Breaking into Tradables: Urban form and urban function in a developing city

December 14 2016

Many cities in developing economies, particularly in Africa, are experiencing ‘urbanisation without industrialisation’. This paper conceptualises this in a framework in which a city can produce non-tradable goods and – if it is sufficiently competitive – also internationally tradable goods, potentially subject to increasing returns to scale. The city may get locked into non-tradable production for three distinct reasons. One is high demand for non-tradables, arising if the city receives income from other sources (such as natural resource rents), creating an urban Dutch disease. A second is coordination failure amongst potential producers of tradable goods. A third arises from the way in which the city is built. In a two-period model with sunk construction costs, expectations about second period outcomes shape construction decisions, which in turn shape the competitiveness of the city. There may be two (perfect foresight) equilibria. One in which land values are relatively low, little is invested in buildings, and the city is too low density and too high cost to attract tradable production. The other in which land values are high, the city is built taller and denser and is able to accommodate more workers and attract tradable production; this, in turn, generates the employment and income to support high land values. The former configuration is consistent with the ‘urbanisation without industrialisation’ experience of many African cities. 

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Tony Venables is Professor of Economics at the University of Oxford where he also directs the Centre for the Analysis of Resource Rich Economies. He has published extensively in the areas of international trade and spatial economics, including work on trade and imperfect competition, economic integration, multinational firms, and economic geography.