant democratic cultures.

Democracy means more than elections. These matter, of course; they are a way of choosing leaders and policies and periodically “throwing the rascals out” when necessary. They offer different constituencies in a country the opportunity to compete for representation rather than the Chinese approach, where in default of an open and transparent voter choice, a handful of pre-selected men emerge from predetermined, secret “elections” to govern the country.

Democratic societies are also characterised by a free media and freedom of speech, the freedom to associate and organise, and the recognition that the state exists to serve individuals and not vice versa. Successful representative democracies also establish institutions that are independent of both politicians and voters, including nonpartisan electoral commissions, central banks and sometimes special courts or ministries designed explicitly to deal with corruption.

Their many achievements notwithstanding, the three societies face significant challenges today: high costs of doing business, inflexible labour markets, declining manufacturing sectors, reluctance to establish public-private partnerships to build essential infrastructure, schooling systems that mainly fail to deliver quality education, and national and local governments with limited capacity.

All three find their competitiveness slipping in a tougher global economic environment. Urban, lower- and middle-class citizens now frequently protest against poor services, high taxes, unemployment and corruption. It is important not to take democracy for granted. Once it is achieved, there are no guarantees: democratic rights and freedoms can easily be eroded and there are signals of this in each country.

All three countries need a second “wave” of reforms if they are to hold on to their many achievements and make further big strides in overcoming poverty and underdevelopment. In each country, reforms need to take place in four different but inter-related areas:

  • The quality of democracy: the transparency and accountability of democratic representation, institutions and processes must be strengthened.
  • Further market reforms: macroeconomic fiscal discipline has to be maintained. Microeconomic reforms must reduce the costs of doing business in each country, open up competition for new firms and labour-intensive factories for the unemployed, promote a positive approach to the role of business and stop the slide in global competitiveness in each of the economies. Deregulation would serve the interests of the economy as well as of politics; complex taxes, tariffs, regulations and subsidies create multiple opportunities for corruption and also slow growth.
  • The competence and capacity of government as the vital facilitator of growth, employment, infrastructure and human capital development must be strengthened: people in developed countries often take the basic functions of their governments for granted, and underplay the role of government in their own history. An efficient state is just as important in the developing world. Well-functioning state institutions are required to ensure the gains from economic growth are translated into genuine assets and opportunities for all. Public provision does not necessarily entail public production, thus a competent civil service must have the expertise to regulate and manage market players. Reforms to improve state capacity and governance are a vital priority if these democracies are to continue delivering.
  • Policies that expand opportunities for the poor and disadvantaged: markets are the engine of development, but in countries with enormous development challenges, poverty and a history of discrimination and disadvantage against large parts of the population, they are insufficient. Helping the poor, unemployed and disadvantaged to survive and cultivate the skills essential to their participation in a modernising society and economy is vital. It is also important politically. If well-chosen policies are rolled out effectively and at significant scale, they can buy time while economic reforms are implemented. They also demonstrate a national commitment to include and recognise those who are struggling. In each country, the package of policies in this area needs considerable reform to ensure value for money, affordability, effectiveness and the elimination of costly unintended consequences.

Our study of India, Brazil and South Africa leads us to believe that they can build on the many strengths of democracy to put together the new political coalitions that will support and sustain this second wave of essential reforms.

After all, all of them have done this before: in the 1990s, in response to economic and political challenges, democratic governments in these three developing countries successfully implemented a series of economic and governance reforms and reaped significant benefits. If they are to negotiate the less accommodating global conditions and the troubling and tricky phase they now find themselves in, they and their citizens need more democracy, not less, in order to grow and improve the lives of the poorest.

India, Brazil and South Africa are three pivotal examples of the democratic alternative from the Global South. Their efforts to leverage democratic processes and institutions and achieve faster and more inclusive growth in the next decade will be closely watched.