New Cities - More Jobs

As we drive out of the city, we leave the hustle and bustle behind. There is no more of the incessant honking, the jostling, the sight of beggars, as we quickly turn our eyes away from them and peer into our phones. Ugly buildings and garish shop signs stay behind and our eyes feast upon lush green fields, rolling hills and an occasional cow swatting flies as it drinks deep from a village pond. We see children at a distance, running hither and thither in gay abandon without fear of being run over by cars and buses. Makes you wish for a simpler life.

Yet as Aarushi, one of the co-authors says, “I have spent twenty years living in cities like Delhi, Gurugram, Chennai, and Mumbai. Each of these cities has a personality of its own, quirks you wouldn’t find elsewhere but they all have one unifying factor: immense job opportunities. Each time we have moved cities, it is because there is a better opportunity there.” 

In 1950, 30% of the world’s population lived in cities. Thirty years later, despite massive rise in population, this proportion has almost doubled (56.2%). This captures a recent reality: there is a conscious shift away from rural centers of agricultural production to urban city centers of manufacturing and commercial services. And if you go further back in history to 1800 CE you see that less than 5% of the world’s population lived in cities and it has gone up to almost 60% today. According to a world bank report, very few countries have reached a per capita income of $10,000 without 60% of the population moving to urban centres.

A city is a relatively small area that contains a large number of people and firms. Why are cities centers of economic activity? It isn’t as much of a chicken and egg problem as one might think. Due to forces of agglomeration, we see firms working in the same field cluster together. We also notice their allied industries set up production in neighboring areas, in a bid to drive down transportation costs and reduce the costs of face time. Before the shift to an online mode of interacting, people often referred to the “twenty-minute rule” in Silicon Valley. If a firm is within a 20-minute drive from the VC firm, they are likelier to get funded compared to a similar idea from a far away firm. Cities offer thicker markets ensuring better matches between workers, firms, and consumers. As Moretti notes, this reduces the probability that a worker remains unemployed due to presence of multiple employers and firms can fill up any vacancies that exist due to a large and highly competitive labor pool. As Glaeser notes, people become more productive, and we are surrounded by a plethora of economic activity. People respond best to incentives. A city forces people to notice their peers and how they are being rewarded. The move to a city is in search for a better life and seeing people with higher incomes and rewards makes you work harder and smarter and boosts overall productivity.

Cities are also places where women have a greater voice. They are away from oppressive gender norms and can step outside the home and have greater financial independence and freedom.

There has been conversation around cities perpetuating poverty. However, even as cities are increasing in size and becoming common, slums are home to a smaller percentage of the urban population than ever before. Reasons for this include role of public policy that speed up transition to public housing, those that discourage slums through draconian measures, amongst others. Cities are good places for the rich to be due to their access to amenities they can spend on to fulfill their idea of a good life, and they are a good place for the poor due to a better functioning safety net for employment. This is to say, “cities don’t make people poor; cities attract poor people.” Research done by Professor Raj Chetty of Harvard University has shown the positive impact of cities. They note that living in lower-poverty areas (cities) increases a child’s earnings in adulthood. Therefore, urbanization can boost economic growth through a direct channel of rise in income and reduce poverty. 

The oldest know cities date back to 7500 BCE in the Mesopotamia region. India has some really old cities like Varanasi which is over 3,000 years old. Most of the cities of yore grew around riverbanks not far from agricultural centres. With the advent of agriculture, there arose a need for trade and exchange of surplus. There was accumulation of wealth that needed to be protected. A city lends itself to these in ways a sparsely populated village cannot. Then came rest houses and transit towns along trade routes as people started traveling further, buying in one place, and selling in another. Towns and cities also came up near sources of raw material for producing different goods. And then for a king to raise an army and protect his kingdom. More recently, countries have built new cities over time for reasons like creating a new capital and around large factories or mines. 

The idea of building a whole new city by a private builder is relatively new and successful examples are hard to come by. While firms may invest due to ample availability of land, the workers require housing and services to help them survive. Unless there are workmen, no one will invest in land and building in an entirely new town. And workers will not move into a new town unless there are several opportunities for employment in that town. This becomes a catch 22 situation. Developers require incentives to build in an unknown place and these incentives can be at variance with the interests of the local population and the environment. Let us look at the case of Lavasa and how the clash with environment groups, the slow pace of progress and lack of new job opportunities drove the town into bankruptcy.

The successful examples of new cities in the recent past have all been ones where countries and local government bodies built a new capital and shifted the government to the new city. The government represents a large employment opportunity and brings with it a whole host of other service providers, schools, colleges and what not. This then attracts other industries to set up shop in the new capital and the new capital with its more modern planning and infrastructure is suddenly a very attractive investment location. Nitin Pai in a podcast on All Things Policy recommended building new capitals for all our states. I go further and suggest we create new states and build even more new capitals. We have a huge shortage of good ports in our country and building better and new ports as envisaged by the union government’s plan could help in developing the cities around these ports.

So, what are we proposing? We want the government to invest in building new cities that can become a way to create new jobs. These could be by moving existing state capitals that have all become quite unlivable to new locations and by building attractive cities adjacent to the  new ports. We also suggest that we pursue and identify states that can split into smaller states and create new capitals there as well. The investment that will be made will reap benefits by creating a virtuous cycle: creating opportunities for more and more people, inducing more firms to cluster in and around the city, create an ecosystem of sustainable growth and push for better governance and great economic prosperity.