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Cities have grown immensely in the past several decades, and over 50 percent of the global population now lives in urban areas. Over the next 35 years, the world¡¯s urban population is expected to increase by over 2 billion people, at which point nearly 7 out of 10 people will live in cities. Moreover, 80 percent of global GDP is generated in cities, indicating that urbanization is not merely a consequence of economic growth, but can actually be a driver of increased productivity and innovation.

While urbanization is capable of driving growth, policy makers face several urgent challenges associated with urbanization, such as increases in congestion and the proliferation of informal housing. These challenges both decrease productivity and damage the welfare of residents of cities in low- and middle-income countries (LMICs). 

Figure 1: Urbanization is taking place at a rapid pace

Notes: The pictures above show the transformation of Paseo de la Reforma in Mexico City between 1960 and the present. Photo credits: (upper left), (bottom right).

At a recent Policy Research Talk, World Bank Research Economist Roma?n David Za?rate shed light on some of the challenges facing cities in LMICs, and also built on a that captures a much broader picture of the impact of investments in public services like urban transportation. ¡°Urbanization is taking place at a rapid pace,¡± said Za?rate, ¡°and cities are emerging as one of the main engines of economic growth. However, poor transportation infrastructure is unfortunately a common characteristic of cities in developing countries.¡±

Za?rate pointed to the example of Mexico City, where it takes a typical low-skilled worker to work in the center of the city. In Mexico, 50 percent of the urban labor force and 70 percent of business establishments are informal. Being informally employed puts many workers at a disadvantage due to lowered job security, decreased access to services, and lower pay. In Mexico City, the completion of a new metro line, Line B, over the course of 1999-2000 connected the northeast section of the city (where most jobs were informal) with the center of the city (where workers could find formal jobs).

Figure 2: Mexico City Metro Expansion

Notes: In this image, the blue lines indicate previously existing metro lines, Line B opened in 1999-2000, Line C is a proposed line that was not constructed, and Line 12 is the most recent line

The addition of this new transit line served to connect informal workers to formal jobs. The construction of Line B sent broad economic ripples through the local housing and labor markets, leading informality rates to fall by as much as seven percent in locations close to the new stations. This shift to the formal sector amplified the benefits of the new metro line by approximately 20 percent, pointing to the importance of identifying the full spectrum of benefits from investments in public transit.

¡°When new transport infrastructure such as Bus Rapid Transit or metro lines reduce travel time between locations, new places gain access to jobs and the formal labor market becomes more attractive,¡± explained Za?rate.  

The expansion of Chile, Santiago¡¯s metro further demonstrates how improved transit can help transform economies to the benefit of workers. Over the last twenty years, Santiago greatly expanded its metro system in four waves. Drawing on a dataset that tracked both firms and workers over this time, Za?rate and his coauthors that this expansion reduced firms¡¯ market power by seven percent, leading to better wages for workers. The integration of the labor market across the city opened up more options for workers, counteracting the power of large firms to offer less-than-competitive wages.

Looking toward the future, Za?rate shared the first iteration of a toolkit that provides government officials and urban planners across the world the ability to better estimate the effects of not only proposed investments in transit, but of many kinds of urban policies with the potential to transform the economy. Developed in collaboration with the International Growth Centre and dubbed IGCities, the toolkit has only modest data requirements, which makes it suitable for many LMIC contexts.  

Za?rate concluded by stepping back to look at broader policy lessons. In LMIC contexts, officials need to take into account the myriad ways that policies can interact with often pervasive market failures. Cities face stubborn problems like widespread informality, excessive market power of firms, and crime. As his and others¡¯ research has demonstrated, the right investments and policies can have big payoffs when they help tackle these broader problems. In cases like public transit, the right investments can also generate inclusive benefits that disproportionately benefit workers and those living in more marginalized areas.  

With the immense challenges facing growing cities all around the world, advances in research and tools like Zarate¡¯s will be all the more needed in the decades to come.