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Ways To Enable Cities As Drivers Of Economic Development

Cities are the epicentre of economic growth and development

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Economic growth by enabling cities
The path to higher growth for an economy like India should be through its urban areas. Pixabay

Economic development always comes with a dash of urbanization. That is almost an economic truism. Empirical studies have shown that nearly all countries that have attained middle-income status were urbanized by at least 50 per cent, and all high-income countries were at 70 to 80 per cent level of urbanization. The causal factor is the people that are attracted towards cities as urban areas are hubs of activity and growth. The concentration of talent in urban areas drives productivity and spurs job creation and growth. This explains the strong linkage between urbanisation and growth of economies as a whole.

The view that cities are the epicentre of economic growth is supported by the fact that with only 50 per cent of the world population, cities generate more than 80 per cent of the global Gross Domestic Product (GDP). As a result, the composition of cities is such that they are home to a greater number of young and working-age population relative to rural areas, which makes these regions critical for capturing the demographic dividend. Thus, cities in the developing world should be the focus of growth strategy due to their economic size, population composition, and innovative edge.

So, the path to higher growth for an economy like India should be through its urban areas. It must be noted, however, that India has had a curious trend in urbanisation. As per the 2011 Census, 31 per cent of India was urbanised. This is projected to be at 34 per cent by the World Bank currently. By contrast, about 55 per cent of the world has urbanised on an average. Indian urbanisation trends have been slow with an annual growth rate of 2.76 per cent between 2001 and 2011. In fact, the rate of urbanisation in the first decade of the new millennium has been slower than most of the second half of the previous century when urbanisation grew in excess of 3 per cent annually until the 1990s.

growth and development through enabling cities
The path to higher growth for an economy like India should be through its urban areas. Pixabay

These figures show that India is not urbanising at a growing pace as is often argued. Also, in what the World Bank has termed “messy”, the physical space occupied by Indian cities is growing much faster than the population growth in these areas. Satellite analysis of night lights in South Asian cities shows that urban areas are expanding at the rate that was slightly more than 5 per cent annually while the population growth in them has been a little less than 2.5 per cent per year. This curious trend can be a reflection of the growth of slums and sprawl in the periphery of cities. Thus, it can be argued that urbanisation in India and the manner in which it is taking place has immense scope for improvement.

On the other hand, as more and more Indians migrate to urban areas with aspirations of a better quality of life and opportunities, it becomes increasingly challenging to meet those demands. Growing urbanisation brings with it severe stress on the city infrastructure, basic services, housing, land use and environment. The inability to meet these challenges constrains the potential of cities to gain from the agglomeration economies as productivity is severely hampered. A range of policy issues needs to be addressed to remedy these regional issues facing India as they can unlock immense growth potential for the country.

First, at times there is little clarity on the responsible body of governance for urban areas. The Census differentiates between statutory towns and census towns. While the latter are governed by municipalities, census towns, which are areas that have a minimum population of 5,000, at least three-fourths of its male population engaged in non-agricultural activities, and have a population density of at least 400 per square kilometre, are classified as urban areas but are considered rural for all other matters, especially governance. This results in a chaotic development of urbanisation. India had almost 4,000 census towns as of 2011.

growth and development through enabling cities
Urbanization as a driver of economic growth and development. Pixabay

Second, India still lacks devolution of power to local areas despite having decades of constitutional ability to do so. The 74th Constitutional Amendment of 1992 gave the state governments power to transfer a set of 18 municipal functions to urban local governments as they have a greater knowledge of service delivery at the local level. However, most of the states have refrained from devolving all of these powers to local governments. Town planning, for instance, still rests with a lot of states. It is problematic for urban local bodies to be accountable to the people but not having the power to deliver services to them.

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Finally, to add to the constraints of local governments, the introduction of GST has limited their source of fiscal revenue as taxes like octroi and local body tax were subsumed within it. This imposed a heavy strain on the functioning of local bodies as they had relied heavily on revenue from these sources. The GST revenue, thus, should have been shared with local bodies as well. This has not been done; severely limiting the ability of urban local bodies to implement development plans and provide services. India needs to address these issues facing its urban economies to access the full potential that they present for being drivers of economic growth. (IANS)

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Time to Rethink Global Economic Integration As Fears of Recession Grows

Increasing fears of a global recession invites debate on Global Economic Integration

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recession
Typically, sovereign debt issued by a major industrialized nation is viewed as a very safe asset. Pixabay

Fears of a global recession mounted this week, as a host of factors combined to send investors retreating to the safest havens they could find and forced policymakers to make plans to counteract a possible global economic slowdown.

The issues giving everyone pause are numerous and are largely interconnected. Looming over everything is the United States’ aggressive stance on trade with China, which has devolved into a trade war with global implications.

The Chinese and U.S. economies, which between them account for a major share of global economic production, are both suffering. Additionally, Germany, which counts on China as a major importer of its manufactured goods, saw its economy shrink in the second quarter of the year. Meanwhile, Britain stands on the brink of a disorderly exit from the European Union, with unknowable — but likely dire — economic consequences, and markets are nervous about another volley of tariff threats from President Donald Trump that would hit German cars and French wine, among other things.

Recession Fears
Looming over everything is the United States’ aggressive stance on trade with China, which has devolved into a trade war with global implications. Pixabay

Larger question

While these may all seem only tangentially related, each of the different factors currently troubling the global economy is part of a larger question that economist Nicolas Véron, a senior fellow at the Peterson Institute for International Economics in Washington, says everyone is currently trying to answer: “Is global economic integration as we have known it over the last few decades sustainable?”

Recent years have seen an unprecedented intertwining of global supply chains in manufacturing, retail and agriculture. Now, investors are asking themselves whether leaders of some of the world’s largest economies, Trump chief among them, are really going to try to pull those relationships apart, and what will happen if they succeed.

“Is the trade war a real thing, or is it going to peter out? Is the U.S. really going to decouple from China? These are big questions associated with apparent change of direction of U.S. policy with the Trump administration mostly, but are echoing various strands of economic nationalism in other places in the world,” said Véron.

The current uncertainty may be adding to the problems that a major realignment of global trade policies would create.

recession
The current uncertainty may be adding to the problems that a major realignment of global trade policies would create. Pixabay

Across the globe, many investors are so spooked about the future that they are literally paying the governments of economically powerful countries to hold their money for them. Typically, sovereign debt issued by a major industrialized nation is viewed as a very safe asset. That’s why governments — particularly the United States, but also Germany, Britain, Japan and others — can borrow money at very low-interest rates.

However, over the past several weeks, the yield on many government bonds has turned negative, meaning that purchasers agree in advance to suffer a loss, presumably because they expect that they would lose even more in any alternative investment. Early this month, a Deutsche Bank analysis determined that 25% of current government bonds around the world now offer a negative yield, three times the percentage in October 2018.

This is bad news for multiple reasons, not least of all because it means that money that might have been invested in growing businesses is instead tied up in government bonds.

Bond market warning 

Another negative signal from the bond market appeared in the U.S. this week when the price of two-year Treasury notes rose above the price of 10-year notes.

That phenomenon, known as an inverted yield curve, occurs when short-term investments in Treasurys pay more than the long-term kind. If that sounds economically nonsensical, that’s because it is. Lending for 10 years is riskier than lending for two years and ought to command a higher rate of return.

Inverted yield curves are driven by many factors. These include investor panic, but there are systemic issues at work as well, such as large investment funds that are required by their promises to investors to keep a certain percentage of their holdings in bonds — even when doing do requires them to overpay.

Whatever the ultimate cause, inverted yield curves have preceded every recession in the U.S. for the past 50 years, though often the inversion and the onset of the following recession were separated by as much as 18 months.

The increasing possibility of a recession in the U.S., particularly with an election year looming, has drawn mixed reactions from the Trump administration. While administration spokespeople continue to insist that the economy is strong and getting stronger, the president himself seems to be preparing for the possibility of recession by preemptively deflecting blame from himself.

A television monitor on the floor of the New York Stock Exchange headlines a rate decision of the Federal Reserve, in New York, July 31, 2019.
A television monitor on the floor of the New York Stock Exchange headlines a rate decision of the Federal Reserve, in New York, July 31, 2019. VOA

Pointing toward Federal Reserve

Trump has suggested that any downturn in the economy will be the responsibility of the Federal Reserve, which sets interest rates. Trump has consistently criticized the central bank for slowly increasing rates over the past few years, accusing the Fed of hampering economic growth.

Even after a quarter-point cut last month, which left the rate target in a range of just 2% to 2.25%, Trump called for an immediate additional cut to forestall the possibility of a recession.

However, there is sometimes only so much policymakers can do. Economies move in cycles, and those cycles inevitably include periods of recession.

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“The U.S. has its own cycle,” said Véron, of the Peterson Institute, and that cycle is separate from those of other countries. However, the U.S. is now in the longest economic expansion in its history, and factors like the yield curve inversion suggest that it may be reaching its end.

“There is an indication that we’re at the late stage of an expansion,” he said, “but that doesn’t necessarily mean it ends tomorrow.” (VOA)