Jane Jacobs is well known as an activist, an urban theorist, and for her book “The Death and Life of Great American Cities” (1961) where she introduced the concepts of eyes on the street and social capital. What is less known is that Jacobs was also a first-rate economist, despite having had no formal education in the subject. This is amply illustrated in her 1984 book “Cities and The Wealth of Nations,” which holds lessons for us even today.
The fundamental premise of Cities and the Wealth of Nations is that economic growth is primarily led by cities, and is led by the process that Jacobs calls as “import-substitution”. Import substitution is an organic process that happens when a certain region has a high enough population density that it makes sense to stop ‘importing’ certain goods and services, and start producing it by itself. Jacobs argues that import substitution fosters incremental innovation, and this leads to economic growth.
When a city flourishes, it soon starts involving its immediate hinterland in its growth process. Jacobs calls such hinterland “city regions” and prescribes the necessary conditions for a hinterland to become a “city region”: “(1) city markets for new and different imports; (2) abruptly increased city jobs; (3) technology for increasing rural production and productivity; (4) transplanted city work; (5) city-generated capital”. This implies that for a city’s hinterland to prosper, a strong two-way connection and trade between the hinterland and the city is necessary. The interesting bit here is that all five of the above conditions are necessary for a city’s hinterland to become part of the city’s region! She explains in detail how the absence of any of the above can end up turning the rural area into a “supply region” and subsequent decline.
A supply region is one that specialises in supplying one particular good or service to other regions, and the economy of the regions is completely dependent on such exports. The problem with this, Jacobs explains, is that all of the city’s eggs (sometimes literally) are in one basket, and if the demand for the good or service goes down, it takes down the economy of the entire region.
In order to prevent a region from becoming a supply region, Jacobs says that trade needs to be ‘volatile’. There needs to be diversification in terms of both trading partners and tradable goods, and volatility in trade can spur innovation which leads to further economic growth. She cites the example of Venice, which developed rapidly on account of volatile trade with Istanbul. Subsequently, Venice was the “counterparty” with whom other European cities engaged in volatile trade as they grew their respective economies.
One of the more controversial ideas in the book is the criticism of “inorganic injection of technology”. When technology is provided to people of a certain region at a price below market price, Jacobs reasons that it can play havoc with the economy of a region by disturbing its labour dynamics. Subsidised mechanisation of the American cotton picking industry, for example, led to massive job losses and displacement of labourers. Jacobs reasons that if the mechanisation had been ‘organic’ – i.e. the farmers could afford market price for it, disruption would have been a lot lower. The better way for getting rid of rural poverty, she explains, is by providing access to city jobs, and mechanisation happens ‘naturally’ once there is crossover between prices of labour and mechanisation.
Jacobs is critical of the idea that a region can be revitalised by ‘transplanting’ a factory or similar unit from another city region. In the process of setting up, a startup usually relies on its local ecosystem. This soon develops to be a two-way relationship, as the startup grows, the local ecosystem it is part of also evolves simultaneously.
On the other hand, ‘transplanted’ industries are, self-sufficient, and plug in little into the local economy. Thus when they grow, they have little impact on the rest of the local economy. In fact, most such ‘transplanted’ industries are set up for export (from the local region), and can at best turn the region into a supply region.
In the first few years after independence, industries were similarly ‘transplanted’ and set up in hitherto backward areas with a view to revitalising their economies. Such industries, mostly in the public sector, however, did not have any natural links with the areas where they were set up. It is apparent today that few of these backward regions have developed as a consequence of such transplantation – all that has been achieved is to turn these backward regions into supply regions. It is pertinent to mention here that one of the stated reasons for the socialist model was precisely so that industries could be created in hitherto backward areas in order to reduce inequality.
Jacobs touches upon several important economics concepts in the book – for example, she talks about exchange rates, and about how because different city regions of the country have the same currency, ‘feedback’ to some of the city regions might be faulty, and can lead to suboptimal choices. Then, a popular theory is that military production on account of World War 2 was responsible for lifting the United States out of the Great Depression. Jacobs, however, shows that military spending beyond a point is actually counterproductive, and can cripple economies. She also uses her framework to analyse foreign aid, and shows that it is not only bad for the recipient, but also for the donor.
Thirty years after it was written, Jacobs’ framework still holds important policy prescriptions for India. Firstly, transplant industries do little to support the local economy, so the setting up of industries in places for the sole purpose of developing the region should be stopped. Secondly, while India has only a few vibrant and fast-growing cities, it is futile to try and develop others through government fiat. A more preferable way is to let cities grow organically, and for the government to play the role of a facilitator. Finally, with so few city regions, policy should be driven towards increasing the extent of such regions.
So what should the government actually do? One obvious area for investment is in transport and communication networks – good road and railway networks can expand the geographical reach of a city’s region. Initiatives such as the Golden Quadrilateral and the Pradhan Mantri Gram Sadak Yojana (for rural roads) are important. We also need investments in better and faster railways – there is no reason that each of our major cities should not develop a region of 100 kilometres in radius. It must be mentioned here that bullet trains are not an answer – for they bypass hinterlands that can potentially be part of a city region, and flights already do a good job of what bullet trains are supposed to do.
Another important reform is the Goods and Service Tax and removal of inter-state barriers to trade. Some of our more successful cities (Bangalore and Chennai come to min9d) are situated close to inter-state borders, and such borders should be no barrier for expansion of the regions of these cities. Finally, the idea of creating industrial corridors along highways linking major cities is great, and what is likely to make this work is that they involve already successful cities such as Delhi, Mumbai and Bangalore, which can do with an expansion of their regions, rather than attempting to create transplant-led development regions.
Much has changed in the world since the time the book was written – most importantly, the Cold War has come to an end and large countries such as China and India have seen tremendous growth. Yet, the remarkable thing is that several of the ideas in the book are still relevant today, which implies that the book deserves to be treated as a classic. Perhaps the only deficiency, as most books of this nature suffer from, is that it suffers from a “hammer-nail problem”. There is one single framework that dominates the book, and Jacobs can be accused of force-fitting the framework to contexts where it is not appropriate. Yet, it is a book that policy makers of today would do well to read.
Karthik Shashidhar is the Resident Quant at the Takshashila Institution. Republished from Pragati under Creative Commons License 3.0.
