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Megacities and Megaproblems |
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The year 2008 represents a
turning point in human development, according to a recent UN report. For
the first time, the majority of the world's population will live in
cities, as opposed to rural areas. |
Cities are all about economies
of scale. Successful cities are centers of entrepreneurship and innovation
that attract talented and skilled workers and foster greater productivity and
growth. The considerable combined spending power of a city's population
encourages markets and choice, making cities exciting places in which to live.
But, as cities grow bigger and
develop into megacities—those with more than 10 million people—they can also
develop megaproblems. The concentration of population, which partly accounts
for a metropolitan area's dynamism, also causes congestion, environmental
degradation, housing shortages, and the formation of ghettos. And governance
of a sprawling metropolitan area can become complex and difficult.
With the growth of
megacities—whether from migration, growth of the existing population, or
reclassification of populated rural areas as urban—difficulties related to
overall infrastructure planning and the provision of adequate services become
more pronounced. Overlapping and blurred spending responsibilities and
inadequate revenues controlled directly by a city may limit the extent to
which city administrations can be held accountable for their decisions. The
absence of timely information on city finances compounds the accountability
problem, often creating macroeconomic difficulties as well as potential
political economy dilemmas. For example, in many cases, capital cities wield
excessive political power, creating tensions with surrounding neighborhoods.
Take the Bolivian capital of La Paz. Although La Paz is not a megacity, the
tensions are evident between it and the adjoining municipality of El Alto,
which has had the power to paralyze the seat of government through strikes and
protests.
Megacities tend to have not
only greater spending needs but also greater potential revenue bases and human
capital than other cities. Thus, it might make sense for them to have greater
spending responsibilities and be assigned more rights to raise financing than
other similar lower levels of government. This is known as asymmetric
federalism.
This article examines some of
the asymmetries in assignments and political power between megacities and
other geographical areas of a country, the fiscal challenges that arise with
the growth of large metropolitan areas, and possible modifications that might
be needed in fiscal institutions and policies to address improvements in
public services as well as urban poverty and inequality.
Power
and the city: The
year 2008 represents a turning point in human development, according to a
recent UN report. For the first time, the majority of the world's population
will live in cities, as opposed to rural areas. By 2030, the proportion of the
urban population will have increased to more than two-thirds of all the people
in the world. Although the proportion of the population in megacities is still
relatively small, it is growing, This huge shift toward megacities creates its
own challenges of governability and fiscal responsibility.
With many megacities facing
large environmental and social difficulties, the governability of these
agglomerations represents one of the key challenges of the new millennium. It
is unlikely that central governments will be able to effectively manage the
planning and resources needed for such areas. Should these cities be granted
greater spending and revenue-raising responsibilities than other
municipalities?
Different countries have come
up with different types of devolved powers for megacities. Megacities in Asia
and Latin America have more political and economic powers than municipalities.
In some cases, they are assigned the functions and responsibilities of states
or provinces, in addition to their purely municipal functions, whereas in
other cases, fewer powers are devolved, or responsibilities remain unclear.
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In many countries,
particularly in Latin America, different levels of government operate
with overlapping responsibilities, even for functions that might be
considered appropriately local in other parts of the world. |
Strong
devolution: In
China, megacities such as Beijing and Shanghai have dual status—with municipal
functions and responsibilities in addition to those of provinces. This
asymmetric treatment also recognizes the political power that Shanghai wields,
for example, in relation to other provinces or states. Hong Kong SAR has even
more autonomy over both spending and revenue raising, although this was
largely part of the "one country, two systems" political settlement agreed to
with the United Kingdom for the return of Hong Kong to Chinese rule in 1997.
Such
asymmetric arrangements facilitate the implementation of distinct social
policies and public investment that have led to rapid and impressive growth in
these megacities. While Hong Kong SAR is a good model for other megacities in
China—especially in terms of asymmetric responsibilities—the Chinese
authorities need to ensure that overall borrowing by the megacities is
coordinated with overall macroeconomic objectives. Thus, the focus should be
to further clarify spending responsibilities and provide appropriate
incentives and transparency needed for accountability in Chinese megacities.
Partial devolution:
In Latin America, the Colombian capital of Bogotá presents an interesting
experiment, where a combination of measures have resulted in significantly
improved public service delivery in the metropolis. This combination of
measures includes the granting of additional powers to the capital (through a
special organic statute approved in the 1990s); election of the city
mayor—resulting in some dynamic leaders (such as Jaime Castro, 1992–94, and
Antanas Mockus, 1995–97 and 2001–03); and the strengthening of the city's
finances, with increased efficiency in tax collections and transparency in
spending. Adopting these measures has partially offset the perennial
difficulty created by the overlapping of responsibilities of Colombian
subnational governments.
Little
devolution: In
contrast to Bogotá, a more typical example of the implementation of asymmetric
power is Mexico City—the world's second largest city after Tokyo-Yokohama,
with a population exceeding 19 million. It has achieved megacity status
largely through inward migration (Graizbord and Santillán, 2005). However,
spending functions remain unclear, and the ability to raise local revenues is
as limited as those of other municipalities.
Although Mexico City generates more property tax revenues than any other
metropolitan area in the country, collections are lower than they might be for
other emerging market and advanced countries. And some of the key local
functions, such as education and health care, continue to be directed by the
federal government through special-purpose transfers. Similarly, the main
social safety nets, such as "Progresa/Oportunidades" and key education and
health spending programs, remain federal with direct provision, or are funded
largely by the federal government. Thus, the asymmetric responsibilities and
resources that might be possible for a more effective provision of public
services in Mexico City have yet to be realized or even considered. Other
Mexican states and cities, with limited own-source revenues, are even more
dependent on transfers.
Devolution, plus clear separation of functions:
The clarification and separation of functions—needed for greater
accountability and good governance—remain high on the list of policy
priorities in advanced and developing countries alike.
A good example of the
interplay of megacity administration and political power is London, with
"megacity" functions separated from purely local-level activities. The Greater
London Council (GLC) was established under a Labour government in 1965 and had
significant powers over public service delivery. The Conservative government
abolished the GLC in the mid-1980s; some functions were devolved to
metropolitan boroughs, and others were taken back by the center. The
government of Tony Blair reintroduced the GLC, but gave it more of a strategic
and coordination role, including for transport, policing, emergency planning,
and development functions. Thus, functions needing coordination at the
metropolitan level were distinguished from the purely local functions of
primary schooling and basic services, which remain at the borough level.
In other countries, capitals
have been moved from major cities, such as Rio de Janeiro, Karachi, and Lagos,
partly to insulate the central governments from vested interests of the
metropolis. Other objectives included opening up the hinterland (Brasilia) and
reinforcing security (Islamabad).
Responsibility and accountability:
It is clear that there is a direct
interplay between the responsibilities of the megacities and the political
power that they wield. Establishing their responsibilities together with
accountability appears to be the most promising avenue for effective service
delivery and poverty reduction. But how is this greater accountability to be
achieved?
A key element in achieving
greater accountability is to clarify which level of government is responsible
for a given function. In many countries, particularly in Latin America,
different levels of government operate with overlapping responsibilities, even
for functions that might be considered appropriately local in other parts of
the world.
One example is primary
education. In several Andean countries, municipalities are responsible only
for operations and maintenance expenditures for schools and, in one country,
certification of hours worked. The hiring of teachers is often handled by the
intermediate tier of administration, acting on behalf of the center, and
payment of salaries is typically a central government function. In such cases,
no level of administration could reasonably be held responsible for primary
education outcomes. This is an example of incomplete decentralization and
overlapping responsibilities.
The megacity must have access
to significant own-source revenue at the margin. This allows it to raise
additional moneys for its own priorities and not depend on the center to make
financing available through transfers, which are often earmarked for
particular central objectives. This access to own-source revenues is critical
in ensuring a hard budget constraint at the megacity level and would also help
to ensure that city borrowing and investment decisions do not create
difficulties for the central government.
Spending and performance:
Clarifying and simplifying the
responsibilities of different levels of government, particularly on the
spending side, is at the center of the policy dialogue in many parts of the
world, including China, some countries in the Organization for Economic
Cooperation and Development, and the Andean cases mentioned above. These
efforts are increasingly being supplemented through the use of contracts for
the delivery of certain outcomes. Making budget recipients responsible for
policy outcomes has come to be known as "performance budgeting."
Performance budgeting is
useful because it clarifies the outcomes that city administrations or spending
agencies can be held accountable for—with or without explicit contracts.
However, accountability requires that such outcomes be first specified,
costed, and then monitored. This also puts a premium on transparency in the
generation and use of public funds—and most subnational governments may be at
a disadvantage in this context because resources and capabilities are
generally constrained. Even for central governments, the introduction of
performance budgeting requires careful planning and takes time to implement.
But megacities may have
built-in advantages. Capacity constraints are often not a problem because
megacities have no dearth of workers and talent. In addition, with a flexible
and accountable political framework, it might be easier to introduce changes
in administration, management, and information systems at the megacity level
than at the central or federal government level. This was the case in Bogotá,
where the Mockus administration stressed efficient, responsible, and
transparent management of public funds and the need for the administration to
be held accountable. Since 2000, the city has been able to implement a
results-based budget—something well beyond what the federal government is
currently able to do (Fainboim, forthcoming).
Megacities could create an
infrastructure for managing public finances that is capable of handling more
significant functions than might be possible in smaller municipalities. For
instance, the city of São Paulo has a more advanced government financial
information management system than the government of Brazil.
To create such an
infrastructure, information flows are critical. Full and standardized
information about government functions and the economy, as well as programs
and projects, is required to obtain full costing of outputs and, eventually,
outcomes. The IMF's Government Finance Statistics Manual 2001 provides
the internationally accepted standards for the economic and functional budget
classifications. This information should provide governments at all levels, as
well as legislators and the public, with details on how much has been spent
and for which purposes.
Tapping revenues:
In general, megacities tend to have
significant revenue bases, some of which may be shared with central
governments. They also have the potential to set up modern revenue
administrations, given economies of scale, that could match or even exceed
national standards.
On the taxation front, there
is often some room for improvement in local property taxation to give the
local authority adequate own-source revenue at the margin. For instance, the
Mockus administration in Bogotá made significant advances in its collection of
property tax revenues by using the modern principle of self-assessment,
subject to greater reliance on market-based valuation techniques.
Property taxation may not be
sufficient to provide significant own-source revenues if wider
responsibilities are to be assumed. Mexico City, for example, collects 40
percent of the country's total property taxes but would need additional
revenues if more functions were devolved. Mexico City has considerable
potential for additional own-source revenues, such as surcharges on the
value-added tax or income taxes, which have been proposed at various times.
However, it has not felt the need to impose these taxes, given the weight and
incentives in the system of transfers and its current responsibilities.
Megacities can also secure
financing by borrowing. Together with the necessary revenue sources and public
financial management infrastructure, megacities tend to have other conditions
that might also permit an asymmetric approach to borrowing. They include the
operation of credit agencies and information on government operations that
would facilitate borrowing for likely infrastructure needs.
However, it is important that
prudential limits be respected and that information on borrowing and risks
from operations, including public-private partnerships, be properly recognized
and recorded. Although market discipline is desirable and should be
encouraged, there may be a need for a combination of instruments that include
fiscal rules and administrative constraints, along with market discipline
(Ter-Minassian and Craig, 1997). In most developing countries, the overall
macroeconomic implications of significant subnational borrowing have to be
kept in mind. For example, subnational debt crises in Argentina and Brazil in
the late 1990s exacerbated the macroeconomic imbalances in both countries.
Accountable devolution:
The trend toward larger urban
agglomerations and the creation of megacities poses particular challenges for
public policy and poverty reduction. Megacities increase pressures and risks,
but these are counterbalanced by the dynamism and additional resources of the
metropolis.
The need for strategic vision
in megacities, particularly for overall infrastructural planning and its
financing, suggests some need for accountable decision making in those cities.
But decision-making authority can become remote from many citizens' local
concerns, and the large spending needs of megacities create major fiscal
challenges. At the same time, national goals—such as a demand for regional
equity and maintenance of macroeconomic stability—might force metropolitan
regions to contribute financially to the rest of the country or limit
borrowing and investment plans to be consistent with a sustainable
macroeconomic stance for the whole country.
Both national governments and
megacities can secure potential benefits by exploring the devolution of
clearly defined responsibilities that, together with the ability to generate
additional own-source revenues, provide incentives for good governance. The
degree of devolution of fiscal responsibility will vary from country to
country and often reflects the existing political and institutional balance of
power. However, standardized information flows and transparency remain
critical for accountability, as well as for maintaining overall macroeconomic
stability. A number of megacities have begun assuming asymmetric
responsibilities, but there is clearly room to learn from the experiences of
others and to develop appropriate measures and strategies—whether in Asia,
Africa, or Latin America. |
