Opinion

Urbanisation and leveraging Economies of Agglomeration

17 Dec 2015 - {{hitsCtrl.values.hits}}

Agglomeration economies can be either ‘localisation economies’ or ‘urbanisation economies’

The urban population of Sri Lanka has reached, over the past few decades, a staggering 48% of the total population of the country in real terms, in contrast to the official statistics which place the figure at around 18%.

While the former figure is based on the ‘Agglomeration Index’, a multi-dimensional measure of the geographic concentration of urban population (which is usually verifiable with satellite imagery of night-time lighting), widely used by the World Bank and other development agencies, the latter simply indicates the percentage of population living within the administrative boundaries of municipal and urban councils,thus excluding the extensive number of townships and settlements that have grown rapidly to become largely and truly urban in character.

This situation, referred to as “hidden urbanisation” in policy studies, has led to urban townships such as Homagama, Beruwala, and Weligama etc to be ‘hidden’ within Pradeshiya Sabha limits,when it comes to official statistics.

Be the statistics as it may, the vital policy imperative being emphasised here is on the role of cities, or more generally, the role of urbanisation in promoting economic development, and its potential for promoting prosperity and livability. Achieving this end obviously needs effective strategies to address the often severe stresses being brought about by growing urban populations on urban infrastructure, basic urban amenities and services, land use, housing, and the environment.

The theory that urbanisation spurs economic growth has been found to hold true for a multitude of diverse situations. Urbanisation-experience of different regions in the world, spanning from the late nineteenth century experience of Europe and North America to that of the South East and the East Asia during the past few decades, stands in strong support of the theory. However, the recent phase of urbanisation in the South Asian region, in general, has failed to show such strong positive correlation, according to a recent World Bank study. The measure of comparison that has been adopted is the difference between each region’s share of global GDP and its share of global urban population. While this figure remains positive for North America, Europe & Central Asia, the Middle East & North Africa, it assumes a negative value for the rest of the regions, being most negative for the South Asian region.

Despite this sub-optimal economic performance of the urban areas in the South Asian region, the vital fact being nevertheless underscored therein is the vast potential for large gains in economic productivity that is yet to be realised by leveraging the benefits of urbanisation and consequent agglomeration of both people and enterprises in the towns and cities in the region.

The nexus between urbanisation and economic productivity is explained on the basis of ‘agglomeration economies’, which are the benefits that firms and workers experience from one another as they cluster together, by way of improved productivity and enhanced job creation, specifically in manufacturing and services.

Towards this end, the comparative urbanisation statistics of Sri Lanka appear encouraging. Sri Lanka has largely eradicated ‘extreme urban poverty’, rapidly reducing urban poverty from7.9 per cent in 2002 to about 2 per cent in 2013. The proportion of urban populations living in slums is estimated below 3% in contrast to the rest of South Asia, where the figures range from 17.1% in India to 88.6% in Afghanistan. This means that the cities in Sri Lanka, in relative terms, are better positioned in both livability and economic performance, and therefore have the potential of being transformed into productive cities with relative ease.This demonstrates far greater potential and readiness of the country to translate the economies of agglomeration into tangible gains in economic productivity,under effective strategic interventions.

The operation of agglomeration economies resulting from urbanisation merits a brief explanation here.Agglomeration economies can be either ‘localisation economies’ or ‘urbanisation economies’. Localisation economies are the productivity and cost advantages that firms in the same industry derive from locating close to one another, while urbanisation economies are the productivity advantages that firms in different industries derive from locating in the same urban area. Further, Agglomeration economies also arise from the lower fixed costs of new urban infrastructure and basic urban services and amenities.

It is an established fact that the exploitation of the economies of agglomeration brought about by urbanisation could not only enhance the economic productivity and livability of cities, spurring further urbanisation and growth, but also could bring about substantial growth outside urban areas. However, the essential pre-condition for effective leveraging of the economies of agglomeration for greater prosperity and livability in cities is to effectively address the congestion pressures that are necessarily associated with urbanisation. These include meeting the demands of urban infrastructure, urban amenities and services including housing, transport, education, healthcare, solid waste management, environmental management, and also building resilience against natural disasters and climate change.

Obviously, one significant reason why the country has not so far managed to realise the potential productivity gains from urbanisation is that the process of urbanisation has been substantially messy and hidden. Messy urbanization is resulting from the existence of slums and shanties, while unplanned urbanisation taking place in the peripheries of the cities, a phenomenon commonly known as urban sprawl, results in hidden urbanisation.The extent of messy and hidden urbanisation often reflects the inadequacy of the existing measures to address congestion constraints that are necessarily attendant with urbanization. So, what should be the strategic direction for Sri Lanka in order to leverage the potential of urbanisation in realizing our economic growth targets of ‘upper- middle- income country’ status, and then high- income status? Obviously, the strategic road map would necessarily involve both a major spatial transformation as well as an attendant structural transformation of national economic activities.

The spatial transformation will indeed be spear-headed by development of the entire Western region as a single Megapolis. This is to be followed by development of the Southern agglomeration that has emerged in the Galle – Matara belt, and is already connected to the Western Megapolis by the Southern Expressway, and then the development of the agglomeration around Kandy which would be connected to the Western Megapolis through Central Expressway.

Subsequent development of the agglomerations emerging in Trincomalee, Anuradhapura and Jaffna are to be provided with improved connectivity.The structural transformation that will occur in parallel would necessarily see an enhancement of the manufacturing sector as well as the services sector, with higher value addition and increased exports.

Leveraging the economies of agglomeration offered by the Western Megapolis as well as other emerging multi-city and single-city agglomerations for enhanced economic productivity, while effectively addressing the pressures of urban congestion, will certainly form the cornerstone of the nation’s grand strategy for achieving the status of a ‘higher income country’ in the long run.

Opinion

Urbanisation and leveraging Economies of Agglomeration

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