The fast-growing cities of the developing world would benefit from a major overhaul in governance structure, to improve the financing and delivery of essential services, according to a report published by the Lincoln Institute of Land Policy. Governing and Financing Cities in the Developing World, by Roy W. Bahl and Johannes F. Linn, examines more than 50 cities in the developing world in the midst of the rapid urbanization that has become typical in those metropolitan areas. The authors recommend a new relationship between major cities and national governments that combines autonomy and national fiscal planning.
“After decades of neglect, due in large part to the lack of effective political pressure on national, provincial, and local authorities, the stars may now align in favor of a metropolitan strategy for many cities in the developing world,” the authors write. “With the increase in urban population, the metropolitan area constituency is growing in political power and may be, more than ever, in a position to sway votes. Moreover, the opportunities and the challenges of metropolitan cities are likely to become great and evident enough to force themselves onto the policy agenda of the governments around the world.”
Big cities generate the most dynamic economic development, the strongest links to the global economy, and the resources to help poorer countries become more competitive and prosperous. However, the same advantages that drive investment and growth in these areas also draw migrants who need jobs and housing, lead to demands for better infrastructure and social services, and result in increased congestion, environmental damage, and social problems.
Governments in developing countries face two key challenges: how to capture a share of the economic growth to finance the needed expenditures, and how to manage cities so that the urban economy functions efficiently, services are delivered cost-effectively to all, and citizens have a voice in governing the city.
Governing and Financing Cities in the Developing World, the latest Policy Focus Report published by the Lincoln Institute, identifies the critical issues and describes current practice, the gap between practice and theory, and potential paths to reform. The authors identify two fundamental challenges: how to manage complex vertical and horizontal urban governance structures, and how to raise the finances to promote efficient, equitable, and sustainable metropolitan growth. The report explores local revenue instruments, with a focus on property-based local taxes and user charges, as well as external revenue sources such as intergovernmental transfers, borrowing, public-private partnerships, and international assistance.
Among the conclusions drawn from prevailing practice:
• Industrial countries and developing countries have different patterns. While allowing for significant outliers, developing country governments overall tend to be more centralized; their metropolitan areas tend to be more fragmented; their cities are less self-financing and, hence, more reliant on transfers; they borrow less and have fewer PPPs; and they rely more on external aid financing, especially in the poorest countries. There does not appear to be a significant movement away from these distinctions.
• There are few lasting, overall success stories of metropolitan governance and finance in developing countries. Hong Kong and Singapore have had tremendous and sustained success, but they are special cases due in part to their status as city-states. Bogotá and Shanghai have also become successful cities in recent decades, but they also demonstrate how ephemeral success can be, as significant problems now confront both cities due to changes in city management (Bogotá) or a buildup of legacy issues, including congestion and pollution (Shanghai).
• Too few central governments have clear strategies for supporting the development of the metropolitan areas in their countries. With few exceptions (e.g., cases of new capital cities, such as Astana, Kazakhstan), national-level authorities do not focus on developing visions and strategies for their metropolitan areas; rather, they deal with them in an often-undifferentiated manner from other local or regional jurisdictions. They do not coordinate across functional ministries that are involved in metro-area services, regulation, and taxation, and they rarely see their function as one of supporting—rather than controlling—the local authorities in their difficult task of managing the complex and challenging metropolitan dynamics.
• Political economy is at the heart of the metropolitan finance problems in both developing and industrial countries. Entrenched interests preserve the status quo; short-term time horizons and misaligned incentives result in putting off difficult decisions; and corruption in and around government undermines effective public service provision and financing. As a result, central governments do not want to give up control and create political competition at the metropolitan level; metropolitan managers do not want to introduce unpopular but essential local revenue measures; competition among sub-metropolitan jurisdictions prevents effective coordination; and local managers are not held accountable for managing effectively the limited functions they have.
• Some innovative financing and management practices have emerged. These include the use of information and communications technology (ICT) and geographic information systems (GIS) in land use planning and property taxation; land value capture; metropolitan bond issues; municipal development funds for channeling grant and loan finance together with capacity-building assistance; and PPPs in infrastructure finance and alliances in slum improvement.
Clearly there are no blueprints, silver bullets, or universal solutions for metropolitan governance and finance reform. What might the future metropolitan areas look like in terms of the prevailing governance and financing patterns if they evolve in appropriate directions? Broadly speaking, the typical metro area in the mid-twenty-first century would have the following four key characteristics:
• Authority would be decentralized and governance consolidated at the metropolitan level, with metropolitan governments exercising a great deal of control over function, finance, and functionaries in a way that aligns autonomy, accountability, and capacity.
• Metropolitan areas would be largely self-financing, relying on a combination of well-designed and well-administered property taxes, nonproperty taxes, and user charges to ensure that urban citizens pay for the costs the city incurs on their behalf.
• Metros would finance their large capital investment needs by well-regulated borrowing or rely on public-private partnerships to bring finance and management discipline.
• Metros would rely on grants only to a limited extent; these would be performance-based, competitive, and asymmetrical with nonmetropolitan areas.
Governing and Financing Cities in the Developing World, the Lincoln Institute’s most recent Policy Focus Report, was preceded by the book Financing Metropolitan Governments in Developing Countries, by Bahl, Linn, and Deborah L. Wetzel, country director for Brazil at the World Bank. The research has been the basis for a webinar series on governance and finance produced by the World Bank.
About the Authors: Roy W. Bahl is Regents Professor of Economics, emeritus, and founding dean of the Andrew Young School of Policy Studies at Georgia State University. He is the author of numerous books and papers on taxation and financing local governments, and he has worked extensively as an advisor to governments in the United States and in countries around the world. Johannes F. Linn is a resident senior scholar at the Emerging Markets Forum in Washington, DC, and a nonresident senior fellow at the Brookings Institution. Prior to joining Brookings, he worked for three decades at the World Bank in various capacities, including as the Bank’s vice president for financial policy and resource mobilization, and as vice president for Europe and Central Asia.
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