April 14, 2023
10 am-12:30 pm
Hybrid Virtual and In-Person Meeting
|Time||Activity / Topic|
|9:45 am||Webex Conference Line Opens|
|10 am-10:20 am||Welcoming Remarks
Alice Albright, CEO, Millennium Challenge Corporation
Overview of Meeting and MCC response to EAC recommendations from previous EAC meetings
Arif Mamun, Managing Director, Economic Analysis
Nomination and Selection of EAC Chair
Mesbah Motamed, Designated Federal Officer
|10:20 am-12:00 pm||MCC Investments in Urban Settings
|12:00-12:15 pm||Suggestions from EAC members for future topic discussions|
|12:15-12:20 pm||Administrative Next Steps
|12:20-12:30 pm||Opportunity for Public Comment|
|12:30 pm||Meeting Adjourns|
Welcoming Remarks, Overview of Meeting, and MCC Response to EAC Recommendations
Following the call to order, Alice Albright, MCC Chief Executive Office, offered welcoming and introductory remarks, including a remembrance of former EAC member Martin Ravallion. MCC Managing Director Arif Mamun described how MCC has continued to reflect on and incorporate EAC inputs across a range of topics covered in previous meetings and offered introductory comments on the meeting’s topic of urbanization.
Selection of EAC Chair
Designated Federal Officer Mesbah Motamed called for nominations for the EAC Chair. Shanta Devarajan was nominated and assumed the role of EAC chair for the 2023-2024 period. Following remarks on the EAC’s role in support of MCC’s model of rigorous economic analysis, as exemplified in the work and advocacy of Martin Ravallion, Devarajan introduced the meeting’s primary topic of discussion, MCC’s investments in urban settings.
MCC’s Investments in Urban Settings
A Topic Note on urban investments, circulated in advance, served as background for discussion. Louise Fox, the first discussant, offered introductory observations on urban investments focusing on the concept of the informal city wherein informal housing and informal employment overlap. Planning efforts frequently fail to account for informal spaces and activities, often leading to neglect of cities’ poorest inhabitants who lack tenure. Moreover, while rural poverty can drive rural to urban migration, so too does productivity growth in agriculture, an outcome that is also desirable. Ultimately, cities should be productive enough to serve as revenue generators for development, protecting both public and private space mindful of the needs of poor households.
Syed Akhtar Mahmoud, the second discussant, observed that the informal sector solves problems for the poor, and that informal productivity, in some cases, can exceed the formal sector’s. Meanwhile, obstacles to formalization can be detected in “Doing Business Indicators,” such as registration streamlining, which invites the threat of government interference through taxation. Separately, indicators based on average outcomes (e.g., time to register a firm are often less meaningful than the variance, insomuch as variances capture the uncertainty of doing business. Finally, benefits to formalization come with costs, particularly political costs, suggesting the need for reforms to come in “bundles” that present a “net positive” to firms.
In subsequent discussion several members stressed both the critical importance and complexity of urbanization as an opportunity to advance development outcomes, as well as a risk to livelihoods of the poor. Several members encouraged MCC to be more engaged in analytic work and financing for effective urbanization strategies in MCC compacts.
- Importance of cities to economic growth. Members described cities as arguably the greatest “economic invention” of human societies, spatially concentrating activities to achieve productive scale economies, beneficial spillovers, efficiencies in transport and resource use, as well as climate-related benefits. Policy makers in developing economies often miss the productive potential of cities by failing to locate important industrial activities in cities. A glaring example is the remote location of special economic zones far outside urban settings that consequently fail to stimulate agglomeration economies within cities, undermining their impact. Diagnostic work needs to reflect circumstances when urbanization is not an engine of growth. Understanding how China and OECD countries succeeded in harnessing urbanization’s economic benefits can present lessons for developing countries.
- Focusing beyond capital cities. EAC members noted that urban development projects, whether led by MCC or other major donors, appear concentrated in large capital cities, yet urbanization-led income growth is often greatest in smaller, secondary cities, suggesting a mismatch between resources and productive potential. Migrant choices to settle in secondary cities potentially reflect quality of life preferences. Often, capital cities host consumption activities, not production, with investments consequently failing to maximize productivity. Meanwhile, MCC should recognize that capital cities inhabited by international organization staffers and local elites often distort infrastructure priorities away from productivity and towards livability and comfort.
- Ties between cities and rural communities. Members noted that successful cities often sustain demand for food and agriculture, stimulating growth in rural agricultural communities while forging productive supply chain linkages, particularly in secondary cities where proximity to the farm sector is greater. Market failure in rural areas is intense, but where on-farm production and urban food processing activities achieve closer connectivity, cascading growth effects can materialize. By the same token, the high price of food significantly drives up urban wages which dampens job growing-investments in urban settings. One member, meanwhile, cautioned that poverty remains concentrated in rural settings, urging MCC not to allow the pendulum of resources to swing completely away from the needs of rural inhabitants.
- Local finance for urban investments. Members stated that cities often lack the financial tools, capacity and independence to carry out investments in public infrastructure, creating dependence on federal sources of funding. As the distance between decision makers and on-the-ground realities grows, however, funding increasingly fails to reach places and activities where the need is greatest, an outcome that also threatens the sustainability of investments via insufficient maintenance and long-run management. Strengthening the ability of city governments to access financial markets, develop credit ratings, sell bonds, and ultimately provide public services and pursue projects in response to local needs is key to unlocking urban productivity. That said, investments that support urbanization via enhanced connectivity between urban centers, e.g., regional road networks, often diminish when authorities and funding mechanisms devolve to the city level, suggesting the need for a balance between local and federal fiscal capacity and funding mechanisms.
- Gender and cities. One member stressed the disparity between men and women’s experience in cities and the need to apply a gender lens to urban investments. Issues of safety and security, transport and mobility, informality, and the absence of extended family support networks place women at particular disadvantages, particularly in terms of their ability to access jobs and public services. Mobility and childcare for women are particularly important for the urban poor.
- Diagnosing constraints to growth. Members observed that identifying and measuring growth externalities and the constraints to agglomeration is difficult. For example, in the presence of high urban migration rates, why do urban incomes remain persistently higher than rural counterparts? Is migration not large enough or do higher incomes compensate for less “livability” and lower “general well-being.” High urban incomes are arguably under-taxed leading to sub-optimal investments in common urban externalities (e.g., congestion). Meanwhile, benchmarking formal private sector employment in cities can highlight whether cities may be dragging national growth. Separately, members inquired into MCC’s toolkit for diagnosing growth of a particular kind, e.g., “inclusive,” “sustainable,” or “green,” and how to balance these different priorities. Recognizing the value of capturing these features, one member recommended that MCC should not lose its focus on growth fundamentally, given its singular contribution to poverty reduction. Only upon establishing growth should MCC then tend to additional qualifiers.
- Learning from failures. Members emphasized that urban investments often fail to achieve their goals. Documenting these failures and spreading the lessons to relevant actors is worthwhile. For example, upgrades to informal settlements often proceed from top-to-bottom, often at the expense of the poorest inhabitants.
- Managing risks in urban investment. One member argued that, moreso than the lack of investment capital is the presence of risks that discourages investment in urban settings. In developing economy settings, firms typically reduce risk in two possible ways: (1) obtaining guarantees from governments, either through prices or market access, or (2) appropriating underutilized land at favorable prices and terms. Insomuch as these options present unpalatable options to many firms, an alternative option could be soliciting bids for individual projects with finance packages attached.
- Urbanization and climate change. Linkages between these should not be neglected since urbanization must be an engine for a ‘green transition’ to more resilient and less environmentally costly growth. The link should be understood and exploited, recognizing potential urbanization benefits with environmental migration to the cities, which will likely be critical to successful climate adaptation.
Suggestions for Future Meeting Topics
Members offered a variety of suggestions for topics for future EAC discussion. The topics include MCC’s infrastructure investments interactions with climate change adaptation for loss and damages, de-risking investment, particularly in Africa, diagnosing “privilege seeking” and interventions to address it, follow-ups on MCC’s efforts to upgrade its diagnostic toolkit in light of earlier meetings, behavioral approaches to growth diagnostics, and the general topic of state finance, and governments’ abilities to mobilize and distribute resources.
No comments from the public were presented.
Members Present (virtually and in-person)
- Alan Gelb, Center for Global Development
- Asli Demirgüç-Kunt, Center for Global Development
- Caren Grown, Brookings Institution
- Celestin Monga, Harvard University
- Ehtisham Ahmad, London School of Economics
- Emmanuelle Auriol, Toulouse School of Economics
- Homi Kharas, Brookings Institution
- Lant Pritchett, University of Oxford
- Louise Fox, University of California-Berkeley
- Maitreesh Ghatak, London School of Economics
- Michael Woolcock, World Bank
- Mushtaq Khan, SOAS University of London
- Paul Smoke, New York University
- Raquel Fernandez, New York University
- Ravi Kanbur, Cornell University
- Shahrokh Fardoust, College of William and Mary
- Shantayanan Devarajan, Georgetown University
- Stefan Dercon, University of Oxford
- Syed Akhtar Mahmood, World Bank
- Tauhidur Rahman, University of Arizona
- William Martin, International Food Policy Research Institute
- William Masters, Tufts University
Members Not Present
MCC Staff Participating
- Alice Albright, CEO
- Arif Mamun, Managing Director, EA-DPE
- Mesbah Motamed, Designated Federal Officer