Local investments and the urban economy

The urban population is increasing globally. While in the 1950s there was only one city with a population exceeding 10 million (New York), that number has now surpassed 20. The urban population is also growing rapidly in developing countries. Since resources allocated for transportation, housing, water, and sewage services are insufficient in these countries, it can be said that rapid urbanization is sounding an alarm. It has become essential to study urban systems by considering not only the costs of urbanization but also its economic benefits.

Local government services raise the standard of living for the existing population while attracting new population inflows and increasing the labor supply. On the other hand, it enables the growth of goods and services produced by firms operating in the region through the increasing demand of the growing population.

As urban populations grow rapidly, particularly in developing countries, the provision and financing of municipal services face serious challenges. Insufficient funding and the inefficient use of existing resources increase the risk of a decline in the standard of living for the growing urban population, as well as rising poverty and crime rates. Beyond the improvement, maintenance, and repair of existing infrastructure, the provision of new services requires significant costs.

Infrastructure investment is important from two fundamental perspectives: services that raise the standard of living for households and those that increase the productivity of the private sector. In other words, it directly affects household consumption and firm production.

City administrations provide a wide variety of services. In addition to services such as roads, bridges, public transportation, street lighting, walkways, water networks, stream rehabilitation, solid waste collection and disposal, fire departments, parks and recreation, and libraries, they can also provide various services aimed at zoning plans and regional development. Priority is important in these services. For example, in some countries, services that encourage public transportation are preferred over infrastructure that facilitates roads and transit passages.

The most important decision in cities relates to land use. The areas where households will reside and where firms will invest are the most critical decisions. Although it may appear to be a simple planning activity at first glance, the subject contains details within a much broader framework.

- Households are also the labor force working in firms. Excessive distance from industry entails high transportation costs for firms.

- The intermingling of residential areas and industry can create negative effects on health and other welfare indicators.

- Infrastructure investments and services for spaces planned for households and firms differ from one another. Different models need to be developed in terms of cost and financing.

- In spatial planning, inconsistencies between central and local governments can create effects such as delays in work or the discouragement of investments.

According to urban economists, the spatial proximity of market actors in cities provides cost savings in consumption, production, information, matching, learning, and human capital accumulation. This is because economies of scale have an important place in long-term endogenous growth theory. Spatial concentration also plays a key role in urban models.

These large cities should be governed according to a separate election and management system. A new administrative financial law should be enacted for the management of cities.