Big, or too Big?

AuthorEhtisham Ahmad
PositionAdvisor in the IMF's Fiscal Affairs Department
Pages20-23

    Megacities create special issues of governance, funding, and provision of services


Page 20

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 mega-problems. 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 (see Congleton, 2006).

This article examines some of the asymmetries in assignments and political power between mega-cities 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 pro-Page 21portion 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.

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...

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